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Renewable Energy Production Payments

Carel DeWinkelRenewable Energy Divisioncarel.dewinkel@state.or.us

Renewable Energy Working GroupBend, March 22, 2006

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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

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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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World Wind Market Comparison

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

Year

0

5

10

15

Thousand MW Total

Britain

Denmark

Spain

USA

Germany

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Germany’s Renewable TariffsThe Results

• 50,000 PV Installations

• 1,600 Biogas Plants

• 6,000 Hydro Plants

• 15,000 Wind Turbines

• Total of 70,000 Generators!

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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:

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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:

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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

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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:

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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:

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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:

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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?

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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):

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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):

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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):

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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/MWh or 7.8 cents/kWh

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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…...

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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

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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

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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….

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Information Workshop

For more information, contact: carel.dewinkel@state.or.us

Renewable Energy Production Payments for small to medium sized projects

Salem, April 5, 2006