Thoughts on Solar by Run on Sun's Founder & CEO, Jim Jenal

We have just learned that LADWP will be bringing their long-awaited Feed-in Tariff (FiT) program to their Board this Friday, January 11, 2013.  The meeting will be held at LADWP Headquarters in Room 1555-H, beginning at 9:00 a.m. and it is open to the public.  (You can see the meeting Agenda here - this is Item # 20.)

We are still reviewing the Proposal (read it here) - it has been significantly revised since last we wrote about this program in October - but here are some highlights so far:

• Initial Base Price of Energy Increased - The earlier proposal had this set at $0.15/kWh but this has now been revised upward to $0.17/kWh.  It remains to be seen whether that is sufficient to subscribe the program.  This will step down based on a tiered implementation schedule.


• Overall Program Size - The earlier proposal called for a total program of 150MW divided into a bundled group and the individual project group.  The new proposal allocates 100 MW to individual projects at the start, with 50 MW more to be added later.  (Not clear yet what became of the “bundled group.")


• Tranches - The 100 MW is divided into 20 MW tranches to be allocated every six months.

We will have much more to say about the proposal (and the process of developing it) after the Board meeting on Friday which we are planning to attend.  If you have thoughts or questions about the proposal, please try to attend - or just let us know your thoughts in the comments.

The Los Angeles Department of Water & Power (LADWP) has released an update on the status of its efforts to develop a Feed-in Tariff program (FiT) which provides some clarity while leaving many questions unanswered.  Here is our take on what has been revealed so far.

As we have reported before, LADWP has taken a somewhat tortuous path on its way to developing a FiT - most notably by rolling out a pilot/demonstration program that did not provide for an up-front, fixed price for energy - generally considered a necessary element of a FiT.  Instead, the pilot program was really much more of a reverse auction used by LADWP to provide “price discovery” for different sized projects throughout the LA area.

Lessons Learned?

Although DWP has yet to disclose the pricing details from the pilot (those details are due out next month), it seems that the response was somewhat tepid: only 26 proposals were submitted (for a pilot program that was supposed to account for 10 MW of capacity) of which only 17 (65%) made it through the initial screening and just 15 had interconnection studies performed.  Given that final project costs cannot be known until the results of the interconnection study are provided, it seems highly likely that some of these 15 will no longer pencil out and will fall away.  Such are the joys of being a “price discovery” guinea pig.

Still, DWP believes it has learned something from the process, including the following bullet points (DWP text in bold italics):

• Small-scale developers prefer set pricing for certainty while Utility-scale developers prefer competitive pricing - Well, yeah.  Small-scale developers are just that, smaller entities with fewer resources to throw at a speculative venture.  Having a set price allows the smaller entity to know in advance whether it makes economic sense to devote finite resources to the process.


• Energy pricing for systems [in the] (30-150)kW [range] were cost-competitive with systems (151-999)kW - Really?  Well, until we see the pricing data it is pretty hard to make sense of this “lesson” as it would seem to repeal the law of economy of scale - unless “cost-competitive” means accounting for that scaling, in which case this doesn’t seem to be much of a lesson at all.


• Application process works, will remain mostly unchanged - Works for whom?  I would not consider an application process in which 35% of applicants fail, to be a successful process.  Would we consider a teacher who only sees 65% of his students pass a test, successful?  Here’s hoping that going forward DWP will create a program where 90% of applicants can produce successful applications.

Moving Forward

Having concluded the bidding phase of its pilot program, LADWP’s full-scale FiT program of 150MW is set to debut by the end of this year.  In an apparent effort to satisfy both large and small developers, the program as described will be divide evenly into to pieces: 75MW in the so-called “Individual Project Group” with another 75 MW allocated to the “Bundled Project Group” on private property (as well as another 150MW of utility-scale projects on LADWP property).

Bundled Project Group (BPG)

The very large allocation associated with the Bundled Project Group is really not a FiT at all.  Rather, DWP is planning on putting out an RFP for the entire allocation and will select three vendors to supply it.  Needless to say, this means only the largest entities will be able to participate in this program.

Individual Project Group (IPG)

Of far greater interest is the Individual Project Group since that is closer to being a true FiT program, albeit with some wrinkles.  Like a true FiT, this appears to an “open to all” program with set prices for energy from the outset.  The 75MW total allocation is to be subscribed in 15 MW tranches, the first of which is set for next January, with additional tranches to be released every six months thereafter.  DWP is suggesting that its set price will likely start out at $0.15/kWh for the first tranche and then step down by half a cent with each subsequent tranche.

However, DWP’s proposal is a bit confusing in that they say that any unclaimed allocation from one tranche will not be carried over into the next - which means, assuming we understand this correctly, that the 75MWs assigned to this program may never be allocated, let alone built.  On the other hand, DWP says that the price will only decline when the 15MW associated with a price point has been allocated.  Which means that tranche sizes are strictly tied to the calendar whereas prices are not.  Somehow this seems backward - if I am deciding whether to put forward a proposal, the most important question is the price that my proposal will receive.  Tying that to the calendar gives me certainty.  On the other hand, the total amount of capacity to be installed should not diminish just because developers are not inline to request an allocation within a given window in time.  We have asked DWP to clarify and we will update this post if/when we get a response.

Perhaps the most perplexing wrinkle is the introduction of “Time-of-Delivery” (TOD) multipliers which modify the amount paid based on the day of the year (high or low season, i.e., June-September or not) and time of day.  Here are the TOD multipliers being proposed by DWP:

Energy produced in the summer between 1 and 5 p.m. receives a substantial bonus, but roughly a third of the energy produced is subject to a 50% penalty.  Moreover, this substantially increases the complexity of the modeling process.  If all energy produced were priced the same, then the CSI calculator would be sufficient to estimate system earnings in Year 1.  You could then apply a depreciation factor (to allow for system degradation over time) to arrive at the earnings of the system on a year by year basis.

Instead, you need to model the array’s output on an hourly basis over the course of the year.  (Fortunately, NREL’s PVWatts version 1 calculator will provide such an output that can be imported into Excel.)  An appropriately coded function will then allow you apply DWP’s TOD multipliers to the hour-by-hour output to calculate the estimated earnings from the system in Year 1.  Phew.  Seems like a lot of added work for what is supposed to be an open to all process.  (We have confirmed with DWP that the TOD multipliers apply to both the BPG - where it makes sense - and the IPG - where it is far less appropriate.)

Given the emphasis on summertime production, we thought it would be interesting to see how different azimuth angles would effect the year earnings of the system.  We ran PVWatts on three different configurations of the same 100 kW (nameplate system) at 180, 235 and 270 degrees azimuth.  (In each case we assumed an unshaded site and a panel tilt of ten degrees.)  We also calculated what the earnings would be under a straight, $0.15/kWh without the TOD multipliers.  Here are our results:

The three top lines reflect the TOD multiplier effect - certainly during those summer months the systems are all earning more money than their flat-rate brethren.  The (perhaps surprising) loser here is the 270 degree azimuth.  In the peak summer months it is matched almost exactly by the 235 degree system, but loses out to it (and to the 180 degree system) the rest of the year.  Overall, the 235 degree system earns the most - about $24,416 in Year 1 by our estimation - about $170 more than the 180 degree system and nearly $800 more than the 270 degree system.  (Is there a “sweeter” spot out there to be found - perhaps, but that determination is left to the student.)  Overall, the earnings of the TOD based systems are roughly 9% higher than the corresponding flat-rate systems.

Which begs the question - why not simply raise the offered rate by 9% or so and avoid this complexity?  After all, this is supposed to be a simple program that offers “price certainty” so why all of these additional hoops?  Raising the initial rate to $0.165/kWh would cost the same amount of money and produce pretty much the identical amount of energy over time - particularly if DWP simply issued guidelines for acceptable system designs.  The TOD multipliers should be relegated to the BPG projects where that level of complexity is par for the course and the participants will have the staff to properly predict their earnings no matter how complicated the pricing regime.

IRR or I-Yi-Yi?

The most perplexing element of DWP’s proposal is their claim regarding anticipated Internal Rates of Return (IRR) for projects completed under the FiT’s IPG.  Like lots of solar companies, we have developed our own model for determining the client’s return on investment based on the calculation of the project’s cash flow IRR.  DWP published a chart purporting to show where different IRR values land between the cost per Watt versus payment per kilowatt hour graph.  Here’s what they are projecting:

According to this chart, a project that comes in at $4.50/Watt and earns $0.15/kWh in Year 1 will generate an IRR of 12%.  To which we say - how?

Take that optimal 100kW system we were looking at before - assume it costs $4.50/Watt which works out to $450,000.  That system will earn roughly $24,400 in Year 1, subject to a degradation of about 0.9%/year.  It qualifies for a 30% ITC tax credit from the federal government and is subject to accelerated depreciation for both the state and the feds.  And that’s it on the plus side (there is no rebate since this is a FiT system).  On the minus side, in addition to the annual reduction is system output, there are also O&M costs associated with this system which could well reach 1% of the system cost per year.  Put that all together and you end up with an IRR of 7.3% - not awful, but a long way away from 12%!  Again, we have requested clarification from DWP and we will update this if/when we hear from them.  (Of course, if you think I’ve overlooked something crucial, please let me know in the comments.)

To Play, or Not to Play

So what can we conclude from all of this?  LADWP is moving toward a FiT, even if the actual open-to-all FiT program is limited to just 75Mw.  However, questions of complexity in the application process (including the need for interconnection studies) and the pricing structure combined with some rose-tinted profitability projections cast doubt on just how desirable this program will be.  LADWP is actively soliciting comments on their proposal - please consider this one long comment - and hopefully they will be open to making changes to address the concerns of the stakeholders who have been pushing for this program for a very long time.

LADWP’s Board of Commissioners voted today to approve the Solar Feed-in Tariff (FiT) Demonstration program. The vote clears the way for the program to begin immediately and workshops explaining the application process are taking place this week and next.

Here is the full text of LADWP’s press release issued today:

FOR IMMEDIATE RELEASE    DATE: April 17, 2012 3:38:42 PM PDT

Board of Water and Power Commissioners Approve LADWP Solar Feed-in-Tariff Demonstration Program

New Program Expands Ability to Tap into City’s Abundant Sunshine

The Los Angeles Department of Water and Power (LADWP) Board of Water and Power Commissioners today approved the creation of a Solar Feed-in Tariff (FiT) Demonstration Program for 10 megawatts (MW) of solar power, further opening up solar power generation to a broad array of customers and solar developers in Los Angeles.

A workshop is scheduled tonight at LADWP’s downtown headquarters to ensure that interested participants understand how the new program will work. Additional workshops are slated for Thursday afternoon at the Century Plaza Towers and April 24 in Bishop for those interested in developing solar in LADWP’s Owens Valley service area.

The FiT Demonstration Program will allow solar power to be developed by third-parties and then sold to LADWP for distribution on the city’s power grid. Once the initial 10 MW of solar has been deployed, LADWP will roll out a program of between 75 MW and 150 MW based on information learned from the demonstration phase, rate support and stakeholder input.

“We are blessed with sunshine nearly year-round here in Los Angeles so starting this program has been a priority for this Board and the Department,” said Board President Thomas S. Sayles. “Tapping into local solar power is the right approach for Los Angeles as we increase green energy in our power mix and work to comply with state mandates that set renewable energy levels.”

The Los Angeles City Council previously gave its blessing of LADWP’s FiT Demonstration Program by adopting an ordinance that gives LADWP’s Board of Water and Power Commissioners administrative discretion to enter into the many long-term standard contracts that previously required a more lengthy process of Council approval. The action also permits the Board to delegate that authority to LADWP General Manager Ronald O. Nichols. Mayor Antonio Villaraigosa signed the ordinance last Thursday.

The LADWP Board today approved the FiT Demonstration Program Guidelines, along with the standard purchase agreement and interconnection agreement that will be required of FiT projects. The Board’s action also delegated authority for General Manager Nichols to approve the FiT contracts.

The FiT Demonstration Program will allow third-parties to generate solar from small and medium-scale projects, and sell the power to LADWP for distribution on the electric grid. Projects will be selected based on competitive bids, which will determine a set contract price per kilowatt-hour, for up to 20 years. The program will set aside a prescribed amount of smaller and larger solar generation projects.

The new program will complement LADWP’s existing Solar Incentive Program, an incentive-based, net-meter program. Through the net-meter program, customers displace energy that would otherwise be supplied by LADWP and receive a credit on their bill for solar generation that exceeds the amount of energy they consume.

“In addition to residential customers, the FiT program will open up local solar development to rooftop real estate, such as warehouses, multi-family developments and other large rooftop structures beyond those that currently benefit from our Solar Incentive Program,” said Aram Benyamin, Senior Assistant General Manager, LADWP Power System.

“The fact that we’ve received a tremendous amount of interest from folks wanting to attend the workshops confirms just how vital this program is for Los Angeles,” Mr. Benyamin added.

In developing the FiT Demonstration Program, LADWP incorporated key feedback received during a series of public workshops over the past year. LADWP also took from lessons learned by other national and international FiT programs.

The FiT workshops are designed for interested persons and prospective bidders to explain the bidding and contracting process prior to accepting project proposals/bids in May. Dates and locations of the workshops are as follows:

Downtown Los Angeles
Tuesday, April 17 – 6:30 p.m.
LADWP Headquarters
111 North Hope Street
A-Level Auditorium
Los Angeles, CA 90012

West Los Angeles
Thursday, April 19 – 2:00 p.m.
Century Plaza Towers
2049 Century Park East
Concourse Level, Conference Room A/B
Los Angeles, CA 90067
RSVP closed - meeting at capacity

Owens Valley
Tuesday, April 24, 2012 - 6:30 p.m.
First United Methodist Church
205 North Fowler Street
Bishop, CA 93514
RSVP Owens Valley Workshop

For additional information on solar power in the City of Los Angeles, please click the following links:

The Department’s solar webpage, www.LADWP.com/solar
More about the FiT program, www.LADWP.com/FiT

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UPDATE - LADWP has made available a webinar hook-up for this meeting so you can participate without the hassle of driving into downtown LA.

To access the webinar, click here: LADWP FiT Workshop Webinar.

It is official - LADWP is formally launching its Feed-in Tariff Demo Program with a series of workshops to be held over the next two weeks.

We have written at length about the work that has been done to develop a feed-in tariff program at LADWP.  Last week the Los Angeles City Council approved the demonstration phase of the program and the workshops next week are designed to give potential participants the information that they will need to submit program applications.  We will be attending the first of these meetings and we will report back afterwards.

Here’s the schedule and contact information:

Tuesday, April 17, 2012

 6:30 p.m.

LADWP Headquarters

111 North Hope Street

A-Level Auditorium

Los Angeles, CA 90012

RSVP Downtown LA Area Workshop

(200 guests maximum)

Thursday, April 19, 2012

 2:00 p.m.

Century Plaza Towers

2049 Century Park East

Concourse Level

Conference Room A/B

Los Angeles, CA  90067

RSVP Century City Workshop

(100 guests maximum)

Tuesday, April 24, 2012

 6:30 p.m.

United Methodist Church

205 North Fowler Street

Bishop, CA 93514

RSVP Owens Valley Area Workshop

Will you be attending?  Let us know your thoughts in the comments.

Next Tuesday, December 6th at 11:30 a.m., the LADWP Board of Commissioners will host a special meeting to discuss the LADWP’s Renewables Portfolio Standard (RPS) Policy and Enforcement. The meeting is open to the public and will be held at LADWP Headquarters in downtown LA (111 N Hill Street) in Room 1555-H.

Some in the renewable energy community are viewing this meeting as one of the last, best chances to modify the proposed LADWP Feed-in Tariff program that has been under consideration now for months.  As Michelle Garakian of the LA Business Council put it in an email to FiT supporters, “This is another crucial opportunity to make sure we have a real meaningful Solar feed-in tariff here in Los Angeles.”

The meeting comes after LADWP received substantial criticism of its proposed FiT demonstration program as being too timid and inconsistent with the state’s legal mandates, as well as the release of a major study from UCLA and USC that found that a greatly expanded FiT would find a ready workforce in the area.  State Senator Gloria McLeod (D-32SD), author of SB 32 which creates the statewide FiT mandate, has also been critical of the LADWP approach, noting that it “ignores the intent behind the legislation and diminishes its potential."  (The lawyer in me cannot fail to note that when a legislator says an action “ignores the intent” of the law, they are effectively conceding that the proposed action is legal.)

We have noted previously that LADWP staff appears completely committed to pursuing its demonstration phase as proposed regardless of the pushback from the community.  Armed with a legal opinion that says that their “price exploration process” is consistent with SB 32, it is hard to imagine them changing course at this point.  It will be interesting to see if Tuesday’s meeting shows any softening in that position.

We will report back after the meeting.  If you are attending, please take a moment to come up and say hello.