-NV: -\UN!V!ENl ENE G : C:.. NOV 1 o l 010. CITY OF Los ANGELES OFFICE OF THE CHIEF LEGISLATIVE ANALYST. November 12th, 2010

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1 CITY OF Los ANGELES OFFICE OF THE CHIEF LEGISLATIVE ANALYST GERRY F. MILLER CHIEF LEGISLATIVE ANALYST SHARON M. TSO EXECUTIVE OFFICER ROOM 25'5 CITY HALL ZOO N. SPRJNG STREET LOS ANGELES, CA FAX November 12th, The Honorable Members of the Los Angeles City Council City Hall Los Angeles, CA 912 To the Members ofthe City Council: Please find attached the Solar Feed-in Tariff for Los Angeles - Review of Proposal from Los Angeles Business Council report. This review was prepared in response to a directive from the Cow1cil's Energy and Environment Committee on July 2t", 21. The Committee instructed the Chief Legislative Analyst (CLA) to conduct an independent assessment of the Los Angeles Business Council's (LABC) 6 MW Solar Feed-in Tariff Policy Proposal. The Proposal is based on a Study dated July 8 1 h, 21, which was conducted by the LABC in conjunction with the UCLA Luskin Center for Innovation School of Public Policy Affairs. The Study concludes that a Solar Feed-in Tariff designed as proposed would "be a cost-effective program for ratepayers over the long-term, while meeting the job-creation and clean-energy goals set out by the Los Angeles Department of Water and Power and City policymakers." The Study can be accessed on LABC's website: org/ P A Consulting prepared the independent assessment/review of the Study through a contractual agreement with our Office. Specifically, PA reviewed the Study and assessed its conclusions relative to the following: The likely rate of solar capacity installation w1der the proposed Feed-in Tariff; 1 ENE G : C:.. -NV: -\UN!V!ENl NOV 1 o l 1

2 Job-creation estimates associated with new solar installations; and The likely rate impact of the Feed-in Tariff. With its overall assessment of the proposed Feed-in Tariffproposal, PA offers recommendations for modifications to the proposal and areas of further study. In conducting the independent assessment/review, every attempt was made to ensure the independence of the reviewers from the LABCIUCLA and the Los Angeles Department of Water and Power. P A was tasked with reviewing the information, comparing it to other Feed-in Tariff arrangements and developing their own analysis and conclusions. In addition, our Office limited our interaction with P A to clarification of information, formatting and contract compliance. P A was not directed in the formulation of conclusions and/or recommendations. Sinc:e~y ~ ~ Chief Legislative Analyst CC: Honorable Mayor Antonio R. Villaraigosa Honorable Board of Water and Power Commissioners 2

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4 Executive Summary The Los Angeles Business Council (LABC) has proposed a feed-in tariff policy that would result in 6 MW of new solar power in Los Angeles. This policy supports the development of solar energy by offering long-term purchase agreements to developers of solar projects based on the estimated cost of development plus a reasonable return. PA has examined the LABC proposal as well as the analysis supporting the accompanying report. The feed-in tariff proposed by LABC would drive rapid development of solar power, offer a mechanism for broad participation in solar by a range of players, and create local jobs for as long as projects are being built under the FiT. However, a FiT of the size and design proposed by LABC offers several challenges that must be addressed prior to adoption. Most notably: Large amounts of distributed solar generation could require extensive transmission upgrades and pose reliability issues if not planned and integrated properly While the tariffs for large-scale development envisioned by the FiT is competitive with expected costs for utility projects, the cost of proposed generation for residential rooftops is significantly higher than the cost of large, utility planned solar projects. The administration of a FiT can be complex and difficult These advantages and challenges need to be examined carefully prior to the adoption of a FiT proposal. PA examined three major components of the LABC report: the evaluation of economic solar potential in Los Angeles, the evaluation of rate impact, and estimates of job creation. This evaluation is detailed on the following page. PA Kn owled ge Limited 21. Page 2.l::r1 Group

5 Executive Summary Los Angeles county has over 19, MW LABC has conducted a rigorous review of of solar potential and the recommended solar potential and solar economics based tariff structure will drive 6 MW of solar on recent solar costs and reasonable economic assumptions.. '1n Ill -m a. "' -(/) The FiT will have a small impact of $.48 per month on the average ratepayer bill, with development in later years actually reducing costs for ratepayers. The FiT will create 11, direct jobs in the City of Los Angeles. This estimate was clarified by LABC as "job-years", implying creation of 1,1 jobs for 1 yrs. Rate impacts are likely to be higher. LABC assumes avoided costs that are not consistent with the LADWP I RP. More analysis of avoided costs and reliability upgrades is needed, as well as comparison with other solar development options. Using the same reference, PA estimates an average of 835 direct jobs would be supported during the 1 years of the FiT plus an additional 1,16 indirect jobs. While LABC's report provides a thoughtful and in-depth evaluation of FiT design considerations, the proposal requires a more detailed evaluation of cost impacts using a methodology consistent with LADWP's Integrated Resource Planning efforts. This should consider both the cost of the tariff relative to other generation sources as well as a comparison to other solar development options. The evaluation of options should address reliability concerns and be performed with the same assumptions and methodology used for other resource evaluations in the IRP. PA Knowl edge Limited 21. Page 3 ~ Group

6 Agenda Solar Feed-in Tariffs - Experience in other c"ountries - California and Los Angeles - Pros and Cons Review of LABC report and proposal - Methodology - Tariff design considerations - Economic potential for solar in Los Angeles - Rate impacts - Job creation Summary and Next Steps PA Knowledge Limited 21. Page 4.1:1'"1.. Group

7 What is a solar feed-in tariff? A feed-in tariff (FiT) is policy focused on supporting the development of new renewable energy projects by offering long-term purchase agreements for the sale of renewable electricity. A solar feed-in tariff focuses exclusively on the development of solar energy. Under a FiT, utilities are mandated to provide access to the grid and buy electricity from projects meeting requirements at specified rates under purchase agreements that typically range from 1 to 2 years in duration: Rates are known in advance of project investment and schedules are not changed once a purchase agreement is signed This reduces risk for project developers, improving access to financing and lowering the cost of development Feed-in tariffs may be considered alternatives or complements to centrally planned utility projects or traditional RFP's for renewable procurement A "cost-based" FiT bases rates on the actual cost of solar development. A "value-based" FiT bases rates on alternative generation costs (adjusting for any benefits of solar generation). The mechanisms for how rates are set, how projects qualify for inclusion in the program, how much power is purchased under the program, and other details of how the program is administered can vary widely across feed-in PA Knowledge Limited 21. Page 5.l:l"1 Group

8 While all feed-in tariffs promote open access and offer long-term purchase agreements, there are options in the details of policy design The FiT policy choice involves policy tradeoffs between renewable development, cost, economic development, and ease of access. Based on the cost of renewable development (cost-based) Based on the market cost of power (value-based) Based on a premium to market costs +-' a..::j"' +-' -> ::.s:: ' -LU N -...J One rate for all projects Differentiated by project type (PV, thermal, ground/roof mount) Differentiated by project size Caps provide limits to the amount of subsidy provided (as well as rate impacts) and can prevent unsustainable market overheating If caps are met it implies that rates were set higher than necessary to achieve desired goals, resulting in inefficient development Low barriers to entry (minimal deposits & screening) encourage participation but can result in spurious projects taking up "queue" space Local content requirements may be used to keep economic development focused on local resources but can reduce participation PA Knowledge Limited 21. Page 6 D1l. Consulting ~ Group ~

9 Experience in other countries offers insight into feed-in tariff design Germany Rates are based on the cost of project development and set to provide a developer a reasonable rate of return. Rates are predictable but decline over time. Separate rates for different forms of renewable energy and project size based on cost of development No caps on amount of development - rates set to control level of development Costs nationally distributed Generally considered a success, leading to rapid and stable growth and establishing Germany as a leader in solar energy. This is largely attributed to the consistency and predictability of tariff levels and policy. Spain Initial model offered option of fixed-cost contract based on projected cost of development or fixed-premium contract (wholesale price plus premium) Separate rates for different forms of renewable energy and project size based on cost of development No caps on amount of development. Costs nationally distributed High rates led to explosive growth in market; subsequent changes in rates and imposition of caps led to collapse in solar industry. Ontario Limited to wind and solar development. Separate rates based on type of power and project size based on cost of development Mandate for local content (over 5%) Costs distributed across province Participation has lagged relative to expectations despite high rates, perhaps due to local content requirements PA Knowledge Limited 21. Page 7 n' Consulting..l:1"1 Group

10 A range of solar programs are offered throughout California but none are costbased tariffs like the one proposed by LABC California leads the nation with 666 MW of installed solar capacity. California offers incentives for solar development under the California Solar Initiative, while developers also benefit from generous federal tax benefits. Investor-owned and municipal utilities have procured and built solar power to meet Renewable Portfolio Standard requirements. In addition, new "value-based" feed-in tariffs with caps have been established at PG&E, SCE, SDG&E, and SMUD. AB1969 programs (PG&E. SCE. SDG&E) CPUC has extended AB1969 to require investorowned utilities to provide a power purchase agreement to customers who install facilities under 1.5 MW in size. Some utilities have programs that extend to largers sizes The price of the power purchase is established based on the Market Price Referent (MPR). The MPR is established by the CPUC in renewable procurement proceedings and represents the marginal cost of utility power procurement. Power price depends on the time of day of generation. The amount of power to be purchased under AB1969 is-capped. PA Knowledge Li mited 21. Page 8 SMUD SMUD has instituted a feed-in tariff for up to 1 MW of renewable generation. The price of the power purchase is based on the marginal cost of power procurement and varies by time of day and season. The program was filled quickly by only 6 applicants. One applicant (Recurrent Energy) accounts for 6MW of the FiT capacity As of August 21 the program is no longer accepting applications n' Consulting.J::l"1 Group

11 The draft IRP issued by LADWP contemplates a range of 66 MW to 156 MW of new solar development Under the draft scenarios considered by the Department, higher solar development results in higher rates than would be incurred through either traditional power generation (natural gas) or wind generation: Projects are assumed to cost between $179 and $217/MWh to build and operate Avoided costs are based on actual changes in generation and procurement costs incurred by the Department assuming a range of natural gas and C 2 prices Economic development benefits have not been specifically quantified in the IRP LADWP's IRP has not specifically evaluated the cost and performance tradeoffs of instituting a solar feed-in tariff relative to other mechanisms to develop solar generation. These may include: The development of remote, utility-scale solar sites with transmission systems linking the sites to Los Angeles Utility-planned development within the LA Basin, including development on city-owned properties Continued incentives for solar development similar.to those offered today by LADWP A feed-in tariff PA Knowledge Limited 21. Page 9.a:::t'1 Group

12 Feed-in tariffs offer several advantages compared to other solar development mechanisms, but also presents some challenges Advantages Provides certainty of payment and lower risk for independent developers, maximizing participation in the program Allows customers to maximize the solar potential of their roofs by selling power back to the utility in excess of actual power consumption (net metering) When coupled with a cap on qualifying MW, provides a known limit to a utility's costs under the program. The risk of project cost overruns or poor performance rests with the developer. Allows full capture of tax incentives that may not be available to a municipal utility that does not pay taxes Disadvantages Small-scale solar projects that may be targeted through a feed-in tariff are typically more expensive than larger, centrally pianned projects Solar may be developed in areas that are not optimal for the design and operation of the utility's transmission system, requiring local distribution and reliability upgrades Setting the tariff to achieve desired results is a complex process. High rates may lead to overdevelopment or economic windfalls to developers while low rates will not realize development goals PA Knowledge Limited 21. Page 1.l:l'1 Group

13 Agenda Solar Feed-in Tariffs - Experience in other countries - California and Los Angeles - Pros and Cons Review of LABC report and proposal - Methodology - Tariff design considerations - Economic potential for solar in Los Angeles - Rate impacts - Job creation Summary and Next Steps PA Knowledge Limited 21. Page 11 ~ Group

14 PA has examined the LABC proposal as well as the analysis supporting the accompanying report PA's review included: A review of two reports published by LABC outlining their proposed feed-in tariff design principles and calculations: - "Designing an effective feed-in tariff for greater Los Angeles", which provides an overview of solar policy, worldwide feed-in tariffs, and design options - "Bringing solar energy to Los Angeles'', detailing the feed-in tariff design parameters and projected performance An interview with LABC and review of working spreadsheets and calculations for solar economic potential, rate impacts, and job creation Review of other feed-in tariffs, solar programs, and review articles summarizing the impacts of solar development and feed-in tariff design options An interview with LADWP staff regarding their concerns regarding the potential reliability and cost impacts of a feed-in tariff and its place within the Integrated Resource Plan PA focused its analysis of LABC's report on feed-in tariff design elements, solar economic potential, rate impacts, and job creation. PA Knowledge Limited 21 Q_ Page 12 m oroup

15 LABC has proposed a Feed-in Tariff that would result in 6 MW of solar development in the LA basin over the next ten years Summary of LABC proposal An average of 6 MW/year over ten years Three distinct rates and targeted capacity levels, with initial rates set.to spur development within a given market segment: 1 MW of small scale rooftops (less than 5 kw): $.34/kWh - 3 MW of large scale rooftops (over 5 kw): $.22/kWh - 2 MW of ground-mounted solar: $.16/kWh Initial rates are reduced by 5o/o each year as long as targeted capacity levels are met $.35 $.3 $.25 - $.2 X ~ $.1 5 :::: j LABC proposed capacity and rates for FiT -45 ~~--~- / - ~ - ~ ~ ~ ~ $. +, ,------,------,------, , , , , , (I) 'E == X 2 ~. 15 > 1 co 5 PA Knowledge Limited Small Roof Rate --Small Roof MW - - Large Roof Rate --Large Roof MW Page Ground Mount Rate --Commercial MW.17"1 Group

16 The tariff designed by LABC is similar to the FiT model used in Germany and recommended by third party reports studying worldwide feed-in tariff design Key characteristics of the tariff design include: Cost-based tariff levels set to spur participation by providing a reasonable return on investment for developers Stable payment terms over twenty years Use of a simple application process with a non-refundable deposit to discourage projects without a serious chance of being built Predictable reductions in rates for new projects (5 /o per year) assuming adequate participation in order to capture reductions in solar development costs Differentiated tariffs to incentivize participation across multiple sectors The LABC FiT differs dramatically from other solar purchase agreements currently offered in California in its use of a cost-based vs. value-based model: A cost-based model will result in higher rates in early years, driving higher participation than would be realized in a value-based model However, a cost-based model will generally result in higher costs as higher rates and participation drive higher utility costs relative to other generation PA Knowledge Li mited 2 1. Page 14.J:l'1 Group

17 LABC has performed a rigorous analysis of solar economic potential and tariff levels required to spur development LABC has used a sound and rigorous approach in estimating solar resource potential. Elements include: A thorough assessment of solar resource potential based on GIS analysis Use of an economic model incorporating relevant tax incentives Use of recent actual solar costs with a range of potential future cost projections to test sensitivities Use of distributions for various elements~ including solar performance based on solar studies and required rates of returns, resulting in a projected distribution of solar penetration as a function of tariff levels. Actual tariff levels would be based on the use of updated costs for solar development and a review of all model assumptions: Tariff levels should be chosen to encourage participation without resulting in "oversubscription!} of tariffs. This will result in the most cost-effective achievement of participation goals. PA Knowledge Limited 2 1. Page 15..t:::ri.. Group

18 LABC's estimate of rate impacts should be revised to adopt the approach and assumptions used in the LADWP IRP Rate impacts are determined by comparing the cost of paying for solar power generated under the FiT and the cost of power that otherwise would be generated without the FiT (avoided costs). The avoided costs assumed in the LABC study are based on the Market Price Referent for used by CPUC in IOU renewable proceedings, adjusted for Time of Use factors. LABC also assumes a system upgrade cost of $1, per MW. LADWP's IRP process simulates the system in future years under different resource scenarios to project the actual rate impacts of various resource configurations. Rather than making simplified assumptions for avoided costs, the rate impacts of the LABC FiT should be evaluated under the standard assumptions adopted for the LADWP I RP. This is likely to result in higher rate impacts than derived in the LABC report. Also, since LADWP is likely to pursue multiple solar developments, it is important to compare the rate impact of the FiT to other solar projects as well as natural gas generation. PA Knowledge Limited 21. Avoided Cost $/MWh Comparison of solar and avoided cost assumptions $16 (large-scale) to $32/MWh (residential), declining 5%/yr $119/MWh, increasing by 4% each year Solar becomes less expensive than avoided cost by year 1 $179 to $217/MWh Calculated through simulation of LADWP system Solar is more expensive than other resource options

19 LABC's estimates of job creation should be clearly stated in "job-years" instead of jobs in order to avoid any confusion over economic development LABC's report stated that the FiT would create 11, direct jobs in Los Angeles. This was clarified in an interview to mean "job-years" over ten years, or an average of.1, 1 jobs per year. PA applied the results of the same report cited by LABC* and reached conclusions similar to LABC's figures: An average of 835 direct jobs and 116 indirect jobs would be supported in Los Angeles for ten years A number of utility and administrative positions would be required to connect installations, implement upgrades, and administer the program. PA has not estimated this figure as it is dependent on reliability upgrades required to accommodate the FiT program. Additional benefits from a FiT could be realized if solar wafer and module manufacturing moves to Los Angeles Other forms of solar development should result in similar job creation given a similar mix of residential and commercial installations: Small-scale rooftop programs are estimated to produce 3% more jobs per MW than commercial programs; this is directly related to their relatively higher cost 25 2 ~ _c ~ 15 _c :c 1 -til '$ co 5 3 (1) 25 'E -9 2 :.=:"' ~ 15 11S ~ 1 "! u ~ 5 Comparison of job creation estimates Admin??? LABC PA I o Direct o Indirect o Admin/Utility I Job creation assumptions* Residential Commercial * Navigant Consulting, 'Economic Impacts of Extending Federal Sofar Tax Credits", September 28 I Ill within LAo outside LA I n' consulting PA Knowledge Li mited 21. Page 17. 1"'1 Group

20 Summary and Next Steps The LABC FiT provides a strong analysis of solar potential in Los Angeles and the tariff rates required to drive solar development in various sectors. However, job creation figures as described in the report are overstated by a factor of ten as figures represent job-years, not sustained jobs. Also, the assertion that a solar FiT would not substantially impact rates is based on declining solar costs and rapidly increasing costs for alternative generation sources. While this is one potential scenario, the evaluation of FiT rate impacts should be based on the same avoided cost methodology (simulation of actual LADWP system) and scenarios used in the LADWP I RP to evaluate other resource options. A FiT has a place within the resource planning process for the City of Los Angeles. However, any FiT needs to consider the reliability and cost concerns mentioned above in a manner that is consistent with the utility's resource planning process. LABC will require assistance from LADWP in this evaluation. As part of this evaluation, the LABC proposal should be compared to other mechanisms for solar development, including utility built solar and other FiT strategies such as value-based FiTs, pilot programs, slower phasing, or lower FiT levels. The cost of maintaining system reliability given high penetration of distributed solar penetration should be addressed as part of this analysis. With this information, the cost/benefit tradeoffs of a FiT compared to other solar development, other renewable generation, and traditional generation can be made. PA Knowledge Limited 21. Page '1 Group