by David Niebauer

Although California has long supported renewable energy development and generation in the state, it is not entirely clear where the funds will come from to achieve its ambitious goals in the coming years. California already has one of the highest electricity rates in the country. Since most incentives are ultimately paid by rate-payers through increases in the rate structure, will rate payers be willing and able to foot the bill for the proposed increased use of renewables?

The Renewables Portfolio Standard (RPS), originally established by legislation enacted in 2002, was one of the first in the nation. California’s RPS initially required the state’s investor-owned utilities, electric service providers, and community choice aggregators to increase procurement from eligible renewable energy resources to 20% by 2017.  Senate Bill X1-2 (SBX1-2), signed in April 2011, made a number of changes to the program, significantly increasing the goal to 33% renewables by 2020 in step process:  20% by December 31, 2013, 25% by 2016 and 33% by 2020.

California is now recognized as having one of the highest RPS standards in the country

So how are we doing?

From 1998 to December 31, 2006, the Energy Commission’s Emerging Renewables Program funded grid-connected solar/photovoltaic electricity systems under 30 kilowatts on homes and businesses in the investor-owned utilities’ service areas, wind systems up to 50 kW in size, fuel cells (using a renewable fuel), and solar thermal electric. The California Public Utilities Commission (CPUC) funded larger self-generation projects for businesses.

In 2009, 11.6% of all electricity procured in California came from renewable resources such as wind, solar, geothermal, biomass and small hydroelectric facilities. According to the CPUC, that number had increased to 18%, by the end of 2010.  All indications are that the state can attain its aggressive RPS goals, provided the proper incentives are in place.

Of the RPS generation in 2010, the majority was composed of wind and biomass, although solar PV is expected to grow in importance over the coming years.  This is due primarily to the decreasing cost of solar PV, as well as aggressive solar programs sponsored by the state’s utilities.  The CPUC estimates that over 30% of all renewables will be solar PV by 2015, rising from just over 1% in 2010. This is based on contracts in place and California’s goals for solar PV.

Review of State Incentive Programs

The Database of State Incentives for Renewable Energy & Efficiency (DSIRE) website lists no fewer than 13 state, utility and regional incentive programs in California (including both renewables and energy efficiency). The following is a quick snapshot of some of the more popular renewables incentive programs.

The California Solar Initiative started in 2007 with a budget of $2 billion and had the goal to reach 1,940 MW of installed solar capacity by 2016.  This program provides most of the net metering for residences and businesses in the state.  By all accounts, the CSI is nearly out of funds.  As of the beginning of September 2011, the program had remaining capacity of only 440 MW, with a forecasted program short fall of approximately 375 MW.  It is not clear whether the CSI will be replenished, or replaced with other programs.

The Feed-in Tariff

The feed-in tariff (FIT), which offers long-term contracts to renewable energy producers at a fixed cost, is the most direct way to provide incentives to renewable power producers of all sizes.  Under the classic FIT, utilities are required to offer standard long-term contracts at favorable rates, spurring the development of renewable energy sources.  A recent study by the accounting firm of Ernst & Young concludes that feed-in tariffs are more effective than other incentive programs in that they bring on more renewable capacity at lower costs than other policies.

California’s history with feed-in tariffs is mixed.  The current program, administered through the CPUC, was amended by legislation in October 2009 (and amended again by SBX 1-2).  It requires the state’s public utilities to offer long-term contracts for small renewable energy systems (up to 3 MW) at a price based on the CPUC’s “market price referent” (MPR) – a price based on the cost to buy power from a very large gas-fired facility (“avoided cost”). The MPR for this program has proved to be too low to attract much renewable generation, especially solar PV, which tends to be more expensive to install. The CPUC now has guidance from the Federal Regulatory Energy Commission (FERC) to do a technology-specific cost-based approach, which should result in a higher MPR, representing the higher value of renewables to rate payers. The CPUC expects litigation from the state’s IOUs, which will likely delay implementation of the program.

Renewable Auction Mechanism (RAM)

The CPUC is in process of developing a renewable auction mechanism (RAM) as an alternative to the feed-in tariff, for renewable projects under 20 MW.  Under the program, energy producers compete for contracts with any of the three investor owned utilities.  Bids are selected by least-cost price first until the auction capacity is reached. The program is being hailed as a boon to renewables producers, especially companies developing solar PV projects.  Most industry observers believe the RAM will result in better-executed projects at prices that make economic sense for developers.  The first program announced by the CPUC will deliver 1 GW of renewable energy.

Renewable Energy Credits

In a number of jurisdictions, Renewable Energy Credits (RECs) are being used as a market-based approach to provide incentives for renewable energy development.  Especially where states have adopted a solar set-aside for use of RECS (identified as SRECs), a total of seven East Coast states as of this writing, the credits provide additional financing for solar PV projects.  A REC represents 1 MW/hour of electricity generated from a renewable source; a SREC is derived specifically from solar resources (primarily solar PV).  RECs are used by utilities to demonstrate compliance with the state’s RPS goals and can be purchased by utilities unbundled from the generation itself.  This system allows distributed generation (DG) to be included in a state’s RPS where it might not otherwise be counted.

Although California has implemented tradable RECs (called TRECs), they are currently of little use in providing incentive to renewable energy developers, especially DG.  First, the use of TRECs is capped at 25% of a utility’s RPS requirement (shrinking to 10% by 2017), and the price of a TREC is capped at $50.  Second, it appears that an unintended consequence of legacy definitions in the various rulings, and an attempt to limit the availability of TRECs for out-of-state generation, has placed a severe limit on the use of TRECs by in-state DG. The California Energy Commission (CEC) is expected to rule on the eligibility status of DG projects to satisfy the RPS later this year, and hopefully the disadvantages placed on DG will be rectified.

PACE

Property Assessed Clean Energy Financing (PACE) was getting pretty good traction a few years ago before the Federal Housing Finance Authority (FHFA) stopped it in its tracks.  That may now be changing.

Under the PACE program, up front capital is provided for clean energy retrofits on a property (primarily solar PV), and subsequently repaid through a special assessment on the participant’s property taxes.  The financing is tied to the property, not the property-owner, and is transferred easily when the property is sold.

In July 2010, the FHFA stated that PACE programs “pose unusual and difficult risk management challenges for lenders…” and restricted Fannie Mae and Freddie Mac loans in PACE districts.

A lawsuit initiated by then attorney general (now governor) Jerry Brown and new federal legislation, the PACE Assessment Protection Act of 2011, may unstick the process and pave the way to PACE assessments with some new restrictions, for residential solar installations.

Conclusion

California has one of the most ambitious renewable energy programs in the country.  These programs are supported by numerous incentive strategies throughout the entire utility system.  There is some question where funds will come from to continue to support the expansion of clean energy technologies in the state and whether rate-payers will bear the higher energy costs.  Given the political will, however, the state and its agencies are poised to develop and administer the programs necessary to achieve these goals.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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