Tuesday, November 24, 2015

Using Market-Based Approaches to Set Roof Top Solar Feed in Tariff Contract Prices

In the past rooftop solar feed in tariffs have been set by governments, government bodies such as productivity commissions and sometimes power retailers.  These FIT's have ranged from obscenely profitable down to unfair rip-off's.
Governments have also tried to use FIT price as a crude mechanism for controlling the rate of installation.  The result has been a rooftop solar business that has gone through a number of boom/bust cycles.

In addition, the cost of solar has been dropping rapidly.  What is a fair price now may be a very generous price when the next price review comes up.  This failure of FIT price to keep up with falls in the cost of solar adds to the boom bust cycle.

What is suggested here is that we need a market based system for setting the price for FIT contracts and possibly setting some control on the rate at which new solar is installed.

What is suggested here is one simple variation of the normal competitive tendering process that could be used.  The steps are:
  1. The government periodically puts out a call for bids for FIT contracts. The call will specify the total new contract mW that will be accepted and may put on other conditions.
  2. Individual householders put in a bid for a contract stating the nominal kW they want to install and the minimum FIT they are willing to accept for the contract.
  3. When bids close, the government will accept bids starting with the lowest and continue until the total kW target has been reached or the bid prices are too high to be acceptable.
  4. All the successful bidders will be offered a contract at the highest price accepted. (Aim here is to encourage bidders to bid low so that they have a good chance of being accepted.)
  5. The successful bidders will pay a deposit that will be repaid when their new system is working.
  6. Successful bidders have a limited amount of time to sign a contract for installation of the system.
NOTE: Solar installers or others may be allowed to bid for some of the contracted capacity and be allowed to offer installation plus contract.

Key benefits include:
  1. Competitive bidding helps keep prices low.
  2. Calls for bids several times a year means that FIT's will drop in line with the falling price of solar.
  3. The government has some control over the rate at which solar is being installed. (This helps make solar a stable business.)
  4. The government can put limits on upper price and limit call for bids to particular areas, west facing houses, etc.
NOTE: The predictability of returns under gross FIT's will help drive prices down during this bidding process.  However, if necessary this bidding process could be used for contracts based on net FIT's.

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