Next generation or flawed policy? A look at California's Renewable Auction Mechanism (RAM) and feed-in tariffs for California with FIT Coalition Associate Executive Director Ted Ko

Ted Ko
Ted Ko

Ted Ko is tech-industry veteran with wide-ranging experience from performing advanced research at a public utility to starting companies out of his living room. As a founding team member, he helped two startups through initial funding and one successful exit by acquisition. On a larger scale, he managed and launched new products for tens of millions of Yahoo customers, acquiring a specialty in global consumer Internet services.

Mr. Ko maintains a consulting practice advising entrepreneurs and private equity investors on cleantech strategy and innovation at the intersection of sustainability and the Internet.

Mr. Ko is a co-founder of the FIT Coalition and currently serves as the Associate Executive Director where he manages operations and drives legislative strategy. He received his BS and MS in Computer Science from MIT.

 

Solar Server: Can you tell us a little bit about the FIT Coalition and the work that you do?

Ted Ko: The FIT Coalition is a non-profit advocacy organization, whose mission is to bring online cost-effective renewable energy in a massive way in the U.S. So we advocate for the best policies in both legislation and regulation that will open up the market, bring access to the market, and allow cost-effective renewable energy to get built in the United States.

Our primary focus has been on the wholesale distributed generation (DG) market segment, as the market segment that has the greatest potential for bringing on energy quickly as well as bringing on more green jobs more quickly in the U.S. But it is also the segment that is the least served by policy right now anywhere in the county. So that has the biggest potential, the biggest bang for the buck in terms of clean energy, clean economy jobs goals. So that is why we focus on that.

We work at the national level, at the state level, and even at the municipal level, on policies at all these levels, and have been one of the strongest voices for both wholesale DG as well as for feed-in tariffs, and bringing the best practices, the best lessons about feed-in tariffs around the world to the United States.

 

Solar Server: Can you summarize the FIT Coalition's concerns with the RAM?

Ted Ko: The FIT Coalition is concerned specifically that it is an experiment that we are going to try in California with an unproven mechanism that even if wildly successful is nowhere close to what we need to hit our goals. So it's fine - it's an experiment that we know that the PUC wanted to try to improve the process and get more wholesale DG online in a cost-effective way, but it's a 1GW program with auctions over two years. Which means that we will end up getting the energy actually online - 1GW of renewable energy online - maybe by 2014, maybe 2015, when it is actually delivering to the grid.

And so we are halfway to 2020 with 1GW of energy. When the governor (Governor-Elect Jerry Brown) has already called for 12GW of distributed generation. It's OK to give the mechanism a try, but if we are serious about hitting our goals, and the goals the governor has called for, then we should be going with a proven mechanism at the scale that we need. The most proven policy around the world has been a true feed-in tariff.

Actually, if you read the decision, interestingly enough, originally, the PUC and some of the proponents of the RAM had actually been calling it a next-generation feed-in tariff, feed-in tariff 2.0, these kinds of things. When in actuality it can't be called a feed-in tariff at all, because it lacks the basic features that make a feed-in tariff successful. Even in the final decision that was passed last week, the PD acknowledges that this is not actually a feed-in tariff. We were calling it a feed-in tariff, but it's not actually a feed-in tariff. Because it doesn't have the features that make it a feed-in tariff.

One of the lines that I used earlier when talking about this, for people to get a sense of this: people are saying this is a next generation, this is a better, improved feed-in tariff, really, because the RAM is just a competitive solicitation, another form of the same kinds of competitive solicitations that we had before, calling the RAM an improved or next generation feed-in tariff is like calling a cassette player a next-generation i Pod. It's just doesn't make sense.

We want to be clear: it is something that, well intentioned as an experiment, but we can't be experimenting with small programs that we will only see the results of in four or five years, when we need to get 12GW in the ground, or more, by 2020.

 

Solar Server: So it lacks some of the things that make a feed-in tariff successful. What specifically does the RAM lack?

Ted Ko: The number one fundamental thing that it lacks is a fixed price, so a fixed price that is known ahead of time is the key element that reduces the risk, that gives the certainty that you need for investors to invest in renewable energy projects. If you read some of the reports that Deutsche Bank has put out recently about energy policy, what you need is transparency, longevity and certainty.

Certainty is one of the key factors that brings the risk down and brings the cost down, across the board, and lets people actually invest in these projects. The fixed price is the key part of that, is the key thing that makes those possible, and then you don't have the high risks and the high failure rate that a competitive solicitation will have.

Beside that, the RAM is not a must-take contract, so one of the weaknesses of that is that the utilities are given quite a lot of latitude in deciding whether to reject bids. They admit, they say specifically, this is not a must-take contract. You are adding more risk, you are adding more uncertainty. You can put it in there and utilities have a lot of leeway in saying "Oh, we don't like that bid". They have to file an advice letter about why they rejected it, but at the same time, in the actual program, the criteria around rejecting a bid is left pretty open to the utilities.

So, you don't have a must-take contract, you don't have a fixed price. And those are two of the most important elements for a successful feed-in tariff. There are other flaws in the program design that we can talk about that aren't specifically feed-in tariff flaws. There are other risks and flaws in the way that it is designed.

 

Solar Server: Go ahead - what are those risks and flaws?

Ted Ko: One of the big issues in terms of designing a bidding process is that it doesn't actually acknowledge, what we've said along, locational benefits of connecting to the distribution grid versus connecting to the transmission grid. Something that the policy in California has missed for quite a while is the value of energy connected to the distribution grid needs to be acknowledged in the prices paid to the developers.

So if you are located there, you should get credit for that, because it is more valuable to the ratepayers, if your energy is connected to the distribution grid instead of the transmission grid. So for a variety of reasons including transmission line losses, avoiding transmission upgrades, all of these things that ratepayers end up paying for energy that is connected to a transmission line instead of a distribution grid.

So the proposed decision, interestingly enough, contradicts itself in some ways, it recognizes that there is a value difference, but it doesn't allow the utilities to consider that in their bids. So if there is actually a difference in value to the ratepayers, when you are ranking bids you should normalize the bids for those differences. But it doesn't allow that.

So now you are going to have projects that are connected to the transmission that their bids might be cheaper, but the ultimate impact to the ratepayer might be more, the cost to the ratepayer might be more. But yet the utility is going to select the transmission that is connected to the transmission-connected one instead of the distribution-connected one, because of the bid ranking.

This reveals a major, major flaw. The acknowledgement that locational benefits matter is something that is in the decision. That in and of itself we consider a major victory for the FIT Coalition because we have been arguing for this for years. That locational benefits matter. And they acknowledge that, but then they go ahead and don't figure it in to the bid pricing. Which is a major flaw.

One of the other issues that they have is that there are no specific controls for solar concentration and project splitting, allowing a single entity to take up a large portion of a particular auction, with lots of projects, or split a big project into a bunch of smaller projects to get them down to the size range, under 20MW. So this is also a significant problem, we just don't feel like that is what the intent of the way that we want California's renewable energy industry to develop, in that manner.

And what we've seen in a lot of these processes before, and the reason why the biggest proponents of the auction mechanism are the large players, are the people that are going to go ahead and dominate these auctions. So they say, go ahead, let's all compete on these, and we are going to dominate it anyway. What we want is broad participation and building up the industry in a broad way for local communities to get jobs and also more entrance and more competition in the marketplace.

One of the key principles of the whole thing is let's use competition to drive prices and we want healthy competition in the marketplace, but the mechanism itself is going to be dominated by the larger players, and then new entrants and smaller players are not going to be able to really compete.

 

Solar Server: I have noted in a FIT Coalition blog post concern about the failure rates in other competitive solicitation processes. Do you believe that the failure rate with other solicitation processes will carry over to the RAM, and if so, why?

Ted Ko: Yes, the failure rate of bids, and the number of bids that actually turn into contracts, and the number of contracts that actually turn into online projects, the failure rate is tremendously high. We do feel that there will be quite a high failure rate. It might not be quite as high, but there still will be quite a high failure rate.

That is just inherent in any kind of bidding process, or competitive solicitation, in which the auction, the RAM is only a slight change from any other kind of competitive solicitation that you have seen. They have done some small tweaks to improve it, to provide protection against that, but at the same time it is inherently going to have those problems.

And when you talk about the underbidding, this is something that we hear directly from developers who have been involved in such competitive processes before. They see it happen, it is just a fact of how those processes work, that you end up getting people that are underbidding.

Not necessarily just underbidding in any sort of competitive, try to game the system kind of way, but also there is underbidding that happens because you are pressing people down to the thinnest razor margins in all the different variables they can work on in their project. So just the nature of these projects is so complex, and you have so many different moving parts, that if you are trying to squeeze the smallest possible bid out of each variable, you are just making it highly risky.

And if you have to do that in order to be able to win a solicitation process, you are just putting yourself at a really high risk. And then if any one of those many variables ends up going a little bit wrong for you, then the entire project may go under just by itself. And so this kind of process ends up developing quite a lot of waste, wasted money for the industry, and wasted time for everyone, in that you get a lot of these projects, and then you have a lot of them fail. So all that cost involved in bidding, and all that cost involved in going through these processes end up being wasted.

 

Solar Server: Specifically, how will large players benefit from this and how will small players get pushed out?

Ted Ko: This kind of competitive auction process allows large established companies to bid in and underbid. And with the kind of resources of scale and balance sheets that new entrants, developers, will not have the balance sheets necessarily. It may allow smaller projects, but the large companies are going to be able to do the projects or even do larger projects, are more likely to then get the economies of scale and actually underbid.

There is definitely a philosophical discussion around, well, maybe that's a preferred outcome for some people in terms of that the pricing may be lower, at the same time it may allow for more gaming, and more ability for large players to dominate, and push smaller players back to the point where they can't actually keep their financing for that much longer, or options on the land - these sorts of things.

So if it is going to be larger players and larger projects, we are not going to get the broad industry development. There is definitely a philosophical argument around what is the preferred outcome, whether you are just going for absolutely the cheapest energy, and any way to do that, or whether you actually want a level playing field for all entrants to be able to participate.

One of the things that Governor Brown called for in his clean energy jobs plan is not just 12GW of distributed, but also opportunities for other kinds of entities, or public land, schools, all these kinds of players to participate, and take advantage of all these places where we can get good distributed energy close to load centers and allow broader participation in the market. And that's not what is going to happen with this kind of process.

 

Solar Server: Can you talk more about the CLEAN CA program and Governor Brown's program?

Ted Ko: The CLEAN CA program, CLEAN stands for Clean Local Energy Access Now, and it is a legislative proposal that the FIT Coalition is putting together to act as a statewide, comprehensive program of feed-in tariffs for the state of California that matches the size of Governor Brown's call to action. 

We have talked with his team about it, and let him know that we recognize that you are calling for 12GW of distributed generation, we have a proposal that we have been working on that has been refined over the years that is going to match and hit that goal for you. We are in the process of taking that proposal to Sacramento, talking with potential policymakers that would like to carry it, and author it and turn it into a bill in the California legislature this year.

It is going to be, we would say, the most significant piece of clean energy legislation to happen in 2011, maybe excepting the RPS bill. In terms of actually bringing online clean energy and bringing jobs to California, it is going to be the most significant bill in 2011.

 

Solar Server: Both the FIT Coalition and (Energy Policy Expert) Paul Gipe state that Governor-elect Brown supports feed-in tariffs. Do you think we will see a European-style feed-in tariff in California?

Ted Ko: That is what the CLEAN CA bill is going to be. It is going to be a European-style feed-in tariff. He has been as the Attorney General, Governor-elect Brown has been very supportive of feed-in tariffs. And his team is fully briefed and knowledgeable on the policies and the issues and the questions around feed-in tariffs, so they are very up to speed on the whole topic. If you look at this clean energy jobs plan, the last bullet point on there says that we will get this distributed generation through a feed-in tariff.

 He is definitely supportive. Of course, his support is definitely couched in, we will design this thing, we won't just take the policy straight from Germany, for example, we will take the best practices, and understandings, and design it to be the most cost-conscious program possible, so it is not just we are going to do a feed-in tariff, but we are going to do a feed-in tariff that is well-designed to be sensitive to any kind of ratepayer impact, and to bring online these sorts of energy and jobs at the lowest cost to the consumer.

 

Solar Server: Do you think the RAM could interfere with future plans to pass a feed-in tariff closer to the European model?

Ted Ko: We expect that the RAM will be used as an argument by FIT opponents to say we have this program, to say that we don't need a true-feed tariff because we have the RAM program, and we fully expect that argument to be made, and we have already made it clear to everybody we've been talking to, that the RAM, again, as an experiment, that may give us 1GW by 2014 or 2015, in no way diminishes the need for a true feed-in tariff program that is going to get us to 12GW. It is insignificant in terms of that.

And since we know that the RAM is an untested, experimental mechanism, with several flaws that we have already identified up-front, there is no way that we can count on it to actually help us hit our jobs goals, or our clean energy goals. You cannot expect that experiment to be meaningful to what we really want to accomplish in California.

 

Interview conducted on December 20, 2010 by Solar Server International Correspondent Christian Roselund