Southern California Edison (SCE), one of the state’s largest utilities, has had a voluntary Renewable Standard Offer Program for the past several years. It’s a fixed-price offer to buy wholesale renewable energy from systems under 20 MW in size, with the price set at the the cost of new natural gas generation.

In 2009, SCE contracted for 140 MW of solar photovoltaics (chart of contracts) under this program. These contracts used the 2008 MPR price [PDF] (every year, the state calculates the Market Price Referent–it’s the 20 year levelized cost of energy of a combined-cycle natural gas plant, meant to represent the next marginal unit of generation). It’s a great story — here’s significant amounts of solar purchased below the cost of fossil fuels.

However, will this work in the future? Natural gas prices have plummeted since 2008, and the MPR went down about 20 percent  this year. The question is: is the new price enough to deploy solar? Big problem.

Well, not to worry. Going forward, SCE is changing the program from fixed-price to a competitive solicitation. So, instead of pricing solar based on the cost of natural gas, they will price solar based on … the cost of solar as bid. In order to make sure that the bids are viable and not aspirational phantom projects, the program requires development security of $20/kW (by requiring skin in the game, developers will only bid numbers that they are confident in delivering), and project development timelines. In order to reduce parasitic transactional costs and help developers line-up financing ahead of time, the program uses standard, non-negotiable contracts. In order to get projects that can come on-line quickly and don’t need new transmission, it is only eligible for projects under 20 MW. (Note that SCE also has a similar program for rooftop PV systems, 1-2 MW in size.)

Now, this is a voluntary program, and no substitute for a state-wide, mandatory program with terms and conditions negotiated on a level playing field.

Which is why we are extremely excited to see the CPUC release a proposed decision in its 2 year effort to overhaul the state’s feed-in tariff program. Released on Tuesday, the proposal [PDF] calls for a 1 GW pilot program, open to all eligible renewable technologies, for systems under 20 MW in size. Under this program, utilities would conduct biannual auctions for renewables under 20 MW, then take the lowest bids first for each auction allocation.

Why systems up to 20 MW? Because systems of this size are large enough to achieve the economies of scale that delivery low prices, yet small enough that they can use the existing distribution networks and come on-line relatively quickly. For jurisdictions where cost is an issue, this is a sweet spot (and if you read the decision, you will see that cost control is the primary concern). Based on extrapolted data from recent purchases by SCE, APS, and SMUD, we see contracts at under 14 cents/kWh for solar projects in this size range. These are the kind of price levels necessary to get price-conscious policymakers (and I don’t know of any other kind) to develop programs with real scale, not one-off feel-good efforts.

Another advantage of this approach is that it is legal. Early in the proceeding, utilities raised objections to fixed-price approaches; and indeed, last month the Federal Energy Regulatory Commission ruled that states do not have the authority to establish wholesale electricity rates that exceed utility “avoided costs.” The CPUC program overcomes this jurisdictional challenge by instead requiring utilities to purchase a certain type of energy (e.g. from renewable energy systems under 20 MW in size with particular power characteristics) and letting market mechanisms determine the price. It’s an elegant solution to the problem.

The proposed decision is different from the staff proposal, and we are still evaluating details. Nonetheless, the effort is directionally helpful and provides a nice model for tapping into the wholesale distributed generation market in a way that complies with federal law.

California has the world’s largest program for encouraging residents to use solar to power their homes and businesses (in contrast to wholesale programs, the California Solar Initiative is oriented towards self-generation. The program is designed to develop a local solar industry capable of delivering solar power more cheaply than retail rates. At grid parity — and we are not far off at all — the market can continue without incentives). At the same time, the state’s RPS is driving large-scale project development. There is a clear gap in the middle. Yesterday’s CPUC proposal is designed to unlock that missing piece.