Oregon FIT Critique, April 2011

WHY OREGON’S SOLAR PILOT PROGRAM IS NOT A GENUINE FEED-IN TARIFF: WHY THIS IS IMPORTANT AND WHAT WE CAN DO – OREP Commentary

A Feed-In Tariff itself is simply a payment you receive for every kWh of electricity you produce from a renewable resource and feed into the grid.

A Feed-In Tariff LAW is the policy that when in place makes it possible for you to receive those payments.

FITs pay you per kWh for producing electricity from a renewable energy source whether it's solar, wind, hydro, or even wave. FIT Laws open up the energy market and make it financially attractive to produce and sell Renewable Energy to your utility. FITs encourage millions of utility customers to become renewable energy entrepreneurs and enable ordinary citizens to compete with large commercial developers.

A successful FIT law provides THESE FOUR GUARANTEES:

1 - if you can produce renewable energy, your utility must hook you up so you can feed the energy into the grid

2 - your utility must buy 100% of the renewable energy you produce

3 - they must pay you a fixed price per kWh for a set number of years (usually 15-20), so you can pay off a loan or recoup your investment; and

4 - the price paid must be calculated to cover what it costs you to produce the energy plus a reasonable profit (cost of generation plus a reasonable return on your investment).

A good FIT law attracts investment capital so that RE production skyrockets, jobs are created and the price of RE starts coming down.

FITs made cloudy Germany the world leader in solar in less than a decade. FITs are responsible for 75% of the world's solar and 45% of its wind energy and over 60 countries use them.

In 2010 Ontario, Canada started its FIT program and in its first year installed 5000MW of RE and created 43,000 jobs.

PROBLEMS WITH HB3039 THAT AUTHORIZED OREGON’S SOLAR PILOT PROGRAM (to view HB3039 click here):

HB3039 provides for:

#1 - guaranteed hookup and

#3 - guaranteed fixed price over a set contract period of 15 years

HB3039 does not provide for:

#2 - 100% purchase guarantee, and

#4 - a fixed price that covers the cost of generation plus a reasonable return on investment

PROBLEMS WITH SOLAR PILOT PROGRAM:

#2 - 100% purchase guarantee

During rulemaking for Oregon's Solar Pilot Program at the PUC, it was discovered that Section 210 of PURPA prevents states from setting prices that utilities must pay for wholesale renewable energy at above avoided cost. Avoided cost is typically equated to the highly subsidized cost of energy from fossil fuels like natural gas and coal and is much lower than the cost of generating electricity from renewables. Only the Federal Energy Regulator Commission can set wholesale prices for RE. This is known as the "FERC pre-emption".

The program design chosen by the PUC for the Solar Pilot Program to avoid FERC pre-emption provides a disincentive to maximize solar production. It limits the maximum size of an installation at a given location to less than the customer's annual consumption and will not pay the fixed rate above avoided cost for production in excess of consumption in order to avoid the possibility of a wholesale sale by the customer to their utility at above avoided cost. This constraint creates a perverse incentive for the customer generator to over-consume energy in order to maximize their production payment, and creates a disincentive to adopt energy efficiency measures.

SOLUTIONS:
STATE: Amend statute to include a 100% purchase guarantee.

FEDERAL: In a case brought by California's PUC, FERC recently ruled that PURPA does allow states to set wholesale prices for RE at above avoided cost, but the case was appealed by CA's utilities. An amendment to PURPA would fix the problem. Both Senator Wyden and Senator Sanders will introduce amendments this session. Senator Wyden's PURPA PLUS Act sets a project size cap of 2MW, which is too low and if the FERC decision is not upheld, would prevent the application of FITs to large wind, solar and probably wave nationwide. Twenty other states have FIT bills somewhere in the legislative pipeline and will encounter the same problems Oregon has. We need a fix that works for everyone and frees states to decide what mix of RE technologies and project sizes best fits their needs.

#4 - a fixed price that covers the cost of generation plus a reasonable return on investment

A price that does not cover costs plus a reasonable return on investment will not attract private capital, whether it is a homeowner with a CD or a group of private investors.

Getting the fixed price correct is the most vital element to a successful feed-in tariff. If we hope this pilot program for solar PV to test the concept of a FIT that can then be applied to other technologies, we must get the financial medaling correct. This is critical and complex.

PUC staffers are finding it so challenging coming up with the right price that on Feb 11th they proposed to put out half of the medium-sized  capacity to competitive bidding.  Competitive bidding has no place in a Feed-In Tariff for many reasons. It introduces inefficiencies into the FIT process and limits the number of producers. The key element that makes FIT produce rapid growth is that everyone can take advantage of the same fixed price for their technology and project size, so multiple projects can proceed simultaneously. Competitive bidding means one project at a time and lots of losers. FITs mean all winners, no losing bids.

SOLUTIONS:

- Amend statute to require a fixed price that covers the cost of generation plus a reasonable profit. This requires the PUC to work to get the price right.

- Bring in outside expertise to advise PUC Staff on the latest methodology for setting FIT prices that is used in other countries and takes into account both the needs of producers to cover their costs and of ratepayers not to be over-charged. Such price-setting expertise is available. Vermont used it and Ontario used it for their highly successful program. By Dec 2010, the end of the first year of its full-fledged FIT program for all RE, Ontario had installed 5000MW of RE and created 43,000 jobs.

Finally, the Solar Pilot Program that resulted from  HB3039 is not a test of a genuine FIT, partly because as they were making decisions about program design, PUC Commissioners felt under no obligation to design a test of a genuine FIT. To paraphrase the Commission in their May 28, 2010, ruling just prior to the program's July 1st launch, the term feed-in tariff does not appear anywhere in HB3039.

SOLUTION:

- Amend the statute to use the term feed-in tariff

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Despite the above drawbacks, the program has been well received and capacity has sold out in minutes at both the July 1st and October 1st enrollment windows. This may be partly due to the increased demand created by the new limits on BETC and RETC. In fact, with the severe cutbacks on BETC and RETC the foundation that supported Oregon's solar industry is now in the process of collapsing.

There is much hope now being pinned on a successful FIT as an alternative to tax credits to sustain a solar industry in Oregon and eventually other renewables as well.

However, we will not achieve the true economic and environmental potential of a FIT in Oregon until we fix the current flaws in the pilot program.

In summary, we suggest: several eventual statutory fixes to HB3039; bringing in outside price setting expertise to bring greater precision and fairness to the fixed price; and federal legislation to remove the FERC pre-emption that currently prevents states from easily adopting and  experimenting with genuine feed-in tariffs.