One of the problems with solar feed-in tariffs is that if the price is set too high, there's a frantic gold rush to claim the richly subsidized projects. If the price is too low, there's not too much enthusiasm by developers to build marginal projects.

That's what appears to have occurred in Palo Alto in the heart of Silicon Valley, California.

Jon Abendschein, Resource Planner at the City of Palo Alto Utilities, just sent out a letter which said: Tuesday, July 31 was the deadline for submitting an application to receive a Palo Alto CLEAN contract in August. No applications were received, so there is still 4 megawatts of capacity remaining in the program. The City is now accepting applications for September contract issuance. We encourage interested property owners and developers to submit an application by Friday, August 31 to receive a contract at the beginning of September. 

Craig Lewis, Director of the CLEAN Coalition, a distributed generation advocacy group, said, "Although disappointing, this is not entirely unexpected, given that Palo Alto's objective was to set the price based on avoided cost and to test whether the market could deliver wholesale solar at a ratepayer-neutral price."

The city is looking to pay $0.14 per kilowatt-hour for 20-year contracts. Jon Abendschein, Palo Alto's Resource Planner, had commented earlier that $0.14 per kilowatt-hour is a price that will attract developers to the program.

Palo Alto initiated this program in March of this year with a unanimous vote by the Palo Alto City Council. Palo Alto looked to join Germany, Italy, Gainesville, Florida, and Sacramento, California as regions with solar feed-in tariffs (FIT).

Palo Alto called its program a CLEAN program (Clean Local Energy Accessible Now) rather than what they considered the awkward term 'feed-in tariff,' or FIT.

It's a pilot program for the City of Palo Alto Utilities (CPAU) -- the first year is capped at 4 megawatts and meant for medium-sized commercial rooftops with a minimum size of 50 kilowatts per installation. The FIT is applicable to solar only, although other renewable energy sources such as solar hot water could be considered later on. 

Palo Alto is arguably the heart of Silicon Valley, home to dozens of venture capital firms and thousands of new companies, and armed with a startup- and innovation-friendly culture fueled by its immediate neighbor, Stanford University. The city itself has about 26,000 electric meters and a peak load of approximately 180 megawatts.

The FIT program limits itself to medium and large commercial solar rooftops in the interest of keeping workload issues to a minimum in the early stages of this endeavor.

The $0.14 per kilowatt-hour figure was based on the city's avoided cost. Here's the calculation:

  • $0.070 for energy
  • $0.034 green premium
  • $0.006 local capacity value, essentially avoided distribution grid costs
  • $0.019 avoided transmission access charges (TAC), an amount paid in California for every kilowatt-hour that is delivered from the transmission grid
  • $0.006 avoided transmission losses
  • Total: $0.1355 per kilowatt-hour

So, the $0.14 per kilowatt-hour FIT price includes a $0.0045 premium and was agreed upon as a number that would attract developer interest. Obviously, it hasn't.

The cost of a fully subscribed program would be $29,000 per year; the city council estimates that the cost to the utility customer would be $0.01 per month. At this scale and modest cost, the city gains experience with the permitting, interconnection, metering, and billing process while developers gain experience in working with Palo Alto. (Note that Gainesville, Florida's FIT price was in the $0.26 to $0.32 range, which is good for developers, but perhaps not so good for municipalities.)

Craig Lewis saw this as "a good program, because it is constrained and not open to residential rooftops." He added, "It delivers the trifecta of being cost-effective, timely, and environmentally sustainable, and the pilot program is designed for success by avoiding pitfalls like dealing with tax complications of residential-level projects."

Detractors of feed-in tariffs have claimed that the prices can never be set at a proper rate and that auction mechanisms are a more equitable solution. Others have argued that having no subsidy at all is the right solution.

Lewis notes that the feed-in tariff implemented by Long Island Power Authority (LIPA) had "a far more favorable uptake." He said, "I believe that all 50 megawatts of LIPA's CLEAN Solar Initiative will be filled before year-end and potentially much sooner."

Adam Browning of Vote Solar said, "I'm still hopeful that they will eventually fill the queue. But that's an issue with fixed prices. They either work, or they don't. With a competitive solicitation, you get the going rate and you get your projects. In this case, Palo Alto set the price at what they are willing to pay, and if the local installers can't make that work, so it goes. Note that any potential generator with load to serve may be better off generating behind the meter and offsetting utility purchases rather than taking the FIT, as the FIT rate is near the retail rate, and FIT payments are taxable income while self-generation is not. This mirrors the situation in Germany right now, where, as the FIT rate for wholesale power reaches parity with retail rates, they are seeing a boom in behind-the-meter generation as well."

We've asked Jon Abendschein, Resource Planner at the City of Palo Alto Utilities, for a comment, but have not yet heard back.