Clean Energy Backstop by Transformer

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Pitch

Clean energy projects need long term stable offtakers. Instead of a feed in tariff, allow utilities to set a PPA floor.

Description

Summary

Executive Summary:

• Renewable energy projects such as wind and solar are economically viable means of avoiding emissions from traditional thermal generators.

• Long term Power Purchase Agreements (PPAs) have shown a viable financing mechanisms for providing immediate payback to end users of electricity

• One of the biggest barriers to project development in many parts of the world is the credit risk of the off-taker.

Proposal: Federal, state, and local governments can enable mass deployment of renewables with no net capital outlay by committing to be the buyer of last resort at backstop price.

Category of the action

Reducing emissions from electric power sector.

What actions do you propose?

Required Policies: Here is a step by step guide to implementing policies that will support large scale renewable deployment

• Net Metering: In the event of default the utility must have the ability to buy back power from the site. This concept is referred to as net metering. In this proposal the strike price should be set slightly below the retail rate.

• Virtual Net Metering: This concept allows net metering credits to be transferred to other customers of the same utility within the same load zone. VNM policies of various types are on the books in 9 states in the US already. 

• 3rd Party Ownership: Power purchase agreements have been able to grow rapidly via 3rd party ownership. The proposed model is flexible regarding the owning party, and could be a local bank, or a more traditional development fund.
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Who will take these actions?

Example: (simplified tariff used for illustrative purposes)

• The state government, acting through PUC and perhaps local utility, agrees to be the offtaker of last resort for 50GWh of solar at a price set slightly below the current retail rate.

• A commercial operation has a thriving business, but growth is hampered by high costs of electricity (~$0.15/kWh USD)

• The commercial site has negotiated a behind-the-meter PV array that will support their business but the cost of capital it too high given local banks lack of familiarity, and a lack of credit history for the business.

• The utility agrees to backstop the PPA (ex. ~$0.13/kWh). In the event of default the energy produced on the commercial rooftop will be sold to the neighbors at slightly below the retail rate (~$0.14/kWh)
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• In MA this type of neighbor to neighbor transaction can be done through a policy called virtual net metering, however the practice is note common.

Where will these actions be taken?

These actions can be taken in any country with a functioning electricity market. It is better suited to deregulated markets, but vertical integration is also an option.

It's important to review how this proposal is different from other models already in place. Feed in tariffs (FIT)  are some of the most successful policies in driving adoption of renewables. A prime example is the case of solar energy in Germany. There are a few major differences to note from this proposal.

1. In front of the meter: Utility scale projects compete at wholesale market prices, and thought they can be more cost effective to build do not compete with the higher retail rate. Utilities today are the most common buyers for utility scale solar, through corporate buyers are on the rise particularly for wind.

2. Community Solar: These are utility scale projects, but are able to compete with the retail rate by having off-takers in the same load zone. These still require long term contracts and the associated credit hurdle.

3. FIT > Retail: FITs are initially so successful because they offer a price that was greater than the retail rate of electricity. As long as this is true, customers that install PV will prefer to sell it back to the buyer than displace their own usage. As soon as the FIT goes below the retail rate, a customer would much prefer to offset their own usage rather than sell it back.

4. No Net Capital Outlay (FIT < Retail): The proposal here is similar to a FIT, however it is only used when the customer cannot displace their own retail rate either because their usage drops, or some form of default. In this case the FIT provider becomes the buyer of last resort, but since the purchase rate is below retail, the energy can be immediately resold at retail rates to the neighboring business.

How much will emissions be reduced or sequestered vs. business as usual levels?

Tons. 

Renewable energy is great, but as long as long term contracts are required, the market will be artificially limited. Renewable energy can grow even faster and more cost effectively if the credit threshold can be lowered.

What are other key benefits?

There is no renewable energy model that allows for cost effective short term contracts. 

The model proposed here allows for the following benefits:

1. No upfront investment by governments or off-takers: Avoid the expensive upfront annual budget associated with subsidies and feed-in-tariffs
2. Lower credit threshold: No other model would allow off-take terms of 10 years or less
3. Preserves 3rd party competition: This model does not require utility ownership or abuse of monopoly power

What are the proposal’s costs?

There are some real challenges that make it difficult to implement this recommendation:

1. Net metering is already an embattled policy in the US. VNM relies on this as a foundation, and may have similar difficulties in getting passed
2. Fixed cost allocation: It's easy to say that the utilities will pay for it, but there are still real fixed costs that need to be borne by the utility, and paying out energy charges and T&D charges doesn't recoup this cost, it becomes worse. (there is a companion proposal to this one that would allow for partial debt funding of the solar installation to earn a regulated rate of return).
3. Monitoring and administration costs: In the event of default or vacancy the utility now has to off-take power and ensure continued operation of the asset. The good news is that there are companies working on making this process easier, and the 3rd party installer will generally provide monitoring and O&M as part of a PPA.

Time line

Some of the states where VNM policies already exists could be used to test drive this idea. The fastest path to implementation could occur within 18 months perhaps with a corporate backstop. For other countries to adopt this set of policies it would likely be 2-3 years.

Related proposals

References

coming soon...