PERSPECTIVES
California’s Reverse Auction Mechanism from page 13
Utility of Wholesale DG “Wholesale DG” refers to system-side DG installations that are primarily intended to produce electricity that will be exported and sold in the wholesale market. This differs from “retail DG” or “customer-side DG,” which refers to DG systems that are located on the customer side of the meter and are often used to offset the customer’s electric consumption. 20 Wholesale DG projects can significantly contribute to California’s DG objectives for several reasons: (1) they generate more electricity per project than customer-side DG installations, thus contributing to California’s 12,000 MW goal; (2) there is an economic incentive for developers to invest in such projects, since they can potentially profit from the wholesale sale of DG electricity; 21 and, (3) mid-sized systems are viewed as more economically efficient than smaller systems because there are fewer transaction costs per MWh of electricity produced and they are generally large enough to achieve economies of scale. 22 Thus, the wholesale DG model represents a promising approach for the future of electric generation in California and elsewhere.
Understanding the RAM: Program Objectives and Mechanics In the decision adopting the RAM, the CPUC specified that it chose a reverse auction as the “primary contracting tool for this market segment” because doing so would “promote competition and elicit the lowest costs for ratepayers, encourage the development of resources that can use existing transmission and distribution infrastructure, and contribute to RPS goals in the near term.”23 The CPUC further noted that it expected the RAM to “complement the RPS Program by reducing transaction costs and providing a procurement opportunity for smaller RPS-eligible projects, which have not
been able to effectively participate in the annual RPS solicitations to date.”24 As illustrated in the statements above, the RAM is intended to achieve several key objectives. These include the following: 1. Contribute to RPS Goals by Promoting Renewable DG Development—The fundamental
objective of the RAM is to encourage investment in renewable DG projects in order to increase the electricity generated by such sources. 2. Streamline Procurement Process and Minimize Transaction Costs— In order to achieve the first goal, the RAM is intended to streamline the procurement process for developers, utilities, and regulators, and to minimize the transaction costs associated with this process. 25 3. Encourage Development of Projects with Fast Timelines—The RAM also is designed to promote “the procurement of projects that can come online quickly.”26 4. Promote Use of Existing Transmission and Distribution Infrastructure—The RAM is intended to promote the procurement of projects that can use the existing transmission and distribution structure to avoid or defer the need for additional infrastructure investment. 27 5. Support Resource Diversity—The RAM is designed to promote procurement of three different types of DG resources: baseload, peaking intermittent, and non-peaking intermittent. 28 6. Provide a Realistic, Efficient Pricing Mechanism— One advantage of an auction approach is that prices are set through a competitive bidding process that is “aimed at achieving economically efficient results without the need for an administrative process to develop prices based on predictions of future market conditions and technology evolution.”29 As such, the RAM is designed to lead to more efficient, flexible pricing, and also
1 4 THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL
to alleviate the burden on regulators who would otherwise have to establish prices.30 7. Ensure Economically Efficient Project Selection—Another key goal of the program is to ensure that the IOUs will procure electricity from the most economically efficient projects in order to minimize adverse impacts of the program on ratepayers.31 Whereas a FIT and other financial incentives do not necessarily discriminate between the more or less efficient projects, the competitive nature of an auction should “favor those developers with the greatest technological advantage and the lowest installation costs through expanded market share” while also weeding out less efficient developers.32 Thus, over time, the auction approach “should lead to economically efficient outcomes and meet renewable targets at the lowest possible costs to customers.”33 8. Promote Competition between DG Developers—The program also is intended to foster competition between different DG developers in order to encourage innovation and efficiency in this sector.34 9. Prevent Speculative Bidding—The program contains project viability requirements to deter speculators and ensure that utilities do not invest in unproductive or otherwise unsuccessful products.35 10. Develop Self-Sustaining Markets— The long-term goal of the program is to provide a pathway to the development of self-sustaining energy markets. Specifically, the RAM is intended to contribute to the identification of more realistic prices while also contributing to the growth of the overall DG industry.36 These objectives are closely interrelated, and they all relate to the basic purpose of the RAM program: to expedite the deployment of DG resources at the lowest possible cost. Given the inherent trade-off between expedited