Standard Offer and Feed-in Tariff Development Lessons Learned

John Dalton

[email protected]

Tel: 978 369-2465

Vermont Public Service Board

Standard Offer Workshop

Lessons Learned in the Design

of Standard Offer and Feed-in Tariff Programs

July 10, 2009

mailto:[email protected]

Power Advisory’s Relevant Standard Offer Experience

Distinguishing between Standard Offers and Feed-in Tariffs

Ontario’s Standard Offer Program

Objectives

Review of Program Design

Program Impacts

Lessons Learned

Ontario’s Feed-in Tariff

Context for Feed-in Tariff

Objectives

Review of Program Design

Assessment of Feed-in Tariffs

Florida’s Standard Offer Contract

Objectives

Assessment of Program

Presentation Outline

Power Advisory LLC 2009

All Rights Reserved 2

Power Advisory: small consulting firm focused on the

electricity sector

Major standard offer and feed-in tariff assignments:

Advised regarding Ontario SOP design in 2005

Advised regarding reforms to SOP for PV in 2007

PV program design not part of initial work

Assisted with redesign of SOP in 2008, became FIT

program design in late 2008

Testified regarding FPL’s standard offer contract in 2008

Clients include project developers, electric utilities and public

utility commissions

Consulting support includes policy development, price

forecasting, market assessment and project development

Renewable energy project development a major focus

Relevant experience of Power Advisory with Standard

Offer Program (SOP) Design



The pricing for standard offer programs typically value-

based

Prices don’t distinguish between the type of resource

Value often based on avoided costs

The pricing for feed-in tariffs typically cost-based

Different prices set for different renewable energy

resources, based on cost differences

Feed-in tariffs typically designed to provide greater

price stability

Long-term price schedule, e.g., degression

Proven to be effective in promoting rapid adoption of

renewable energy technologies

Often used as economic development policy

Distinguishing between Standard Offers and Feed-in Tariffs



Ontario implemented a Standard Offer Program in

November 2006

Objective to remove barriers that prevented smaller

renewable energy projects from proceeding

Addressed barriers RFP processes present to

small generators:

1. Financial security requirements

2. Complexity of the contracting process

3. High cost of proposal development relative to

project size

4. Uncertainty of proposal outcome

5. Administrative burden of RFP processes

Ontario’s experience with Standard Offer Program



Program provided a fixed price of 11 cents/kWh (Can$)

for eligible renewable technologies

20% of contract price escalated with CPI

Pricing based on recent renewable RFP, along with

distribution premium

Premium (3.52 cents/kWh) available for projects

which could focus output into peak periods

Solar PV received 42 cents/kWh

Projects no more than 10 MW and connected to

distribution network

20-year contract terms provided

Ontario’s Standard Offer Program Design



Standard Offer Contract was 34 pages

No security or contract deposits required

No cap on the amount of capacity contracted

Program to be evaluated after two years

In May 2008 program was suspended

314 contracts representing over 1,300 MW

56% of capacity was wind

34% solar

The Standard Offer Contract and program evolution



With 750 MW represented by wind projects,

connection requests in areas with most attractive wind

resources overwhelmed distribution capacity

Transmission capacity also becoming constrained

Considerable portion of capacity from larger

projects broken into 10-MW blocks

OPA proposed limiting developers ability to connect

more than one project to a substation or more than 50

MW per developer until commercial operation

Distribution capacity proved to be a major constraint



With more challenging credit market and declines in Can

$, considerable portion of capacity won’t be developed

Capacity reserved until contract terminates (3 years)

Valuable connection capacity held by proponents

that are unlikely to develop projects

Some queue positions sold

Without security deposit, proponents had a free option

Supply response likely to determine the natural system

constraint which became connection capacity

Less of an issue in Vermont given smaller project sizes

and 50 MW program limit

Should ensure that projects are likely to be developed

Financial security or project development status

Ontario Standard Offer: Lessons Learned & Postmortem



Objectives of policymakers not clearly articulated and

not reflected in program design

Importance increased with new political leadership

Diversity of technology and project types became

more important

Community group-based projects unable to

compete for connection capacity (queue position)

Smaller farm-based bio-energy projects not able

to be developed given transmission constraints

Ontario Standard Offer: Lessons Learned & Postmortem



Ontario has moved to a Feed-in Tariff to achieve renewable

policy objectives

Increase renewable energy supply to ensure adequate

generation and reduce emissions

Create new “green” industries and jobs through

investment

Enable the participation of a broader range of developers

and technologies

Ontario’s Standard Offer Program has migrated to a Feed-in

Tariff



Ontario’s Standard Offer Program and Feed-in Tariff DevelopmentMinister

Directs OPA

& OEB to

Develop

Standard Offer

Program

OPA & OEB

submit

recommendations

on Program

Design to

Minister

SO

Program

launched

SO Program

1st

Aniversary

842 MW

under

contract

SO

Program

suspended

1,300 MW

under

contract

FIT

Program

design

work

initiated

FIT Program

formally

announced

Green

Energy Act

filed

Stakeholder

Consultation

on FIT

Program

Design

Aug-05 Nov-05 Nov-06 Nov-07 May-08 Nov-08 Feb-09 March-May 09

Green Energy and Green Economy Act (GEGEA) filed

and passed in 3 months: job creation a major focus

Auto sector major employer, seeking new industry

Recognized that had to compete with RPS and federal

tax incentives offered in the US

Feed-in Tariff to provide stability to attract industry

Promoting investor confidence which is key to

investment decisions by manufacturers

Risk if you get the Feed-in Tariff (FIT) price wrong

Ability to reset prices to limit rate impacts

Undermines investor confidence

Major source of tension with FIT implementation

New Ontario Energy Minister impressed with German and

Spanish Feed-in Tariffs



Accelerated the development of the transmission

network to accommodate more renewable energy

FIT program evaluated connection capacity upfront

prior to contract award

Economic test developed to evaluate where wires

expansion economic. Expansion costs socialized.

Streamlined approvals process for renewable projects

Reducing municipal oversight

Domestic content requirements can be specified

Essential to economic development benefits

GEGEA cornerstone of broader framework to promote

renewables



Development security required with contract

application

Prices differentiated by technology to promote wide

range of technologies

Prices differentiated by proponent

Community group and aboriginal projects to receive

premium prices

Based on higher development costs and inability

to obtain economies commercial developers

realize with equipment vendors

Feed-in Tariff program design addressed the failings of

Standard Offer Program



Setting the Feed-in Tariff

The FIT is cost-based, with

prices set to provide a

reasonable return

11% After tax ROE

OPA anticipates updating FIT

prices every two years, based

on changes in costs and

considering market uptake

Community project prices $4

to $10/MWh higher

depending on technology



Technology Size Price

($/MWh)

Biogas ≤ 500 kW $160

> 500 kW ≤ 10 MW $147

> 10MW $104

Biomass ≤ 10 MW $138

> 10 MW $130

Landfill gas ≤ 10 MW $111

> 10 MW $103

Solar PV

Rooftop or

ground mounted ≤ 10 kW $802

Rooftop > 10 kW ≤ 250 kW $713

Rooftop > 250 kW ≤ 500 kW $635

Rooftop >500 kW $539

Ground

mounted > 10 kW ≤ 10 MW $443

Waterpower ≤ 10 MW $131

> 10 MW ≤ 50 MW $122

Wind

Onshore any $135

Offshore any $190

Note: prices in Can$

Assessment of FITs

FITs can be an effective strategy for promoting

the development of renewable energy resources

where:

Costs and operating performance of

renewable resources are well understood and

subject to limited variation

Project size is such that the costs of

participating in a formal competitive

procurement process cannot be justified



Assessment of FITs

Significant risk associated with FIT pricing

Cornerstone of the program is stability

Essential if economic development benefits

from siting of major renewable energy

production facilities to be realized

If price too high significant market response

can leave consumers exposed to higher costs

Risk most significant for PV given its pricing

The 50 MW program cap mitigates these risks

for Vermont



Assessment of Ontario FIT

Ontario program could be a victim of its own success

and be “oversubscribed”

Renewable survey indicated 15,000 MW under

development (88% wind and 8% solar)

Ability of Ontario to integrate the baseload

generation provided by FIT

6 week period this spring when wholesale prices

were negative for 1/3 of hours

Ability to put enough transmission/distribution

wires in place in time to integrate FIT projects

Need to incent production during times when

most valuable



Review of Florida Power & Light Standard Offer

Program

Florida utilities mandated to provide Standard

Offer Contract (SOC)

Objective to promote development of

renewable energy in Florida

Under Florida PSC rules SOC prices based on

next avoidable fossil fueled generating unit

Not an appropriate avoided cost benchmark

given objective of promoting renewable

energy

Required similar operating performance as fossil

units

Not realistic or appropriatePower Advisory LLC 2009


Review of Florida Power & Light Standard Offer

Program

Risk allocation in SOC disadvantaged renewable

energy project developers

Capacity factor of 97% required to receive

full capacity payment

No capacity payment if capacity factor below

80%

FPL able to interrupt purchases when

uneconomic, adversely affecting capital cost

recovery for renewable projects

FPL had right of first refusal for RECs, even

though price paid was based on fossil unit



Considerations for the design of Vermont’s Standard

Offer

Program design must balance objectives:

Ensure customer value?

Eliminate undue barriers to project

development?

Promote development of a range of

technologies and project sizes?

50 MW program cap limits price risks

Program design will influence impacts, e.g.,

range of prices for different size projects




Offer (Cont’d)

With 50 MW cap, need to ensure that projects in

“queue” are likely to be developed

Financial security: easy to administer, but

potential barrier;

Evidence of project development

Establish development milestones




Offer (Cont’d)

Considerable risks with establishing Standard

Offer price schedule

Publicly available data with opportunity for

stakeholder feedback on assumptions

Supply curve likely to be relatively flat

Small price change, significant supply

response

Linkage between model assumptions and

program design




Offer (Cont’d)

Provide appropriate incentives to enhance value

of production

On-peak production

REC generation

Capacity value



Thank you for your attention

John Dalton

Power Advisory LLC

[email protected]

(978) 369-2465

www.poweradvisoryllc.com



mailto:[email protected]

http://www.poweradvisoryllc.com/

Standard Offer and Feed-in Tariff Development Lessons Learned

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