California proposes auction to boost solar energy

California has proposed setting up an open bidding process for mid-size solar projects. Under the scheme, utilities would rank bids by price and accept all of the cheapest proposals that their budgets allow. The auction would be repeated twice a year, with the eventual goal of bringing an additional 1,000 megawatts of solar capacity online.

The scheme is somewhat reminiscent of feed-in tariffs, a dead-simple policy mechanism that has successfully boosted renewable energy in Europe. Essentially, a feed-in tariff is just a guaranteed, above-market rate paid for electricity from renewable sources. The rate depends on the technology used: one rate for wind, another for solar, etc.

The simplicity of feed-in tariffs is one of their primary virtues. Such programs are easy to administer and easy for investors to understand. By providing long-term price stability and guaranteed returns, feed-in tariffs do an excellent job of coaxing capital toward renewable energy projects.

The tariffs are not, however, without their problems. Picking prices is hard. Too low, and the incentive won’t work. Too high, and consumers overpay. Also, because different rates apply to different technologies, certain industries can become unfairly advantaged. (Note, though, that even if picking prices is hard, alternative policies aren’t necessarily better. In the U.S., we typically mandate that a specific percentage of our electricity come from renewable sources, which requires predicting future supply and demand — no easy feat. At least when you pick prices, you can plan a budget.)

Also, feed-in tariffs may suppress innovation by offering a guaranteed price to all providers, regardless of their underlying costs. This problem can be at least partially addressed by lowering the tariff over time. But when prices for solar energy have plummeted 40% in only six months, it seems unlikely that any simple descending tariff is going to keep up with the state of the art.

Auctions retain most of the simplicity of feed-in tariffs and address many of the problems. The auction mechanism ensures that the price is always right, neither too high nor too low. The price automatically adjusts with each new auction, capturing any changes in technology. And because the program specifically targets mid-size solar installations — defined as projects between 1 megawatt and 20 megawatts in size — it holds the potential to bring a lot of capacity online quickly, without the need for expensive new transmission infrastructure.

The system reminds me a bit of New England’s forward capacity market, an auction system that puts energy efficiency projects on equal footing with fossil fuel-powered energy projects. The California system hasn’t been formally approved yet, but solar providers seem excited about it, so hopefully it will move forward quickly.

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