Standard Offer and Feed-in Tariff Development Lessons Learned

Vermont Public Service Board
Standard Offer Workshop

Lessons Learned in the Design
of Standard Offer and Feed-in Tariff Programs

July 10, 2009

John Dalton
jdalton@poweradvisoryllc.com
Tel: 978 369-2465

Presentation Outline
 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
Power Advisory LLC 2009
All Rights Reserved 2

Relevant experience of Power Advisory with Standard
Offer Program (SOP) Design
 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

Distinguishing between Standard Offers and Feed-in Tariffs

 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

Ontario’s experience with Standard Offer Program

 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 Standard Offer Program Design

 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


The Standard Offer Contract and program evolution

 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


Distribution capacity proved to be a major constraint

 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


Ontario Standard Offer: Lessons Learned & Postmortem

 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’s Standard Offer Program has migrated to a Feed-in
Tariff
 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 and Feed-in Tariff Development
Minister OPA & OEB SO Program SO FIT Program
Directs OPA submit 1st Program FIT formally Stakeholder
& OEB to recommendations Aniversary suspended Program announced Consultation
Develop on Program SO 842 MW 1,300 MW design Green on FIT
Standard Offer Design to Program under under work Energy Act Program
Program Minister launched contract contract initiated filed Design
Aug-05 Nov-05 Nov-06 Nov-07 May-08 Nov-08 Feb-09 March-May 09


New Ontario Energy Minister impressed with German and
Spanish Feed-in Tariffs
 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

GEGEA cornerstone of broader framework to promote
renewables
 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


Feed-in Tariff program design addressed the failings of
Standard Offer Program
 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


Setting the Feed-in Tariff

 The FIT is cost-based, with Technology Size Price
($/MWh)
prices set to provide a Biogas ≤ 500 kW $160
> 500 kW ≤ 10 MW $147
reasonable return > 10MW $104
Biomass ≤ 10 MW $138
11% After tax ROE > 10 MW $130
Landfill gas ≤ 10 MW $111
 OPA anticipates updating FIT Solar PV
> 10 MW $103

prices every two years, based Rooftop or

on changes in costs and ground mounted ≤ 10 kW
Rooftop > 10 kW ≤ 250 kW
$802
$713

considering market uptake Rooftop > 250 kW ≤ 500 kW
Rooftop >500 kW
$635
$539
Ground
 Community project prices $4 mounted > 10 kW ≤ 10 MW $443
Waterpower ≤ 10 MW $131
to $10/MWh higher > 10 MW ≤ 50 MW $122
Wind
depending on technology 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 appropriate

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
jdalton@poweradvisoryllc.com
(978) 369-2465
www.poweradvisoryllc.com


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