designing an effective feed in tariff for greater los angeles 040110

8/9/2019 Designing an Effective Feed in Tariff for Greater Los Angeles 040110

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DESIGNING AN

EFFECTIVE FEED-IN TARIFF

FOR GREATER lOS ANGElES

DESIGNING AN

EFFECTIVE FEED-IN TARIFF

FOR GREATER lOS ANGElES

Los Angeles Business Council Studyin partnership with the

UCLA Luskin Center for InnovationSchool of Public Affairs


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puRpose of the stuDy

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intRoDuction to solaR economics anD policysolaR photovoltaic inDustRy 101 2BaRRieRs to solaR owneRship 6solaR puBlic policies in califoRnia 9feeD-in taRiffs 13

Review of feeD-in taRiffs pRoGRams woRlDwiDeGeRmany 15spain 17ontaRio, canaDa 19Gainesville, floRiDa 21 veRmont sacRamento municipal utilities DistRict 23

assessment of califoRnias feeD-in taRiff pRoGRams & pRoposalslos anGeles DepaRtment of wateR anD poweR:feeD-in taRiff pRoGRam pRoposal 27califoRnias feeD-in taRiff unDeR aB1969 anD sB32 28califoRnia puBlic utilities commission:RenewaBle auction mechanism 29implications foR los anGeles 30

DesiGn GuiDelines foR feeD-in taRiff policies

DesiGn elements 34

evaluative cRiteRia 44

conclusions 47

enDnotes 49

Table of Contents

1

2

3

4

5

6

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fiGuRe 1: annual installations of GRiD-connecteD solaR pv 1

fiGuRe 2: u.s. solaR ResouRce map (nRel) 3

fiGuRe 3: cost anD pRoDuctivity of solaR in selecteD u.s. cities 3

fiGuRe 4: the solaR value chain 5

fiGuRe 5: components of installeD costs of solaR 6

fiGuRe 6: impact of incentives of a typical 50 kw commeRcial solaR pRoject 9

fiGuRe 7: limitations of cuRRent incentive fRamewoRk 10

fiGuRe 8: Relative contRiBution of solaR incentives (pResent value Basis) 11

fiGuRe 9: pRoject owneR costs anD Benefits of califoRnias feeD-in taRiffs 31

fiGuRe 10: feeD-in taRiff pRoGRam DesiGn hieRaRchy 33

fiGuRe 11: implications of aDministRation DesiGn elements 35

fiGuRe 12: implications of eliGiBility DesiGn elements 37fiGuRe 13: implications of taRiff DesiGn elements 39

fiGuRe 14: implications of maRket contRol DesiGn elements 41

fiGuRe 15: implications of special pRovision DesiGn elements 43

fiGuRe 16: evaluative cRiteRia 46

List of Figures

appenDiX 1: solaR maRket stRuctuRe 54

appenDiX 2: summaRy of woRlDwiDe feeD-in taRiffs 55

appenDiX 3: analytical assumptions 56

appenDiX 4: Results of assessment of cas feeD-in taRiffs 59

appenDiX 5: laDwp floatinG feeD-in taRiff, eXpecteD taRiff 60

appenDiX 6: sensitivity analysis 62

appenDiX 7: solaR aDvisoR moDel Results 63

Appendices

iv


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1SECTION1INTRODUCTION TO SOLARECONOMICS AND POLICY

Los Angeles maintains some of the most ambitious regional clean energy goals

of any jurisdiction in the world. Regional leaders have articulated goalsrelating to renewable energy targets and economic development. Clean TechLos Angeles, a multi-institutional collaboration between Los Angeles majorresearch universities, businesses, and public agencies, aspires to establish LosAngeles as the global leader in research, commercialization, and deploymentof clean technologies.1

FIGURE 1: Annual Installations of Grid-Connected Solar PV

Data Source: Renewable Energy Policy Network for the 21st Century

Los Angeles municipally-owned utility plans to eliminate coal and meet 40% o itselectricity demand rom renewable and sustainable sources by 2020.2 In 2008, theMayor o Los Angeles proposed a plan to procure 1,280 mega-watts o solar genera-tion by 2020.3 Each one o these goals, taken individually, is among the most ambi-tious o any jurisdiction in North America. aken collectively, the realization o thisbroad vision could transorm Los Angeles into a leading center o clean technology.Solar energy generation has the potential to contribute to these goals, but it has yetto make a signicant contribution to the Los Angeles economy. Not only does solargeneration produce clean, emission-ree energy, but also it creates local opportuni-ties or employment and entrepreneurship. Solar companies employ people to ndsuitable sites, sell systems, install equipment, and monitor each installation. Tese

opportunities originate rom the site and the system itsel, and thereore create localemployment benets.

Caliornias share o the world-wide installed solar is declining.4 Driven by economicdevelopment strategies expressed through energy policy, other countries are claim-ing solar market share aster than Caliornia. Germany has led the world in annualsolar installations with sustained growth between 2004 and 2008. Germanys steadygrowth was due to a national eed-in tari (Fi) law that stimulated their domestic


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solar industry. In 2008, Spain experienced explosive growth and overtook Germany inannual installations due to an aggressive national Fi policy. In 2009, the policy waschanged and Spains annual installations plummeted. Germany is poised or steadygrowth and will retake the annual leadership position during 2009. During 2009, 45countries had Fi policies.5

Te inuence o Fi policies is evident as the rest o the world makes signicant annuacontributions to the total installed solar capacity. Despite strong absolute growth, Cali-ornias share o the worlds annual installations ell rom 5.2% to 2.8% between 2004and 2008. Driven by aggressive Fi policies, other jurisdictions around the world areincreasing their use o solar energy, developing their local economies, and capturing theworlds solar market at a aster rate than Caliornia.

PURPOSE AND METHODOLOGY

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Te purpose o this report is to provide a useul guide or policy makers interested indesigning a Fi policy or Los Angeles. Te design guidelines in this report provide ageneral ramework highlighting the important considerations policy makers must iden-tiy and conront when addressing this type o solar policy. Te ramework ocuses ondesign alternatives and their associated trade-os.

Tis ramework is the product o several sources o inormation. First, we researchedFi programs that have been implemented in the United States and around the worldWe gathered inormation about the specic program design and the actual results oeach program. Second, we interviewed important stakeholders in the solar industryTis included leading organizations in the commercial, educational, and non-prot sec-

tors within the Los Angeles region. From these interviews we gained a general rameor the important issues. Tird, we developed a solar project model using industry best-practices. We applied this model to Caliornias proposed and existing Fi programs us-ing realistic assumptions and examples. Based on the observations rom these individuaresearch tasks, we propose the ramework in this report as a guide or policy makers inthe Los Angeles region interested in understanding Fi policies.

SOLAR TECHNOLOGYSolar photovoltaic (solar PV or simply solar in this report) systems are energy conver-sion devices that transorm sunlight into electricity. In areas where the sun is intensesolar systems are more productive. A typical 4 kilo-watt system on a single amily homein Los Angeles can produce about 5,400 kilo-watt hours per year.6 Tis is enough elec-tricity to oset most o the annual requirements o this typical residence. In cities wheresolar systems are very productive, the cost o the energy is lower. Los Angeles is amongthe most productive cities in the United States or solar.

Solar technology is not new, but innovation within the solar industry is driving newapplications and achieving greater conversion efciencies. Originally solar was used in

DESIGNING AN EFFECTIVE FEED-IN TARIFF FOR GREATER LOS ANGELES

SOLAR PHOTOVOLTAIC INDUSTRY 101


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FIGURE 2: U.S. Solar Resource MapSource: National Renewable Energy Labo-ratory7

3

FIGURE 3: Cost and Productivity of Solar in Selected Cities


space-based applications, but the early market adopters used the technology to meetthe electricity needs o remote buildings or o-grid applications. Later, solar was in-tegrated into the existing electrical grid. oday solar is most requently used to osetthe electrical loads o homes and businesses. Any excess power can be delivered to theelectrical grid and made available to other electricity consumers. Some solar projects aredesigned to provide all their power to the grid.

Solar systems can be placed virtually anyplace that receives direct sunlight. Modernapplications o solar are diverse. Rootops are the most common grid-connected ap-


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Within the Los Angeles basin, there are ewer opportunities or larger solar projects. TeLos Angeles basin is land supply-constrained. Tere are many competing uses or landthat prevent ree-standing, ground-mounted in-basin projects. Gaining entitlementis more difcult in densely developed areas. Tese actors present challenges to larger

solar projects within the Los Angeles basin. However, rootops, uncovered parking lotsand buer areas around transportation acilities lack alternative uses. In-basin solar energy generation may be the highest and best use or these areas.

Land-intensive, utility-scale projects are only ea-sible out-o-basin. Tese projects provide so-lar power more cheaply than in-basin projectsbut there are signicant challenges to importingpower into Los Angeles. High-voltage transmission lines are either congested or reserved or oth-er renewable energy projects. Te time required

to plan, permit, and develop new transmissioncapacity ar exceeds the time required to devel-op energy generation. Tis mismatch creates atransmission bottleneck that limits the amounto solar power Los Angeles can import.

Each type o solar project has specic advantages and disadvantages, cost structures, andenergy conversion efciencies. Because the costs o the system and the electrical outpuvary according to many actors, the economic prole o every type o project is uniqueSolar economics are driven by technology, project size, application, and location. Dueto this variation, unique market segments have emerged that ocus on delivering solar

A 2 mega-watt solar farm on 16 acres.


plication, but panelscan also be mountedover parking lots, in-tegrated into buildingstructures (BIPV), orconstructed in largeground-mounted ar-rays known as solararms.

Grid-connected so-lar projects come inmany sizes. At thesmallest, a one kilo-

watt system on a residential home requires just 100 square eet o rootop space andosets only a small portion o the homes electricity use. A larger one mega-watt projectrequires several acres. Te largest solar projects can occupy hundreds or thousands oacres in less developed areas o the southwest.

A 7 kilo-watt residential solar system

SOLAR IN LOS ANGELES


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THE SOLAR VALUE CHAINTe solar value chain delivers solar products and services to the market. It is a diversecollection o companies. Te upstream players in the value chain manuacture equip-ment. Te downstream players produce energy and provide services. Most solar publicpolicies and incentives are targeted towards the downstream end o the solar value chainconsisting o owners and electricity consumers.

FIGURE 4: The SolarValue Chain

DOWNSTREAMTe downstream participants in the solar value chain are the installers, system owners,and users o electricity. Tese participants are primarily ocused on providing services.Installers, also called system integrators, are the solar industrys construction managers.Te industry supports many types o business models at the system integrator role in thevalue chain. In general, these companies sell solar systems to owners. Tey also oversee

the installation process. Tis involves procuring equipment, managing constructioncrews, engineering the systems, and interacting with municipal permitting authorities.

Tere are several distinct business unctions at the system owner position in the valuechain. Some owners are proessional solar developers who nd promising sites, hireinstallers, arrange nancing, and sell the electricity. Proessional developers rely on capi-tal provided by investors to cover the high initial installation costs. Other owners arenon-proessional players. Tey purchase solar systems or the energy benets, but solarownership is not their core business activity. Homeowners are non-proessional own-ers. Most commercial owners also all into this category. Te purchase o a solar systemrepresents a serious nancial commitment or the non-proessional owner. Although

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UPSTREAMTe upstream participants in the value chain are the manuacturers. Tese entities col-lect raw materials, manuacture solar cells, and assemble solar modules. Because theinverter is a major component o the solar system, inverter manuacturers are importantplayers in the upstream solar value chain. Te remaining balance-o-system (BOS) com-ponents o the solar system consist o electrical connections, wires, insulators, mount-

ing and tracking hardware, system monitoring sotware, and other components. Tesemanuacturers are a diverse set o companies that also participate in other industriessuch as the consumer electronics industry.


energy in specialized ways. Appendix 1 illustrates this diversity and highlights the di-erence between in-basin and out-o-basin solar projects.


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ECONOMIC BARRIERSTe most signicant barriers to solar ownership are economic. Although some po-tential owners are interested in the positive social and environmental benets o solarenergy, the economics o the investment are weighted most heavily in any decisionto purchase a system. Relative to the long-term recurring benets, the installed costso the system are very high. o acilitate ownership, the recurring benets must be

sufcient to pay back the system costs and to provide a reasonable return on invest-ment.

FIGURE 5: Components of Installed Costs of Solar

6

High Installed CostsIncreased BusinessRisk

Tax Incentives Limi-

tationsLack of Access toCapitalNo Grid AccessCompeting Uses forSpaceNon-optimal Place-ment

BARRIERS TOSOLAR OWNERSHIP:

BARRIERS TO SOLAR OWNERSHIP


solar systems are reliable and relatively simple to operate and maintain, many potentiacommercial owners perceive direct ownership to be a distraction rom their core businesactivity.

Te urthest downstream players in the value chain are the distributors and consumerso electricity. raditionally, utilities have been the monopoly distributors o electricity tohouseholds and businesses. In some instances, solar owners can act as wholesale electricityproviders and sell their electricity to a utility, which then distributes the power to retailend-users. Utilities have complex procurement processes making it difcult or impossibleor many solar owners to participate. In many parts o the country, an alternative modehas emerged. Proessional developers build systems on a customers site and sell the elec-tricity directly to the customer under a long-term contract. Tis model, called a PowePurchase Agreement (PPA), has been the most successul business model to date in theU.S. or large, commercially-owned solar systems.8


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Te high installed costs o solar are a barrier or most owners. Te installed costs o asolar system are a product o business contract negotiations throughout the value chain.For this reason, installed costs are highly variable. Te solar modules represent the larg-

est single component (about 45%) o the installed costs in most projects.9 Module costs,subject to global supply and demand, are also the most volatile component o installedcosts. Inverter and the BOS costs cover the remaining hardware. System integration andlabor costs reect the administrative and construction labor costs o installation. In De-cember 2009, installed cost indexes ranged rom $4.63 per watt or a large industrial sys-tem to $8.44 per watt or a small residential system.10 Tese indexes trended downwardduring 2009, primarily because o decreases in module costs.11 Because o the volatility othe installed cost o solar, public incentives must be well-designed in order to consistentlyand positively inuence the economics o a solar project.

Many building owners are not able to accept signicant business risk to accommodate

solar generation on the buildings they own. o own a solar system, landlords must paythe initial installed costs, but cannot accrue the utility savings benets under most leasestructures. Te tenant benets exclusively rom the decreased utility charges. Tis splitincentive dilemma prevents solar adoption on many commercial buildings that are notowner-occupied. Furthermore, many rootop solar installations on commercial buildingscan invalidate the roo warranty and introduce additional business risks. Although manylandlords are interested in adding value to their properties with solar energy, the cur-rent structure o the real estatemarket prevents them romowning systems and providingsolar energy to their tenants.

Many owners cannot use tax-based incentives. Many pub-lic and non-prot agencies aremandated to meet a portion otheir energy consumption withrenewables. Others are moti-vated by the social benets oclean energy or the potentialor operational cost savings.Many incentives designed toreduce the cost o an installa-tion are implemented throughtax-based policies. I the en-tity does not pay taxes, theycannot take advantage o thesecost reduction policies. Telack o access to tax-based in-centives is a barrier to owner-ship or public and non-protagencies.

A 106 kilo-watt rooftop solar system. Under current marketconditions, this system costs over $600,000.

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TECHNICAL BARRIERSNot every site is appropriate or solar. Regardless o the incentives oered, some sites can-not accommodate the equipment, have too much shading, or have competing land usesthat prohibit installations. Some sites receive excellent sun, but use little electricity ocannot deliver the surplus energy to the grid. Solar modules are most productive whentilted skyward and oriented to the south. I the site cannot accommodate the installationat these specications, the modules perormance can be degraded by as much as 50%. 1

Te decreased output caused by less than optimal placement can alter the economics so theproject is no longer easible. Regardless o the economic or regulatory barriers, some sitewill never accommodate solar economically.


Te most signicant regulatory barrier to solar adoption in Los Angeles is the protectiono LADWPs legal monopoly status by the Citys Charter. Tis regulatory barrier preventsproessional solar developers rom owning systems and selling solar energy to those entitiethat cannot otherwise bear the business risk associated with solar. Other jurisdictions haveexperienced similar regulatory barriers and have experimented with potential workaroundsUnder solar lease structures, electricity customers pay proessional solar owners to leasesolar equipment rather than to buy electricity. Alternatively, a utility could become a contractual intermediary between a solar owner and an electricity consumer. I determined tobe legal, these structures could bypass this major obstacle. Tis regulatory barrier preventthe City o Los Angeles rom accommodating the most successul rootop solar businessmodel in the United States so ar.

Access to the electricity grid is undamental to solar economics. Because solar productiondoes not match electricity consumption at every site, the system must be interconnected tothe grid so the owner can be compensated or every kilo-watt hour o electricity the systemproduces. Without this guarantee, most owners cannot recover their costs o installationHowever, access to the grid is oten not guaranteed. Furthermore, many suitable solasites are not near a easible grid interconnection point. Te inrastructure to transmit anddistribute electricity is planned and constructed through a separate, but parallel process tosolar generation planning. At many locations, grid availability and solar potential are notaligned. Tis condition creates a barrier to the potential solar owner.

REGULATORY BARRIERS

Lack o access to capital is a major barrier to ownership or businesses. Te initial installation costs are out o reach or many businesses. Many cash-constrained owners cannoprovide the up-ront capital without external nancing. Te benets rom solar ownership

must not only be sufcient to cover the installation costs, but also predictable in order toacilitate external nancing.

Te economic barriers to ownership make it difcult or many organizations to own solarsystems. Tese entities are interested in solar energy benets but are unable to bear thebusiness risks in many cases. In other jurisdictions outside o Los Angeles, proessionasolar owners take the business risk o ownership and sell solar energy to the site under aPPA contract. Tis arrangement allows the site hosts to ocus on their core activities whilesimultaneously beneting rom solar energy.


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Public incentives are necessary to reduce the barriers to ownership. Potential solar ownersare currently incentivized by an array o programs. Tese programs provide the subsidy toparticipants through dierent delivery methods, each addressing the economic barriers toownership dierently. Te goal o Caliornias incentive rameworks is to allow an owner torecover some or all o the costs o ownership.

Under the current conditions o the retail electricity market, most solar energy systemscannot pay or themselves without public incentives. With sufcient incentives, a systemowner can achieve a payback o the initial costs within 6-10 years. Most owners expect areasonable return on the solar investment over the entire lie o the system, which can exceed25 years. Te long-term nature o a solar investment creates an economic risk prole that

many potential owners are unable to bear. Most solar public policies are aimed at incentiv-izing ownership by improving the economic prole o a solar investment.

RATEPAYER FUNDED INCENTIVES

FIGURE 6: Impact ofIncentives on a Typi-cal 50 kW Commer-

cial Solar Project

SOLAR PUBLIC POLICIES IN CALIFORNIA


In many jurisdictions, utility customers (ratepayers) subsidize solar ownershipin the orm o direct incentives. SB1 authorized ratepayer subsidies or Cali-

ornia solar owners. Direct incentives can be disbursed to owners in one otwo orms, cash rebates which oset the high initial system cost, or productionincentives which pay system owners periodically based on the amount o en-ergy produced by the system. Te Caliornia Solar Initiative (CSI) oers bothtypes o incentives or customers o the Investor Owned Utilities (IOUs). Ineither orm, the total value o the CSI subsidy helps make the economics o so-lar more attractive or system owners. Te program has incentivized over 480mega-watts o solar or Caliornia.13 LADWP administers a similar programwhich has incentivized 35 mega-watts o solar or Los Angeles.14

*After the 30% ITC, MACRS Depre-ciation, and a $2.50 per watt rebate

IMPACT OF INCENTIVES

1.2% 7.4%

BEFORE AFTER*RETURN ON INVESTMENT:

YEARS TO PAYBACK:

No Payback 7 Years


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FIGURE 7: Limitations of Current Incentive Framework

Because o these implicit caps, owners are discouraged rom building the largest systemtheir site will accommodate. Commercial or public entities with abundant unused rootopspace, large uncovered parking lots, or low on-site power requirements are most aected

A 743 kilo-watt Solar System in City of Industry.Using only a portion of the available roof, this system brought the owners electricity bill to zero.


First limitation:1.On-site power requirementsSecond limitation:2.One mega-watt incentivecaps. Beyond these caps,the economic beneftso larger systems decline

quickly.

LIMITS TO

CALIFORNIAS CURRENT SO-LAR INCENTIVEFRAMEWORK

Tese incentive programs are intended to work in conjunction with net metering policies.Solar systems produce electricity during the hours o direct sunlight. Many sites cannotuse all the solar electricity during these hours. Since the excess generally cannot be stored

economically, net metering policies allow the owner to deliver the excess energy to the gridor a retail credit. wo provisions to this policy dissuade owners rom building systems thawill produce more energy than they can use on-site. First, the owners energy bill can onlygo to zero. Tis two-way net metering system increases the owners utility bill savings, butdoes not allow the owner to be credited or surplus energy beyond what can be used on-siteSecond, Caliornias net metering policy will only credit owners or production by systemsup to one mega-watt in size. Beyond each o these inherent caps, the economic benets olarger systems decrease dramatically.


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by these inherent restrictions in the existing incentive policies. Tese types o sites are ex-amples o untapped solar market segments.

Large multi-amily residential developments are another untapped market segment. An

apartment complex with a rootop solar system could avoid the complexity o creditingeach individual residents electricity bill or their portion o the solar energy by simplyselling all the energy to the grid. Tis model could expand the potential solar market byincentivizing proessional solar developers towards Los Angeles multi-amily residentialmarket. Other untapped market segments include unused space along transportation cor-ridors, transmission and communication rights-o-way, and buer zones around airports orindustrial acilities. Because o these implicit caps, net metering policies limit the potentialsize o the solar market in Los Angeles.

AB920 was passed into law in Caliornia during 2009.16 Tis law will allow solar ownerswho supply surplus power to the grid to be credited beyond their utility bill charges at a

wholesale rate yet to be determined. Tis bill could expand the solar market by allowingowners to build systems to provide more power than they can use. Because the credits arelikely to be based on the prevailing value o electricity and not on the cost o solar genera-tion, this bill will not undamentally change the nature o net metering incentives.

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TAX-BASED INCENTIVESFederal tax authorities oer the Investment ax Credit (IC) or investment in solar energyequipment. Tese tax credits are intended to oset the high initial costs o solar by givingthe system owner a dollar-or-dollar reduction in income taxes. Te value o the IC is30% o eligible initial costs, reducing the initial burden. Te disadvantage o this type o

incentive program is that the system owners must owe taxes in order to realize the benets.Public agencies and non-prot entities cannot directly receive this benet. With the onseto the nancial crisis, ewer commercial entities owed enough income taxes to monetize thiscredit. Te American Recovery and Reinvestment Act (ARRA) o 2009 created a short-term option or cash grants rom the reasury in lieu o tax credits, eectively bypassing thetemporary obstacle to tax-based incentives.

FIGURE 8: Relative Contribution of Solar Incentives (Present Value Basis)



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SUBSIDIZED FINANCINGAn innovative method to overcome the high initial costs o solar is Property Assessed CleanEnergy (PACE) bonds.17 Tese bonds allow a property owner to nance energy efciencyand solar through municipally-issued bonds. Te owner then repays the principle andinterest on the bond over twenty years through an additional property tax assessmentAB811, the enabling legislation in Caliornia, was passed in 2008 and the rst bond wasissued in Berkeley during 2009. Although this program does not reduce the cost o solarit can address the capital constraints aced by many potential owners. Te program couldexpand the solar market by making it easier or capital-constrained homes and businessesto purchase a system to oset their on-site power requirements.

Te Renewable Portolio Standard (RPS) requires the states IOUs to meet a minimum por-tion o their electricity sales with renewable energy.18 Although this regulatory mechanismdoes not directly aect a private producer o in-basin solar energy such as a solar-equippedhome or actory, the mechanism has several indirect eects on the broader market. Firstthe RPS incentivizes market participation by creating certainty that there will be a state-wide market or at least a minimum quantity o clean energy. Tis acilitates long-terminvestment. Te RPS system allows renewable producers to compete or supply contractswith utilities. Te competitive process creates downward pressure on the prices bid bydevelopers. A disadvantage o this process is that bidders oten underbid just to win the

renewable supply contract. With low contract prices that oten do not cover the projectscosts, the winning projects oten ail to get built.

Te second way in which an RPS can inuence solar adoption is through the creation oRenewable Energy Credits (RECs). A REC is a certication that a unit o energy was pro-duced through renewable generation. Tis potential value could be realized over the lie othe project as power is produced and RECs are generated. RECs can be sold independentlyo the solar energy itsel. Incentive programs normally require that participants transertheir RECs to the utility. Caliornias state RPS program has helped create opportunitiesor proessional developers to sell solar power to the utilities, but it has not signicantlyexpanded the opportunities or in-basin solar.

RENEWABLE PORTFOLIO STANDARDS

& RENEWABLE ENERGY CERTIFICATES


Solar energy equipment can be depreciated under an accelerated schedule. Tis allows acommercial owner to accelerate their tax deductions rom twenty to ve years. Tis timingdierence signicantly increases the overall value o the depreciation tax benets. Althoughdepreciation benets are realized over the rst six years, their total value amounts to a sig-

nicant portion o the initial system cost. As with the IC, businesses must have the taxliability to take advantage o this benet. Residential and public owners are not eligibleTis restriction increases the cost o solar or these types o owners.

ax-based incentives are unded by all tax-payers. Because o this, these programs are morepolitically vulnerable through budgetary processes. Commercial owners can receive bothorms o tax-based incentives, so commercially-owned systems are more cost-eective thancomparable residential or publically-owned solar.


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13

BASIC QUALITIES OF FEED-IN TARIFFSA Fi is a contract or electricity sales between a solar owner and a utility. Fi contractshave standardized prices, terms and conditions, simpliying the electricity procurementprocess and creating opportunities or homeowners, businesses, and public entities to enterthe electricity supply market. Te price paid or the electricity ed into the grid is calledthe tari.

Many variations o Fi programs have been implemented around the world, but there arethree general qualities o solar Fis.19 Tey are price certainty, simplicity, and accessibility.Other solar incentives can have similar attributes, but Fi programs intentionally shapemarket response by maximizing these qualities. Tese three programmatic qualities make

it possible or smaller systems, non-proessional owners, and less cost-eective solar sites tocontribute solar energy to the grid.

First, the tari must create price certainty. Potential owners and capital providers mustclearly understand how the tari is set and how it is likely to change over time. Te con-tract must be designed in a way to assure the owner o the timing and magnitude o thebenets provided by the tari structure. Te Fi contract must provide certainty or a

period roughly equivalent to the eco-nomic lie o the solar system, generallyat least 20 years. A Fi contract is along-term nancial asset that can bal-ance the long-term liabilities created bya solar investment. Without this pricecertainty, owners and capital providersare less likely to invest in solar.

Simplicity is an essential quality forresidential customers.

Second, the contracts must be simple.Non-proessional solar owners donot have the expertise or resources toparticipate in a complex utility pro-curement process. Power generation

equipment is not amiliar to most non-proessional owners. A simple contractis a requirement or widespread solarparticipation in a Fi.

Tird, owners must be guaranteed ac-cess to the grid. Te utility must berequired to oer the tari (and gridaccess) to any eligible solar provider without a competitive negotiationprocess. Small, non-proessional solar

Price CertaintySimplicity

Accessibility

QUALITIESCOMMON OF ALLFEED-IN TARIFFS:

FEED-IN TARIFFS



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14

ARGUMENTS FOR AND AGAINST FEED-IN TARIFFS

Fis programs are controversial. Tere are valid arguments both or and against them.Critics o Fi policies highlight the risks o setting the tari through an administrative process rather than a market-based process.21 I the tari is too high, owners will be excessivelycompensated, the market will overreact, and the program can exhaust its resources, creatinga policy-driven industry boom and bust cycle. I the program continues or a long-timethe industry will come to rely on subsidized taris. Downward pressure on costs will not bepassed through the value chain and there could be reduced incentives to be efcient. Tetaris are normally passed directly on to ratepayers. With an expensive technology such asolar energy, this eect can be pronounced. Fis do not directly address the high installedcost o solar. And at the high penetration levels caused by Fis, renewable energy can in-

troduce grid integration challenges.22

Advocates say Fi programs are the astest way to bring clean energy online, creating envi-ronmental and economic benets. Tey say Fi programs can expand the solar market bycreating accessibility or new market segments. Te programs can reduce the regulatory andeconomic barriers to ownership. Research suggests that Fis are also the most cost-eectiveway to bring renewable energy online.23 Because the guaranteed tari reduces revenue riskit also reduces the risk premiums required by equity investors, thereby lowering the costs othis nancing mechanism. Te tari predictability and price certainty also can acilitate thegreater use o more cost-eective debt nancing, urther reducing project costs.24

Economics drive solar energy development. Innovation within this nascent industry icreating specialized ways o delivering solar. Tere are many signicant barriers to solarownership and public policies are addressing these challenges. Although Caliornia has astrong solar market, other jurisdictions around the world are capturing the solar industry ata aster rate. Caliornias current policies help some owners oset their electricity use withsolar, but the policies do not maximize the opportunities or solar energy generation withinthe state and the Los Angeles region. Fis are a promising alternative which can increasethe opportunities or solar within Los Angeles.

CONCLUSIONS


Fis are generally considered a distinct alternative to Caliornias current incentive rame-work designed to incentivize solar systems which oset on-site power use.20 Under mostFi programs, a system owner would not be eligible or ratepayer-unded rebates, otherproduction-based incentives, or net metering benets. ax-based incentives will apply toFi projects, however.

owners cannot compete with proessional energy generators. Negotiations will avor cer-tain parties over others, inherently avoring lower cost ossil-uel generation or proessionamarket players. Without this purchase obligation rom the utility, some generators will beexcluded rom the utilitys procurement process. Guaranteed grid access and a utility purchase obligation create market accessibility.


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15SECTION2REVIEW OF FEED-IN TARIFFS

Fi policies have several decades of history from which to draw lessons. Los

Angeles can learn from implementation both in the U.S. and abroad. Tissection of the report describes the design, implementation, and results of sixFi program worldwide.

In 2009, 45 countries and 18 states, provinces, or territories had Fi policies. 25 Weselected six jurisdictions that not only represent diverse program design, but also il-lustrate the policy trade-os aced by Los Angeles. We selected Germany, Spain, On-tario, Canada, Gainesville (Florida), Vermont, and the Sacramento Municipal Utili-ties District (SMUD) to investigate more thoroughly.

Because o the diversity o the jurisdictions, these six Fi programs and their resultsdemonstrate many o the commonly experienced trade-os policy makers ace whenmaking design decisions. Spain and Germany are national jurisdictions, both withover one decade o Fi-related policy experience, while the domestic programs areall very new. SMUD and Gainesville are municipal utility-based programs, whileVermont and Ontario are state/provincial programs. Te national programs are large,driven by renewable energy goals measured in giga-watts, while Gainesvilles total goalor the program is just a ew dozen mega-watts. Each program is designed dierently.Te dierent program designs demonstrate how program design can inuence theprogram results.

GERMANYGermany is the worlds leading solar market primarily because o its Filaw. Although Germany receives only about one-hal the sunlight o LoAngeles, the German Fi has created an economic environment that issupportive o the nascent solar industry. Te German model is otenlooked to as the epitome o an eective Fi.

Germany created its rst Fi law in 1990. Tis law, Stromeinspeisungs-

gesetz (StrEG), was initially aimed at helping the hydropower industry,but wind producers soon became involved. Te StrEG assisted renewableenergy generators by requiring utilities to purchase the renewable powerat wholesale prices without negotiated contracts or complex administra-tive procedures.26 Te program achieved some uptake o wind power, butthe benets to solar providers did not provide enough incentive to sub-stantially move this market.

Te StrEG oered a tari based on the value o retail electricity. Under this value-based structure, taris paid to renewable generators were proportional to the retailmarket price o electricity. Market prices o electricity are primarily determined by

PROGRAMS WORLDWIDE


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conventional energy generation which has greater market share and a lower cost structurethan renewable generation. Tis structure made it challenging or even the most cost-eec-tive renewable projects to recoup their higher initial costs. Although the StrEG achievedsome participation rom the least expensive renewable producers, wind and small hydro-

power, it did not incentivize widespread renewable energy or solar adoption. During 2000,the last year the StrEG was in eect, the German market only installed 40 mega-watts osolar.27

In 2000, a new national Fi law replaced this initial attempt to level the playing eld orrenewable energy. Te Renewable Energy Sources Act o 2000, Erneuerbare-Energien-Gesetz (EEG), and its 2004 amendments provided the incentive necessary to stimulate thesolar market in Germany.28 Based on experience gained rom the 1990 law, administratordesigned the EEG to allow the taris to move with market conditions, minimize cost to theratepayers, and maximize energy production.

German policy makers have articulated a goal o meeting 30% o national electricity con-sumption through renewables by 2020 and 50% by 2050.29 Tese ambitious renewableenergy goals are driven by a clear intent to reduce greenhouse gases and create economicdevelopment.

Among the most important changes were dierentiated taris based on the renewable pro-ducers costs, market-responsive incentive levels, and increased accessibility o the programSolar PV systems beneted rom these amendments, making solar more attractive and ac-cessible to entities which did not specialize in energy production. Te EEG was the biggestactor contributing to Germanys solar market explosion ater 2004.

Te EEG changed the tari basis to consider the specic cost structures o renewable tech-nologies. Administrators set taris based on detailed predictions o project costs plus areasonable prot. Solar energy beneted rom this new tari structure. aris were highenough to cover solar installation and ensure a reasonable prot.

Te EEG does not cap the total participation. Also, the eligible system size is not cappedcreating opportunities or many types o market participants. Individuals with large roo-tops or open spaces can convert these under used resources into energy generators andsources o income.

Since 2004, the major design elements o the EEG have remained constant. Te EEGrequires utilities to buy renewable energy rom those able to supply it, even individuals orentities which do not specialize in energy production. Te solar taris are designed to create access to ve distinct segments o the solar market: residential rootops, medium-sizedagriculturally-owned and community rootops, large commercial rootops, and open-spaceprojects. Because the cost o solar varies by market segment, so do the taris. Tis alloweach type o owner to recoup their up-ront costs and make a reasonable return on invest-ment. During 2009, these taris ranged rom $0.37 USD or open space projects to $0.64USD or small rootops. aris decline 8-10% annually based on the markets responseTis structure is intended to maximize market participation while consistently providing4-5% ater-tax rates o return to participants.

GERMAN FEED-IN TARIFF LAW EVOLUTION

16 DESIGNING AN EFFECTIVE FEED-IN TARIFF FOR GREATER LOS ANGELES


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RESULTSTe cost o the EEG law is distributed equally among all ratepayers. o achieve a 15.1%renewable contribution to the electricity supply, the Federal Ministry or the Environment

estimates that the cost to an average household in 2008 was about $4.64 USD per month.30Solar energy consists o 6% o this total renewable contribution.31 Te Ministry estimatesGermanys renewable industry revenue at 28.7 billion euros during 2008 and that 117,000jobs were created in renewable energy since 2004.32

In 2009, despite Germanys marginal sunlight, its solar industry is among the worlds larg-est. During 2008, Germany installed 1,500 mega-watts o solar and claimed the largestnational share o the existing worldwide solar PV installations.33 Germanys 2009 instal-lations are estimated to be 2,500 mega-watts despite the global recession, bringing its cu-mulative solar to 7,800 mega-watts.34 Germany achieved this leading position by clearlyarticulating its national energy goals and designing a Fi policy that achieves these goals

over the long-term.

SPAIN

Spains experience with Fi-related policies dates to 1997.35 Spainsearly Fi policies were primarily motivated by energy diversicationconcerns. Te 1997 Electric Power Act set a 12% renewable goalby 2010. Tese early policies established the legal basis o paying

a premium above market rates or renewable power. Royal Decree2818/1998 entitled owners o renewable systems to be paid a whole-sale price plus a guaranteed premium. Although Spains wind in-dustry boomed under these initial policies, its solar industry did notexperience a similar growth trajectory until 2007.

FROM VALUE-BASED TO COST-BASEDTARIFF STRUCTURES

Royal Decree 661/2007 introduced a Fi program designed to achieve 371 mega-watts o

solar. Tis cap was achieved quickly and increased to 1,200 mega-watts. Single projects upto 50 mega-watts were eligible or a xed tari or 25 years. aris dierentiated only byproject size. Administrators increased taris annually or ination, but did not reduce thetaris based on market response. Tey ranged rom $0.35 USD or large projects greaterthan 10 mega-watts to $0.68 USD or projects under 100 kilo-watts. Although Spain re-ceives about twice the sun o Germany, these taris were nearly equivalent to those o Ger-many, creating opportunities or windall prots. Multiple solar systems could participateunder the umbrella o one project.



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Te 2007 Fi program created an explosive bubble which propelled Spain to install 2,600mega-watts during 2008.36 Both global and Spanish investors, seeking shelter rom the realestate crisis, were attracted to the long-term certainty and double-digit returns oered by

the 2007 Fi. Tis dramatic increase in market activity represented a 400% increase overthe previous years installations. Spain overtook Germany, the incumbent solar marketleader, in annual installations during 2008.

Te taris were established during a silicon shortage, which kept solar module prices highWhen the shortage eased, module prices ell while taris remained at their original levelsTis divergence created large prot margins or participants. No degression or periodicreview was built into the tari design in this version o Spains Fi program.

Spain did not dierentiate the 2007 taris in a precise manner. For example, projectsbetween 10 and 50 mega-watts received $0.35 USD, while projects under 10 mega-watts

received $0.64 USD. Tere was no limit on the number o systems per application. Proj-ect developers connected many small solar systems in series to capture the higher tarisor smaller projects while beneting rom the economics o scale associated with the largerprojects. Te result was large open-space installations accounting or 95% o the countrystotal solar installed capacity.

Tis run-away market growth and the imminent economic crisis prompted Spain to reviseits program. Te new program, Royal Decree 1578/2008, cut taris by 25%, capped theprogram at 500 mega-watts per year, and established a burdensome registration processTe Decree reduced the system cap to 10 mega-watts and taris were dierentiated accord-ing to the type o system: small rootops, large rootops, or ground-mounted. An annua

degression scheme was applied to the tari.

Te 2008 program attempts to control market growth by creating a registration processthat requires considerable eort rom the program applicants. Applicants must submitadministrative authorization, acquire building permits, and post a substantial security de-posit. Te projects are selected by the program registrar according to the strict quarterlycap allowances and on a rst come, rst served basis. Te program grants licenses to ap-plicants who then have one year to connect projects to the grid.

RESULTS

While the new program seeks to balance participation more eectively than the 2007 pro-gram, the complex application procedures remain a barrier to the owners o rootop proj-ects. Many rootop participants are non-proessional solar market participants and cannoteasily navigate the administrative procedures. As a result, the number o applications oropen space installations has exceeded the allowed cap by a actor o 8 to 10 while rootopapplications have not reached the quarterly caps.37

Ater 2,661 mega-watts were installed during 2008, only 5 mega-watts were installed dur-ing the rst eight months o 2009.38 Te solar sector accounted or more than 26,000 em-ployees in 2007 and 50,000 employees in 2008. But in 2009, between 15,000 and 20,000jobs were reportedly lost with countless companies exiting the market.



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Ater 2008, Spain had 3,354 mega- watts o installed solar. Tis met1.5% o Spains electricity needs.

Te design o the Spanish Fi pro-grams created a boom and bust cyclein Spains solar industry. Althoughthe Fi signicantly increased so-lars penetration into the Spanishmarket, the potential o the Fi tocreate the conditions or solar tourther contribute to Spains energygoals is uncertain.

A large solar thermal power plant in Spain.

ONTARIO, CANADAOntario implemented the Renewable Energy StandardOer Program (RESOP) during 2006. Te program didnot have a strict capacity cap. Te program oered asingle, undierentiated tari to all solar projects. Te$0.40 USD tari was available to solar projects up to 10mega-watts. Te program was intended to procure 1,000

mega-watts o all types o renewable energy over 10 yearsin order to meet a provincial mandate or renewable en-ergy procurement.

Te program had a goal o 1,000 mega-watts over 10years but in a year and a hal, the program had alreadyreceived 530 mega-watts worth o solar applications.39Te Ontario Power Authority (OPA) did not expect thesignicant market response to the RESOP. However,most o the demand came rom a small pool o develop-ers submitting applications or 10 mega-watt projects, the maximum allowable project size.40

Te development o residential rootop solar lagged behind due to the prohibitively costlyinterconnection and RESOP contracting processes.

Te $0.40 USD tari did not reect any specic overarching policy goals or specic econom-ic analysis. Instead it was intended as a price discovery mechanism. Te initial tari wouldtest the market and incentivize early adopters. CanSIA suggested this tari level was theminimum tari required to stimulate any solar PV in Ontario.41 Tey suggested that $0.79USD would be more appropriate or rootop installations based on system cost analyses. TeRESOP program did not take this suggestion, and instead oered the single solar PV tari o$0.40 USD, regardless o the specic costs incurred by a participant.



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Ontarios administra-tive and regulatoryenvironment was notconducive to solarparticipation underthe RESOP. Many lo-cal ordinances did notallow rootop solarInterconnection tothe distribution grid was overwhelmed bthe market response.42

Furthermore, the pro-cedures and ees as-

sociated with the in-terconnection process were too onerous o

many small system owners to successully navigate. Because there were no qualication re-quirements to apply or a RESOP contract, many developers entered into multiple contractswhile lacking the organizational capabilities and capital necessary to complete even one proj-ect. In February, 2009 very ew o the contracts had been successully converted into operational projects.43 At that time, o the initial contracts executed by the OPA, only 9% o thewind projects and 0.3% o the solar PV projects were in operation. By the end o 2009 only58 mega-watts o solar will be installed in Ontario under the RESOP program.44 Virtually alo this solar will be rom three large solar arms.

REVISED FEED-IN TARIFF PROGRAM FACILITATESRESIDENTIAL SOLARTe RESOP program was suspended in 2009 and replaced with the Renewable Energy Feed-in ari (REFi). Te REFi Program launched on October 1, 2009. Te REFi programdierentiates between system sizes. A separate, simplied program targets all renewable proj-ects under 10 kilo-watts, while a dierent program targets projects over 10 kilo-watts.

Te REFi addresses many o the RESOPs issues and added new requirements or appli-cants. Te most signicant new eature is a requirement that at least 60% o the manuactur-

ing content or solar PV must be sourced rom Ontario. Tere is no overall program capTere is a system cap o 10 mega-watts or ground-mounted systems. aris vary rom $0.44USD or large open-space projects to $0.76 USD or small solar projects under 10 kilo-wattsTe taris are designed to cover the projects costs, plus a consistent return.

Te domestic content requirement is a very signicant eature o the REFi program. Tisdomestic requirement could act as a de-acto program cap, constraining market responsebased on limited domestic solar manuacturing capacity.

Developers were caught o guard by stringent requirements to participate in the new Fiprogram. Te application ees, environmental impact assessments, and the domestic content


A solar farm in Perth, Ontario


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requirements signicantly increase the organizational resources required to participate. Teseactors can make it challenging or smaller, non-proessional solar owners to participate.

RESULTSTe ofcial press release o December 16, 2009 states that the OPA received over 2,200 ap-plications during the rst application round.45 About 1,200 o these applications were orprojects under 10 kilo-watts. Tese smaller projects, mostly residential rootop solar, accountor only 8.6 mega-watts o 2,500 mega-watts available during the rst round. Te total appli-cations are or 8,000 mega-watts o capacity. Te OPA is prioritizing shovel-ready projectsto handle the oversubscription.46

Te RESOP program may have implicitly avored large projects and proessional developersbecause o the challenging permitting and interconnection conditions. Te REFi was de-signed to accommodate the concerns o smaller owners, especially solar PV owners. Although

the REFi received over hal o its applications or small solar projects, the 8.6 mega-watts ocapacity oered by these projects is only a minute raction o the overall rst round target o2,500 mega-watts. Based on the act that the RESOP executed about 250 mega-watts o solarcontracts during both 2007 and 2008 with a less valuable tari, it is likely that solar participa-tion in the REFi was constrained by the domestic content requirements.

Te OPA estimates that the rst round o Fi projects will generate $5 billion in invest-ments in manuacturing, design, construction, and engineering and lead to the creation othousands o new jobs.47

Te dierence between the RESOP and the REFi program highlights how important it is

to address the concerns o smaller owners i widespread participation is a program goal. Fur-thermore, it also illustrates how special provisions, such as domestic content requirements,can impact participation.

GAINESVILLE, FLORIDA

In March o 2009, Gainesville Regional Utilities (GRU) became the rst U.S.utility to adopt a cost-based solar Fi.48 Te program plans to procure 4mega-watts o solar PV per year rom 2009 until 2016. Tis helps to meetmunicipal greenhouse gas reduction targets o 7% by 2012. Although onlymentioned in one program inormation brieng and not in the utilitys stat-ed goals, an additional benet o the program is economic development orGainesville. Te utility identied that the current value o Floridas utilityand net metering incentive programs are not attractive to larger solar systems.By implementing a Fi, GRU is expanding the solar market in Gainesville byincentivizing participation rom previously unreached market segments.


A TARGETED SOLAR FEED-IN TARIFF PROGRAMGRUs program oers a xed tari to participants or 20 years. Te tari dierentiatesree-standing or building-mounted solar PV with $0.26 or $0.32 respectively, primarily tar-


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RESULTSGRUs Fi program proved hugely popular. Te 4 mega-watt annual cap was ully sub-scribed in one week ater the application was available. Five months later the utility had received enough applications to ll the entire program cap by 2016 (32 mega-watts). Te GRUcalculated the expected rate o return assuming Fi projects would not receive the $4.00 perwatt state rebate, which had recently run out o unding. When unds or the rebate program

were reauthorized, projects could benet rom both incentives, creating high rates o returnor those enrolled in both programs.

Te program was successul in achieving its goal o incentivizing commercial applicationsMost o the rootop contracts, 75% o the rst years cap, are or systems ranging rom 100-500 kilo-watts, many on commercial shopping centers. Te remaining 25% o the programcomes rom two ree-standing system applications, while residential rootop applicationsamounting to a blip on the screen.50

GRU anticipates the cost o the program or the rst year o installations at $1.5 million.Tey estimate the rst year impact on GRU ratepayers to be about $0.75 per month on a

typical residential bill, a 0.6% increase. GRU expects annual increases o the same magni-tude or the duration o the program. While the job creation potential has not been ormallyreleased by the utility, John Crider, a strategic planner or the utility, estimated the programcould generate about 170 ull-time positions or 7 years.

GRUs program demonstrates how a dierentiated tari can target specic market segmentsto achieve the programs stated goals.

VERMONT


geted towards commercial installations.49 Tese taris were based on the estimated cost oree-standing and commercial rootop solar plus a targeted 4-5% return on investment. Indetermining the taris, the utility used an investment model and anticipated realistic projec

costs. Te taris all about 5% annually based on expected declines in solar installation andmodule costs. Te goal o the tari degression is to maintain a 4-5% return on investmenas market conditions change.


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SACRAMENTO MUNICIPAL UTILITIES DISTRICT


Vermont opened the Sustainably Priced Energy Enterprise Development (SPEED) pro-gram in September, 2009. Tis program is aimed at achieving ambitious economic de-velopment and renewable energy goals.51 Tese goals include meeting 20% o Vermonts

electricity load with renewables by 2017 and ensuring that the economic benets ow tothe Vermont economy and the states rate-paying citizens.

UNDIFFERENTIATED COST-BASED TARIFFSTe SPEED program is capped at 50 total mega-watts with 14.5 mega-watts or solartechnology. Single systems are capped at 2.2 mega-watts. A single tari o $0.30 is avail-able to all system owners or 25 year contracts. Tis tari is intended to meet the costs othe owner and oer a 12.13% rate o return. Tese taris are subject to biannual reviewsby the Vermont Public Service Board.

RESULTSTe program was ully subscribedon its rst day. Administrators re-ceived 161 mega-watts o solar ap-plications. A lottery process se-lected 13.7 mega-watts o projectsranging in size rom 32 kilo-wattsup to 2 mega-watts. Some appli-cants or the Fi incentive couldalso receive the 30% Vermont Busi-

ness Investment ax Credit or proj-ects installed beore 2010. Te program does not dierentiate taris based on system sizeor project type. Te Board is examining the possibility o including tari dierentiationprovisions in the January 2010 nal contract oer.Vermonts SPEED program demonstrates how eectively a tari designed to recover thecosts o a project and provide a return can move the market.

In January o 2010 the Sacramento Municipal UtilitiesDistrict (SMUD) will begin a Fi program designed toprocure renewable energy and contribute to the utilitysgoals. Tey intend to use this program as a model tostreamline their small-scale renewable power procure-ment process.53 Te energy will help SMUD meet itsRPS goal o 20% by 2010. Economic development isnot mentioned in the utilitys stated goals.


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LESSONS LEARNEDFis are increasingly used around the world to bringrenewable energy online quickly and drive economicdevelopment. Tese two benets are the most commonly cited goals or Fi programs. But Fi pro-grams can contribute to these broad goals in dierentways. Dierent jurisdictions can have dierent preer-ences about how these goals are achieved. SMUD i


Applications will open in January o 2010. SMUD reported that the utility has receivedmany promising inquiries or solar PV projects, most o which approach the 5 mega-watcap on individual projects.56

SMUDs Fi is a least cost utility supply strategy aimed at distributed renewable energy.Te tari structure is not designed to reach market segments or small solar systems orresidential customers. Simply calculating the economics o a project with a time-o-deliv-ery tari schedule is a daunting task or a non-proessional participant, those most likelyto install small solar systems. Figuring out whether this program will provide any return

on investment is only within the reach o more sophisticated players, such as those mostlikely to install larger 5 mega-watt systems. Furthermore, taris are unlikely to cover thehigher costs o small systems and non-proessional solar suppliers.

With taris based on the value o the electricity, this program is likely to have minimaimpact on the electricity bills o SMUDs customers. Tis utility-based program does notmention economic development in its program goals.

SMUDs program is an example o a targeted Fi program intended to procure energy atleast cost rom small renewable energy acilities located at or near the customers site. TeSMUD program is not intended to support an industry, incentivize widespread adoption

o solar, or create access to the electricity supply markets.

RESULTS

Te taris structures were calculated by accounting or the utilitys avoided cost o genera-tion, ination, rising gas electricity prices, and avoided greenhouse gas cost. Te tarisvary rom $0.08 to $0.29 based on when the energy is delivered to the grid. SMUDestimates that the expected tari or a typical at plate, south-acing solar PV system wilaverage $0.16 annually.55 Customers are not eligible or other state or utility solar rebatesContracts can be 10, 15, or 20 years. Contracts or longer terms are given slightly increased taris.

LEAST COST PROCUREMENTTe program cap is set at 100 mega-watts with a 5 mega-watt project cap. Te taris

are based on the value o electricity to SMUD.54

aris are only dierentiated by time-o-delivery. All customers, regardless o the cost o their system, will receive payment inaccordance with this value-based tari schedule.

A commercial rooftop solar project.


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FiTs are used worldwide to incentivize

solar and drive economic develop-mentFiTs must be informed by policygoals and carefully designed toachieve the goalsEvery design element contains trade-offs

LESSONS LEARNED


aiming to procure least cost renewable energy rom small generators omany types o renewable energy while GRU is very specically target-ing mid-sized commercial solar projects. Tese two utilities have simi-

lar renewable procurement goals, but are approaching the challengein dierent ways; presumably each approach is best-suited to theirstakeholders. Te choice o overarching policy goals is the rst policydecision that must be made. All other decisions about Fi programdesign must ollow rom these policy goals in ways that are acceptableto the sponsoring jurisdiction.

Fis are not blunt policy instruments. In order to achieve their statedgoals, not only must they be inormed by over arching policy goals,but also they must be careully crated through expert judgment and learned adaptation.Nearly every example above demonstrates an evolution o policy design. Even Germany,

the worlds solar industry leader, experimented with Fi designs that did not initially meetits ambitious goals. Te current EEG represents two decades o policy renement. A well-designed Fi program can create a sustained, long-term contribution to the policy goals,while a poorly-crated Fi program can be detrimental to the jurisdictions policy goals.

Every design choice introduces trade-os that must be consciously managed by policymakers. For example, cost-based taris are the only proven tari structure to incentiv-ize solar energy. However, the increased costs o the solar technology will impact rate-payers more prooundly than other, less costly renewable technologies. Conversely, thecost-based tari structure may incentivize many small solar projects and create greateropportunities or local employment. Each trade-o shits the costs and benets o theprogram between stakeholders. Ultimately, the tension created by the design trade-osmust be solved primarily through the political process. Fi program administrators mustbe prepared to quantiy the program results and impacts in a way that is useul or thestakeholders in the debate.


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ASSESSMENT OFCALIFORNIAS FEED-IN TARIFF

PROGRAMS & PROPOSALSLos Angeles maintains ambitious renewable energy targets and economicdevelopment goals. Clean ech Los Angeles, a multi-institutionalcollaboration between Los Angeles major research universities, businesses, andpublic agencies, aspires to create jobs and deploy clean technology. Tisorganizations ambitious goal is to establish Los Angeles as the global leaderin research, commercialization, and deployment of clean technologies.

Los Angeles municipally-owned utility, LADWP, plans to eliminate coal and meet40% o its electricity demand rom renewable and sustainable sources by 2020. In

2008, the Mayor o Los Angeles proposed a plan to procure 1,280 mega-watts solargeneration by 2020. Each one o these goals, taken individually, is among the mostambitious o any jurisdiction in North America. aken collectively, the realization othis broad vision could transorm Los Angeles into a leading center o clean technol-ogy.

Tere are three major Fi programs that, i designed appropriately, could induce thesolar industry to signicantly contribute to the vision that the leaders o Los Angeleshave described. wo programs are proposed and one is active. Te two proposals arethe Los Angeles Department o Water and Powers (LADWP) Fi proposal and theCaliornia Public Utilities Commission (CPUC) sta proposal or a Renewable Auc-tion Mechanism. Te existing program is the Caliornia state-wide Fi as directedunder AB1969. Tis section o the report assesses the potential o Caliornias exist-ing and proposed Fi programs to contribute to the policy goals o the Los Angelesarea.

SECTION3

METHODOLOGYWe constructed a model to analyze the project-level economics o the three programsrom the perspective o a program participant. Tis modeling process is representa-tive o the best-practices o the solar industry. It takes a series o inputs, perormsa cash-ow investment analysis, and produces several commonly-used indicators o

economic worth. Te indicators o economic worth are net present value (NPV),the ratio o the projects benets to costs (B/C), years to payback, and annual rate oreturn. We used these indicators to evaluate the attractiveness o each program roma participants perspective. Our basic assumption is that i a program is economicallyattractive, then owners will participate. Appendix 3 contains a more detailed deni-tion o these indicators.

o assess the attractiveness o each program rom the participants perspective, we de-veloped our case study examples. Tese examples are representative o potential solarsites within the Los Angeles basin. Te rst, a 5 kilo-watt residential project, is typi-

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cal o the potential solar sites ound on single-amily homes within the Los Angeles basin.Second, a 500 kilo-watt rootop project owned by a public agency, is typical o potentialsolar projects ound on public schools, government administration buildings, or non-prot

agencies. Tird, a 500 kilo-watt commercially-owned parking lot solar project, is typicalo the vast numbers o potential parking acility solar sites ound in Los Angeles. Finally, a1,500 kilo-watt rootop system on a commercially-owned warehouse is typical o the largeareas o commercial-industrial zoned sites within the region. Tese our examples representthe variety o potential in-basin solar projects in Los Angeles.

Te models inputs are representative o the market and policy conditions at the time oanalysis. We developed the models assumptions based on industry research and interac-tion with market participants. Tere are many inputs, each with considerable variability.We used a guiding principle o nancial conservatism to develop appropriate values or theinputs. Commercial banks and investors use this general principle to evaluate the easibilityo loans and investments. From this, one important assumption to this assessment is thati a solar project is not economically attractive under conservative assumptions, no bank orinvestor will be willing to help a solar owner nance the high up-ront costs. Because -nancing is such an important issue with solar, conservative assumptions are necessary whenevaluating solar projects.

Appendix 3 contains a comprehensive list o these assumptions. Te input values we usedto analyze the case studies will not be true or every project. Instead there is a high degree ovariability. wo actors inuence the program economics more than others. Te installedcost o solar is the most important actor. As module prices all, solar will become more

attractive over time i the incentives remain constant. Te target rate o return or partici-pants is the other important actor. I a Fi program intends or a participant to simplymeet its costs, the tari can be lower. A higher program target rate o return requires ahigher tari. Te sensitivity analysis in Appendix 6 illustrates how signicantly these twoactors inuence the economics o a Fi program.

We validated the results o our model with those o the Solar Advisor Model, a publicallyavailable solar project model developed and maintained by the National Renewable EnergyLaboratory.57 Tese are consistent with our results and can be ound in Appendix 7.

LOS ANGELES DEPARTMENT OF WATER AND POWER:FEED-IN TARIFF PROGRAM PROPOSAL

On November 20, 2009 the LADWP proposed a Fi program to its Board o Commis-sioners.58 According to the proposal, the solar energy purchased under the program willcontribute to the utilitys aggressive RPS goals. Te proposal adds that the tari shouldrecognize the environmental attributes o renewable energy, the demand reduction charac-teristics o solar projects, and the avoided transmission costs. Furthermore, the proposalindicates that the tari should be set in a manner that accelerates the deployment o re-newable energy resources. Te program intends to procure no more than 25 mega-watts



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and limits the customers system size to 5 mega-watts. Each customer must sign a 20 yeacontract and pay a monthly service charge to administer the account.

Te program oers two tari options to the customers. Both tari options are value-based

tari structures. Te taris are based on the prevailing retail price o electricity rathethan the producers costs. Tis market-determined price is overwhelmingly inuenced bycheaper, but more plentiul ossil-uel generated energy. Te tari structures in LADWPsolar Fi proposals do not account or the higher cost o solar generation, nor do they dierentiate by project type, size or type o customer.

FLOATING TARIFFSTe rst tari option is a Floating tari based on the time-o-use electricity rate scheduleand a highly variable component called the Standard Energy Credit.60 Both components othe tari vary by hour, day o the week, and season. Te tari is higher during summer a

ternoons when electricity is more expensive and lower at nights and during the winter whenelectricity is less expensive. As the solar system delivers energy into the grid, the customereceives these taris depending on the time-o-delivery. A typical Fi customer can expecto receive an annual average tari o between $0.09 and $0.11 under this option. See Appendix 5 or a more detailed discussion o the expected tari o the Floating option.

Te second tari option available to customers is a Fixed tari. Te Fixed option oers atari that does not change over the 20 year contract. It is based on the market price osolar and avoided transmission costs. Te market price is a tari equivalent to what the

utility could buy a long-term solar contract or rom a proessional solar developer. Teavoided transmission is the component o the tari paid to the customer to compensate othe utilitys reduced need or high-voltage transmission lines. Since in-basin solar produceelectricity near the point o use, it lessens the burden o importing power rom a distantpower plant.

In all o the examples, neither tari option is attractive enough to induce in-basin solar participation in this program. Te results indicate that in-basin solar will be a poor investmenunder LADWPs Fi program. In all cases, the taris will not provide enough benet to asolar owner to either payback the initial system costs or provide a reasonable rate o returnFor the Floating option, taris must escalate between 7% and 17% annually to be attrac-tive. In the Fixed option, the tari must be increase by a actor o two to our in order to battractive. Tis proposal will not induce any additional in-basin solar or Los Angeles.

FIXED TARIFFS

Caliornia has had a state-wide Fi program since 2008.61 State law, AB1969, requirethe IOUs to purchase renewable power rom eligible on-site generators.62 Te bill cappedthe program at 500 mega-watts and the individual system size at 1.5 mega-watts. Previously, only very large projects could participate in the utilities RPS process. Te programsimplied contracts allow small generators (up to 1.5 mega-watts) to enter the RPS-driven

CALIFORNIAS FEED-IN TARIFF UNDER AB1969 AND SB32



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renewable energy market. Te bill requires the IOUs to pay a renewable generator a tarino more than the market price o natural gas red generation. It does not require the utili-ties to oer a dierentiated tari that would cover the higher costs o solar generation. Te

value-based tari structure under AB1969 is not high enough to incentivize widespreadsolar participation. Te CPUC indicated that solar developers have not participated in theprogram or this reason.63

SCE implemented the Crest program in order to comply with AB1969. Te taris oeredunder this program are based on the value o natural gas red generation. Te taris varyby hour, day o the week, and season, but not by generator type or system size. Becausethe tari is highly variable, evaluating the program economics is a sophisticated task that isbeyond the reach o many small, non-proessional solar owners.

For each o the our case study examples, the Crest program taris are not attractive enoughto payback the solar systems costs or to provide a return on investment. Appendix 4 showsthese results in greater detail. Te Crest program is not attractive to in-basin solar owners.Tereore no solar owners have participated in the Crest program.

State law, SB32, amends the original Fi program to address some o these concerns.64 Techanges will become law in 2010. Tese changes require that in addition to the value-basedtari, IOUs must make additional payments to account or the valuable attributes o renew-able and solar energy, including avoided environmental compliance and transmission costs.

Te value o these additional payments will be determined in uture CPUC proceedings,but many in the solar industry expect that it will be no more than $0.02 to $0.04.65 SB32also increased the state-wide cap to 750 mega-watts and amended the current program toinclude individual projects up to 3 mega-watts. Te actual eects o the SB32 amendmentswill not be known until ater the CPUCs rule-making proceedings.

CREST PROGRAM

SB32

CALIFORNIAS PUBLIC UTILITIES COMMISSION:RENEWABLE AUCTION MECHANISM

On August 27, 2009 the CPUC sta led a proposal or a Renewable Auction Mechanism

(RAM). Te proposal would require the states IOUs to hold an auction twice per year toprocure a mandated quantity o renewable energy, including solar.66 Te current RAMproposal targets projects rom one to twenty mega-watts in size. Developers would submitnon-negotiable bids or long-term contracts with the regulated utilities. Te lowest costprojects that meet the viability criteria would win the contracts. Tese contracts would belargely based on the states existing Fi, as mandated by AB1969. Te energy would con-tribute to the states RPS goals. Tis regulated program would apply only to the IOUs, soLADWP would not oer this auction process. Te program rules have not been developedand proposal is being debated through the CPUCs administrative process.

I implemented, the program could quickly stimulate renewable energy generation through-



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out the IOUs territories at cost-minimizing, market-clearing prices. Te competitive pric-ing ensures that players in the solar value chain are incentivized to be efcient. It also shouldensure the winning bid covers the winners costs. Tis structure could keep prices low while

simultaneously spurring innovation within the value chain. Te quantity mandate wouldsend a signal to the solar industry about the size o the solar market and help acilitate long-term investment. Te targeted projects, one to twenty mega-watts, could be located nearbut not within the densely developed areas, keeping land use competition low and reducingthe need to build additional long-distance transmission lines.

Tere are some valid criticisms o this proposal as well. Smaller market players who spe-cialize in rootop systems might be disadvantaged in a competitive process against moresophisticated and better capitalized developers. Gaming o the auction could produce unpredictable results over time. Industry collusion is a possibility. Underbidding could occurleading to high levels o contract ailure. Regardless o the overall outcome o the RAM

Los Angeles would only benet as ar as the program could induce solar projects withinSCEs territory close to the City.

Te RAM, as currently proposed, could shape the competitive environment to disadvan-tage in-basin solar bidders. Urban rootop or parking lot projects (1-2 mega-watts) wouldhave to compete with larger and more cost-eective out-o-basin solar projects (2-20 mega-watts). Also, the program does not dierentiate between solar PV and solar thermal. Solarthermal is lower cost so it has advantages in a competitive auction process.67 In-basin solaris not likely to win contracts under the RAM mechanism. For these reasons, many industryproessionals support a xed price Fi or smaller, in-basin projects and a competitive pric-ing process or larger projects.68 Although the RAM could be very benecial or the state

it will not directly contribute to Los Angeles goals.

IMPLICATIONS FOR LOS ANGELESTese three programs will not signicantly contributeto Los Angeles renewable energy or economic develop-ment goals. Te tari structures are not high enoughto cover the costs o in-basin solar projects or to provideany return on investment. In the case o the RAM,competitive orces will avor larger projects sponsoredby proessional developers. None o these programs or

proposals will induce any signicant in-basin solar.

All o the tari structures are value-based structures. Value-based structures have not sup-ported widespread adoptions o solar energy in other jurisdictions around the world andwill not support solar within the Los Angeles basin. In all o the case study examples, thetotal benets do not cover the total costs o the solar project. Te taris are based on theprevailing market price o electricity, set by ossil-uel based generation. Value-based tar-is alone cannot properly account or the higher cost structure and valuable attributes oin-basin solar, avoided environmental costs, and reduced need or transmission. Under avalue-based structure, additional payments would be required to compensate the owner ortheir additional costs.



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Despite their inability to incentivize small, in-basin solar under the current market condi-tions in Los Angeles, value-based tari structures have some positive attributes. Value-basedtaris can minimize ratepayer impact by procuring energy at the prevailing market price.Over time, as the solar industry matures, a value-based tari can acilitate the positive e-ects o competition, including cost minimization and innovation. Value-based structurescan contribute to the long-term sustainability o the solar industry within a ree-marketeconomy.

FIGURE 9: Project Owner Costs and Benefits of Californias Feed-in Tariffs

Tese three value-based programs and proposalscould be attractive to certain market segmentsunder certain conditions. Te RAM proposalwill likely be attractive to proessional solar de-velopers ocused on larger projects. Te LAD-WP proposal and SCE programs could possiblybe attractive to a proessional solar developerwith a very low cost structure seeking to build alarge system (3-5 mega-watts) just under the al-lowable project caps. Te installed cost o solarwould have to drop more dramatically than thecurrent trend (below $3.00 per watt) and the developer must be willing to accept a very lowrate o return as compensation or the projects risks. Many developers compete ercely orcontracts with utilities, accepting low taris in order to win contracts and establish them-


designing an effective feed in tariff for greater los angeles 040110

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