Blog Post

Cali Approves 1GW Program to Auction Clean Power

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

California wants 33 percent of its electricity from renewable sources by 2020, but hitting that goal might be difficult. To potentially help with the crunch, state regulators approved a 1 GW program Thursday.

The California Public Utilities Commission (CPUC) voted unanimously for what is called a Renewable Auction Mechanism (RAM), which will require the three largest utilities in the state to hold auctions twice per year and sign power purchase agreements with developers who can offer the lowest prices. The RAM program will run for two years and is open to developers of different types of renewable electricity, including solar, wind and geothermal.

“The program will get the best price for ratepayers and provide meaningful market opportunities for small projects,” said Michael Peevey, president of the commission, during the meeting.

The program caps the size of each project at 20 MW. The idea is to encourage projects that can more easily find suitable space closer to cities and suburbs. This approach will reduce the need to build expensive transmission lines to ferry electricity from more remote regions. Proponents believe it also will likely reduce the time it’ll take for developers to secure permits, line up financing and complete the projects.

A 20-MW project is small compared with some of the mega-proposals that have been considered and approved by California regulators. The California Energy Commission has approved nine solar energy projects totaling roughly 4.1 GW in the past four months. Many of these projects are set for the less populated desert in eastern California and have faced strong criticism for their potential impact on the wildlife. One of them, the 709-megawatt Imperial Valley Project, is facing a court challenge from the Quechan Indian Tribe. Earlier this week, a federal judge granted the tribe’s request to temporary halt the project’s development

Proponents say large projects are necessary for the state to meet its renewable energy generation goal, and utilities have been signing deals to buy power from developers of these mega projects. One of them, a 392-MW solar farm by BrightSource Energy, broke ground in October.

The Public Utilities Commission said the RAM program will offer utilities yet another option to add renewable electricity to their supplies before the 2020 deadline. Meeting this type of mandate has proven to be no easy task. The three main utilities — Pacific Gas and Electric, Southern California Edison, and San Diego Gas & Electric — are supposed to get 20 percent of their supplies from renewable sources by the end of 2010. As of 2009, PG&E and SDG&E were far from meeting the mandate. SCE reached 17.4 percent last year. The utilities do have a 3-year grace period to achieve the 2010 goal.

But the RAM program, of course, isn’t perfect. A few commissioners expressed concerns that developers might offer contracts with prices that are way too low for them to actually complete the projects.

“There is a danger that the utilities, in their thirst for price and cost disciplines will unrealistically push the prices of the contracts to a level that (the projects) are unlikely to be built,” said Commissioner John Bohn at the meeting.

To minimize underbidding, the RAM program dictates that contracts, once signed, are not re-negotiable. The program rules also require developers to put down a security deposit of $20 per kilowatt when they sign the contracts with utilities. Developers also have to put down a deposit guaranteeing the power output of their projects. For a project that is less than 5 MW, the performance deposit would be $20 per kilowatt. Larger projects would require 5 percent of their expected revenues.

The program “guarantees an outcome instead of prices. It ensures that ratepayers get the best deal,” said Adam Browning, executive director of the Vote Solar Initiative, a San Francisco advocacy group. “You select projects not based on who is first in line but based on the ability to provide the most value.”

In a separate vote Thursday, the commission also approved a 5-year solar program proposed by PG&E. Again, the intent here is to encourage small and mid-size projects (up to 20 megawatts each). PG&E plans to own 250 megawatts of projects and buy the remaining 250 megawatts from developers. The commission capped the price for the power purchase agreements at $295 per megawatt-hour.

For more research on GigaOM Pro (subscription required):

Photo courtesy of Jay Galvin.

4 Responses to “Cali Approves 1GW Program to Auction Clean Power”

  1. Here is the discussion of the decision. As you can see even SCE acknowledges that the deposit is less than 1% of the estimated project costs (when PV system costs are at least $2.50 per Watt, 2c per Watt is nothing). To have a bite, the deposit should have been higher, at least 5%.

    0.2. Development Deposit

    The current FIT does not require a development security deposit. ED proposes RAM require a development security deposit of $20/kW. ED recommends that this deposit is either (a) refunded once the project is operating or (b) applied to the subsequent performance deposit. In response, parties recommend a range of development security deposits from zero to at least $30/kW.

    We adopt a development security deposit, based on ED’s recommendation, of $20/kW which is either refundable upon achieving commercial operation (e.g., COD) or applied to the subsequent performance deposit. The deposit is due on the date of contract execution in the form of cash or a letter of credit from a reputable U.S. bank. It is forfeited if the project fails to come on line within 18 months or other extension granted by the IOU.

    We adopt a development security deposit because IOU costs relative to a failed project are not zero (e.g., there are costs to obtain replacement power). The deposit provides collateral against those costs without requiring a complicated, potentially time consuming and costly study of actual damages. A deposit subject to forfeiture also provides a small additional incentive for the developer to complete the project within the allotted timeframe.

    The adopted amount, however, is not so large as to cause a serious impediment. Opponents assert even a small deposit is an unnecessary barrier, but provide no evidence. On the other hand, SCE shows that a $20/kW deposit is less than 1% of an estimated minimal $2,100/kW installed cost for the least expensive renewable project.

    Several parties argue that the pay-for-performance feature of paying only for the delivered product provides sufficient incentive for a developer to bring its project to successful commercial operation, and no additional incentive is necessary. We agree that the pay-for-performance structure provides a powerful incentive. It does not, however, completely compensate for the risk, nor eliminate the cost, to the IOU and ratepayer of a project’s failure to reach operation. Moreover, a modest additional incentive for timely completion is reasonable.

    Sustainable Conservation argues there should be no development deposit since it is already a significant challenge to obtain project financing and a project should not have to raise additional capital just to hold a place in the queue. We disagree. A minimal deposit will help filter out projects that investors believe have no chance of success.

    Recurrent recommends increasing the deposit to at least $30/kW in order to strengthen project and developer viability requirements. We have no evidence of the specific degree to which any deposit, or an increase of $10/kW or more, materially affects viability. We address viability in other, more direct ways (e.g., site control, developer experience).

    • But why at least 5%? The discussion you highlighted showed that the commission didn’t find specific evidence showing that a higher deposit would make a difference. I’d interested to find out why you think 5% is a good threshold. Is that a figure used in other construction sectors?

  2. Ucilia: Here we go again. You have been writing about this stuff for how long? How can somebody be required to put $20 per kilowatt-hour deposit? If the system is not built, there will be no kilowatt-hours, and thus the deposit will be zero, if we believe what you are saying. The deposit is, obviously, $20 per kW, or 2c per Watt, which is obviously nothing. They should have made it much higher, of course.