California Feed-In Tariffs: The Price Isn't Right

As state regulators look into expanding the feed-in tariff program to promote small-scale renewable power generation, they will likely hear passionate arguments for boosting the prices for buying renewable power.

California's feed-in tariff program so far hasn't turbo-charge renewable energy generation by small power producers. And that has something to do with the prices set for renewable energy.

The problem with the feed-in program – which is supposed to complement the large alternative power deals being signed between utilities and companies like BrightSource Energy for hundreds of megawatts of generation capacities – is that the price of alternative energy is set by standardized contracts and set table of prices promulgated by the California Public Utilities Commission (CPUC). Standardization saves time and administration.

Unfortunately, the price of alternative power is based on the costs of building and operating a combined-cycle natural gas power plant, not the costs of installation and running various types of renewable energy power projects, said Seth Hilton, a partner at the law firm Stoel Rives. As a result, the price are considered too low.

For larger power projects, utilities have to negotiate each contract and seek the CPUC ‘s approval (see BrightSource Inks 1.3GW SoCal Edison Deal and First Solar Buys OptiSolar's Power Projects). In most of these contracts, utilities are paying more for power, Hilton said.

So far, only power projects totaling about 9.6 megawatts in generation capacity have taken advantage of the feed-in tariff program, the CPUC said. Although seven utilities participate in the program, only the Pacific Gas and Electric has signed power purchase contracts, and none of them involve solar generation. There is a 1.5-megawatt wind contract. The rest are hydropower and landfill gas projects.

The CPUC enacted the program a year ago to make it easy for investor-owned utilities to buy renewable energy from their customers who own and operate projects that are up to 1.5-megawatt in size. The program has a cap of 480 megawatts (the CPUC is due to increase the cap to 500 megawatts).

The feed-in tariff program is just one of several by the state to boost the amount of renewable power in the utilities' energy mix. California is requiring the utilities to source 20 percent of their supplies from renewable sources by 2010. The state Senate recently passed a bill that would mandate 33 percent by 2020. The state Assembly is considering the bill now.

The CPUC is now considering expanding the feed-in tariff program to include projects up to 20 megawatts. Its staff has come up with a proposal, though it's taking more time to figure out how to set the prices for these larger projects (see California Considers Expanding Renewable Energy Feed-In Tariffs).

The California Energy Commission also has suggested that the CPUC should come up with a different method of determining the tariffs.

"There is a need for continued evaluation of different mechanisms to decouple the price paid for renewable energy from the price of natural gas, including using feed-in tariffs that focus on the actual cost of generation of renewable resources," according to a energy commission report issued late last year.

Although the energy commission doesn't set renewable energy prices, it works on policies for meeting the state's renewable energy and greenhouse gas emissions reduction goals. The agency also is responsible for issuing permits to most of the power plants proposed in the state.

Feed-in tariff proponents in California said the state should set higher prices for small-scale power generation because it takes less time to install and doesn't require expensive upgrades to the transmission and distribution networks, unlike those mega projects with hundreds of megawatts in capacity that are being planned in remote sites.

In comparison, the renewable energy tariffs in Spain and Germany are much more lucrative. The generous prices have helped to make the two countries the world's top two solar energy producers.

California's tariff program also isn't as lucrative as other state renewable energy programs available to both homeowners to businesses. The California Solar Initiative offers rebates for installing energy systems, and the net metering policy offers savings based on retail prices, which are higher than the wholesale prices used for feed-in tariffs, Hilton said.

Boosting the tariffs is likely to increase energy bills for ratepayers, however. Utilities have not been fond of feed-in tariffs, arguing that they aren't good incentives to encourage more renewable energy generation overall, according to the energy commission report. Inadequate transmission capacity and complex permitting processes are the real barriers, they told the energy commission.

Setting the right alternative pricing isn't a simple task. A lot of political wrangling went into setting the tariffs in Germany and Spain, for example (see Spain Approves 500MW for Solar and Solar Prices Set in Germany).

In Spain, the tariffs were so attractive last year that they caused a rush by developers to install solar power projects, which pushed up solar panels prices worldwide. That eventually led to a glut of unused panels that had to be re-sold at cheaper prices (see Solar a Bust in Spain). The program also prompted some developers to claim they had completed installations when they didn't (see Solaria Has a Solar Park Deal for You and Solar Fraud Could Eliminate Spanish Market).