How Well Will California Feed in Tariff Work?

It's 2011 and the California Feed In Tariff is now in effect.

California homeowners with solar panels have had an unusual arrangement: They’ve been able to use their utility as a kind of power storage bank through-out the year — but they’ve been forced to give the utility any extra power beyond what they use at home, free of charge.

This will change in early 2011…

Currently, when a California home solar installation produces more power than the home uses that month, this excess power can be “banked” for use in a subsequent month (applied against the bill for power bought from the utility). But every 12 months these power storage accounts must be reconciled — at which time the homeowner then either pays for a shortfall, or surrenders any remaining excess for free to the utility.

But in 2011, the state’s investor-owned utilities (Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric) will have to start paying homeowners for this extra generation capacity at a rate to be determined by the California Public Utilities Commission as early as January 2011.

The extra power production is recorded via net metering, one of the capabilities of smart meters. The “net surplus compensation” is required as part of AB 920 (the California Solar Surplus Bill), which was signed into law by Gov. Arnold Schwarzenegger

Who Benefits?

Less than 10% of the state’s solar photovoltaic system owners are likely to be affected by this law. And in most cases, their compensation will be small.

However, the response of homeowners may be vocal. This is because most will follow their intuition, believing that they are entitled to be paid for excess generation at a rate equal to the retail price that they pay for the utility to provide electricity to them — not the wholesale price that utilities pay to conventional suppliers.

The wholesale rate for power runs about 5 cents per kWh, while the retail rate is more like 25 cents. This difference results from all of the other things included in electricity rates — including transmission, distribution, customer service, energy efficiency, and other programs.

Under the draft decision before the California Public Utilities Commission (CPUC), the compensation for net surplus generation would be calculated by a formula that reflects short-term wholesale electricity prices. Because these prices vary hourly, the plan calls for averaging out 12 months of fluctuations. In 2009, the average price for was 5 cents per kWh for energy purchased between 7am and 5pm (typical hours for solar energy production).

The draft decision also calls for adding a payment to the wholesale electricity price that reflects the cleaner-energy attributes of solar or other renewable generation. This amount is to be based on the average market price of renewable energy credits. These are not yet traded on a public market in California, but could be about 1-3 cents per kWh.

The CPUC’s hands are somewhat tied as it addresses this pricing issue. California law requires that net generators receive “just and reasonable” compensation; but also that this cannot affect other ratepayers. But here, other ratepayers are benefiting only through avoided purchases from the wholesale market — hence the use of wholesale prices to set these rates.

A further wrinkle is the Federal Energy Regulatory Commission policy which equates excess residential generation with wholesale power. (FERC regulates the wholesale power market.) Such power can be compensated only at the avoided wholesale cost, with reasonable adjustments. Thus, the CPUC may factor in the cleaner-energy attributes of renewably generated electricity.Of course, the higher the rate paid to homeowners who generate excess power, the more it will promote residential solar panel installations. Look for the CPUC’s final ruling in the next few weeks.

California Feed In Tariff

Today, the California Public Utility Commission, after more than a year of consideration, unanimously approved the California feed-in tariff version - called RAM, the Renewable Auction Mechanism.

It's not a classic FIT, and as such might avoid some of the pitfalls afflicting poorly administered FIT programs. On the other hand it might not generate the benefits realized with the European systems either.

The program is intended to drive small to mid-sized renewable energy development and requires investor-owned California utilities to purchase electricity from solar and other renewable energy systems from 1.5 megawatts to 20 megawatts in size.

The vote establishes a 1-gigawatt pilot program for power from eligible mid-sized renewable energy systems.

The program requires California’s three largest investor owned utilities to hold biannual competitive auctions into which renewable developers can bid.

Utilities must award contracts starting with the lowest-cost viable project and moving up in price until the megawatt requirement is reached for that round. The program will use standard terms and conditions to lower transactional costs and provide the contractual transparency needed for effective financing.

To ensure project viability and realistic pricing, the program requires development security and relatively short project development. Utilities must file implementation plans in the next 60 days, and the program is expected to be operational this spring.

Feed-in tariffs are Tricky

Run them right and the result can look like Germany's solar miracle -- a country with Alaska-level sun can sprout a solar industry and develop an energy grid with a strong proportion of renewables.

Run them wrong and it looks like Spain a few years ago or the Czech Republic today. Failure to provide a cap or setting the wrong price can result in a land rush and a spate of poorly executed projects at immense cost to the taxpayer.

Run the in California and it seems that the Utility companies benefit.

In my opinion (as a solar developer in Europe involved in projects between 1.5 MW and 20 MW) the California system does not motivate me to want to build projects in California. The German and Italian feed in tariff programs are easier to understand and use to attract money to build the projects – because you know going in what you can sell the electricity for and so you put a lot of pressure to bring the project in at a low enough cost to achieve the margins you need to cover bank financing, attract your investors and make a profit.

Also as a homeowner – the California Feed In Tariff program encourages you to produce enough electricity to cover your own needs – but does not really motivate you to contribute to the grid – whereas the German and Italian rooftop feed in tariff programs encourage you to maximize the amount of electricity produces – which helps you … and everybody else.

Don’t get me wrong - the California feed in tariff system is a positive step in the right direction … and I'm sure it will help encourage the development of 1 GW of renewable energy projects (wind and solar) – but last year, Germany added more than 8 GW of solar projects alone… and in the middle of a credit crunch.

But surprise, surprise – letting the CPUC design the new rules benefits the utilities … not their customers. I guess it is just too much to expect them to utilize the most successful feed in tariff system in the world to achieve the same kind of results (better actually as there is more sun and land to build on) … they just had to change it to keep the profit margins for the utilities.

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