California Reversal of Feed-in Tariff Auction Proposal

Highlighting photovoltaics, the CPUC proposes a reverse auction for Feed-in Tariff (FiT) pricing of 1.5 MW (MegaWatt) to 10 MW Distributed Generation renewables.
Valuing lowest price over quality, time, and open, transparent markets?

Per ATTACHMENT A – System-Side Renewable Distributed Generation Pricing Proposal released on August 27, 2009, by the California Public Utilities Commission (CPUC):

RAM Proposal
Based on the guiding principles in Attachment C of the Ruling, staff recommends a market based pricing mechanism, or renewable auction mechanism (RAM)¹² as the preferred policy solution to determine contract prices for system-side renewable DG. The intent of RAM is to create a simple, standardized process for procuring system-side renewable DG.

What is a Reverse Auction?
Wikipedia defines a Reverse Auction as “a type of auction in which the role of the buyer and seller are reversed, with the primary objective to drive purchase prices downward. In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service. In a reverse auction, sellers compete to obtain business.” On eBay, the reverse auction mechanism is used in Want It Now.

“California proposes new program for 1 GW of renewables” by Adam Browning at Grist waxes enthusiastic on the RAM proposal and implies the approach skirts issues “On the legality of feed-in tariffs in the US” related to the Public Utility Regulatory Policies Act of 1978 (PURPA).

“A ‘Reverse Auction Market’ Proposed to Spur California Renewables” by Todd Woody for the New York Times Green Inc. Blog provided a prompt yet slanted view in favor of the CPUC Feed-in Tariff pricing proposal made public the previous day.

By virtue of placement in the NYTimes, the article attracted comments with greater insight from CALSEIA (California Solar Energy Industries Association), Fraunhofer ISE (Institute for Solar Energy Systems), Vote Solar, and even an engineer from the Colorado Public Utilities Commission among others.

Where does CALSEIA stand?
From the above CALSEIA comment:

CALSEIA recommends a fixed price approach for projects 3MW and smaller and to establish the fixed price based on a bid solicitation that uses the median price of the bids set a market price.

In addition, CALSEIA outlines concerns about reverse auctions including:

high transaction costs that will lead to market concentration
inability of smaller and new enterprises to compete in a reverse auction
lowball bidding that results in projects that cannot be constructed and further delays California’s goal to increase the use of renewable energy generation
higher ratepayer costs

RAM Cons per the CPUC Energy Division Staff Proposal
CPUC staff identified “RAM Pros and Cons Based on Guiding Principles and Program Goals” in ATTACHMENT A. I chose to highlight the Cons since these have not been addressed in the posts cited:

RAM Cons:

Market must be competitive for auction to work

Auction design is very important in order to ensure a procurement process that lowers transaction costs, puts downward pressure on price, and that identifies least-cost projects. The auction’s design, timing, and frequency will all affect the results of the auction. While the auction design may not be perfect at the outset, this challenge can be overcome. The auction rules can be improved and modified based on lessons learned from prior auctions.

While it is possible for market to be dominated by only a few large players, this concern can be mitigated by establishing auctions rules that address seller concentration.

Project developers do not know the “winning” price, which may deter some participation, lead to gaming, or increase transaction costs.

Unlike a FIT, financing occurs later in the project development process, which may impact small sellers that do not have the capital to meet the minimum project viability criteria, such as establishing site-control.

I believe the greatest danger with the proposed RAM market based pricing mechanism is the unintentional creation of a project developer oligarchy in California. Gaming bidders in the first few auctions could lowball bids to win projects and lockout competition driving them out of future auctions. Subsequent auctions could see flat or even increased bids from oligarchs once competition was eliminated. My concerns on lowball bids are elevated by Suntech’s recent solar module dumping flip flop per “Suntech Exec Now Says Not Actually Selling Below Cost” by Eric Savitz for Barron’s Tech Trader Daily.

With the proposed Seller Concentration rule:

No one seller can contract for more than 50% of capacity or revenue cap in each auction (across all bids).

I don’t find it difficult to conceive of a single integrated downstream photovoltaic module manufacturer bidding and winning half the auction capacity while a systems integrator partner captures the balance.

And the talk of market mechanisms falls flat when auction bids are not disclosed once the auction is over:

The price of each individual bid will be confidential, but staff will release auction bid information on an aggregated basis to the extent it does not violate CPUC confidentiality rules.¹⁵

Let the games begin! After also learning about confidential CPUC testimony, I am beginning to think revised Sunshine Laws are required here.

By contrast, Feed-in Tariff rate schedules are open and public information. Digression also guarantees FiT rates decline over time based on the expected manufacturing learning curve.

CPUC FiT Panel
I listened to the webcast of CPUC 21st Century Thought Leaders – August 27, 2009 – Feed-in Tariffs and noted and took exception to statements by Recurrent Energy CEO Arno Harris. His blog post, “The Role of FiTs in California”, captures his points and sentiment from the panel well.

I posed a number of tough (loaded?) questions to Recurrent Energy about the CPUC RAM Proposal and Mr. Harris’ participation in the CPUC FiT Panel, and they were unable to reply before the end of last week or over the Labor Day holiday weekend.

Here’s what I asked:

I have questions for Recurrent Energy about your strong support for the new so called FiT (Feed-in Tariff) proposal.
What potential downsides does Recurrent see in the reverse auction approach?
Are you concerned it will prompt a race to the bottom in rate pricing and undervalue solar electricity generation based on TOU rates?
What about the possibility of solar module dumping deflating bids below cost?
Would you be concerned if First Solar or their partners swept the auction?
A new process could be gamed in unknown or unexpected ways. An oligarchy of companies could seek to drive competitors out of the auction and raise prices in subsequent auctions. Does this concern you?
Is Recurrent committed to using organized labor in all California projects?
In last Thursday’s CPUC panel discussion, your CEO called FiTs a “blunt” instrument and labeled them as a subsidy implying a negative connotation.
Does Recurrent consider the ITC to be a subsidy? Will you avoid using the ITC in California FiT projects?

If Recurrent Energy replies in a constructive fashion, I will post a follow up. Of course, the ITC (Investment Tax Credit) is a subsidy and the question was rhetorical. Are certain subsidies better than others?

When the COAL CAN DO THAT industry group tweets: