How Feed-In Tariffs Can Unleash Clean Local Energy and Obviate Polluting Gas Plants in California
California has an opportunity to replace polluting natural gas plants with clean local energy — and never build another new gas plant again. But the California Public Utilities Commission (CPUC) must require efficient market mechanisms to ensure this happens in the most timely and cost-effective manner possible.
This fall, environmental groups, local leaders, and advocates won an astonishing victory when a California Energy Commission (CEC) committee rejected plans for the new Puente gas plant in Ventura County. That development, on the heels of the CPUC rejecting the refurbishment of the Ellwood Peaker Plant in Santa Barbara County, led many to question whether another gas plant will ever be built in the state.
We must take advantage of this unprecedented moment by using the perfect market mechanism for bringing large volumes of local renewable energy projects online in a timely and cost-effective manner: feed-in tariffs (FITs).
Right now, Southern California Edison (SCE) needs to build a host of renewables projects throughout Ventura and Santa Barbara Counties. The old utility way of relying on a request for offers (RFO) is too slow and wasteful, resulting in unnecessarily high costs for ratepayers.
In fact, SCE has a record of failure in using RFOs to procure renewable energy, which makes it too easy for the utility to scuttle the process and force California ratepayers to pay twice as much for natural gas plants.
A FIT provides a better way. A FIT is a program that leverages a standardized power purchase agreement (PPA) to bring clean local energy online far more quickly, reliably, and cheaply than any type of RFO.
Unlike RFOs, FITs have a solid success record in delivering cost-effective clean local energy, in California and around the world. FITs have proven they can deploy substantial levels of renewable energy within two years.
For example, the Sacramento Municipal Utility District (SMUD) received nearly enough bids to fill its entire 100 MW FIT within one day of program launch. Within two years, 98.5 MW had been successfully installed. This 98.5% success rate is vastly better than SCE’s spotty record with RFOs.
FITs are faster, cheaper, and more reliable because they are simpler for developers, property owners, utilities, and regulators. The standardized contracts and prices of FITs can be approved by the CPUC in a single decision, saving time and money compared to the many rounds of proposals, evaluation, negotiation, and approvals that delay RFOs and raise costs for all parties, including ratepayers.
A well-designed FIT program ensures cost-effectiveness for all parties, including ratepayers. And a FIT with a Market Responsive Pricing mechanism, like FITs designed by the Clean Coalition, allows prices to adjust based on market response — ensuring that energy contracts are always set at the best market price, while eliminating the parasitic transaction costs and failure rates associated with other approaches. The Clean Coalition’s innovative FIT also includes a Dispatchability Adder to ensure that cost-effective energy storage can be deployed along with the renewables.
In sharp contrast, RFO processes are expensive, slow, and risky, raising costs to ratepayers. First, the RFO itself must be approved by the CPUC, followed by multiple rounds of proposals and review. Interested developers prepare expensive, detailed, individualized bids without knowing what price they might get or if they will get any contract at all. Then, the utility reviews proposals and develops a shortlist, negotiates with shortlisted bidders, and makes offers. By then, market conditions could have changed substantially, so not all offers are still viable, leading to yet more negotiations and contract failure. The utility finally contracts with the small percentage of winners and submits each individualized contract to the CPUC for approval. Should any contracted projects fail at any point, the utility must go through more rounds of negotiations with any developers who remain interested.
California’s experience with RFOs is that over 90% of bids fail, costing developers more than $100,000 per megawatt for each bid. Not surprisingly, the excessive failure rates associated with RFOs adds tremendous risk and raises costs for all parties, including ratepayers.
Relying on SCE to run a slow and expensive RFO process to replace the Puente plant could easily fail entirely due to the short timeframe required for procurement completion — potentially giving SCE an excuse to build a more expensive (and profitable for them) gas plant, locking in decades of pollution and economic inefficiency.
California has the tools to deploy the clean local energy it needs to move away from gas power plants. But we need to make use of the right market mechanisms. Now is the time to adopt a streamlined FIT, and relegate polluting gas plants to the dustbin of history.
Photo Credit: haymarketrebel via Flickr