Vermont’s Democratic Governor Peter Shumlin signed a bill into law 18 May 2012 that slightly increases the cap on the state’s Standard Offer Contract program.
Senate Bill 214 extends the small existing 50 MW program by a modest amount.
The bill’s passage into law was overshadowed by his approval the day before of a ban on the controversial drilling technique of fracking for natural gas.
The law increases the Standard Offer Contract portion of Vermont’s SPEED (Sustainably Priced Energy Development Program) policy by about 10% per year for the next ten years.
The new policy adds 5 MW of additional program capacity to the existing 50 MW program for the next three years, and slightly more in subsequent years, ultimately more than doubling total capacity available under the Standard Offer Contract program.
The new law also excludes some technologies, such as on-farm biogas, from the program cap, thus the total amount that could be developed under the program may exceed the authorized 127.5 MW.
In North America, the expression “standard offer contracts” is sometimes used in place of the more well-known term feed-in tariffs.
While Vermont’s SPEED program offers standard contracts, the “offers” are not standard but vary by technology and project size. For example, there are two tariffs for wind energy, and separate tariffs for solar, biogas, biomass, and hydro.
Most of the generation from the previous Vermont program, 60%, has been from on-farm biogas. Solar photovoltaics (solar PV) accounts for 18%, one landfill gas plant accounts for 14%.
The original program was launched in the fall of 2009. Since that time only 10 MW of the 50 MW program has been built. More renewable capacity, 11 MW, has been built in the small city of Gainesville, Florida under its feed-in tariff than has been installed in the state of Vermont under its Standard Offer Contract program.
SPEED’s program administrators say that an additional 14 MW will be added this year. If completed, this will bring the program to about one-half of the authorized capacity after two complete years of implementation.
Below are some details of the new program.
- Project Size Cap: 2.2 MW maintained
- Program Cap: 127.5 MW over a 12-year period.
- Portion Reserved for Utilities: 10% first three years, 15% for second three years, and 20% for the remainder.
- Biogas from farming operations and landfill gas are exempted from the cumulative capacity cap.
- Also exempted from the capacity cap is any distributed generation that can prove that it mitigates transmission constraints.
- Term: 10 to 20 years for all but solar PV; solar PV: 10-25 years.
- Specifies use of “market-based mechanisms” for new SPEED capacity.
- Annual Program Reviews: Vermont Public Service Board (PSB)
- Project Completion Window: two years for solar PV and small wind; three years for large wind and all other technologies.
- All reasonable cost to utilities less credits will be passed along to ratepayers.
- Wood biomass plants restricted to only plants with an efficiency of 50% or greater.
- Reporting: biennial report to the legislature.
Reading the Tea Leaves
Developers, renewable energy advocates, and regulators are all now trying to read the tea leaves as to what the legislature had in mind and how their intent will be implemented.
Two provisions that will require extensive interpretation stand out: Capacity exemption for some distributed generation, and the introduction of “market mechanisms”.
Distributed Generation Exemption from Capacity Cap
In addition to on-farm biogas generation, the new law also exempts distributed generators from the program’s capacity cap if they can prove “sufficient benefits” to alleviate transmission constraints.
The law requires that the PSB, the state’s utility regulator, initiate a proceeding to identify transmission constrained areas and how generators can prove that they provide the necessary benefits.
Proceedings before the PSB are both lengthy and costly. Renewables advocates have only been partly successful making their case before the PSB in the past. They have had to counter both the utilities, who can afford to delay and obstruct proceedings, large industrial users who oppose any policy that may increase rates, and the executive branch’s Department of Public Service (DPS).
Under the previous governor, DPS was openly hostile to SPEED’s Standard Offer Contract program.
Solar PV proponents have long argued that the technology provides grid support benefits to distribution networks and have sought to be paid for the “value” this service provides.
This demand to be paid for the “value” of distributed solar PV lends support to the general argument in orthodox neoliberalism that a generator, such as solar PV, should only be paid for its “value” or benefit to the system. This would be equivalent to the “avoided cost” plus a bonus for solar PV’s distribution benefits.
Solar PV promoters hope that as prices fall, especially for medium-size, commercial-scale projects, small payments for various “values” such as grid support will be sufficient to make solar competitive with the avoided cost of natural gas.
However, the price at which this will occur is a moving target. There is currently a glut of natural gas in the US and the avoided cost has plummeted along with natural gas prices.
In contrast, successful feed-in tariff policies pay all renewables, not only solar PV, the “cost of generation plus a reasonable profit”. This is similar to how regulated electric utilities have been paid for their generation for decades. Solar PV often receives the highest payments under feed-in tariff programs because it remains the highest-cost technology, though new German solar tariffs have reached the price of offshore wind, another high-cost technology.
Thus, solar advocates play a dangerous game advocating on the one hand that they be paid for the special “values” they presumably bring to distribution networks, while on the other hand arguing for cost-based tariffs because solar PV remains more expensive than the spot-market price of natural gas. This has been likened to the proverb of trying “to have one’s cake and eat it too.“.
In the end, the likely regulatory hurdles may make it difficult to use this exemption in practice.
Market Mechanisms
An even thornier issue is the statute’s requirement that the price be set by “market-based mechanisms”.
The inclusion of this provision was probably introduced at DPS’ suggestion. In the past, the department has argued against the regulator, the PSB, setting the tariffs administratively, though the PSB regularly sets utility rates.
This provision goes on to suggest that a “market-based mechanism” may be a “reverse auction” (bidding system) or “other procurement tool” that delivers the amount of authorized capacity that is consistent with federal law and the “timely development” of renewables at the “lowest feasible cost”.
Some observers note that the legislature could simply be trying to avert a legal challenge from the Federal Energy Regulatory Commission (FERC) by specifying the terms “market-based mechanism”. FERC’s recent decisions use the term to define what is acceptable in setting prices for renewables.
Under this interpretation, the PSB could simply define technology-differentiated feed-in tariffs as a “market-based mechanism” since the statute’s language permits “other procurement tools”.
However, this begs the question, why does the statute spell out “reverse auction” and not also “standard offer contracts”, the PSB’s idiom for feed-in tariffs, if it didn’t intend for the PSB to use a “reverse auction” to set prices and award contracts.
That both “reverse auction” and “other procurement tools” are mentioned in the same passage may reflect the diversity of opinion not only within DPS but also within the legislature on how to best set prices and award contracts.
The intent, after all, is to set prices and award contracts that get projects built in a “timely” manner as the statute says.
However, renewables advocates were unable to persuade the PSB that the previous program failed to deliver renewable projects in a “timely” manner. Only 10 MW of a 50 MW program have been installed to date. And, there is no assurance that advocates will prevail in the future to challenge the PSB on the new program’s progress if it fails to deliver renewables in a “timely manner”.
For the past three decades, American renewable policy, has lurched from one idea to the next, trying to hit on something that works while fitting within economic orthodoxy. First it was capital grants, then tax credits, subsequently PACE (Property Assessed Clean Energy) programs, and now California’s Renewable Auction Mechanism (RAM) all have had their place in the sun.
RAM is currently the rage, presumably as a means of awarding renewable contracts without running afoul of FERC, as if this was the sole criteria in policy design.
As a form of bidding, RAM is a policy favored by those with market power, the existing incumbents of the renewable industry. As in all bidding systems, only those with sufficient size and, hence, deep pockets, can hope to participate. This leads to further concentration of the industry into the hands of a few players and makes it more difficult for new players to enter the market.
Bidding systems are notorious for a “race to the bottom” where projects are underbid and don’t get built.
Moreover, bidding is often opaque. Only an elite few know who bid what. Seldom is this information made public.
Thus bidding systems not only limit who can participate in renewable development, result in high failure rates, often 50% or more, but are also secretive. Bidding replicates the makeup of the existing utility industry only with new names.
In the US, the wind industry is dominated by the unregulated subsidiaries of electric utility companies. Most US renewable programs use bidding to award contracts.
In Germany, on the other hand, 51% of renewables are owned by common citizens who often live in the community where the renewables are installed. Germany uses a sophisticated system of Advanced Renewable Tariffs, the modern form of feed-in tariffs.
Feed-in tariffs, when not designed well, can also have high failure rates. But in contrast to bidding systems, the price for feed-in tariffs are set in an open and transparent process that expands the market to new entrants, including mom-and-pop businesses as well as small and medium-size enterprises.
Fortunately, the view that only auctions are “market mechanisms” is not universally shared among economists.
Proponents of feed-in tariffs argue that this policy tool is also a “market mechanism” where price is determined administratively and the “market” determines what and how much gets built.
It is conceivable that this is what the legislature had in mind. Tony Klein, the chair of Vermont’s House Committee on Natural Resources and Energy, said in a local news report that “when it comes to getting projects built in Vermont, the standard offer is more efficient.”
As data worldwide continues to substantiate that feed-in tariffs are the least costly “procurement tool” and the most likely to deliver renewables in a “timely manner,” they stand a good chance of continuing to be the “market-based mechanism” of choice for Vermont.
Shumlin says renewable energy program will be good for business
An act relating to customer rights regarding smart meters [and renewable energy].
