Will California’s Hybrid Feed-In Tariff RAM Program Work?

Last week, California created the first large-scale U.S. version of the feed-in tariffs — the system of paying renewable power producers a premium, set price per kilowatt produced — that have helped Germany become a solar powerhouse. At the same time, California’s new Renewable Auction Mechanism (RAM) adds features to avoid the problems that have plagued feed-in tariffs in other countries, like Spain’s boom-and-bust solar market. Now the question is, will California prove its version of a FiTs will work in the U.S., or give them a black eye for years to come?

Under the RAM, California will open twice-yearly auctions where renewable power projects between 1MW and 20MW can bid their promises to deliver power. The state’s three big investor-owned utilities — Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric — are then bound to accept the lowest bids, adding up to a 1GW total, giving mid-size projects a guaranteed rate of return for up to 20 years of power production.

Given that California could be a model for the rest of the United States, its RAM program is under a lot of pressure avoid the problems other FiT programs around the world have encountered, as well as dangers that may arise from its new approach. Here are some key details to consider:

1) The RAM program doesn’t apply to all solar power projects, but rather covers a gap in California’s solar incentives. For under 1MW systems, the California Solar Initiative already offers incentives for power fed back into the grid. Utility-scale projects, on the other hand, are covered by the state’s renewable portfolio standard, which requires the state’s three IOUs get one-fifth of their power from renewable resources by 2010 and one-third by 2020.

2) RAM shares characteristics with California’s RPS mandate-driven solar power promotion. California’s big IOUs have been making power purchase agreements (PPAs) with the developers of big solar projects, in which they agree to buy power for many years at a fixed price. That’s something like a feed-in tariff — except that the prices per kilowatt-hour aren’t disclosed in California’s big PPAs.

3) The RAM program could be abused if not managed carefully. Project developers could underbid to win contracts then fail to deliver their promised low generation costs — a problem that may be emerging in India’s first solar auction. To prevent that, RAM requires security and performance deposits. Also, bidders could collude to keep bids high, driving up renewable power costs and turning utilities and policy makers against the program — though competition between projects may well prevent such an outcome.

4) The RAM-FiT model could provide better support than the current U.S. tax incentive model. Sure, U.S. renewable backers cheered last week when Congress extended the stimulus program offering cash grants in lieu of 30-percent federal tax credits. That program has helped keep green power growing through the recession, when most institutional investors didn’t make enough money to need to offset tax burdens. But even in non-recession years, tax credits are a flawed way to support clean energy projects, feed-in tariff proponents say, because they don’t link incentives with the cost of producing electricity.

5) Feed-in tariffs can be mismanaged. While Germany has used FiTs to become the world’s biggest solar power producer and grow a powerful solar industry, Spain failed to provide a cap on its overly-generous FiT, leading to a glutted market that collapsed when the country cut back drastically on its original promises to prevent runaway deficits. The Czech Republic recently passed a law retroactively applying taxes that could erase much of the promised benefits of its feed-in tariffs for solar power, providing another cautionary tale.

Question of the week

How is California’s new Renewable Auction Mechanism like a feed-in tariff, and how does it differ from the classic model?