Renewable Energy Feed-in Tariffs: Lessons Learned from the U.S. and Abroad

1. Renewable Energy Feed-in Tariffs: Lessons Learned from the U.S. and Abroad VT Public Service Board Feed-in Tariff Workshop Karlynn Cory SEAC Financing Team Lead July 10th, 2009 NREL is a national laboratory of the U.S. Department of Energy Office of Energy Efficiency and Renewable Energy operated by the Alliance for Sustainable Energy, LLC

2. Agenda • Feed-in Tariff (FIT) Overview • FIT Policy Best Practices • Policy Design and Implementation Challenges • FIT Policy Misconceptions (PURPA, PBIs) • Policy Interactions (net metering, RPS) • FIT Policy Implementation (U.S. and VT) National Renewable Energy Laboratory Innovation for Our Energy Future

3. Feed-In-Tariff Definition • Feed-in Tariff (FIT)*:A renewable energy policy that typically offers a guarantee of: • Payments to project owners for the total amount of renewable electricity they produce; • Access to the grid; and • Stable, long-term contracts (15-20 years) • This revenue may pay for: • Electricity sales, or • Electricity sales + RECs (as in Vermont) • * Also called fixed-price policies, minimum price policies, standard offer contracts, feed laws, renewable energy payments, renewable energy dividends and advanced renewable tariffs. National Renewable Energy Laboratory Innovation for Our Energy Future

4. FIT Policy: Application in the U.S. Note: Gainesville Regional Utilities, has approved the first U.S. cost-based FIT for solar PV. In May 2009, Vermont enacted the first statewide FIT policy based on the RE project cost. Palm Desert, CA (proposed) Rhode Island (proposed) Santa Monica, CA (proposed) Los Angeles, CA (proposed) Gainesville, FL (approved) One state with enacted FIT legislation based on avoided cost (CA) One state with enacted FIT legislation based on cost of generation (VT) Three states with enacted utility-based FITs (OR, WA, WI) Seven states (incl. 3 munis) with proposed RE cost-based FIT legislation Source: Adapted from Gipe www.wind-works.org, NREL June 2009 National Renewable Energy Laboratory Innovation for Our Energy Future

5. FIT Policy Best Practices – 1 • Ensure the profitability of RE investments • Often, the FIT payment is based on the RE project cost + pre-determined rate of return • Long policy duration • Length and reliability of the policy framework, over time • Include substantial FIT payment differentiation to closely approximate a variety of RE project costs • Technology; • Project size; • Resource quality (e.g. lower level for higher wind class); and • Other project-specific variables. National Renewable Energy Laboratory Innovation for Our Energy Future

6. FIT Policy Best Practices – 2 • 4. Long contract length – FIT payments awarded over longer periods mean greater revenue certainty and lower required FIT payments • Encourage efficiency and innovation – decrease payments to projects that come on-line in subsequent years • 6. Allow widespread participation • Residential, nonprofit, commercial and industrial customers; • Federal, state and local government agencies; • Independent power producers; and • Utilities • 7. Use caps sparingly – restrictive caps on project size, overall program size or program annual budget can limit FIT policy success. National Renewable Energy Laboratory Innovation for Our Energy Future

7. FIT Policy Challenges • Setting FIT payment level is challenging: • if set too low, little new RE development; • if too high, surplus profits to developers • Cost: supporting emerging technologies • can lead to near-term, upward pressure on elec. costs • Complexity: Usually many levels of differentiation • Policy design challenge: Tracking technological improvement and cost reduction accurately over time • Policy crutch: RE industries could develop a reliance upon the policy for project deployment National Renewable Energy Laboratory Innovation for Our Energy Future

8. Key differences: U.S. & EU • 1.In general, U.S. FIT policies have not been based on the cost of generation (plus a reasonable profit) • 2. EU FIT policies can be used by everyone • - Res, Com & Ind customers • - Fed., state, local govt. • - Non-profit organizations • - AND utilities • 3. U.S. FITs impose caps (e.g. project size, program capacity or total cost) typically on an annual basis • - U.S.: focus tends to be on annual increment • - EU: longer-term goals/caps are set (10-20 years) • - Longer-term caps provide investor certainty • 4. U.S. FITs have yet to fully differentiate FIT payments • - Different project costs based on technology, size of project, quality of resource and other locational factors National Renewable Energy Laboratory Innovation for Our Energy Future

9. FIT Policies: Addressing Misconceptions • FITs are not a “foreign” policy • U.S. utilities get cost-recovery + profit for conventional gen. • FITs are not the same as PURPA • FITs can be compatible/compliment RPS mandates/goals • All FITs are production-based, but not all PBIs are FITs • FIT policy design and administration will be different if performed by states, as opposed to utilities • FITs have different goals and structure than net metering National Renewable Energy Laboratory Innovation for Our Energy Future

10. PURPA: a FIT Policy Precursor Public Utilities Regulatory Policy Act (1978) Provided production-based payments to qualified non-utility renewable energy generators Payments based on utility “avoided cost” EX: California’s standard offer contract No. 4 % of retail electricity price FIT policies Avoided cost-based FIT policies Undifferentiated FIT policies SOC No. 4: contracts based on utility projections of long-run fossil fuel prices Modern FITs, fully differentiated, often cost-based National Renewable Energy Laboratory Innovation for Our Energy Future

11. Feed-in Tariff vs. PURPA FIT payments are distinctly different from PURPA • PURPA payments to RE projects were anchored on erroneous projections (oil-fired power on the margin; oil prices high) • In reality, actual electricity prices diverged greatly from forecasts (NG-fired power on the margin; lower fuel prices); but PURPA payments remained high and continued to grow • In contrast: successful FITs* are based on RE project economics (plus reasonable return) • Not usually tied to fossil fuel/electricity prices (some exceptions) • Most often, payments are levelized (perhaps small escalator) • Price hedge, if fixed payment (propsed in VT), or if a market/auction premium payment bound with cap & floor * Successful FIT: Results in substantial RE MW and GWh, quickly National Renewable Energy Laboratory Innovation for Our Energy Future

12. FITs and RPS: complimentary policies • FITs replace/compliment competitive solicitations (i.e. RFPs), NOT RPS policies (e.g. EU countries use FITs to achieve goals) • A FIT policy can be compatible with an RPS mandate or goal • Project financing support through ratepayer backing • FITs can target DG (RFPs focus on utility-scale) • FITs can be used for utility-scale between RFPs • Hedge against project delays and cancellations • Open to all end-users, including utilities • Focus on “reasonable” cost RE (not least cost) • Assured support for emerging technologies National Renewable Energy Laboratory Innovation for Our Energy Future

13. Feed-in Tariff vs. Production Incentives • Production-based incentives (PBIs) are distinguished from capacity-based incentives ($/W) • All FITs are PBIs, but not all PBIs are FITs • PBIs generally offer a per kWh payment without regard to production costs • Not always long-term, nor widely available • VT FIT proposed to follow some FIT best practices • They are targeted so that the revenue streams cover total project costs, plus a reasonable return • Offer long-term contracts offered over long period of time National Renewable Energy Laboratory Innovation for Our Energy Future

14. Feed-in Tariff vs. Utility Policies • Important to distinguish between utility-based FIT policies and state-based FIT policies • PG&E, SCE, Xcel, MGE et al., all have “FITs” - None are cost-based - None are meant to stimulate large amounts of RE - None are meant to create jobs …but that’s not utilities’ role National Renewable Energy Laboratory Innovation for Our Energy Future

15. Feed-in Tariff: Net Metering vs. FIT • Net metering (NM) vs. FIT Policy Goals • NM goal: credit customers with value of power to utility • FIT goal: provide project owners with adequate project revenues • NM vs. FIT policy structure • NM provides a credit for excess generation • NM usually re-sets/zeros out at the end of the year • NM policy success depends on ability to cover the cost of the project (i.e. depends on NM policy details) • FITs provide cash payment for the entire electrical output over a pre-established period of time NM and FIT policy – comparison • FIT provides greater revenue certainty (pre-determined P over L-T) • NM granted at utility retail rate for up to 12 months (variable, benefit credited to the utility after a year) • While not a true FIT, could also consider using net metering in combination with FIT payments (FIT payments make up difference between system cost and utility retail rate) National Renewable Energy Laboratory Innovation for Our Energy Future

16. FITs in the Financial Crisis • U.S. is down to ~ 4 tax equity investors (Jan ’09) • FITs facilitate project financing through guaranteed, long-term contract for output • Help attract capital • Can reduce dependence on tax equity • Proven mechanism to stimulate new industries, create jobs, if generous caps • FITs provide the opportunity for low-risk returns on local energy investments National Renewable Energy Laboratory Innovation for Our Energy Future

17. Future U.S. FIT Policy • Best practices suggest that successful FITs : • 1. are methodologically based on RE project costs (+return) • 2. are in place over a long period of time to provide policy stability and reduce uncertainty • 3. are differentiated by project size, resource quality and technology type • 4. involve long-term contracts (15-25 years) • 5. include built-in decreased payments to drive innovation and cost-reduction over time • 6. are generally available to all end-users and project investors • 7. minimize the use of program and project caps National Renewable Energy Laboratory Innovation for Our Energy Future

18. How to implement a FIT in the U.S.? • Make a long-term commitment to RE – enact the policy for 10 or more years to provide policy stability • Introduce as a procurement mechanism to meet RPS mandates/goals (either supplement to RFPs – for DG or between RFPs, or as a replacement for RFPs) • Establish clear interconnection standards to streamline access and reduce administrative barriers • Introduce provisions on cost allocation (e.g. rate-basing, inter-utility cost sharing, T&D upgrades, etc.) • Consider interactions with existing state & federal policies (ITC, PTC, MACRS, etc.) • Address any legal and/or regulatory barriers to RE • Consider local context and resource availability National Renewable Energy Laboratory Innovation for Our Energy Future

19. How to implement a FIT in VT? • Clarify REC ownership, use and claims now and in future • Evaluate options for 50 MW FIT program cap • If smaller projects are a goal, can reserve a portion for residential, small C&I • Can exclude utilities if they have another mechanism to cover costs • Clarify intent of FIT rate structures • If price transparency important, can separate energy, capacity, and RECs • If goal is to include non-taxable entities, can use higher FIT payments to compensate for no federal tax benefits (to achieve equivalent return) • Consider bonus payments • Offset peak demand (for dispatchable technologies) • Use of specific biomass waste streams • Physical location of systems (e.g. building vs. ground mount) • Specific ownership structures (community owned) • Transmission (grid integration tech, and also grid constraints) • Auction payment mechanism + Costs less, can send market signal if prices transparent and auction happens more than once a year (3-4 times?) • Favors larger projects (due to economies of scale), favors specific technologies (unless technology specific), favors developers (end-users unlikely to participate) National Renewable Energy Laboratory Innovation for Our Energy Future

20. NREL Reports • “Feed-in Tariff Policy: Design, Implementation, and RPS Policy Interactions” NREL, March 2009 • http://www.nrel.gov/docs/fy09osti/45549.pdf • “State Clean Energy Policies Analysis (SCEPA) Project: • An Analysis of Renewable Energy Feed-in Tariffs in the • United States” NREL, May 2009 (revised June 2009) • http://www.nrel.gov/docs/fy09osti/45551.pdf • COMING SOON • “Feed-in Tariff Policy Design and Implementation: • Best Practices Guide” NREL, 2009 • http://www.nrel.gov/docs/fy09osti/44849.pdf National Renewable Energy Laboratory Innovation for Our Energy Future

21. Thank you for your attention! Strategic Energy Analysis Center National Renewable Energy Laboratory www.nrel.gov\analysis 1617 Cole Blvd. Golden, CO 80401-3393 Karlynn Cory Claire Kreycik P: (303) 384-7464 P: (303) 384-7447 E: karlynn.cory@nrel.gov E: claire.kreycik@nrel.gov National Renewable Energy Laboratory Innovation for Our Energy Future

22. Tariff Degression National Renewable Energy Laboratory Innovation for Our Energy Future

23. Fundamental FIT Payment Choice - 1 (1) Fixed Price FIT Payment(can include escalation) Most countries use fixed-price FIT payments (2) Premium FIT Payment(above spot market) National Renewable Energy Laboratory Innovation for Our Energy Future

24. Fundamental FIT Payment Choice - 2 Refinements to FIT payment methodologies (3) Premium FIT Payment with Caps and Floors FIT payment premium, plus spot market price (total expected revenues) Premium goes to zero (receive the spot market price) Source: IDAE 2008 National Renewable Energy Laboratory Innovation for Our Energy Future

25. Fundamental FIT Payment Choice - 3 Refinements to FIT payment methodologies (4) Spot Market Gap Model (above spot market) National Renewable Energy Laboratory Innovation for Our Energy Future