Connecticut has driven down the costs that ratepayers will incur for their public utilities’ clean-energy purchases through an innovative reverse auction. The newly-launched program is the first of its kind, but there’s a congressional proposal with language directing the Energy Department to set up reverse, renewable-energy auctions on a nationwide basis.
The legislation has languished in the current Congress, but it will be back – and its sponsor can now point to the promising outcome in Connecticut, where Gov. Dannel Malloy has led a charge for “cheaper, cleaner, and more reliable” electricity.
The state’s auction was mandated by the 2011 Energy Act. It was held last spring by Connecticut’s two distribution companies – United Illuminating and Connecticut Light & Power. The utilities selected from 368 bids, 87 solar, and 10 fuel-cell projects qualifying under the state’s Low- and Zero-Emissions Renewable Energy Credit (LREC and ZREC) Program.
In this first round of auctions, UI and CL&P solicited bids for large and medium ZREC projects and LREC projects of any capacity. The bids were expressed as prices for renewable energy credits that the projects would be assigned on the basis of one REC per megawatt hour of electrical generation.
The bids were limited to $350 per REC for ZREC projects and $200 per REC for LREC projects. However, the utilities won’t have to pay anywhere near those numbers for the 31 megawatts that the winning bidders will produce from their 97 projects.
The resulting RECs will cost UI and CL&P a total of $8.1 million annually, which works out to an average weighted price of $90 per REC – or far less than REC prices in many other states.
Alex Kragie, a senior official in Connecticut’s Department of Energy and Environmental Protection, told Breaking Energy that, “As predicted, the results showed that the program successfully drove down the cost of clean energy even more impressively than we had anticipated, which is a huge step towards grid parity.”
Creative Financing Mechanisms are Key
Kragie also pointed out that the winning bidders will enjoy a rock-solid assurance that the REC prices paid for their projects’ output will never change during the 15-year terms of their contracts. Like the reverse auction itself, the price guarantee is unique in comparison to the terms in practically all other PPAs for renewable energy.
DEEP Commissioner Dan Esty told Breaking Energy that “this is the key to the program because these [REC price] commitments enable the developers to get private sector loans to build out the projects. We believe that the key innovations required for renewable energy development is much less in the area of technology than it is in the area of financing – particularly with government funding for subsidies being so limited.”
Reed Hundt, CEO of the Coalition for Green Capital, told Breaking Energy that Esty and Gov. Malloy – who had directed Esty to come up with a legislative proposal for clean energy incentives – “should get all the credit in the world. They’re protecting the ratepayer and the taxpayer while fostering clean energy conversions. A lot of economists think customers have to be punished in exchange for clean energy conversions, but they’re wrong, wrong, and wrong.”
Hundt, who served as FCC commissioner under Pres. Bill Clinton, is very familiar with auctions inasmuch as he had been tasked with launching “spectrum auctions” of the commercial airwaves. He observed that clean-energy subsidies are typically too high or too small, “so you have to think of a way to get the maximum amount of clean electricity for the least amount of money. And that’s what Connecticut has achieved with its reverse auction.”
Using market incentives instead of government subsidies to foster clean electricity was the motivation for Rep. Devin Nunes (R-CA) to include a national, reverse-auction mandate (Title III) in his comprehensive energy bill, H.R. 909.
Advocating the Market-based Approach
In a statement to Breaking Energy, Nunes said, “The government’s preferred method of supporting alternative energy – doling out millions of taxpayer dollars and taxpayer-backed guarantees to risky green-energy start-ups – is inefficient, unfair, and prone to corruption and cronyism. This system should be replaced by reverse auctions, which are a more efficient, market-oriented way to accomplish the same goal.”
Nunes spokesperson Jack Langer told Breaking Energy that the congressman intends to bring back his reverse-auction proposal in the next Congress.
Brown Rudnick partners John Wadsworth and Phil Small told Breaking Energy that reverse auctions will help eliminate the boom-and-bust cycles that are inevitable when states set lofty REC prices to encourage green energy development, leaving developers stuck with inadequate REC payments after the initial flood of projects saturates the market with RECs and their prices collapse.
Wadsworth and Small recently published in Law360 an article entitled, “Could CT’s Approach to Clean Energy Be A National Model?” The attorneys both said the answer to the question is “yes,” adding that one of the auction problems addressed by Connecticut is potential non-performance by winning bidders.
That’s because the winners are required to put up 10% or 20% of their project costs (for medium and large projects, respectively) when they sign their PPAs, and they forfeit the earnest money if they don’t build their promised projects, thereby ensuring that the utilities (and their ratepayers) aren’t left holding the bag.
Equally as important is the contribution that the performing bidders will make towards bringing the utilities into compliance with the state’s renewable portfolio standard: 9% this year and 20% as of 2020. Esty said the utilities have been “barely” complying with the standard because “there are very few opportunities to buy low-cost renewable power [in- or out-of-state], and the utilities have been hesitant about going out and purchasing clean but expensive power – and we concur with that sensitivity.”
Looking further out, Kragie said reverse auctions and financing support will pave the way for renewable energy to become the third piece of the country’s predicted energy “renaissance,” with the other two pieces being cheaper natural gas and a surge in domestic oil production. “The big question,” Kragie said, “is who will be the ‘Chuck Yeager’ who breaks through the ‘carbon barrier’ and delivers electricity at prices below that level.”