California’s Bold Experiments with Feed-in Tariffs
Buildings & Energy
On Sunday, October 11th, California Governor Arnold Schwarzenegger signed new legislation that creates a solar Feed-in Tariff parallelingsolar policy in the EU. A Feed-in Tariff (FiT) is a premium price paidfor renewable energy, in this case solar power. Under the newlaw, if you build a solar facility in California with a rated capacityof 1.5 to 3.0 megawatts, the local utility is now required to paybetween $0.15 and $0.17 for each kilowatt hour of solar power produced.
Under this legislation, FiTprojects benefit from US DOE 30% cash grants, and, if applicable,Federal accelerated depreciation. But because FiT is a wholesale program, these projects will not tap incentive funds from the California Solar Initiative.
In sharp contrast, a Californiasolar developer might finance a commercial power purchase agreementwith five separate funding sources:
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DOE cash grant
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Accelerated depreciation
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$0.10 to $0.14 per kilowatt-hour for the life of a 15-20 year power purchase agreement
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$0.15 to $0.22 per kilowatt-hour in CSI incentive payments for five years
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$0.005 to $0.015 per kilowatt-hour for RECs
Solar developers currentlyrespond to proposal requests (RFPs) from municipalities, non-profits,and educational institutions for solar power purchase agreements. Thoughdata is difficult to obtain, we found recent proposals in the middle ofthe range totaling $.325 per kilowatt-hour for the first five years ofoperation.
Smaller commercial PPAs may haverevenues of up to $0.375 in years 1-5. It should be added thatcommercial PPAs may also have a yearly increase in the kW price of 2%to 3%.
Projects of this size are notbuilt out of pocket. Equity investors and tax equity investors (banks)have profit and due-diligence requirements that must be met beforefunding a multi-megawatt solar project. Along with basic equipmentcosts, investor expectations and document costs take a large bite outof potential revenues.
I’m not satisfied that the $0.15 to $0.17 legislation is strategically sound.Will solar developers deliver viable solar projects at an abrupt andsteep rate decrease of $0.095 to $0.1675 per kilowatt-hour? Willthey be able to walk away from about $3.1 million or more in revenuesto build a 1.5 megawatt project that generates a $0.17 per kilowatthour?
In most cases, NO. When we ran cash flows, we found that under ideal conditions, a 10 MW,ground mount, thin-film project might work at $0.17 as long as the 30%DOE cash grant is available. When solar finance returns to the 30%Investment Tax Credit in January 2011, $0.17/kWh may not work at all.
On the other side of the equation, theCalifornia Public Utility Commission is working through a staffproposal to award Feed-in Tariff contracts to solar developers througha “reverse auction”. Solar developers will propose powerpurchase agreements with the lowest responsible price per wholesalekilowatt. The CPUC will award power purchase agreements to the lowestbidders.
Can the CPUC experiment in FiT fill the gap in 1 MW to 10 MW solar projects?
SuntechPower Holdings Co. Ltd., SunPower Corp., and Applied Materials Inc. arequoted as favoring the auction approach to establish market price formid-scale solar projects. As seasoned solar developers, Suntech and SunPower already thrive in the competitive RFP environment.
If the CPUC is willing to acceptproposals with tariff rates that approach the return on investmentderived from commercial PPAs negotiated with large university andmunicipal customers, for example, then the CPUC experiment may succeed.
The CPUC program has some otheradvantages. As a public agency, PPA terms and the kWh pricing willbecome publicly available. As such, the availability of the data couldproduce a model for a national Feed-in Tariff.
There are drawbacks. Only ahandful of solar developers specializing in power purchase agreementsare qualified and financially capable of participating in the auction. Many will be shut-out without the economies of scale that a verticallyintegrated company like SunPower brings to the competition.
Second, multi-megawatt projectsrequire a tax equity investment partner. When the banking industrycollapsed in 2008-09, so did the market for tax equity investment. Though that market is gradually recovering, only a few solar developershave the funding commitments to deliver on CPUC auction projects. Thisconstrains the pace of development.
With the goal in mind of powering solar development, I suggest two different questions:
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Instead of asking if solar developers can meet the financial challenge of either price structure, how about: what tariff price per kilowatt-hour would allow solar development to proceed like a conventional business?
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Under what circumstancesmight a solar developer invest 20% to 30% of the initial capital,borrow the rest at 6.5%, and produce clean-energy at a modest profitfor 15 to 20 years?
Ultimately, California’s Feed-in Tariff programs must be viewed as experiments. After all, solar finance as we know it today emerged in 2005. Properlymanaged and amended, they may contribute to a renewable energy future.
[1] US DOE cash grant as part of the ARRA stimulus package.
[2] Accelerated Depreciation, also known as MACRS is governed by the US Tax Code and is subjest to limits and restrictions
[3] PPA rates per kWh are linked to retail utility rates
[4] CSI incentive rates vary by utility service area and the terms of the CSI program
[5] Renewable Energy Credits orCertificates (RECs) represent the green aspect of clean energy and canbe monetized at very low rates.
