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Local Government Commission

Currents - A Quarterly Energy Newsletter For Local Governments


Winter 2009

The FIT we need for California

Guaranteed payments for renewable energy – “feed-in tariffs” or FITs – have been the most successful means of getting a lot of renewable energy online in a short amount of time. FITs have been very successful in Germany, Italy, Spain, France and other countries around the world. The basic idea is that utilities must buy power from a renewable energy project at a price set by energy agencies. This price represents enough support and certainty to encourage rapid development of renewables. And we need rapid development of renewables for a variety of reasons.

Germany’s FIT has been the most successful thus far: it was responsible for about half of global solar installations last year. The U.S., even though it has very few serious FITs in place today, actually pioneered this policy. 1978’s Public Utility Regulatory Policy Act (PURPA) was the first foray into power competition and it required utilities to buy power from third party renewable energy and cogeneration developers.

Each state implemented PURPA, a federal law, in its own way and California was, as usual, in the forefront. California’s PURPA process was actually suspended in 1985, just five years after it was introduced, because of “an embarrassment of riches” due to too many projects being offered to the utilities. It’s a little-known fact that in California almost all the renewable energy projects online today (about 10,000 megawatts for the three big utilities combined) were built in the 1980s and 1990s as PURPA projects. Less than 400 megawatts of new projects have come online over the last six years under the current Renewable Portfolio Standard.

California still has some weak FITs in place: PURPA has been revived but in a rather limited fashion. We need much more than PURPA offers today. AB 1969, implemented in early 2008, created a new FIT for projects 1.5 megawatts and under. The price paid, however, is the “market price,” the same benchmark used in the Renewable Portfolio Standard system (RPS). To date, no AB 1969 projects are online and to my knowledge none have even been signed up by the utilities.

So what’s the problem? The problem is that the prices offered by today’s FITs are too weak.  We need a better FIT!

The European FITs are based on the cost of generation. A cost-based FIT assesses the range of costs for each renewable energy technology, adds a reasonable profit on top of this range, and sets this sum as the guaranteed payment. California’s current “weak FITs” provide the “market price” for compensation, which is the assumed cost of electricity from a new natural gas power plant (also known as the “avoided cost”). Over the last two decades, many renewable energy projects have been able to compete with natural gas power plants – for example, all the PURPA projects were by definition cost-effective because they came in under the market price.

But the last couple of years have seen an unfortunate shift. Recently, most renewable energy projects proposed are more expensive than the market price. Why? Two things: commodity costs and demand. Demand for renewable energy has shot up around the world, so solar panels and wind turbines have become more expensive. This trend has been exacerbated by the steadily rising cost of commodities like steel and concrete.

With the recent economic crisis upon us, commodity costs are falling again – oil is now below $50 a barrel, down from almost $150 over the summer. This bodes well for renewable energy costs starting to fall again, combined with technology improvements. But it’s bad news for the “market price” calculation because as natural gas costs plunge, the market price (again, the cost of power from a new natural gas plant) drops also, making renewables less competitive.

The bottom line, however, is that we need to get a lot of renewables online as quickly as possible.  The twin crises of climate change and peak oil demand a rapid transition to a renewable energy economy. Not only can renewable energy substitute for dirty and dangerous power from coal, natural gas and nuclear plants, renewable energy can also provide the basis for a much-improved transportation system.  Electric vehicles and plug-in hybrids hold great promise over the next decade or two for wholesale transformation of how we move people and goods.

The time is now for a major revision to California’s FITs. We need a boost of just a few cents per kilowatt-hour to prompt a huge build-out of solar and wind in our state. A recent state report found tremendous potential around the state for 20-megawatt solar projects. These projects, totaling at least 28,000 megawatts (enough for about one fifth of the statewide electricity demand), will require minimal new infrastructure because they can be built close to existing substations. They also provide reliability support to the grid because they produce power at peak demand and produce that power where it’s needed.

As another major advantage, these projects can be built rapidly because each project will take up only 160 acres or less – a marked contrast to the square miles required for utility-scale solar projects. I am completely supportive of larger solar and wind projects, but I’m also very optimistic that these 20 megawatt projects can be built more quickly and with far less community opposition than the larger projects, providing a strong boost toward meeting utility renewables requirements.

The major hurdle to these community-scale solar projects? Pricing. Currently, costs are estimated at 15-25 cents per kilowatt-hour for these projects. This is too high to be competitive with the fossil fuel alternative, as is required by current state policies.  But the difference in many cases is only a few cents. Technology costs should come down some, but if we’re serious about the renewable transition state policies should also provide a boost to pricing. The combination of falling technology costs with an increase in prices should lead to the necessary boom in community-scale renewable energy projects.

The cost to ratepayers of a stronger FIT will very likely be offset, partially or entirely, through reduced natural gas costs. There is a direct relationship between reducing natural gas demand and natural gas price reductions. There are also indirect benefits that may be quantified, in terms of job creation and ancillary economic activity. But beyond the economic arguments, there are major advantages, as discussed above, to improving our energy independence and reducing greenhouse gas emissions.

To achieve community-scale renewable energy boom, we need a new FIT that follows one of two options: 1) amending current laws to require inclusion of “locational benefits” in the market price calculation. Locational benefits are those benefits provided by community-scale projects such as increased grid reliability, less infrastructure additions, and fewer transmission electricity losses. 2) Adoption of a European-style FIT that provides a reasonable profit above the required cost of building such projects. Either of these fixes promises to unleash the huge potential for community-scale renewables throughout California.

Please contact your state officials and urge them to adopt a better FIT in California.

Tam Hunt is Energy Program Director and Attorney for the Community Environmental Council in Santa Barbara.  See www.cecsb.org for the CEC’s regional energy blueprint. He is also a Lecturer in renewable energy law and policy at the Bren School of Environmental Science & Management at UC Santa Barbara.