Tuesday, October 16 , 2018, 10:47 am | Fair 71º


Tam Hunt: What Will Replace the California Solar Initiative?

No one can really debate that the California Solar Initiative, a 3,000 MW solar program started in 2007, has been very successful. In fact, the utility customer portion of the program targeted 1,940 megawatts of solar by 2017, and we’re on track to cross that milestone later in 2013 or early 2014. This is really impressive and good news for Californians.

CSI is an incentive-based system of declining rebates, with a set rebate amount per “bucket” of megawatts in each step of the program. But the CSI’s system of declining rebates is, due to early achievement of the goals, about to go away entirely.

This was always the plan: Declining rebates were designed to bring the market to a point where it could thrive without any state help. (There is still a 30 percent federal investment tax credit through the end of 2016, as well as accelerated depreciation, which will continue to help the market grow.)

As successful as the CSI has been in achieving its goals, there is still a good debate over whether the goals were ambitious enough to begin with. California, a state of 40 million people and excellent solar resources, has installed a total of about 1,800 MW of solar over the last 10 years, which includes CSI and other programs like the Renewable Portfolio Standard that is focused on utility-scale solar.

However, compare this to Germany’s over 30,000 MW over the last 10 years, or Italy’s 17,000 MW over the last 10 years, or China’s 8,300 MW over the last 10 years (with the majority of that installed in just the last two years). And Japan has vastly ramped up its solar programs since the Fukushima nuclear disaster, installing about 10,000 MW of solar over the last decade — with more than 5,000 MW expected in 2013 alone.

Figure 1. Comparing solar installations in different localities over the last decade.

China is a much larger country with a vastly larger population, so it’s probably not a fair comparison. But Germany is a bit smaller in land area and has only twice the population of California. Italy is about 1.5 times our population and about one-third less land area than us. Of course, California has far, far better solar resources than either Germany or Italy.

It seems reasonable to think that California can and should be doing a lot more on the solar front, as well as on other renewables such as wind and biomass.

The rest of this article will examine the two main options for replacing CSI: 1) a robust feed-in tariff program and 2) an expansion of net metering. My preference is a robust feed-in tariff, but I recognize that the debate is complex and fair minds can differ on these issues.

Germany set a record this year when wind and solar power combined served 60 percent of all of Germany’s electricity needs. That’s a truly remarkable transformation that has taken place in just 15 years. Germany is the world’s fourth-largest economy, so this transformation was no mean feat. Why is Germany so successful with renewables? Anyone who follows the renewable energy field knows it’s because of Germany’s aggressive feed-in tariff policies. Ditto for Italy. Ditto for China, and ditto for Japan.

California, usually a leader on energy issues, has unfortunately dawdled on feed-in tariffs. We pioneered the feed-in tariff policy in the 1980s and 1990s before abandoning it for alternative policies. The policy provoked an “embarrassment of riches” because of such strong market response.

Since that earlier era, we’ve had a very weak feed-in tariff for the last five years: the AB 1969 feed-in tariff for projects up to 1.5 MW. This program is open to any renewable energy technology, but the payment provided is linked to the price of power from a new 500 MW natural gas plant — considered the default type of power in California. Known as the Market Price Referent, this payment was too low to work for 1.5 MW renewable energy projects for the first few years of the program and no new projects were built.

But a couple of years ago, the cost of solar power equipment dropped so much that a veritable gold rush occurred with the small feed-in tariff program. Totaling only a few hundred MW statewide (on a grid that is about 60,000 MW), the program filled up quickly with solar projects, and it’s looking good for these projects actually being constructed — even with compensation pegged to the cost of power from new natural gas plants, which is by definition cost-effective.

Unfortunately, the AB 1969 feed-in tariff is ending this month and being replaced by a much worse program: SB 32’s Renewable Energy Market Adjusting Tariff (ReMAT). SB 32 was passed in 2009 and was meant as an improvement to the then-nonfunctional AB 1969 feed-in tariff. SB 32 increased the project size to 3 MW, which was indeed a major improvement, but it also provided more flexibility to the California Public Utilities Commission to set compensation levels under the new program. It has become quite clear in recent years that CPUC staff and leadership don’t like feed-in tariffs, and what could have been a simple and highly effective implementation of SB 32 became an extremely drawn-out and convoluted process that has resulted in a significant worsening of the original feed-in tariff.

(It’s not entirely clear why feed-in tariffs have such a bad rap among policymakers, but my feeling is that it’s probably because of the mistaken impression that feed-in tariffs require above-market payments to be effective. We’ve seen with our own history that this isn’t the case, and I discuss further below how a cost-effective feed-in tariff could be highly effective in spurring market transformation.)

The new SB 32 program is not only tiny — just a few hundred additional MW statewide — it also has pricing that adjusts based on demand and will, as with auction-based programs more generally, induce a “race to unviability” as developers accept prices that they hope they can finance and build with. To be clear: ReMAT is not a feed-in tariff because there is no predictability on pricing.

A predictable feed-in tariff with set pricing diminishing over time, as in Germany, would spur a new “embarrassment of riches” in California. The sunset of the CSI is a good opportunity to renew the statewide conversation about feed-in tariffs and how much renewable energy California should be targeting. Some groups are discussing a 50 percent RPS target for 2025 or 2030 and an effective feed-in tariff should be part of that discussion.

Net metering has been very effective at spurring small-scale solar in California. It is, however, arguably an overly complex system that is provoking an increasing backlash from utilities and ratepayer advocates who feel that net metering is an unjustified subsidy that burdens ratepayers with the cost of grid maintenance that is not paid by those utilizing net metering for their own renewable energy projects.

This is a complex debate, and my feeling is that the grid benefits from avoiding new grid infrastructure will partially or wholly compensate for the costs not paid by net metering beneficiaries. But we can avoid that entire debate if we recognize that a robust feed-in tariff is a simpler solution and very likely will be more effective at prompting true market transformation than net metering by itself — depending on the size of the feed-in tariff program.

Nevertheless, expansion of California’s net metering program is a viable option for replacing CSI. This is not a debate confined to California. Italy recently suspended its highly effective feed-in tariff program because the program budget was exhausted (very similar to the CSI program budget being exhausted, as planned) and put in place a new net metering program that applies to systems 200 kW or smaller.

Kevin Fox with the law firm of Keyes & Fox, and a longtime representative of net metering interests, stated in response to my questions about replacing the CSI: “I would say that intelligent rate design offers a potential path to providing fair compensation to customer-generators for the system benefits their PV systems provide.” So for Fox, it’s a matter of not only expanding net metering but also improving rate design.

There is a large constituency in favor of net metering and expanding net metering who may not like my suggestions here about feed-in tariffs. I would suggest, however, that the solar industry as a whole (not just residential and small commercial solar developers) will do much better under a robust feed-in tariff than under an incremental increase of the net metering cap. Rather than fight the same battle every couple of years to increase the cap, with increasing resistance from utilities, why not invest that same energy in creating a comprehensive, cost-effective feed-in tariff?

I’d suggest a 10-year 10 GW feed-in tariff program as a good start. That would allow us to truly reclaim the leadership mantle that we lost to Europe some time ago.

What cannot be forgotten in this debate, however, is the cost-effectiveness criterion that can easily be included in feed-in tariffs. Historically, this criterion has often prevented feed-in tariffs from being effective. But with the sea change in the reduced cost of renewables like wind and solar, a cost-effective feed-in tariff could spur the necessary transformation to a renewable-based economy in California and elsewhere.

The cost of natural gas is the biggest unknown. Even with the very low cost of natural gas we’re currently enjoying, however, solar and wind power can be cost-effective under the Market Price Referent formula. The current MPR is the 2011 calculation and when the MPR is re-calculated (probably later this year) it will surely drop substantially due to the current low price of natural gas. My feeling, however, is that the price of natural gas is likely to rise substantially (for a variety of reasons) and the declining cost curve and improved efficiency of solar and wind, in particular, will continue to expand the cost-effective opportunities for deploying these renewables on a very wide scale.

A robust feed-in tariff should also include payments for grid benefits provided by projects located on the distribution grid, to the degree that such projects actually provide grid support. This idea is generally known as “locational benefits” and my longtime client, the Clean Coalition, has pioneered this discussion.

Wrapping up, my hope is that the Legislature, policymakers and advocates, seriously consider the robust feed-in tariff option alongside debates over the expansion of net metering. The obvious examples from other countries — and California itself during the 1980s and 90s — weighs heavily in favor of feed-in tariffs as a viable solution for market transformation.

— Tam Hunt is a Santa Barbara lawyer and writer, and blogs at Thought, Spirit, Politik. Click here to read previous columns. The opinions expressed are his own.

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