BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
AB 1106 - Fuentes/Ruskin Hearing
Date: July 7, 2009 A
As Amended: June 25, 2009 FISCAL B
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DESCRIPTION
Current law requires the state's investor-owned utilities (IOUs)
to increase procurement from renewable energy resources until
they reach 20% by 2010. To achieve that goal, the IOUs rely on a
competitive wholesale market for generation and issue annual
solicitations for renewable energy. Renewable energy may also be
procured through bilateral and standardized contracts.
Current law establishes the California Solar Initiative, which
provides $3.2 billion in ratepayer-funded incentives to
encourage the deployment of solar photovoltaic (PV) panels.
Current law requires all electrical corporations to develop a
standard tariff (aka feed-in-tariff or FIT) for all retail
customers to compensate those customers for excess renewable
energy produced up to a maximum of 1.5 megawatts (MW). Statewide
participation is capped at 500 MW and the price paid is the
market price referent.
This bill sunsets the current FIT program on June 30, 2011.
This bill requires the CPUC to adopt FIT rate structures and
approve related standard offer contracts for eight specified
renewable resources by June 1, 2011. There would be 16 total
tariffs and contracts - two for each specified renewable
technology at tier one, for facilities sized up to five MW and
tier two, for facilities sized five to ten MW.
This bill permits the CPUC to develop tariffs and contracts for
any other eligible renewable energy resource that the CPUC finds
"holds promise" for meeting RPS goals.
This bill specifies that tier one tariffs and contracts be set
at the reasonable cost of production plus a reasonable profit,
but capped at $0.30 per kilowatt-hour, for a fixed period of 25
years.
This bill specifies that tier two tariffs and contracts would be
priced at the total benefit of the electricity to ratepayers, on
a time of delivery basis, and any other renewable attributes for
a period of 10, 15, or 20 years at a fixed price.
Current law requires the state's investor owned utilities
(IOUs), publicly owned utilities (POUs) (except the Los Angeles
Department of Water and Power), and any other entity offering
retail electric service, to credit all electricity generated by
a customer-owned solar or wind system against the customer's
usage of electricity sold by the utility, on a kilowatt hour
basis, a procedure known as "net energy metering" (NEM).
Participation by all utilities is capped at 2.5 percent of each
utility's aggregate peak electricity demand.
This bill permits the CPUC to cap participation in the tariffs
and contracts required by this bill if the CPUC finds that a
reduced capacity limitation is necessary to maintain system
reliability with the territory of an IOU.
BACKGROUND
What is a feed-in-tariff? - A FIT is a rate structure that
provides a simple, comprehensible, transparent mechanism for
electricity generators to sell power to a utility at predefined
terms and conditions (standardized contract), without contract
negotiations. For the IOUs, the FIT operates as a "must-take"
contract in its portfolio. If the participant generates the
power, the IOU must take it. Under current law small renewable
generator FITs are available to customers of the three largest
IOUs and provide a 10, 15, or 20-year fixed-price,
non-negotiable contract for systems sized up to 1.5 MW.
The FIT option is distinct from NEM and direct financial
incentives offered to customers to generate electricity onsite
to offset their own electrical load. Under the CSI and the
Self-Generation Incentive Program, customers are offered upfront
incentives to install solar, wind, and fuel cell generating
capacity that can offset their customer load.
Net Energy Metering - The primary benefit of the CSI program is
derived from the solar customer's eligibility for NEM which is
authorized under state law separately from the CSI program.
Utility customers that generate power from a wind or solar
system are eligible for NEM under which the electricity
purchases of the customer are netted against the electricity
generated by the customer's own solar or wind electric system.
The full retail price of electricity includes the utility's cost
of generating, distributing and transmitting the power, public
goods programs (e.g. energy efficiency), low-income customer
assistance (e.g. CARE), energy crisis costs and other charges
not related to generation.
COMMENTS
1. Need for Renewable Generation - The author notes that
"California is not on track to meet its renewable energy
goal of 20 percent by 2010. It is clear that a new policy
framework will be necessary to achieve the expanded goal of
33 percent by 2020. A number of market barriers exist to
meeting the current RPS, including permitting and siting
challenges, transmission availability, timing, and cost
allocation, development risks, including securing site
control and obtaining financing and complexity of the RPS
solicitation processes." He further states that
"California is missing opportunities to expand the use of
solar energy because excellent sites with space and
interest in installing solar energy equipment cannot use
solar because they cannot participate in either the CSI
incentive program or the RPS solicitation program."
Supporters of FITs believe they can be an effective way to
promote the development of new renewable resources by
guaranteeing the developer a set price for their generation
at standard contract terms and eliminate the need for the
generators to negotiate with the utility. They state that
FITs have been credited for the rapid deployment of wind
and solar energy in Germany and Spain. The European feed-in
tariffs have set the rate paid to the generator based on
the cost of each renewable technology plus a reasonable
profit for the generator. The rate meant there was little
risk on the developer for bringing new renewable generation
on line. The prices paid to renewable generation in Germany
and Spain have exceeded the price terms of renewable
contracts in California.
2. Competitive Procurement vs. Fixed Price - Since the
restructuring of the electricity industry in California,
the CPUC has relied on a "competitive market first"
approach for the procurement of electricity. The IOUs
develop an annual procurement plan which includes plans
under which the IOUs solicit bids for electricity
deliveries. The underlying premise of wholesale
competitive procurement is that ratepayers benefit as a
result of lower cost electricity deliveries. Competitive
procurement also underlies the RPS program which requires
IOUs to establish a competitive process to select renewable
contracts based on least cost and best fit. Competitive
markets are generally thought to benefit ratepayers by
using competitive pressures to lower total costs.
In contrast FITs use administrative processes to set a
fixed price for the purchase of electricity by the IOU, the
price of which does not benefit from competition. Although
a FIT may result in lower transaction costs to renewable
developers, it is not clear that it will result in the best
price for renewable electricity deliveries for ratepayers.
It is difficult if not impossible to set the right price
for a FIT. If the FIT price is too high the FIT results in
a gold rush for renewable developers at the expense of
ratepayers who will overpay; if the FIT price is too low
the FIT will not attract new investment. What is the
chance that a regulatory agency can set just the right
price which will protect ratepayers and bring new projects
online?
Additionally under a FIT structure the utility generally
has no control over where power is built, whether they need
it, or whether it is consistent with its renewable
procurement plan. This is particularly critical for
renewable resources, some of which (e.g. solar and wind) do
not provide base load power but are intermittent and must
be firmed and shaped by the IOU or ISO. This bill does not
address these issues.
3. FIT Cost Structure - This bill proposes 16 separate
tariffs. Two for each of eight technologies with two
separate rate structures - tier one for projects at one to
five MW and tier two for projects sized at five to ten MW.
Tier one pricing is directed to be the cost of each
technology plus profit to the developer. Total costs would
be capped at $0.30 per kWh. This provision looks much like
renewables at any cost. Whatever the cost of the
technology, IOUs would be required to purchase the
generation at unlimited quantities for a minimum of two
years until the CPUC could revisit the tariff. Competition
between and among the different renewable technologies is
completely eliminated.
Tier two does acknowledge the value of the electricity to
ratepayers in the pricing structure but is still a vague
standard with no comparison basis - the value of the
electricity to ratepayers in comparison to what?
In the 1980s California authorized a FIT then called the
Interim Standard Offer 4 (ISO4). According to SDG&E the
ISO4 had "high guaranteed prices and the CPUC was forced to
suspend it less than a year later because the prices the
commission had assumed would be reasonable were not."
4. Net Energy Metering Impacts - Instead of taking a
standardized contract under the tier one FIT, an eligible
resource would be permitted to take service under any one
of several NEM programs. Most likely is the NEM for solar
and wind which provides credit for generation at the full
retail rate of electricity. The effect of this provision
would be that a large electricity user (up to five MW)
could install, for instance, a large solar farm, and be
eligible for full retail NEM.
The current NEM program for solar and wind is capped. It
is targeted to support CSI installations which are limited
to one MW. Statewide NEM is limited to 2.5 percent of the
IOU's peak load.<1> This bill would place pressures on the
NEM cap which would jeopardize CSI program participation.
Significant concern has been expressed about raising the
NEM cap to a level beyond that needed to fully support CSI
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<1> To support all budgeted CSI installations an NEM cap of five
percent would be needed.
installations until a time when the NEM program can be
fully evaluated. This bill potentially squeezes out CSI
customers.
5. Eligible Technologies - Eight renewable technologies are
specified as eligible in this bill. They are also
specified in the RPS program. Since the FIT in this bill
is designed to help the IOUs meet their RPS obligations,
this bill should cross-reference eligibility to the RPS
program as provided for in Public Resources Code Section
25741. To date only the Legislature has specified eligible
RPS technologies. However, this bill gives broad authority
to the CPUC to add additional technologies that it finds
"hold promise" to contributing to the RPS program. This
provision is not consistent with current law which places
clear responsibility in the hands of the Legislature to
specify technologies eligible for the RPS program.
Moreover ratepayer funds should be used to support
renewable technologies that can deliver, not technologies
that merely "hold promise."
6. But Germany Does It - California policy makers involved
in the RPS program have been extensively lobbied by
advocates of a strong FIT to increase renewable generation
in California. In fact Germany has brought a great deal of
PV generation onto its grid and other renewable
technologies as a result of the FIT. But what is rarely
discussed is the cost paid for those resources which is
exorbitant. Rates for solar PV range from $0.47 to $0.62 a
kilowatt hour (kWh). In comparison, contracts for
renewable resources in California's RPS program are running
between $0.08 to $0.15 kWh. In 2008 Germany generated 14.4
percent of its electricity from renewable resources. Not
including the POUs, at the end of 2007, California was at
12.7 percent and is anticipated to reach 20 percent by
2013.
Advocates of a FIT argue that a FIT is warranted because of
the challenges of siting renewable generation and that
California will fail to meet its RPS goal of 20 percent by
2010. However, it is critical to note that the original
RPS goal was established in 2002 and set a timeline of
2017. In 2006 that date was moved up ten years to 2010.
It is not at all clear that the 2010 deadline was
achievable when it was set.
It appears that Germany's only renewable generation program
is a FIT. They do not have a CSI program, a 30 percent
federal tax credit, or an RPS mandate which have been
California's chosen means for greening the grid.
California's RPS program is fundamentally different from a
FIT since it relies on a competitive wholesale market in
which developers bid to deliver renewables.
Advocates are correct that small-scale renewable facilities
can reduce transmission requirements and, when properly
located, assist with reliability on the distribution grid.
They further point to a lack of renewable facilities at one
to five MW capacities as a necessity for a FIT. This latter
argument is hollow since there is no technical difference
between an electron from a one to five MW generator or a
500 MW generator.
7. Federal Power Act - It is not clear that individual
states have the power to establish FITs at anything more
than the avoided cost of electricity. The Federal Power
Act grants the Federal Energy Regulatory Commission
jurisdiction over wholesale electric sales in interstate
commerce, including sales made entirely intrastate and
sales delivered locally to a distribution system. The CPUC
can set rates but the rate at which a utility must purchase
power from a facility must be:
a) "just and reasonable" to consumers,
b) be in the public interest,
c) not discriminate against the facility, and
d) not exceed the purchaser's incremental
alternative cost.
The tier one rate structure specified in this bill is
solely related to the cost of the generation and profit to
the developer which bear no relation to the FERC
requirements. The tier two structure is questionable. The
IOUs and ratepayer groups also question the ability of the
Legislature, CEC or CPUC to set a wholesale rate for the
sale of electricity under federal law at a level as high as
this bill proposes.
The Attorney General has submitted an opinion on the
interplay of the Federal Power Act on a FIT rate and opined
that a rate could be set. However, the A.G. did not review
the tariff provisions specified in this bill.
1. Committee Acted Earlier this Year - Earlier this year
this committee approved SB 32 (Negrete McLeod) to expand
the current FIT from 1.5 MW to three. An expanded pricing
mechanism is also established at the MPR plus renewable
attributes and locational value. Amendments in the Senate
Appropriations Committee required all costs of the FIT to
be under the RPS cost cap and prohibit the CPUC from
developing any other FIT program. This bill is set for
hearing in the Assembly Utilities and Communications
Committee on July 6th.
2. CPUC Rulemaking Underway - The CPUC is considering
whether or not the project size eligible for its current
FIT should be increased from 1.5 MW to 20 MW.<2> Among the
critical issues to be evaluated is the pricing structure.
The CPUC is exploring a tariff structure which would
provide standardized contracts to lower transaction costs
but overlay the tariff with a competitive element.
3. Technical Amendment - Author intends to amend the bill
on page 8, line 33, strike "thirty dollars ($30)" and
insert "$0.30."
ASSEMBLY VOTES
Assembly Floor (50-26)*
Assembly Appropriations Committee (12-5)*
Assembly Natural Resources Committee
(6-3)*
Assembly Utilities and Commerce Committee
(10-4)*
*Votes on prior version of the bill.
POSITIONS
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<2> Current law caps the program at 1.5 MW; there is no clear
authority for the CPUC to expand the program to 20 MW. SB 32
(Negrete McLeod) expands the program to 3 MW and clearly
specifies that the CPUC has no authority to expand the program
further.
Sponsor:
Author
Support:
Applied Materials
California Public Utilities Commission (if amended)
RightCycle (if amended)
The Vote Solar Initiative (if amended)
Union of Concerned Scientists (if amended)
One Individual
Oppose:
Pacific Gas and Electric Company
Sempra Energy
Southern California Edison Company (unless amended)
The Utility Reform Network
Kellie Smith
AB 1106 Analysis
Hearing Date: July 7, 2009