The California Public Utilities Commission issued a new proposal today designed to significantly increase the amount of solar energy installed in the state. It is kind of like a feed-in tariff, but different.  Call it a feed-in tariff v2.0.

The proposed program would require utilities to purchase electricity from mid-size solar and other renewable energy technologies of 1 to 10 MW.  At least twice a year, utilities would issue a request for proposals for qualifying renewable projects.  The regulatory body would set a revenue requirement for each solicitation (i.e. the total amount of money that could be spent).  Utilities would then rank bids by price, then be required to take the cheapest ones first until the money runs out.  Losing bids are free to bid into the next solicitation.

On first read, there’s a lot to like.  The CPUC’s proposal presents an elegant solution to many of the challenges that have bedeviled efforts to grow sustainable renewable energy markets in California and around the world.

It puts steel in the ground.  California’s strong Renewables Portfolio Standard has resulted in signed and approved contracts for more than eight gigawatts of large-scale renewable energy projects across the state (with another six GW of contracts of signed contracts under review by regulators); however, many of the planned projects have yet to be brought online. CPUC analysis identifies transmission as the single most significant barrier to large-scale renewable project development.  This new proposed program stimulates immediate activity by establishing a market for smaller renewable projects that can be incorporated into the existing utility infrastructure without the construction of new transmission. The smaller projects will also likely be easier to finance, another critical hurdle in the current economic climate.

It gets the price right.  Some governments have used standard-offer, fixed price feed-in tariffs to incentivize renewable energy development. The difficulty with this approach is finding the right price.  If the price is set too low, it does not stimulate the desired market activity.  If the price is set too high, ratepayers pay unnecessary costs, suppliers throughout the value chain are not encouraged to reduce prices, and the program can lose political support.  By using a market mechanism to determine the contract price, the CPUC’s program uses competition to establish a price that is both sufficient for project development and protective of ratepayers.  With the price of solar modules coming down 40 percent over the past 6 months and predictions for a lot further to go, it’s hard to see how else to do it.  This method harness and accelerates cost reductions by encouraging the whole value chain to work together to be competitive (read this for the role of silicon and recent market dynamics in solar’s costs).  We expect dramatic market activity at price levels that will attract the interest of policymakers around the country.

It can be implemented quickly. As a practical matter, the proposed auction mechanism can also be implemented much more quickly than some alternative approaches.  There is real urgency in the matter, as the U.S. Treasury Grant Program, established as part of the stimulus package, is only available to projects that have begun construction by 2010.  If approved, this program could be delivering results within the grant eligibility window.

It overcomes legal hurdles.  In an earlier phase of the proceeding, one of the state’s largest utilities, Southern California Edison, challenged the CPUC’s authority to establish a feed-in tariff, claiming that the Federal Power Act only gives the Federal Energy Regulatory Commission the authority to require purchases above ‘avoided costs.’ Under this federal law, California regulators are restricted in their ability to set specific prices.  This proposal elegantly avoids SCE’s legal challenge by establishing a specific requirement for electricity of a certain type, and letting market mechanisms establish price levels.

We’ve spent a year on this docket, and will spend a lot of time going over the details of the proposed program to guide our suggestions for further development.  I guarantee that a lot of people will also have opinions on modifications.  But initial impressions are that there is a lot to like.  The program ensures that renewable energy projects will be built quickly and at the lowest cost to ratepayers.  And it throws the doors wide open on an entirely new renewable energy market in the state: mid-sized solar projects that generate clean electricity for all Californians. Coupled with the highly successful California Solar Initiative program for customer-owned solar, the gigawatt of utility-owned/IPP distributed generation program, and existing channels for large utility-scale projects, California will be able to lay claim to one of the most comprehensive and dynamic solar markets in the world.