The California Public Utilities Commission (CPUC) on Thursday proposed to expand a feed-in tariff program that aims to promote small-scale renewable energy projects without requiring new transmission lines and lengthy regulatory review.

The proposal would create a market for projects from 1 megawatt to 10 megawatts in generation capacity by requiring utilities to purchase 1 gigawatt worth of renewable electricity over a four-year period (see proposal). Utilities then have the option to buy power from projects between 10- to 20-megawatt in size, and the procurement process would be different. 

A feed-in tariff typically refers to a government-set rate for the utilities to buy electricity from producers. Such policy also tends to require the utilities to buy all the renewable energy that is available for sale. Germany and Spain have become the two largest solar energy markets in the world thanks to their feed-in tariff programs.

California started a feed-in tariff program in 2008, but it only applies to installations up to 1.5 megawatts.  The program hasn't been popular, particularly for solar, largely because the method for setting the prices leads to numbers that are too low to be attractive (see California Feed-In Tariffs: The Price Isn't Right).

The new proposal would increase the size of each project in order to promote the so-called distributed generation: producing power close to where it's consumed. This way, developers – and ratepayers – wouldn't have to pay for building new transmission lines. Small projects could go on rooftops or land in and around cities. 

But the proposal also changes the way pricing is determined, but it doesn't follow the European model.

California's proposal calls for a competitive bidding process. The utilities would issue a request for proposal a few times a year. Each time, they would review all the bids and award contracts to the lowest bidders. State regulators would decide the amount that could be spent for each request for proposal.

Each developer could send in multiple bids for each request for proposal, which would likely have enough money set aside for more than one project of 1 megawatt to 10 megawatts in size.

To prevent one company from grabbing all the contracts, a rule would be in place that says no one developer could get more than 50 percent of the money budgeted for each request for proposal.

For example, if a request for proposal aims to spend $50 million, then the lowest bidder wouldn't be able to get more than $25 million worth of contracts. For the remaining $25 million, the utility would pick the next lowest bidder or bidders.

Setting prices is probably the single most contentious issue in crafting the feed-in tariff program. The CPUC staff left the pricing element unanswered when it issued a draft proposal earlier this year that dealt with other issues, such as the size of power projects that would qualify (see California Considers Expanding Renewable Energy Feed-In Tariffs).

"The difficulty has been setting a price for a feed-in tariff. If you set it too low, you don't have market activities. If you set it too high, then you give away undue profits and remove political support for the program," said Adam Browning, executive director of Vote Solar Initiative, a nonprofit advocacy group in San Francisco.

The bidding process also would circumvent a legal dispute raised by Southern California Edison, which challenged the CPUC's authority to set prices and require utilities to pay a premium for renewable energy. Edison argued that only the Federal Energy Regulatory Commission could do so.

Browning said the new proposal strikes the right balance. He pointed to Spain as a cautionary tale of what could happen when pricing is out of whack.

Spain once offered ultra generous feed-in tariffs, leading to a dramatic growth in solar energy system installations in recent years. Then a frenzy to take advantage of the incentives broke out last year when developers and solar panel makers knew that the government was ready to lower the feed-in tariffs in the fall of 2008.

The rush led to about 2 gigawatts of new installations in 2008. By contrast, the United States installed about 391 megawatts last year.

In September last year, the government reset the tariffs and capped the national installation to 500 megawatts for 2009 when the expensive program lost public support (see Spain: The Solar Frontier No More). 

The public now has a chance to comment on the new California proposal, which requires the approval of the five-member commission. 


Image: Courtesy of DonnaGrayson via Flickr.