LA’S SOLAR AMBITIONS AND THE F-I-T TO ACHIEVE THEM

Designing an Effective Feed-in Tariff for Greater Los Angeles
J.R. DeShazo and Ryan Matulka (with Alexandra Kravetz and Gunsang Lee), April 2010 (Los Angeles Business Council and UCLA Luskin Center/School of Public Affairs)

THE POINT
One thing should be clear: If there is a way to turn solar energy into a practical matter, California is going to find it.

If there is a technology that will bring installed costs down to popularly appealing levels, California will find it. If there is an incentive that will drive demand high enough to drive production high enough to create economies of scale that bring costs down to affordable levels, California will find it.

In the meantime, California is trying any and every option to turn its undeniable richness of sun into a marketable commodity. At the state level, it has already instituted a limited and compromised version of the feed-in tariff concept behind Europe’s meteoric growth of installed solar energy capacity.

Now, the City of Los Angeles proposes to institute the most ambitious feed-in tariff ever, supported by the findings of its Designing an Effective Feed-in Tariff for Greater Los Angeles.

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The report comes in the wake of a setback for charismatic young LA Mayor Anotonio Villaraigosa. An aggressive initiative to fund a New Energy plan that included 150 megawatts of solar capacity for his city through a utility rate hike was recently stopped cold, putting a serious crimp in Villaraigosa's breath-takingly ambitious long-term goal of building 1,280 megawatts of solar energy capacity to provide 40% of LA’s power by 2020. His City Council would not approve the rate hike that it believed would make the burden of the current recession and its accompanying 12% statewide unemployment worse.

The basic idea of a feed-in tariff (FiT) is so practical most would-be rooftop system owners are surprised when their installers tell them it is not as yet commonly available. An FiT awards the owner of a solar system a per-kilowatt-hour payment (tariff) for all the electricity the system feeds into the city’s grid.

Villaraigosa’s plan includes a FiT program overseen by the LA Department of Water and Power (LADWP) as a lynchpin. The plan focuses not just on building solar capacity but on building the jobs and revenues the Mayor passionately argues will accompany the aggressive build-up of capacity that will come from an FiT.

Germany’s FiT made it the biggest generator of electricity from solar energy in the world despite its meager insolation (sun per square meter) and created over 100,000 jobs in half a decade. But Spain’s FiT created a bubble that burst. The keys to a successful FiT are (1) how the tariff is calculated, (2) where it is capped, and (3) how user-friendly it is. LA’s study explains why the state FiT is inadequate and how the City’s FiT can serve its Mayor’s ambitions.

The Mayor’s solar ambitions, entangled as they are in the complications of fossil fuel price volatility, a struggling economy and political opposition, make it clear that art was following life when, in the classic 1974 movie, LA’s politics were summarized in the immortal line, “Forget it, Jake. It’s Chinatown.”

But if anything can bring light to California’s hard times and LA’s dark machinations, it is solar energy.

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THE DETAILS
California Governor Arnold Schwarzenegger has staked his legacy on New Energy and the fight against climate change. Schwarzenegger believes they will bring opportunity and economic growth to the state. Opponents say they will not. In response, the Governor issued an executive order upping the state’s Renewable Electricity Standard (RES). By 2020, he has decreed, the state’s regulated utilities must obtain a third of their power from New Energy sources.

The Governor’s California Solar Initiative (SB1) provides a series of incentives with the aim of creating “one million solar roofs” in the state.

Jumping on the same bandwagon, LA Mayor Anotonio Villaraigosa has since 2008 pushed his solar plan to build 1,280 megawatts of LA solar capacity and produce 40% of the city's power from New Energy sources. With the International Brotherhood of Electrical Workers (IBEW) at LADWP eyeing new opportunities and backing him, Villaraigosa's plan emphasizes not just building solar capacity but building the jobs and revenues that both the Governor and the Mayor passionately argue will accompany an aggressive build-up of capacity.

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A feed-in tariff builds solar energy capacity but it is costly, at least until production grows enough so that economies of scale bring production costs down. To offset the expense, a good FiT must also contribute to local good quality job growth, bring revenues into the local economy and help meet policy requirements for New Energy like those established in California’s 33% by 2020 Renewable Electricity Standard (RES).

California’s share of the world’s solar market, though still large, has been steadily falling. Its portion of the world’s annual installations fell from 5.2% to 2.8% between 2004 and 2008 as other nations and states introduced policies and incentives that effectively drive growth even in the absence of sun as good as California’s.

Germany’s sustained growth in installed solar capacity from 2004-to-2008 has made it the biggest market in the world. The growth came from a carefully designed and effectuated national FiT. In 2008, Spain’s growth exceeded Germany’s, thanks to an even more aggressive (but less well thought through) FiT policy. It was so aggressive that Spain had to dial it back in 2009, causing a sudden contraction. Germany, meanwhile, is in the process of methodically ratcheting down its FiT to control growth. Its market is expected to dip slightly at midyear and rebound by late autumn.

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By 2009, 45 countries had FiT policies and more were considering one. Benefits from a well designed FiT (which the report shows neither the current Southern California Edison (SCE) plan or the proposed LADWP plan is) include (1) significant local good-quality job gains, (2) timely additions to the local New Energy supply, (3) productivity from unused local rooftops, parking lots and open spaces in the form of electricity from the sun, (4) eliminated imported electricity transmission and peaking costs, and (5) a market signal of commitment to local New Energy developers.

Among the many economic, regulatory and technical obstacles to owning a solar system in LA, none is more unpopular than the city’s refusal to pay for the electricity fed into the grid. An owner can earn up to the net utility bill metered amount ("net metering") but no more. The FiT allows every kilowatt-hour a system generates to be rewarded at above-retail rates.

Net metering inclines solar buyers to choose smaller systems because they might as well reduce upfront costs if they are not going to earn for the excess electricity they generate. A smartly designed FiT inclines them to the biggest systems they can afford so as to earn the biggest return they can get. As Germany's experience demonstrates, this produces the fullest use of available rooftops and open spaces.

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FiT programs in the Sacramento Municipal Utilities District, Gainesville Regional Utilities, the State of Vermont, the Province of Ontario, Germany and Spain offer many lessons about what makes an incentive good or bad. Some have been good at driving growth and jobs creation and others have caused economic havoc.

The first lesson learned from previous FiTs is that the above-retail tariff rate should be set based on the actual system installation cost plus a reasonable rate of return. If the tariff is too low, there is no incentive; if the tariff is too high, it creates a bubble.

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In addition, it is important that localities’ FiT programs specify rewards for local manufacture and installation so as to stimulate local economic development and local New Energy generation.

Perhaps the most important flaws in the existing SCE FiT and the proposed LADWP FiT are that (1) they neither emphasize local job growth nor local solar energy development, and (2) they fail to provide incentives for large-scale public and commercial installations, the biggest potential sources of growth.

A good FiT for LA must not prevent prospective solar system owners in the city from taking advantage of federal and state tax benefits and other incentives that bring in revenues. It also must identify and focus its benefits on the segment of the market (residential, medium or large scale public and commercial projects) it wants most to attract.

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The ideal FiT design maximizes the city’s return on its investment in the form of New Energy generation, jobs and revenues. Such an FiT (1) pays a tariff based on the cost of the system plus a reasonable profit, (2) has a clearly established cap on the amount of installed capacity it applies to that stimulates the desired growth without creating an economic bubble, and (3) makes it quick and easy for aspiring system owners to apply, set up their remuneration and connect to the grid.

As the LA study carefully points out, any incentive policy and especially a FiT program involves a series of trade-offs between costs and benefits. To make the most successful trade-offs, the program must be tailored to the locality, its specific needs, its specific assets and its ambitions.

A follow-up to the current study will more precisely estimate the solar generation and jobs available in the many and fabled LA sub-regions and specify the FiT designs and rates as well as the costs to ratepayers for various sub-region programs.

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QUOTES
- From the Los Angeles Feed-in Tariff study: “There is a disconnection between Los Angeles’ aggressive solar goals and its policies. Although the region maintains some of North America’s most ambitious renewable energy and economic development goals, the current solar policy framework does not facilitate any significant in-basin solar contribution to these goals. California’s SB1 solar incentives are effective at inducing small amounts of solar power to offset on-site electricity usage, but these incentives do not reach every segment of the potential solar market. It is difficult for public agencies and cash-constrained businesses to directly own solar facilities, but they cannot look to professional owners because of Los Angeles’ prohibition on third-party power sales. Current policies do not maximize the opportunities for solar within Los Angeles. An effective FiT policy could help expand the Los Angeles solar market and also contribute
to the regional goals.”

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- From the Los Angeles Feed-in Tariff study: “…FiTs did not experience significant solar participation until cost-based tariffs were implemented. Under the near-term market conditions, neither California nor Los Angeles will experience widespread solar participation with value-based tariffs. Effective FiT program design alternatives must be tailored for local conditions. The specific design choices of a local policy must support the jurisdiction’s larger goals. Global market conditions influence solar economics, but also many of the factors that influence solar energy economics are local. Because of this, program design alternatives cannot easily be imported from other policies, nor can specific elements be compared between jurisdictions. A tariff in one locality may induce the desired market response, while the same tariff in another locality could over-stimulate the solar market. A serious commitment by administrators is required to calculate the
program economics and estimate the market response. This commitment is essential,
not only for program design, but also to evaluate the results and make appropriate
adjustments…”

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- From the Los Angeles Feed-in Tariff study: “Taken collectively, the realization of [Mayor Villaraigosa’s] broad vision could transform Los Angeles into a leading center of clean technology. Solar energy generation has the potential to contribute to these goals, but it has yet to make a significant contribution to the Los Angeles economy. Not only does solar generation produce clean, emission-free energy, but also it creates local opportunities for employment and entrepreneurship. Solar companies employ people to find suitable sites, sell systems, install equipment, and monitor each installation. These opportunities originate from the site and the system itself, and therefore create local employment benefits.”