Thoughts regarding the results of SPEED Standard Offer’s first Request for Proposals.
On April 1st 2013 the Vermont Public Service Board (the Board) requested proposals (RFPs) from developers of renewable energy projects for about 5 MW of new renewable energy projects. The Board made it clear that proposals would be selected based on the lowest price ($/kWH) and that the prices offered could not exceed “avoided cost price caps” established by the Board. On May 1st, 2013 the RFP was closed. There were 36 proposals received. All proposals received were for solar PV projects which by the Standard Offer rules are limited to projects of 2.2 mW or less and are for a 25 year fixed price term. Prices bid ranged from $0.1340/kWH to $0.2575/kWH (note the “avoided cost price cap” for solar PV is $0.2570).
The distribution of prices offered for projects of 1 mW or greater in size presents somewhat of a normally distributed “bell curve”, with 8 projects offering prices between $0.174/kWH and $0.194/kWH
The distribution of prices offered for projects of less than 1 mW (actual proposals in this size range were limited to 100 kW - 150 kW) generally came in near the “avoided cost price cap” of $0.2570/kWH. Two possible explanations come to mind for these higher prices. First projects in the 100 kW to 150 kW size range don’t have the same “economies of scale” that the larger projects have. Secondly, projects in this size range can qualify for approximately $0.20/kWH under the net metering program. Therefore only projects which are uneconomic at $0.20/kWH are likely to propose under the Standard Offer program.
“Competitive Mechanism” Standard Offer Contracts
The Board authorized us to sign Standard Offer Contracts, totaling about 6.2 mW, with the 3 low bidders. We now have 3 signed Contracts for projects with prices between $0.1340/kWH and $0.1441/kWH. These prices are about 54% of the “avoided cost” cap for solar PV determined by the Board’s consultant. In authorizing us to sign Standard Offer Contracts with the 3 low bidders, the Board was complying with the requirement in the statute for “the lowest feasible cost”. The Board also identified a “Reserve Group” to be awarded a contract if one of the Award Group projects drops out. Projects in the Reserve Group offered with prices between $0.1491/kWH and $0.1639/kWH.
The RECs belong to the Vermont Utilities. They are worth about $0.06/kWH currently. Additionally, the utilities get the advantage of some avoidance of regional network service charges. This makes the cost energy and capacity about $0.06 -$0.07/kWH - fixed for 25 years.
“Curse of the Low Bidder”
The complete requirement in the statute for use of a competitive mechanism is that the mechanism be consistent with “the goal of timely development at the lowest feasible cost.” Last August REV expressed concern to the Board that a competitive mechanism might not work to meet the goal of “timely development”.
“Past experience has shown repeatedly that often the lowest bidder is able to provide a low bid because the developer is not significantly experienced to provide a realistic bid, and ultimately cannot build the project based on the low bid provided by the developer.”
Are we now in a situation where we cannot meet the goal of timely development in the statute because of the “Curse of the Low Bidder”? We will know certainly before next April’s RFP.
Assuming that the bidders are knowledgeable about the “hard” costs of actually building a solar project, I can think of 5 variables to a bid price. These are:
One bidder commented that he was going to
have to go back and re-negotiate with
landowners in order to bid more
Interconnection costs are difficult to know without input from the distribution utility. The utilities will generally not provide information unless a 5.500 Application is filed and accepted. It would be helpful to Producers responding to an RFP to have an understanding of distance to 3Ø distribution line, fault current, native load, and distance to and characteristics of the nearest substation. Several of the bidders did file 5.500 Applications prior to the RFP and therefore did have a good idea of their interconnection costs.
Permitting Costs are often underestimated. Acquiring the CPG permit entails a litigated proceeding before the Board. This means “suiting up” a lawyer, and possibly responding to parties which may have adverse positions such as neighbors and the ANR. One Standard Offer project which signed a Standard Offer Contract in 2009 had their CPG appealed to the Vermont Supreme Court and did not receive a “clean” CPG until the late spring of 2012.
Financing costs may be the key to a competitive proposal. Having a low cost tax equity partner, particularly a Vermont tax equity partner, could potentially reduce the capital costs by more than 50%. Where is that guy?
▪Acceptable rate of return
The statute “pegs” the allowable return on the highest allowable return of a Vermont Utility. The Board has determined this rate of return to be 9.75% in their models used to determine Standard Offer rates. A Producer may require a different rate of return based on their perception of the risk of development and the “annuity-like” cash flow of a Standard Offer project.
Locating Projects where needed for Grid Support
It seemed like a pretty simple idea; “let’s encourage projects to locate where they can benefit the Vermont grid”.
After the formation of Working Group A and Working Group B, many meetings, and significant time expenditure by utility personnel and Board and Department staff, it was determined that (in the words of Donald Rumsfeld)”...there are things we know we don’t know”. We don’t know whether or not there are any deficiencies to the transmission grid which can be significantly improved with SPEED Standard Offer Projects.
However, the Producers were listening. Within the Award Group and the Reserve Group, 10.8 mW of projects (all but one of the projects) are located in the Rutland to Burlington corridor where deficiencies may exist.
What about the Other Technologies?
The only projects which responded to the RFP were solar PV projects. The SPEED Standard Offer statute contains the following requirement:
The board shall allocate the 127.5-MW cumulative plant capacity of this subsection among different categories of renewable energy technologies. These categories shall include at least each of the following: methane derived from a landfill; solar power; wind power with a plant capacity of 100 kW or less; wind power with a plant capacity greater than 100 kW; hydroelectric power; and biomass power using a fuel other than methane derived from an agricultural operation or landfill.
Can we infer from the lack of bids from other technologies that the “avoided cost price cap” is too low to support development of these other technologies? Or, can it be inferred that the other technologies can’t compete with solar PV.
In the case of landfill methane, there may be no more relatively large landfills left to develop. The small landfills are financially better off with a group net-metering arrangement. Non-farm biomass is limited by the efficiency requirement to the small number of Vermont industries that burn wood year-round for process heat. Given the present vocal anti-wind lobby it is unlikely a developer would put up risk money for a single turbine wind project. There may be no more 500 kW+ hydroelectric projects to develop and while there are a few smaller hydroelectric projects in development these projects are also better off financially with a group net-metering arrangement.
The next RFP could attract small wind (100 kW or less) projects which presently have an “avoided cost price cap” of about $0.253/kWH. Apparently small wind cannot compete with solar PV on a price basis, so if the Board wants to develop some small wind projects in the future, it may be necessary to allocate a specific portion of the annual capacity to these projects.