Ratepayer benefits analysis study

Note:  Although the data specifics in this study are based on the Renewable Energy and Economic Security Act (REESA), the results and findings can be extrapolated to conclude that the currently proposed CLEAN California Program would be just as successful at creating the same ratepayer benefits as the REESA.  This is because the legislative and regulatory “feature benefits” design of CLEAN California is modeled after the core features of the REESA.

The Clean Coalition analysis has found a critically important result: The REESA FIT will *save money* for California ratepayers.

Conventional wisdoms has said that Feed-in-tariffs cost ratepayers money by paying an above market price for electricity. This idea has been used to argue against FITs with opponents claiming that electricity bills will skyrocket.

However, this claim is too simple and does not count all the ways in which FITs can reduce costs and result in lower rates than consumers would pay for fossil fuel energy.

The Clean Coalition has created a Ratepayer Benefit Analysis that takes into account various aspects of a well-designed comprehensive FIT and shows that even with the most conservative assumptions, ratepayers will benefit by saving money within only a few years of the start of the program and potentially even sooner.

Our analysis was summarized in comments submitted to the California Energy Commission in June of 2009. Download the letter in PDF.

Below, you’ll find quick summaries of each money-saving benefit as well as reference documents and links.

Baseline scenario

If only considering FIT rates and avoided costs that follow very conservative schedules over time, the FIT is anticipated to result in a net annual savings, versus a business-as-usual scenario, within several years. This baseline is a worst-case scenario found in this model: Ratepayer Benefits Analysis Model (XLS).

The key worst-case assumption is that 100% of the FIT program is fulfilled with solar PV, the most expensive eligible renewable energy source. This energy is priced at $0.16/kWh starting in 2011 with a 5% annual degression through 2020 (i.e. the rate paid for FIT energy decreases over time). Note that the FIT program is capped in this model: FIT projects are allowed to fill an additional 2% of the annual energy each year.

The business-as-usual cost of electricity is assumed to be the avoided cost of $0.125/kWh in 2011 with a 3% annual escalation (the starting avoided cost is derived from the 2009 MPR/TOD schedules for a 20-year, 2011-online, solar generation profile).

The model shows that over 10 years, the FIT satisfies the entire 20% gap in achieving California’s anticipated 33%-by-2020 RPS mandate, while yielding a cumulative savings of more than $3.4 billion to California ratepayers.

The worst-case annual net cost of the FIT Program peaks in 2013 at $315 million, which translates into a rate impact of less than 1%. After 2013 the worst-case net cost decreases and then becomes a net savings to ratepayers each year starting in 2016. Given that this is a worst-case analysis, California ratepayers will save at least $1.9 billion in 2020 alone, which translates to 5% lower energy rates that year.

Merit order effect

Renewable energy sources can save far more money than the TOD-adjusted MPR when these sources reduce peak demand. By preempting demand for the highest priced energy increments, fixed-price renewable energy causes a significant savings because a lower price will apply to energy delivered/priced at peak periods. Note that in Germany, the merit order savings alone exceed any mischaracterized “premium” that is paid under the feed-in tariff.

For more details on the Merit Order Effect, see the “Feed-In Tariffs in America” paper produced by the New Rules Project

Substitution effect

By preempting the use of natural gas to generate electricity, the FIT Program will reduce the overall demand for natural gas, driving the price of natural gas downward. The substitution effect from a comprehensive FIT in California was quantified to be worth between 1 and 2 cents/kWh in the UC Berkeley memo to the CEC dated 10 December 2008. This 1 to 2 cents reduces the effective price for each kWh delivered by renewables under the FIT.

For more details you can download the official memo as a PDF.

Locational benefits

The REESA FIT is designed to promote Wholesale Distributed Generation (WDG). One of the key benefits of distributed generation is that the energy produced does not suffer the losses associated with traveling over the transmission grid. Also, by connecting to the distribution grid close to where the energy is being used, distributed generation does not require the massive investments in new transmission lines.

WDG as promoted by the REESA FIT avoids costs associated with:

  • Distribution line losses
  • Distribution capacity upgrades
  • Transmission investments
  • Transmission congestion

An analysis done by GreenVolts (a distributed solar technology company) has shown that the value of WDGenergy is 35% higher than energy produced a large central power stations connected to the transmission grid.

Parasitic costs

A comprehensive FIT program removes two types of purely parasitic costs rampant in California’s current RPS system. This not only saves money directly, but also reduces risks, which also saves money through lower costs of capital and other favorable effects. Since all savings are eventually reflected in rates, preempting parasitics will provide additional net savings to ratepayers.

  • Parasitic Transaction Costs (PTCs) include the proposing, negotiating, and contracting of projects. PTCs under the current RPS system can easily exceed $1 million even for small projects. Since a comprehensive FIT program predefines and pre-approves projects, the PTCs are eliminated.
  • Parasitic Transaction Time (PTT) is the time between project proposal and CPUC approval. The fastest PTT in the 7-year history of the RPS program is 1.5 years. PTT introduces costs that can break the back of smaller project developers. Since a comprehensive FIT program predefines and pre-approves projects PTT can be reduced to almost nothing.