BEFORE THE FLORIDA PUBLIC SERVICE COMMISSION

IN RE: Establishment of Rule on RenewableI
Portfolio Standard.

DOCKET NO. 080503-E
Filed: August 20, 2008
_____________________________________/

COMMENTS OF THE FLORIDA ALLIANCE FOR RENEWABLE ENERGY

The Florida Alliance For Renewable Energy (FARE) files its comments on the Commission’s proposed Rules 25-17.400, 25-17.410, and 25-17.420 and states as follows:

On July 13, 2007, Governor Crist signed a suite of executive orders to reduce Florida’s greenhouse gas emissions, increase energy efficiency, and remove market barriers for renewable energy technologies such as solar and wind energy. Since the executive orders were signed, Florida has stepped onto the world stage as a major marketplace for advanced energy technologies. It is not at clear that the PSC ruling fulfills the objectives laid out by the Governor.

Summary

We are confident that the PSC and their staff are well informed on the issues of renewable energy policies including the problems associated with RECs versus the benefits of other policies such as Feed-In Tariffs (known as Renewable Energy Payments or “REPs”). Consequently, we are deeply concerned about the direction Florida will be heading with regard to the future of the renewable energy industry in Florida, as set out in this draft ruling.

We do not believe that the RECs policies will achieve the renewable objectives set out by the Governor, nor do we believe that the RECs are a fair and equitable policy allowing equal opportunity to develop renewable resources; nor are the best value for ratepayers – in fact study after study have shown that RECs are the most expensive policy option for ratepayers. They contrast especially poorly when compared side by side with REPs.

The real concern for the long term growth of the renewable energy industry in Florida is that the REC program will benefit a few large out of state companies at the expense of many small and mid-sized companies already operating in Florida, their future growth, and their employees. RECs are complex, opaque, administratively burdensome and unpredictable. Few organisations have the capability to fully assess the risks associated with RECs.

We believe that under a REC policy, market concentration and an oligopoly of REC providers will develop from out of state companies with experience of both lobbying for and drafting RECs policies in other states and then operating under the mechanisms that have been implemented. Indigenous Florida renewable companies do not have this learning curve advantage and will be disadvantaged accordingly.

We do not believe that Florida legislators or ratepayers want a renewable program like RECs that actually discriminate against existing Florida renewable companies.

Internationally, utility Feed-In Payments (known as REPs in the US) have become the incentive of choice for increasing the uptake of solar and other renewable energy technologies, being implemented in over 45 countries around the world. This proven policy option is gaining ground because it takes the state's fiscal role off the table. Indeed, many of the recent calls to Solar Energy Industry Associations like FlaSEIA and Mid-SEIA, for REP policies, have come from businesses concerned about REC dependent markets.

A REP — which most people know as the mechanism that started Germany's solar boom — offers anyone with a solar system (or any renewable energy system) a fixed payment for the electricity generated by that system. The incentive is designed to provide the system owner a “reasonable rate of return.” Instead of relying on the state, utility companies provide the incentives by charging all ratepayers the extra cost borne by purchasing renewable energy. REPs provide long-term stability, which in turn reduces capital costs and allows for a much more diverse group of companies and individuals to invest in renewable. REPs are a simple, stable, inclusive approach to developing renewables in Florida that does not pick technology winners.

We urge the PSC to revise its ruling and replace the RECs policy with a renewable energy payment program.

Concerns with Draft Ruling and RECs

The House Energy Bill required the PSC to investigate the best polices for the deployment of renewable energy, taking into account: analysis of the technical and economic viability, fuel diversity, investment in Florida, lessening the states 98% dependency on imported fossil fuels.

While the PSC in this ruling has clearly looked at and considered RECs, it does not appear that any analysis or study has been done on other policies that allow utilities to “procure” renewable energy as was instructed by both legislatures. Other policies, such as REPs or production based incentives have been proven to achieve much more significant investment, and with it jobs, than REC policies. Furthermore all of the most widely published studies from the European Union to Nicholas Stern [UK Economist] to Summit Blue’s analysis in New Jersey have all concluded that RECs are a high cost option for deploying renewables.

It would appear remiss of the PSC to enter into draft rules without having considered these policies in detail.

Has the PSC undertaken a review of policies outside the US which account for the majority of the worlds renewables. The US now has only 8% of the world’s solar capacity – whereas Germany has over 50%. Germany installed 1100MW of solar capacity in 2007 versus 20MW in New Jersey (a comparable REC market).

Did the PSC undertake a direct study of the Germany REP policies that are now in place in 45 countries and most recently were introduced in Switzerland after a 2 year review that included analysis of mandated quota REC systems?

Were field trips undertaken by the PSC and staff to Germany and other REP countries to review first hand the success of these REP policies and contrast them with the failure of REC policies in states that have implemented them already?

RECs are poor value for ratepayers and restrict renewable deployment

There appears to be recognition amongst many European countries with short-term tradable REC markets that REPs may be a more efficient way to achieve rapid deployment of renewables as cost effectively as possible. In the Stern Review on the Economics of Climate Change, Sir Nicholas Stern noted that both standard offer contract pricing and renewable portfolio standards have proved effective at spurring renewable development “but existing experience favors price-based support mechanisms. Comparisons between deployment support through tradable quotas and feed-in tariff price support suggest that feed-in mechanisms achieve larger deployment at lower costs”.[1] A paper entitled Feed-In Systems in Germany, Spain and Slovenia: A Comparison stated that “Feed-in tariffs have been successful in triggering a considerable increase of [renewable energy] technologies in almost all the countries in which they have been introduced and where their effectiveness was not significantly hampered by major barriers (administrative barriers, grid access, etc.).”[2]

The analysis by Summit Blue Consulting for the New Jersey Board of Public Utilities on how to most cost-effectively transition the New Jersey solar market from rebates to market-based incentives showed that the feed in tariff policy (15-year full tariff) would be more cost-effective for ratepayers than renewable energy credits (SREC only). The SREC policy cost 57% more than the feed in tariff 15 year contract. The SREC was the most expensive policy mechanism out of 7 policies that were reviewed, and therefore the least value for money for ratepayers.

Exhibit x. Ratepayer Impacts ($ millions)
from Different Renewable Energy Policies in New Jersey

Any banker can explain why that is, in one word - “risk”. RECs are more risky than long term fixed price contracts. The PSC ruling appears to ignore the concept of risk capital. RECs with fluctuating prices, no certainty about contracts or grid access will be priced accordingly. Equity costs in the renewable energy power sector currently run at from 8 -15% versus half this cost for debt financing. Creating a policy instrument that encourages significant leverage is therefore a key litmus test for two reasons:

Cost of capital is much lower
Availability of equity is more constrained than debt

RECs fail this litmus test: as they typically result in less than 30% debt financing, versus 80-90% on REP renewable programs in Europe, and consequently more equity per MWs of renewable capacity means less renewable projects

Why is the PSC embarking on a policy mechanism that many independent consultants have concluded is the “least” ratepayer friendly policy.

RECs are a poor return on jobs compared to REPs

First Solar, one of the leading solar manufacturers in the world recently announced a major new manufacturing plant in Germany – why; because Germany has a robust domestic solar market driven by REPs. The poor experience of REC markets has not resulting in a single new manufacturing plant being built in those states.

The REC programs in place in the US have largely failed to stimulate the renewable jobs that legislatures and voters want. RECs encourage utility scale projects like the FPL announced projects in Florida. Utility scale projects generate many less jobs per MWs of capacity than smaller scale commercial or residential projects do; they also can be built by sub contractors resulting in no permanent jobs in Florida.

Several countries have seen a remarkable job return on their renewable policy programs. Direct jobs result from the use of local skilled workers in the development, manufacture, construction, installation and operation and maintenance of renewable generation. Manufacturing centers for solar thermal and solar PV components should be established in-state, as Germany has done, to maximize this benefit. Much of the financing can be done locally as well, stimulating jobs in banking. As of 2007, Germany has created 250,000 direct jobs across the whole renewable energy sector as a result of its significant growth of renewables.[3] To date, Germany has employed nearly 50,000 in the solar industry alone.[4]

These jobs were created by a feed in tariff or REP program NOT RECs.

RECs discriminate against distributed generation and Resource Diversity

RECs fail to take into account the benefits of distributed generation – delivery of renewable power at the point of consumption. The program design typically does not differentiate between different scales of projects – there is a one size fits all REC price – this clearly ignores the societal benefits and cost savings from distributed generation.

RECs with long-term contracts could reduce investment risk for developers and promote more renewables than RECs which rely solely on short-term markets. However, RECs still discourage smaller developers with greater transaction costs (such as legal costs) relative to larger developers[5], newer technologies relative to more mature technologies, and applications and locations which cost more to develop relative to applications and locations which cost less to develop.

RECs and Power Purchase Agreements

The ruling appears to focus solely on centralized generation by requiring PPAs. However, since most counterparties are reluctant to enter into a PPA unless the project size is 10MW or greater, PPAs will just put more barriers in the way of renewable energy.
Conversely, REPs appear to be more successful in allowing entry by smaller developers because they address both distributed and centralized generation and the tariffs obviate the need to negotiate power purchase contracts with a utility. REPs allow a wide range of resource sizes, applications and locations to develop simultaneously – which helps to explain the development rates that have been observed in Germany.

A key element to this is prioritizing renewable access to the transmission grid ahead of other non-renewable projects; transmission access should be monitored by the PSC and a mandate should require access to be provided within 60 days for projects below a maximum threshold (typically 20-50MW).

RECS – Poor Track Record especially for Solar

Let’s take the example of New Jersey and Maryland where REC programs have been operating.

New Jersey once had a vital and growing solar industry, developing thousands of new high paying jobs. Maryland in 2007 followed suite by passing legislation intended to create a market for both small and large solar companies. Under each of these states’ newly adopted REC-based incentive programs, these small to mid-sized companies quickly learned that REC policies are incapable of delivering adequate financial incentives for their client base.

RECs are seen by some larger companies as a low cost, market based policy that allow for broad based participation. However, there is evidence to show that REC based policies can be the most expensive incentive mechanism, requiring significantly more involvement and administration from the state. Additionally, the floating market mechanism feature of the REC is extremely volatile requiring that companies have large financial resources to navigate and master the complex nature of the commodity to truly benefit from this type of policy.

As Ted Middleton, President of a mid-sized, Maryland based solar company explained, “The ratepayer base thus foots the highest bill possible to fund ‘Big-Box’ style installations, and the little guys (farms, auto dealers) get a much lower cash benefit relative to each REC produced because they have little market leverage with remaining REC purchasers.” “The small systems just got completely left off the table,” says Middleton. “The state just said, '[The REC program is] too difficult, too risky for us to do, so we're not going to touch them.'”

“In New Jersey there's a lot of concern that the residential sector, while it may not be completely shut out, is in big trouble,” says Lyle Rawlings, secretary of the Mid-Atlantic Solar Energy Industries Association. “We need to do better at creating a system where small businesses and small projects can play the game. That's not the case right now.”

The current draft of the RPS with RECs appears primarily designed for only one or two large companies, in the same way that in Maryland one solar company was able to corner the market in solar RECs and contracted with a leading utility to supply it with 60% of the market. Pete DeNapoli of SolarWorld, a leading solar manufacturer says “Sure, the state of Florida will meet the RPS goals, but the bottom line is that the Governor’s goal of creating a vibrant renewable energy industry with thousands of new, high paying jobs will not be realized,” Pete adds. “With Feed-In Payment incentives, you get it all.”

FARE Preferred Policy – Renewable Energy Procurement through Renewable Energy Payments (“REPs)

As stated previously, we believe legislators intended the PSC to review policies that allow procurement of renewable power by utilities from 3rd party producers. It would appear remiss of the PSC to enter into draft rules without having considered these policies in detail.
Had the PSC undertaken a comprehensive review of policies outside the US which account for the majority of the worlds renewables, they would have seen that there is one clear policy winner.

The US now has only 8% of the world’s solar capacity – whereas Germany has over 50% - it also has ~ 20GW of wind capacity and one of the largest biomass industries. These all developed under a REP mechanism.

REP Policy
For the purposes of this filing, we define REPs as a set of renewable technology-specific fixed payments that electricity companies make to renewable energy generators based on renewable energy generation costs and a reasonable profit. Some countries, such as Spain and Slovenia, offer renewable energy generators an alternate calculation for their fixed payments – a premium on top of the spot market price for electricity. However, we do not view this as approach as best practice because it could 1) enable windfall profits due to the break of the link between payments and real generation costs and 2) increase investor risk due to the volatility in the price of electricity.
REP contract pricing is implemented through a charge added by the utility to consumers’ electric bills in proportion to their consumption. REPs provides set prices for renewable resources and leaves it to markets to provide the appropriate quantity of resources at those prices. Payments are guaranteed over a long time period (i.e., 20 years) to provide price certainty and market stability and thus reduce the initial investment risk for renewable energy developers. Best practice standard offer contract pricing policy designs have payment levels that are specific to the resource type and with further price differentiation by size and other important criteria (such as for stand alone vs. building integrated applications for solar PV).[6] These payments generally accompany policies which require utilities to prioritize interconnection of renewable generation and procure a certain amount of renewable energy as part of their total resource portfolio.
The structure that Germany implemented is frequently referred to as a best practice and is being leveraged by other European countries such as Italy for solar PV as well as states that have recently proposed REPs such as Switzerland, France, Spain, India, California, Wisconsin and Ontario.[7]

1.To summarize, Germany’s best practice design provides payments that:

Prioritize grid access to renewable producers within 60 days
adequately reflect generation costs and profit;
are guaranteed for a long period of time (i.e., 10 or more years);
are sustained over time once the generator is approved for admission into the program;
decline each year for new generators that are being admitted into the program (this is referred to as tariff degression);
differ by renewable resource (often depending on the stage of development that the technology is in); and
are differentiated within each renewable resource to achieve specific goals (such as promotion of smaller installations, or building-integrated solar PV).

As of early 2007, approximately 70% of the countries in the European Union had some form of standard offer contract pricing. In comparison, approximately 20% had adopted renewable portfolio standards with RECs. Italy is the only European country to have both RECs and standard offer contract pricing.[8]

However, Germany’s success with REPs has garnered recent interest by US states and European countries that have previously adopted RECs (such as the UK) as well as states and countries who have adopted neither to date. US states have acknowledged serious downsides associated with renewable portfolio standards implemented through RECs. New Jersey was one of the first states to note challenges associated with the development of renewable energy under renewable portfolio standards, such as the persistence of investment risk and price volatility.[9],[10] Also, without specific set-asides for more expensive technologies, development has not occurred at a rapid rate.
Exhibit 1. Overview of Policies
to Promote Renewable Energy Development[11]

A Comparison of Strengths and Weaknesses of Renewable Energy Payments and RECs
The exhibit below summarizes the strengths and weaknesses of REPs and RECs. The discussion of advantages and disadvantages is organized into following key characteristics: resource development and cost.

Exhibit 2. The Strengths and Weaknesses of REPs
and RECs with Regard to Resource Development

The Relationship between Project Financing, Profitability and Achievement of Development Goals

Renewable investment requires management of risk and uncertainty with regard to bank financing as well as project profitability. A paper entitled “Prices Versus Quantities: Choosing Policies for Promoting the Development of Renewable Energy” by Phillippe Menanteau provides the following more detailed explanation of the motivation developers need in order to participate in renewable energy markets projects:
“On the supply side, a supplier wishing to enter the market must be able to anticipate future prices and make his project ‘bankable’ in order to secure a loan to enable him to invest in new production capacity…. Project developers see [fixed prices] as ensuring a safe investment with better predictability and a stable incentives framework, as well as by the lower transaction costs for each project”.[12]
The higher development levels that have been observed with REPs are likely due to the reduced risk and uncertainty relative to other policy options.

As discussed above, power and/or RECs associated with renewable energy projects under renewable portfolio standards in deregulated states have been sold though short-term contracts (especially in the Northeast). The use of short-term contracts is a significant barrier for new renewable projects with high capital costs.[13] Renewable portfolio standards could require the use of long-term contracts just as practiced in the regulated states and some deregulated states.[14] This would reduce uncertainty about profitability which would lead to reduced project financing costs. However, the bi-lateral, long-term contract pricing under renewable portfolio standards would likely remain private.[15] REPs that determine and publicly provide the current as well as future payment levels for different renewable projects provide clearer, more stable signals to project developers. Profits are known upfront with REPs. Ensuring a reasonable level of profit can drive manufacturer efficiency and innovation because funds can consistently be made available for further research and development.
The Impact of the Use of Out-of-State Resources
A renewable portfolio standard is better equipped to meet some of the state’s renewable energy development goals using out-of-state renewable energy resources. The main reason for developing and/or purchasing power from out-of state resources is that they can be more cost-effective than in-state resources. Conversely, in states where in-state resources are more costly than out-of-state resources, REPs are more effective at promoting development of these in-state resources. Given the fact that Florida has in-state resources that may cost more to develop than resources in other states, careful consideration needs to be given to the use of out-of-state resources as this may compromise the state’s ability to meet goals related to jobs and stimulation of local manufacturing.

Exhibit x. The Strengths and Weaknesses of Standard Offer Contract Pricing
and Renewable Portfolio Standards with Regard to Cost

Competition and Costs over the Life of the Policy

A renewable portfolio standard “encourages competition among renewable developers to meet the targets in a least-cost fashion”.[20] However, due to the lack of a firm payment structure that provides insight into future payments, there is less of a longer-term price signal to developers. In years where there is lower supply of renewable resources paired with high demand and prices remain high, there is less motivation for developers to consult with manufacturers about bringing the costs of these resources down. Several studies comparing the potential costs of renewable portfolio standards to standard offer contract pricing have suggest that renewable portfolio standards provide greater opportunity for collusion amongst larger players who want to the keep the prices of renewable resources high.[21],[22] This is not a concern with standard offer contract pricing because payments are determined by the PSC.

With REPs, developers know their payments in the first year. They also have a general idea of what their payments will be 3-5 years out. REPs sends a clear, predictable, long-term price signal, and a degression structure motivates developers and subsequently manufacturers to reduce costs because they know that the payments will be lower in future years than what they are in the first year.[23],[24] Also, clear signals can enable manufacturers to better allocate funding to research and development in order to lower capital costs. In other words, competition amongst manufacturers to quickly bring down the cost of their products may be more desirable than competition amongst developers. Since REPs are better positioned to provide price signals that will reach manufacturers, REPs will result in lower costs over the life of the policy compared to RECs.

[1] Stern Review on the Economics of Climate Change. Sir Nicholas Stern Found at: http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm
[2] Held et al. Feed-In Systems in Germany, Spain and Slovenia: A Comparison. October 2007. Found at: http://www.feed-in-cooperation.org/content/view/17/29/
[3] Development of Renewable Energies in Germany in 2007. 12 March 2008. Page 8. Found at: http://www.bmu.de/files/pdfs/allgemein/application/pdf/ee_hintergrund2007_en.pdf
[4] Paul Gipe. German Feed Laws Power Nation to New Renewable Record in 2006. 2 Feb 2007. Found at: http://www.wind-works.org/FeedLaws/Germany/GermanFeedLawsPowerNationtoNewRecord.html
[5] “New Jersey Dealing with Solar Policy’s Success”. The New York Times. June 25, 2008. Found at: http://www.nytimes.com/2008/06/25/nyregion/25solar.html
[6] Klein et al. “Evaluation of Different Feed-In Tariff Design Options – Best Practice Paper for the International Feed-In Cooperation. Found at: http://www.worldfuturecouncil.org/fileadmin/user_upload/Miguel/best_practice_paper_final.pdf
[7] Klein et al. “Evaluation of Different Feed-In Tariff Design Options – Best Practice Paper for the International Feed-In Cooperation. Found at: http://www.worldfuturecouncil.org/fileadmin/user_upload/Miguel/best_practice_paper_final.pdf
[8] Wilson Rickerson and Robert C. Grace. The Debate over Fixed Price Incentives for Renewable Electricity in Europe and the United States: Fallout and Future Directions. Whitepaper prepared for the Heinrich Boll Foundation. Feb 2007. Found at: http://www.boell.org/docs/Rickerson_Grace_FINAL.pdf
[9] cite NJ whitepaper series
[10] An Analysis of Potential Ratepayer Impact of Alternatives for Transitioning the New Jersey Solar Market from Rebates to Market-Based Incentives. Summit Blue Consulting. Prepared for the New Jersey Board of Public Utilities.
[11] Renewable Portfolio Standards, rebates, grants and tax incentives from www.dsireusa.org
Full list of countries with Standard Offer Contract Pricing from Wilson Rickerson and Robert C. Grace. The Debate over Fixed Price Incentives for Renewable Electricity in Europe and the United States: Fallout and Future Directions. Whitepaper prepared for the Heinrich Boll Foundation. Feb 2007. Found at: http://www.boell.org/docs/Rickerson_Grace_FINAL.pdf
Additional resources for states that have implemented or are proposing to implement Standard Offer Contract Pricing can be found in Appendix A.

[12] Menanteau et al. “Prices Versus Quantities: Choosing Policies for Promoting the Development of Renewable Energy”. Energy Policy. 2002. Found at: http://zonecours.hec.ca/documents/H2007-1-1050423.Economic_Rationale_Renewing_energy.pdf
[13] Cite: LBNL reports, synapse report, power point slides, etc (also have the same cites in the section of RPS definition)
[14] Cite or refer to the RPS section that presents examples of long-term contracting practices.
[15] Any cite for “FIT provides clear signal to the public about future prices of renewable projects”?
[16] Held et al. Feed-In Systems in Germany, Spain and Slovenia: A Comparison. October 2007. Found at: http://www.feed-in-cooperation.org/content/view/17/29/
[17] Ibid.
[18] Numerous RPS cost studies found that projected rate impacts by RPS policies are modest, with the median retail rate increase being 0.7% or 0.04¢/kWh among 28 studies. The majority of studies showed the rate increase of less than 0.25¢/kWh while four studies showed rate decreases (Chen, Wiser, and Bolinger 2006, 13–14).
[19] Held et al. Feed-In Systems in Germany, Spain and Slovenia: A Comparison. October 2007. Found at: http://www.feed-in-cooperation.org/content/view/17/29/
[20] LBNL 2004
[21] Held et al. Feed-In Systems in Germany, Spain and Slovenia: A Comparison. October 2007. Found at: http://www.feed-in-cooperation.org/content/view/17/29/
[22] Frede Hvelplund. “Political Prices or Political Quantities? A Comparison of Renewable Energy Support Systems.” New Energy. May 2001. Found at: http://pebb.das.state.or.us/ENERGY/RENEW/Wind/docs/feedlaws-Hvelplund.pdf
[23] Menanteau et al. “Prices Versus Quantities: Choosing Policies for Promoting the Development of Renewable Energy”. Energy Policy. 2002. Found at: http://zonecours.hec.ca/documents/H2007-1-1050423.Economic_Rationale_Renewing_energy.pdf
[24] Frede Hvelplund. “Political Prices or Political Quantities? A Comparison of Renewable Energy Support Systems.” New Energy. May 2001. Found at: http://pebb.das.state.or.us/ENERGY/RENEW/Wind/docs/feedlaws-Hvelplund.pdf