California's Variation on Feed-In Tariffs for Acquiring Renewable Resources

August 22, 2011

State sets up auctions for utilities to buy small renewable energy contracts
Debra Kahn

The California Public Utilities Commission (PUC) recently issued a decision that authorizes the three investor-owned utilities operating in the state to hold biannual auctions to buy renewable energy contracts for projects ranging in size from 500 kilowatts to 50 megawatts, until a total of 1,000 megawatts is reached. The Renewable Auction Mechanism (RAM) adopted by the PUC is a market-based procurement mechanism that is intended to promote competition and acquire renewable resources at the lowest cost for ratepayers. California has a very ambitious renewable portfolio standard, or RPS, which requires utilities to procure 33 percent of their electricity supply from renewable sources (wind, solar, geothermal, etc.) by 2020. The challenge for regulators is to determine an effective way of stimulating small-scale solar projects without imposing excessive costs on consumers. In Europe, the means of achieving this is through “feed-in tariffs,” which require the serving utility to acquire renewable energy resources at a fixed price through a long term contract. In Germany and Spain, the price was set at a rather generous level to stimulate the development of solar projects, and led to Germany being the leading solar country in the world. The cost of electricity acquired through feed-in tariffs, however, is high (in excess of 40 cents/kWh until recent actions in Germany to reduce the level of subsides), and these costs are ultimately passed through to customers. The method adopted by the California PUCallows utilities to conduct competitive solicitations to acquire the output of small-scale solar projects, and the “reverse auction” process (under which the lowest bids are selected) holds down the costs for consumers. This method should ensure that solar companies receive the necessary revenue stream to enable the solar industry to grow and mature, while avoiding the artificial market protection associated with the high-cost feed-in tariffs implemented in Europe.