Lessons from Capped Programs: Spain FIT Revisions

A look at the arc of solar policy development in Spain can shed some helpful lessons for policymakers. The upshot: if a government is uncomfortable with unlimited cost exposure and sets caps on the amount of development, that decision triggers additional policy considerations. The implications are important for the project development process, as capped programs inevitably work very differently than uncapped programs.

In 2008, Spain had an uncapped program: a standard-offer feed-in tariff (FIT) without any limit. The approach works well for developers–as long as you can bring your project on in time, you get a contract with no muss, no fuss. However, due to the incentive levels, a goldrush of development lead to a price tag about ten times larger than the government expected (and was interested in paying for), and the government shut down the program to re-evaluate (and tried to abrogate those contracts, but that is another story).

The latest version (as of the Nov 18, 2010 Royal Decree) relies on fixed prices for standard contracts over 25 years: 14cts €/ kWh for groundmount, 21cts € / kWh for commercial rooftops up to 2 MW, and 29cts € /kWh residential rooftops up to 20 kW.

In order to control costs, however, the entire program is capped at 500 MW a year. How are contracts disbursed? In order to provide some tempo and regularity for business opportunities, there are four calls a year, with contracts awarded on a first-come, first-served basis.

But wait–if there is a limited number of contracts available a year, what if a crafty speculator was the first to submit applications for all 500 MW, with the hopes of selling the contracts later and making money on the spread? Or an enterprising teenager, eating Queso-eetos in his grandmother’s basement, secured a contract for a 50 MW power plant…but doesn’t have the where-with-all to build it?

Here’s the point of this post: in order to make sure that these contracts only go to developers that have the ability and intent to actually build them, Spain employs some strict project viability requirements. Projects must have all permits and licensing secured before they get a contract, and developers must post high development security (a deposit that they get back once the project comes online, but is forfeited if the project does not reach fruition–’skin in the game,’ in the vernacular). And developers have 12 months to come on-line, or they forfeit the contracts.

This is a key element with capped programs…without such requirements, speculators and inexperienced developers can tie up the limited contract opportunities without delivering electrons, while competent developers are left idle on the sidelines. In a capped program, policymakers must put a premium on well-baked, high viability projects.

However, note that these inevitable measures completely re-orient the development process. In an uncapped program, a developer is assured a contract if she can bring the project on-line by the deadline. Conversely, in a capped program, developers must do some work up front, and sink time, effort, and money into developing a project well in advance of getting a contract. In Spain, which awards contracts on a first-come, first-served basis, that means a fair amount of risk for large projects (much less for smaller), with a reward based on the speed of your postman.

According to this article, the last contract call (which took place before the latest Royal Decree–current tariffs, as described above, are 45% lower for groundmount, 25% lower from commercial rooftops, and 5% lower for residential rooftops) had five times more applications than contract availability.

The lesson here is this: with capped programs–whether fixed price FITs or competitive auctions–policymakers must put measures in place to ensure only well-baked projects are selected, and that means developers will have to sink some time and money upfront before having a contract. The only question is: will winners be selected on the basis of 1) best value to ratepayer; or 2) speed of your postman?

Vote Solar is a non-profit grassroots organization working to fight climate change and foster economic opportunity by bringing solar energy into the mainstream.