How to Create Successful Distributed Generation Programs

By Cecilia Aguillon

Cecilia Aguillon is the Director of the Energy Transition Initiative at the Institute of the Americas, an impartial and independent non-profit organization promoting dialogue and collaboration across the Western Hemisphere to foster sound public policies and to advance sustainable inclusive economic growth and prosperity. Ms. Aguillon is also the President of Aguillon Enterprises LLC, a consulting firm advising government agencies, international investors and manufacturers on developing distributed solar policies and projects in Latin America.

Aug 15, 2018 | Governance, Resources | 0 comments

Private citizens have proved able to reduce their communities´ carbon footprint while stimulating their local economies through the use of distributed generation (DG) technologies. Several Latin American countries are in the process of developing new energy transition initiatives in an effort to combat climate change and secure low energy costs for their citizens. In addition to auctions for large scale projects, new solar DG programs are now becoming popular. Early adopters from large cities and small towns in Japan, Germany and California used monetary incentives to create local markets staring in the mid 1990s. As markets grew and technology costs decreased, countries in Latin America started to implement policies that enable the interconnection of PV for homes and businesses. Growing electricity costs and governments´ desires to eliminate energy subsidies are encouraging policy makers and citizens look at DG solutions.

Policies can make or break a PV market. There are two main principles I believe to be essential in order to create sustainable DG markets.  Looking at lessons learned from early adopters such as California, the leading PV market in the Americas will help develop successful policies. Certainty, and consistency in a PV program implementation will encourage market participants to invest in locally deployed clean energy technologies and deliver long lasting markets.

 

Learning From Mature Markets

Why is California the leader? First, it has more than 6GWs worth of PV capacity installed as part of its California Solar Initiative that started in 2007. Second, the market has continued to grow after the direct subsidy program ended. The initiative had a $3billion budget with the goal to install 3GWs within ten years to transform the market and make solar ubiquitous throughout the state. Third, more than 100,000 jobs were created by 2016 and hundreds of new small companies were born across cities and counties.

California is also leading the country in the adoption of residential & commercial energy storage devices and electric vehicles. I would dare to say that the CSI program opened the door to these latest technologies since the affordability of PV and the volatility of gas prices plus the uncertainty of electric utility rates led urban dwellers to adopt them.

Mexico, the Latin American leader, started their development of solar DG markets in the mid 2000´s when a net metering law was enacted for DG projects up to 500kW. The market gained momentum in the last five years as the prices of PV have been dramatically reduced. Unlike California, Mexico’s DG program never had monetary incentives because global PV prices were low enough for citizens to purchase without them. Now, thousands of solar companies are competing in most large metropolitan areas such as Baja Califonia’s Tijuana and Mexicali, Mexico City, Guadalajara, Hermosillo, and others.

When California started to implement its program, other states such as New Jersey, Arizona, and Nevada, started theirs. None has had the success of California because they lacked the main ingredients of transparency and certainty. Unlike California, these markets had mechanisms that were unclear to residential/commercial customers such as the trading of renewable energy credits in New Jersey. The attempt was to treat DG as utility projects and create a spot market for the trading of credits starting with a high price, which was a huge boon for early adopters, but when credit prices were low because of high PV penetration, the market collapsed. While not dead, New Jersey’s PV market pales in comparison to California.

Nevada and Arizona, with a high potential for producing energy from the sun, started out on the right path by applying ingredients from the California program such as net metering and declining monetary incentive. Unfortunately, regulators changed the rules for net metering, or in the case of Nevada, ended the program. This caused a collapse in the market of Nevada and slow growth in Arizona. Many companies left the state and/or laid off workers.

California has managed to actually accelerate its growth after monetary incentives ended, however, new regulation to change electricity rates threaten to reduce payback times for solar customers. To fight back, communities are looking at new decentralized utility models called Consumer Choice Aggregation where cities and counties take away investor-owned utility´s role of procuring energy. The city/county would be responsible for deciding which kind of electricity will be supplied in order to favor renewable generation and support DG.

In addition, citizens are buying battery systems and managing their own demand through the Internet of Things (IoT) devices to deal with the tariff changes and improve their energy efficiency. The new regulations are also increasing demand for energy storage. Hence, the DG market in California may slow down, but popularity and resiliency will likely keep it moving while adding new technologies.

 

Principle of Transparency

Market rules and regulations must be clear, simple, and visible to all market participants. They should allow for fair competition and for reasonable returns on investment. This way, sellers and buyers are encouraged to make investments.

In case of California, the Public Utilities Commission published a guidebook for installers of PV, set up quarterly workshops in the first couple of years to train providers. The public had access to online information and a database that provided information on installed system costs at a specific zip code, who the providers were, and which equipment they used.

For the providers and contractors, the rules were that the equipment must have certain specifications and the contractors had to be trained and certified. This gave the buyers confidence. I know of no other program with such granular data available to the world.

Perhaps emerging markets don’t need detailed data to be public, but making rules clear easy to follow will encourage participation. My recommendation is to take the California’s menu of requirements and pick or substitute what can be applied to each market. Maybe new ideas will emerge where others can copy.

 

Principle of Certainty

New Jersey was a big market at the beginning of the program because the renewable credits were priced extremely high vis-à-vis the electricity rates, but the market crashed within a few years because when too many credits came to the market early on, prices or renewable credits collapsed and ROIs were either unpredictable or too low to make an investment.

California’s program had a visible road map, which ushered in creative financing mechanisms such as power purchase agreements (PPAs) and leases. As the market weaned itself from subsidies and kept growing, new financing mechanisms were created such as PACE financing where home owners could take a loan for the PV system and pay it over 20-30 years along with his/her property taxes. Many banks and credit union have entered the market offering interest rates that afford an acceptable payback for the home or business owner.

Being confident that a return on one’s investment will be realized is all one may need to decide whether to buy or not. When the net metering in California was established, anyone could calculate their ROI, but now that the electricity rates are likely to change and disadvantage solar users, market has begun to slow down because payback times are no longer easy to discern. Rules and incentives should be consistent to keep markets growing. Emerging markets should study California closely to make sure they address potential disruptions and prevent from crashing their markets. 

I also believe that the strong DG market in California has helped the deployment of electric vehicles (EVs). Solar and EVs pair perfectly.  Volatile gasoline prices and lower costs of solar technologies have created the perfect incentives to invest in EVs and PV.

 

Conclusion

Clean solar distributed energy helps cities and states achieve their emissions reductions goals and benefits local and global economies. It creates new technology transfers and jobs for unskilled and skilled workers. From roofers and electricians to accountants and CEOs are employed at local solar companies. This in addition to the hundreds of jobs from equipment manufacturers and suppliers with offices and warehouses throughout cities and counties.

Combatting climate change cannot longer be considered unaffordable. Mexico took advantage of the low cost PV to create a market without monetary subsidies and other countries in Latin America are currently working on program to promote DG. Policy design and implementation is key to helping DG markets succeed. Learning from mature markets and adapting what worked, avoiding what failed will help local communities accelerate the adoption of distributed clean technologies like PV, energy storage and EVs.

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