Whenever I fly into Los Angeles, it surprises and saddens me to see how much empty roof space there is across the city. Los Angeles has a huge amount of roof space suitable for solar, plus a very sunny climate, so how can the city get solarized in a way befitting a modern economy?
LA’s Department of Water & Power (LADWP), the biggest public utility in the country, has had a feed-in tariff program for a couple of years, with a goal of installing 150 megawatts of solar. However, the current program is coming to an end in early 2015 and LADWP is now contemplating the next phase of this important program. The time is now for some serious thinking about how to solarize LA.
LADWP staff proposal for an expanded feed-in tariff
LADWP staff offered an expansion proposal to its board in December. The board hasn’t made a decision on this proposal yet, so there is still time for discussion. The new proposal suggests revising the FIT to 50 megawatts per year over six years (300 megawatts total), with a price that adjusts up or down based on participation levels.
One of LADWP’s explicit principles for the FIT program is to be “dependable” in terms of ensuring that “projects will achieve commercial operation and contribute to RPS targets.” The key problem with the new proposal is that it mirrors the California Public Utilities Commission (CPUC) ReMAT program and its “market adjusting tariff” price system, which is often called a feed-in tariff, but shouldn’t be, because a key feature of a feed-in tariff is a firm and transparent pricing structure.
LADWP’s new pricing proposal is, unfortunately, a recipe for undependability. This kind of price adjustment mechanism ensures a race to the bottom since participants are incentivized to accept pricing that is too low for viability. A race to the bottom will all but ensure that many projects won’t be built because they won’t be financeable due to excessively low contract prices.
LADWP’s current FIT program has seen only 4.5 megawatts come on-line so far (in a 150-megawatt program), so it is far from clear that even the current pricing system has been effective. Given that lack of proven success in the current program, it seems like a bad choice to introduce a new and far less certain pricing system at this time.
Similarly, the CPUC’s ReMAT program has seen very few projects come on-line yet (a total of 7 megawatts out of a program size of almost 300 megawatts) so it’s premature to adopt that pricing mechanism as though there is a track record of success with ReMAT.
Just as importantly, after a year and a half of ReMAT auctions every two months, very few of the contracts have even been awarded. SCE has awarded just 24 megawatts of its available 140 megawatts, and PG&E just awarded 29 megawatts of its 140 megawatts. In sum, the ReMAT program is looking increasingly like a badly designed program.
I was closely involved, on behalf of my client, the Clean Coalition, at the CPUC during the multi-year proceeding that created ReMAT. We warned against most of the features that have resulted in ReMAT’s failure, to little avail at that time. I’m hoping that LADWP will make better choices than the CPUC did on these issues.
How to improve the staff proposal
In terms of size, the LADWP staff proposal suggests just 12.5 megawatts every three months, for a total of 50 megawatts per year. This is far too small a program given the potential for rooftop and parking lot solar in LA. A recent report found that LA has 1.4 gigawatts of solar potential on apartment buildings alone, not to mention commercial buildings and parking lots.
In terms of costs, which should always be part of the discussion, LADWP’s cost analysis suggests that the expanded FIT program will cost $190 million more over 25 years than it would if LA contracted with large solar projects outside of LA instead. Transmission line costs are included for those larger projects. Staff did not offer details on this analysis, but from my discussions with folks in LA it seems that LADWP is not considering the locational value of urban solar, which is a key additional value to the grid that distributed solar can provide.
The CPUC is currently working with the More Than Smart group out of Caltech to quantify the value of urban solar, as part of the Distribution Resource Plan proceeding. A previous analysis by E3 for the CPUC in 2011 found that urban solar can provide significant additional value, up to 7 cents to 8 cents per kilowatt-hour. It is likely that if LADWP were to conduct a similar analysis (which it should), the apparent cost premium for urban solar would disappear, or at least be significantly smaller.FIGURE: E3 Locational Value Analysis Example From SCE Territory
When we consider the local job benefits of the expanded FIT program, as LADWP explicitly does in its own materials, it seems that expanding the FIT program further would make economic sense as well as environmental sense. The LA Business Council and UCLA’s Luskin Center for Innovation, produced a great report looking at the potential for the new FIT to create jobs in LA and to build social equity. The report concludes: “While the [initial FIT] program has met with some initial success, and has positioned Los Angeles to play a larger role in a burgeoning sector that has made California the nation’s leader in solar employment, there is more to be done to achieve the full promise of the program.” I agree.
In sum, it seems that LA should create a larger program -- at least 600 megawatts of new solar, in line with the new mayor’s campaign promises -- and keep the fixed-price system that it’s currently using, which declines over time as contracts are awarded. This provides a good price signal and promotes declining prices over time.
Fixed prices provide market certainty, as well as greater certainty in terms of the total cost of the program to ratepayers. The new program should start with a larger tranche at the initial price in order to create a larger solar market and thus bring costs down faster. Many jurisdictions, including Germany (which was the inspiration for LA’s initial FIT program), have shown that getting markets to scale is the key ingredient for bringing costs down significantly.
Another significant reason for frontloading the program is the planned expiration of the Investment Tax Credit at the end of 2016. If more megawatts are made available in 2015 and 2016, we’ll see substantially cheaper solar, because at the end of 2016, the ITC drops from 30 percent to 10 percent.
Based on this track record, LA should start the new program with at least 200 megawatts in the first year at a fixed price. This kind of scale will announce that LA is open for business for rooftop solar and really provide the jumpstart the city needs to create a long-term and viable solar market. That will bring prices down even further, creating a virtuous cycle of scale, producing lower prices, producing scale.
And that will eventually cover all those empty roofs with beautiful solar panels.
***Tam Hunt is a lawyer and owner of Community Renewable Solutions LLC, a renewable energy project development and policy advocacy firm based in Santa Barbara, California and Hilo, Hawaii.