Feed-In Tariffs Emerge As Key Driver for Solar Development

Reprinted with permission from the 2012 Solar Power International Show Preview Guide

into the grid upon generation, they Feed-In Tariffs Emerge As preclude the use of energy-storage technologies. The requirement that all electric- Key Driver For Solar ity be fed into the grid also prevents FIT participants from utilizing third- Development party PPA arrangements that are often used in conjunction with net metering. Third-party PPA arrangements, FIT programs are slowly taking off in several U.S. cities and states. used popularly by companies such as However, FITs cannot be used with third-party system financing. SolarCity, Sungevity and SunRun, allow electricity users to save on their electricity bills and avoid the up-front b Elliot Hinds, Courtney Matsuishi arrangements, the tax-equity inves- costs of installing solar. Under a typical & Brent Schoradt tor finances the solar installations in third-party PPA arrangement, the util- exchange for the right to all tax ben- ity customer pays a fixed monthly rate his year, both the government of efits for the installations. By providing for the solar power produced from a TJapan and the Los Angeles De- a guaranteed price for all electric- solar system that the third-party solar partment of Water and Power (LAD- ity produced and standardized PPAs, integrator installs, owns and operates WP), the largest municipal utility in FITs help attract tax-equity inves- on the customer’s property. the U.S., launched new feed-in tariffs tors and facilitate financing for solar The installer takes the value of any (FITs). This article compares the key installations. tax breaks, solar incentive programs features of these new FITs to existing FIT programs across the globe have or renewable energy credits generated FITs in other jurisdictions, including established varying maximum project by the solar system and can attract California, Vermont, Washington, Ha- size limitations. (See figure.) Typically, tax-equity investors willing to finance waii, Ontario, Spain and Germany, maximum project size limits exclude installations in exchange for the tax with an emphasis on the key differ- utility-scale projects (larger than 1 credits generated by the solar panels. ences in project eligibility, output con- MW) from FIT eligibility. In addi- Because net-metering utility cus- trols and pricing mechanisms. tion to maximum project size lim- tomers use the solar system to offset FIT programs typically entail its, most FITs have overall program electricity that would otherwise be streamlined long-term power pur- capacity limits based on the total purchased at the retail rate, install- chase agreements (PPAs) between installed capacity or a specified per- ers can negotiate attractive PPA prices utilities and generators, under which centage of peak energy demand in the that are below retail but well above the generator receives a predeter- jurisdiction. the wholesale price of electricity. In mined price for each kilowatt-hour FITs generally require that all elec- states with high retail electricity rates, of electricity produced for the life of tricity output from the solar facility be such as California, third-party PPA ar- the PPA. FIT programs encourage fed into the grid. By contrast, under rangements are particularly attractive. the widespread deployment of solar net-metering arrangements, the utility Third-party PPA arrangements systems by providing price certainty bills the customer for net energy usage have been a major contributor to re- to project developers and incentives (energy consumed on-site less energy cent growth in residential solar instal- for utility customers to install solar generated by the solar facility). lations and commercial-scale projects systems with capacity beyond their Jurisdictions that offer both FIT for customers with high energy de- individual electricity needs. and net-metering programs (includ- mands, such as school districts and In the U.S., project developers can ing California, Hawaii, Vermont and shopping malls. Notwithstanding the aggregate numerous FIT PPAs to at- Washington) usually require partici- success of third-party PPA arrange- tract tax-equity investors, thereby pants to choose between the FIT and ments, FITs will be particularly attrac- monetizing federal and state solar net metering. Because FITs require tive to solar developers in jurisdictions investment tax credits. Under such that all electricity generated be fed where the FIT price is higher than the

Subscription information is available online at www.solarindustrymag.com. Copyright © 2012 Zackin Publications Inc. All Rights Reserved. and avoid the pitfalls of the fixed- Jurisdiction Maximum Project Size Pricing Mechanism price FITs by requiring developers to submit bids that are ranked based on LADWP 999 KW Auction price. Since a high-priced bid may be Fixed-price based on average cost of generation rejected, developers have an incentive Washington 2 MW plus 10% rate of return to submit competitive bids with lower Fixed-price but adopting market-based PPA prices. Vermont 2.2 MW mechanism by 2013 For example, the LADWP established a market-based mechanism in California’s Fixed-price based on RAM results with adjustments 3 MW Re-MAT based on developer participation which project developers’ bids will be ranked by giving preference to the Hawaii 5 MW* Fixed-price lowest prices. The LADWP’s pricing mechanism Japan 10 MW Fixed-price with annual adjustment is similar to the California Public Ontario 10 MW Fixed-price Utilities Commission’s (CPUC) Re- newable Auction Mechanism (RAM), 10 MW which requires California’s investor- Spain** (ground-mounted systems); Fixed-price owned utilities to hold biannual com- 2 MW (rooftop) petitive auctions for renewable energy projects up to 20 MW in size. Germany 10 MW Fixed-price with annual declines*** Under the RAM rules, the utility California’s must rank proposals based on the 20 MW Auction RAM proposed price and automatically se- * Maximum project size varies according to region of state lect the lowest-priced bids until the ** Currently closed to new projects *** Current legislative proposals would significantly curtail German FIT prices for new projects. auction’s total megawatt cap is met. Source: Akin Gump The CPUC is implementing the Re- newable Market Adjusting Tariff (Re- retail rate of electricity, such as in Ver- installations, generous fixed-price FITs MAT) for renewable projects with a mont, Ontario and Japan. have been criticized for providing un- capacity of 3 MW or less. The Re- sustainably high price supports. MAT will offer participating develop- Pricing mechanisms Spain’s notoriously generous FIT ers a fixed-price PPA initially based FIT programs establish the long- price of up to $0.55/kWh proved un- on the average price of the winning term PPA price for each kilowatt- sustainable in the midst of the coun- RAM bids. hour of electricity fed into the grid try’s ongoing fiscal difficulties, and the While the Re-MAT PPA prices are through fixed-price or market-based FIT program was temporarily closed fixed for the PPA term, the PPA price auctions. Many fixed-price FITs pay to new applicants in January. offered to new projects will be adjusted more than the retail electricity rate To avoid the pitfalls of the higher- every two months based on the num- for renewable power. For instance, in priced FITs, Washington’s FIT prices ber of eligible developers that accept Vermont, where the retail electricity are based on the average cost of gen- the price offered in the previous two- rate is $0.12/kWh, the FIT price is eration plus a 10% rate of return. The month period. The RAM price bids $0.27/kWh. Washington methodology is similar are not publicly disclosed, whereas the The market certainty and high- to rate-setting methods traditionally Re-MAT starting price will be based er prices offered by fixed-price FITs used by public utility regulatory com- on the average winning RAM bid, thus have spurred the rapid deployment missions throughout the U.S. providing an important benchmark of solar technologies in jurisdictions Similarly, Japan’s fixed FIT price for project developers. with such FITs. In 2011, Germany (initially $0.53/kWh) will be adjusted The results of Southern Califor- (which has long offered FIT prices annually, taking into consideration in- nia Edison’s (SCE) first RAM auction higher than the retail electricity rate) stallation and electricity costs, the proj- demonstrate that larger solar projects installed over 7,500 MW of new solar ect’s service life, and a rate of return. are more likely to receive awards un- capacity, more than triple the 1,855 The customer surcharge used to fund der the auction method. The average MW of new solar installed over the the FIT will be evaluated yearly to help installed capacity of SCE’s winning same period in the U.S. stabilize funding for the FIT PPAs. bids was 9.57 MW, and the smallest Notwithstanding the success of the Market-based FITs seek to take ad- winning bids were for 2 MW of in- German FIT in spurring new solar vantage of falling solar panel prices stalled capacity.

Subscription information is available online at www.solarindustrymag.com. Copyright © 2012 Zackin Publications Inc. All Rights Reserved. In an effort to protect smaller metering may be more lucrative than developers submitting future bids for projects from competing against FITS in states with high retail elec- California’s RAM. S larger projects (which typically have tricity prices but relatively low FIT a lower price per kilowatt), under prices. FITs and net metering both the LADWP FIT, similarly sized proj- allow developers to aggregate and fi- Elliot Hinds is a partner, and Courtney Mat- ects (up to 150 kW, and 151 kW to nance various solar installations while suishi and Brent Schoradt are associates, at 999 kW) will be ranked against each monetizing U.S. federal tax benefits law firm Akin Gump. All three serve in the other, and a specified number of for solar production. firm’s project finance practice. Hinds can be contacted at [email protected], Mat- megawatts must be awarded in each Additionally, the Re-MAT starting suishi can be contacted at cmatsuishi@akin category. PPA price for California projects with gump.com and Schoradt can be contacted at Overall, third-party PPA arrange- 3 MW or less of installed capacity will [email protected]. ments used in conjunction with net serve as an important benchmark for