1 Renewable Energy Production Payments Carel DeWinkel Renewable Energy Division Renewable Energy Working Group Bend, March 22, 2006

2  Renewable Energy Production Payments (REPPs)  Community-based energy development (C-BED)  A Cost scenario for REPPs to meet part of the REAP goal Outline of presentation

3 Often referred to as the European “Feed-in” law  Prices set by a political process  The amount of installed capacity determined by market forces  This is the reverse of the RPS process  Worldwide to date, this is the most consistent and successful policy tool to promote renewables Renewable Energy Production Payments:

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6  Excellent tool for the development of local manufacturing capacity: for example, countries with the strongest domestic wind manufacturing industry all had some kind of “feed-in” law Renewable Energy Production Payments:

7  Production based payments in the State of Washington for PV, wind and digesters  In Minnesota: 1.5 cents/kWh for small, locally-owned wind farms and now the Community-Based Energy Development Tariff Renewable Energy Production Payments:

8  Tariff must be sufficiently high to drive development  Private investors need “fair and sufficient” profitability  Local banks often play an important role and see these investments as relatively low risk  Long term contracts with minimum prices (often with an initial period of higher prices, followed by a period of lower prices after the loan has been paid off)  Rate based, like public purpose charge, no state aid REPPs’ Critical characteristics

9 Prices are:  Adjusted by technology  Adjusted by location (sites with the best resource gets the lowest payment to avoid windfall profits)  Adjusted by plant size  Declining annually for new projects that come on line  Flexible to adjust to technological changes  Adjusted every two years by an independent entity to adjust market penetration to reach the desired goals Critical characteristics, cont’d:

10  Right to interconnect (like our PURPA)  Elimination of barriers to interconnect  Uniform standards for interconnection  Easy permitting and siting  High level of transparency Critical characteristics, cont’d:

11 This policy tool:  Promotes the development of distributed renewable resources by smaller companies, coops and individual citizens  Builds a strong constituency in favor of renewables (compare wind in the UK with lots of NIMBY problems versus Germany)  Can be used to promote renewables in geographical areas where the resource is lower than the most optimum sites  Can support a diversified portfolio of renewable energy technologies Renewable Energy Production Payments:

12  An RPS will not necessarily result in more community-based renewable energy development projects  Some RPS designs could actually make community-based renewable energy development impossible:  utilities tend to use periodic RFPs to meet RPS goals  only large-scale projects qualify for most RFPs (some have minimum capacity requirements that are larger than typical community-based projects)  large scale wind has lower costs to rate payers But, who cares about community-based energy development and what is it anyway? Renewable Energy Production Payments: Why?

13 Definition: A “community-based” or “locally-owned” energy project is generally defined as an energy project in which one or more members of the local community have a significant direct financial stake in the project, other than through land lease payments, tax revenue, or other payments in lieu of taxes. The size of the projects is small in comparison to typical large generating projects owned by utilities or large commercial developers (for example, large wind farms). But they are bigger than the typical net-metering type installations for homes and businesses. Community-based energy development (C-BED):

14 Benefits:  Increased economic benefits to rural Oregon (see recent OSU study for Umatilla county)  Community-based projects might get more local buy-in for renewables and foster a climate for more renewable development (fewer NIMBYs)  Distributed generation can be interconnected to smaller transmission lines, thereby possibly avoiding the need for additional power lines or help avoid transmission problems  Smaller, multiple generating sites may help stabilize the grid.  Spreading production facilities helps offset variability in resources such as wind and solar, plus it provides an increased level of energy security  Small-scale projects may help develop bigger projects in the future Community-based energy development (C-BED):

15 But doesn’t it cost more? In comparison to what? One answer is, yes, from a simple rate payers’ perspective, a large wind farm is cheaper than, for example, a community-based small wind farm. BUT, a C-BED project may very well be cheaper than its fossil fuel alternatives……..Let’s look at some numbers Community-based energy development (C-BED):

16 Renewables: Value of fuel savings and carbon reductions only:  Fuel cost savings only, for a gas fired power plant with a heat rate of 7,000 Btu per kWh : $/BBL Oil $/MMBtu Nat. Gas $/MWh $60.00 $10 $70  Carbon dioxide reduction, assuming a gas fired power plant: 800 lbs/MWh, valued at $20/ton equals $8/ MWh  Total value of fuel savings and carbon reduction is $78/MWhor 7.8 cents/kWh

17 Numbers in the REAP context: Assume that:  we agree that the value of fuel savings plus the carbon reduction is $78/MWh or 7.8 cents/kWh (from the previous page)  the REPP policy will only be used for projects of 10 MW or less, to fit the OPUC decision in UM 1129 (standard contracts, etc.)  UM1129 proceeding results in a PURPA tariff of 5.8 cents/kWh, but in constant real terms over the contract period  the COUs as a group have the same avoided cost as the IOUs Then, from a societal point of view, we have 2 cents/kWh available for a production payment to equal society’s avoided cost of the fossil fuel alternative…...

18 Numbers in the REAP context, the year 2015:  10% renewables equals 571 aMW (IOUs=408 aMW, COUs=163 aMW)  Assume that the average REPP would be 2 cents/kWh and that the market of C-BED projects would grow to about 20 % of the REAP goal, or about 115 aMW by the year 2015  Assume that the REPP would be paid for by a Public Purpose Charge This would mean a ramp-up to the following costs by 2015:  an annual cost for the IOUs of about $14 million and for the COUs about $5.7 million  Or an extra cost of about 0.04 cents/kWh to the rate payer  Or a rate increase of about 0.6% (current average rate about 7 cents/kWh)  Or an extra annual cost of $4 for a rate payer using 10,000 kWh/yr

19 Numbers in the REAP context, the year 2015:  Note that the numbers shown in the previous slide assume that the same incentive level is needed for the whole period to 2015  In reality, the avoided cost for the utilities will most likely go up  Thus, unless the cost of the renewables increases more rapidly than the utilities’ avoided cost, the required REPP level to make new projects a reality will decrease  It is possible that there won’t be a need for a REPP for new projects by the year 2015

20 And finally The primary incentive tools currently available in Oregon are all focussed on the smaller scale projects:  BETC with its $10 million limit per eligible project cost  SELP with its $20 million limit on project cost  The ETO’s renewable budget of about $10 million per year  The USDA Farm Bill with its grants, loans and loan guarantees To integrate Renewable Energy Production Payments for projects of 10 MW or less with these existing programs appears not to be overly difficult….

21 Information Workshop For more information, contact: Renewable Energy Production Payments for small to medium sized projects Salem, April 5, 2006