HKS703

CaseNumber1963.0


ThiscasewaswrittenbyLeahStokes,Ph.D.candidateinEnvironmentalPolicyandPlanningattheMassachusetts
InstituteofTechnologyandHenryLee,SeniorLecturerinPublicPolicyatHarvardUniversitysJohnF.KennedySchoolof
Government.SupportforthecasewasreceivedfromtheHarvardKennedySchoolsSlateProgram.HKScasesare
developedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimary
dataorillustrationsofeffectiveorineffectivemanagement.

Copyright2012PresidentandFellowsofHarvardCollege.Nopartofthispublicationmaybereproduced,revised,
translated,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeanswithoutthe
expresswrittenconsentoftheCaseProgram.Forordersandcopyrightpermissioninformation,pleasevisitourwebsite
atksgcase.harvard.eduorsendawrittenrequesttoCaseProgram,JohnF.KennedySchoolofGovernment,Harvard
University,79JohnF.KennedyStreet,Cambridge,MA02138.
GainesvilleRegionalUtilitiesFeedinTariff

Introduction

InJune2010,EdRegan,theAssistantGeneralManagerforStrategicUtilityPlanningatGainesville
RegionalUtilities(GRU),wasputtingthefinishingtouchesonhispresentationtoGainesvillesCity
Commission.Astheprojectspolicymanager,hewastaskedwithprovidinganassessmentofthe
performanceofGRUsfeedintariff(FIT)programforsolarenergy.Thetariffs,whichprovidedgenerators
withfixedtwentyyearcontractstopurchasealltheelectricityproducedfromtheirsolarsystemsata
guaranteedrate,wasanewideaintheUnitedStates,andGRUwashailedasapioneerinthisarea.
Afteroperatingforjustoverayear,theGainesvilleprogramhadrunintoseveralproblems.Givena
tightcapacitycapof4MW,theentirequeueforthefirstyearwasfilledonlythreeweeksafterthe
programslaunch.
1
Withinsixmonths,theentireeightyearallotmentof32MWwasfilled.This
unanticipateddemandraisedconcernsthattheFITratemayhavebeensettoohigh.Further,manyofthe
projectdeveloperswerefromcompanieslocatedoutsideofFlorida,underminingtheCommissionsgoalof
creatinglocaljobs.Aftertwelvemonths,somecontractsremainedunfilled,whileotherprojectswere
missingtheirdeadlines.Aprogramthatwaslaunchedwithsuchpositivefanfarewasfacingahostof
unanticipatedproblems.TheseresultsleftGRUfrustratedandpresentedReganwiththetaskoffiguringout
whattodonext.
In2008,EdReganhadtheopportunitytovisitGermanyonatourwiththeSolarElectricPower
Association,aconsortiumofelectricutilitiesandsolarcompanies.
2
Thisfactfindingtripaimedtoexpose
U.S.utilitymanagerstoGermanysexperiencewithsolarenergy.AshedrovearoundtheGerman
countryside,hewasstaggeredbytheextentofsolarinvestment.Thetripmadeitclearthatthefeedin
tariffpolicywastransformingthecountrysrenewableenergymarket.Hewonderedifsomethingsimilar
couldworkinGainesville.
WhenReganreturnedtoFlorida,hebegantofloattheideaofaFITasameanstoincreasesolar
deployment.Beforelong,hewasinfrontoftheCityCommission,proposingthatGRUimplementaversion

1
AnthonyClark,GRUSurpassesSolarFeedinCapfor2010TheGainesvilleSun,March5,2009,
http://www.gainesville.com/article/20090305/ARTICLES/903051029?tc=ar.
2
FormoreinformationaboutSEPAsSolarFactFindingMissionforUtilities,see
http://www.solarelectricpower.org/events/factfindingmissions.aspx.

HKSCaseProgram 2of25 CaseNumber1963.0

oftheFIT.WhenthepolicywasapprovedinFebruary2009,itbecamethefirstFITintheUnitedStates.The
moodwasanticipatoryandcitizenswereexcitedtoparticipatebyputtingsolarsystemsontheroofsof
theirhomesandbusinesses.GRUsimagewiththeenvironmentalcommunitybothlocallyandnationwide
wasdramaticallyenhanced.
Yet,beingapolicypioneercamewithseriouschallenges.Bymid2010,manyprojectswereleft
unimplemented,fewcitizenswereabletoparticipate,andlittlelocaljobcreationhadoccurred.Afterayear
andahalf,theCityCommissionandtheGeneralManageratGRUwerenotsuretheimplementation
hurdlescouldbesolved.AsReganreflectedonthelastseveralmonths,hewonderedwhetherthepolicy
shouldbeexpanded,redesignedorperhapscancelledaltogether.
GainesvilleRegionalUtilities
Gainesville,locatedinnorthcentralFlorida,ishometotheUniversityofFlorida.Theutility,GRU,is
verticallyintegratedandmunicipallyowned.Itserves94,000electricitycustomersscatteredover125
squaremilesofnortheasternFlorida.Inadditiontoelectricity,thecompanyprovidesfourotherutility
services:naturalgas,telecommunications,waterdistribution,andwastewatertreatment.However,power
salesremainitsmainsourceofrevenue.
AGeneralManager,RobertE.Hunzinger,whoreporteddirectlytotheCityCommission,headed
thecompanyin2010.TogethertheMayorandthesixCityCommissionersdirectedthecompanys
managementandservedasitsregulatoryagency,approvingtariffsanditsbudget.Becauseofthelowtax
baseinGainesville,theCityCommissionreliedheavilyonGRUforrevenue.In2009,GRUcontributedabout
35%oftherevenuesthatwentintothecitysGeneralFund.GRUscontributionswerecrucialtocity
operations,andgrewyearoveryearfrom$19.3millionin1995to$27.2millionin2004.EdReganwasin
chargeofstrategyandplanningforthecompany.HestartedwithGRUin1982andquicklyrosethroughthe
ranks.
ThePendingPowerShortage
In2003,GRUidentifiedalongtermneedforadditionalbaseloadcapacityandundertookastudy
todeterminewhattypeofpowergenerationcouldbestmeetthisneed.Atthetime,nearly70%ofGRUs
powercamefromcoalgeneration,25%fromnaturalgas,2.5%fromnuclearpowerandtherestfrom
burningoil(seeExhibit1).Withoutnewinvestmentincapacity,GRUwouldhavetoimportlargeamountsof
powerwithinthedecade,exposingtheirratepayerstohigherratesandgreatervolatility.
3

Naturalgaspriceshadincreasedintheperiod19992004leadingtoadditionalfuelcharges,and
forthisreason,furtherinvestmentinnaturalgasseemedpoliticallyproblematic.
4
HavingworkedwithGRU

3
AshleyRowlandandKathyCiotola,GRUsPowerExpansion,September3,2003,
http://www.gainesville.com/article/20030903/LOCAL/30903010?tc=ar.
4
TimLockette,GRUCustomersWillSeeaPriceHike,March1,2000,
http://www.gainesville.com/article/20030301/LOCAL/303010016.

HKSCaseProgram 3of25 CaseNumber1963.0

forthirtyyears,Reganhadseentherateimpactsfromfuelpricevolatility.Duringtheearly2000s,billswere
risingmonthly,withthenewspaperpublicizingeveryratehike.Inshort,therewasnoeasyanswertohow
besttomeetGRUscapacityexpansionneeds.
AstheheadofGRUsStrategicPlanningteamatthetime,EdReganplayedakeyroleinthisdebate,
attendingpublichearings,speakingwiththepressandpresentingtotheCommission.Atpublichearingsin
2003and2004,citizensproposedanumberofoptions,includingsolar,biomass,nuclear,wind,
conservation,electricityimportsandincreasedgenerationefficiency.Despitenumeroussuggestionsto
movetogreateruseofrenewables,GRUdecidedtostaywithfossilfueledgenerationandproposeda
secondgenerationunitnexttoitsexistingcoalplant.Thenew557MWunitwouldgeneratecoalfired
poweratapproximately$42/MWh.AplantofthissizewouldrequireGRUtofindanotherutilitypartnerto
investintheplant,since557MWwasinexcessofGRUsprojectedneeds.Asmallercoalgeneratingplant
(220MW)wouldbeslightlymoreexpensive,withcapitalcostsfivetotenpercenthigher.
TheproposedcoalunitsparkedapassionatepublicdebateonGainesvilleselectricitymix.Citizens
raisedconcernsaboutthecostandsizeoftheunit,arguingGRUcouldendupwithlarge,strandeddebtif
demandgrewlessthanforecasted.Climatechange,airpollutionandenergyindependencewerealso
frequentlydiscussedasreasonsnottoendorsethecoalplant.Inanattempttoquellitscritics,GRU
proposedtobuildasmalleraddition,220MW,nexttoitsexisting218MWstation.Theentireprojectwould
cost$555millionandwouldmeettheutilitysforecastedneedforbaseloadcapacity.Further,theproject
wouldincorporatestateoftheartpollutionabatementtechnologiesintotheexistingplant,decreasing
particulateemissions,nitrogenoxide,sulfurdioxideandmercury.Theplantwouldalsobemoreefficient
andmoreflexibleabletoburnwoodproductsaswellascoal.Atthetime,ReganarguedThisisthe
biggestpollutioncontrolprojectthathasbeenproposedforAlachuaCountyinthelasttwentyyears.
5

Yet,citizensremaineduncomfortable,callingforanindependentenvironmentalreviewofthecoal
plantinordertobuytimetoevaluatealternativeproposals.Theyarguedthatthecoalplantwouldclearly
raisegreenhousegas(GHG)emissions,nearlydoublingtheplantsexistingemissions.Withthepotentialfor
federalcarbonregulationsloomingonthehorizon,unanticipatedcostscouldbesteep.Tocountertheir
critics,GRUagreedtospend$7.1millionbetween2005and2011toreduceGHGemissionsassociatedwith
thenewplant.
6
Still,thecriticswerenotsatisfiedandtheyaskedtheCityCommissiontoconductan
independentreviewoftheproposal.Whenthereviewcamebackin2006,itsuggestedthatavastmajority
ofGRUsneedforadditionalbaseloadcapacitycouldbemetthroughpotentialenergyefficiencysavings,
andthatanewlargecoalplantmightnotbeneeded.
7
Instead,thestudyrecommendedthata100MW

5
GregC.Bruno,OutsideStudySoughtonGRUPlantEmissions,February22,2004,
http://www.gainesville.com/article/20040222/LOCAL/202220331?tc=ar.
6
JeffAdelson,GRUEyesPlanstoReduceCarbonEmissions,December15,2004,
http://www.gainesville.com/article/20041215/LOCAL/41215005?tc=ar.
7
Theconsultingstudyfoundshortfallincapacitywasminimal,with100MWneededby2020.ICFConsulting,Cityof
GainesvilleElectricitySupplyNeeds,March1,2006.

HKSCaseProgram 4of25 CaseNumber1963.0

biomassplantbeconsidered.Finally,in2007,thenGovernorCharlesCristplacedadefactomoratoriumon
allnewcoalplantsinFlorida,whichputafinalstoptoanycoalproposal.
Thecontroversyoverthecoalfacilitywasintenseandeventuallyresultedintheresignationof
GRUsGeneralManagerandtheappointmentofRobertE.Hunzingertotheoffice.Hunzingerhad
previouslybeenGeneralManageratOwensboroMunicipalUtilitiesinwesternKentucky,andhecameto
thecompanyunweddedtothepreviousstrategy.Withthefailureofthecoalfacilityproposal,hewas
preparedtolookatGRUsneedswithanopenmind,andtheCommissionsmandatewasclear:they
wantedrenewablesandconservation,atalowcost.
Duringthesameperiod,Gainesvilleinitiatedaplantoreduceitsgreenhousegasemissionsto1990
levelsby2013.Theirstrategyformeetingthisgoalreliedheavilyonchangingtheenergysupplymix,from
1%relianceonrenewableenergyto22%.
8
SinceGRUhad~600MWofcapacity,Gainesvilleneededaround
130MWofrenewableenergycapacitytomeetthistarget;overall,Gainesvilleneededtoreplace18%ofits
existingenergysupplymixwithrenewableenergyalternatives.GRUconsideredtwonewoptions:rapidly
increasedsolarPVdeploymentandinvestmentinanewbiomassplant.
Inthelate2000s,GRUhadalreadyexperimentedwithavarietyofprogramstoincreasesolar
installations.FromJanuary2007toFebruary2008,GRUofferedasmallsolarPVrebateprogram,which
supplementedalargerprogramatthestatelevel.
9
Overthisperiod,109kWofsolarPVwereinstalledin
GRUsterritory,amodestachievement.
10
Yetearlyparticipantswerenotabletomakeafinancialreturn
fromsupplyingenergytothegrid.In2007,solarelectricitysoldtoGRUwasonlypaidtheretailrateof
~10/kWh.
Beginninginearly2008,anetmeteringprogramwasimplemented.Thispolicyallowedexisting
GRUcustomerstoinstallsolarsystems,feedtheelectricityintothegrid,andsubtracttheirgenerationfrom
theenergyuseontheirbills.Overthisperiod,thenetmeteringprogramhadsomesuccess,andbyOctober
2008atotalof349kWofsolarwasinstalledinGainesville.However,despitethesetwoprograms,growth
insolarenergycapacityremainedquitemodestgiventheoverallsizeofGRUscapacityneeds(seeExhibit
6).Withnetmetering,itwasdifficultfordeveloperstoinvestinsolariftheydidnotownthebuilding.
Further,theprogramsstructurewaserodingGRUsrevenuestream,andthereby,revenuefortheCity
Commission.Netmeteringdidnotprovidestrongperformanceincentivessincepaymentsweremodest,
andinthecaseoftherebatepaymentswereonlymadeatthetimeofpurchase.Asaresult,Gainesvillehad

8
PegeenHanrahan,Gainesville:TheNationsFirstSolarFeedInTariff,Presentation,
http://www.communityinpower.com/resources/Pegeen.Boulder.pdf.
9
Theprogramoffered$1.50/W.
10
GainesvilleRegionalUtilities,NetMeteringCustomerOwnedRenewableGeneration,Presentation,Regional
UtilitiesCommittee,March19,2008.

HKSCaseProgram 5of25 CaseNumber1963.0

manyinactive,abandoned,andpoorlymaintainedsystemsthatfailedtoprovidetheongoingenergythat
waspromised.
11

Aroundthesametime,GRUimplementedanenergyefficiencyprogram.AlthoughGRUhadmade
significanteffortstoexpandconservation,itarguedthattheseprogramsprovedinsufficienttomeettheir
forecastedneeds.Further,theGainesvillecommunityalreadyhadastrongconservationethic,withthe
lowestpercapitaresidentialelectricityconsumptioninthestate.
12
Newcapacitywasstillneeded.
GRUbeganpursuinga100MWbiomassplanttoincreaseitscapacityreserves.Theplantwouldbe
builtbyaprivatecompany,AmericanRenewables,andwouldcostaround$500million.Powerwouldbe
suppliedthroughathirtyyearpowerpurchaseagreementat13/kWh.Theplantwasseenasagood
alternativetocoalbecauseitwouldhaveasmallerenvironmentalimpact;ratherthanburningfossilfuels,
theplantwouldburnwoodchips.AlthoughtheproposalwasunanimouslyapprovedbytheCommission,
citizenadvocatesbegancriticizingtheprojectonbothfinancialandenvironmentalgrounds,arguingthatit
wastooexpensive,wasnotcarbonneutral,andwouldrequiretoomuchwater,especiallyforawater
stressedregionofthecountry.
FeedinTariffPolicies
Overthepasttwodecades,FITshavegrowninprominencegloballyasapolicytooltoincrease
renewableenergy.ComparedtotheUnitedStates,Europeancountrieshaveactedmoreaggressivelyon
decarbonizingtheirenergysupplythroughrenewableenergydeployment.TheEUembracedatargetfor
20%ofitselectricitytobeproducedfromrenewablesby2020;by2010Europewashalfwaytothistarget.
AmbitiousEuropeancountries,includingGermanyandSpainadoptedanevenhigher30%goal.Tomeet
thesegoals,manyEuropeancountriesoptedforaFITmodeltoincreaserenewabledeployment(seeExhibit
2).WithinNorthAmerica,Ontario,CanadaslargestProvince,plannedtophaseoutcoaluseby2014and
add10,000MWsofnewlyinstalledrenewablecapacityby2015throughaFITpolicy.
Withoutasufficientlyhighcarbonpriceoranothermechanismtointernalizeelectricitygeneration
externalities,thehighcostsassociatedwithrenewableenergytechnologiesmeanttheyrequiredother
formsofgovernmentsupporttoacceleratetheirdeployment.AFITpolicywasoneofseveralanswersto
thisproblem.Althoughthereisgreatvariationinpractice,aFITpolicyhasthreetypicalcomponents:
1) Astandardpurchasepriceforelectricitygenerationfromaspecifictypeofgenerationoption.(i.e.
12/kWhforonshorewindelectricity.Theactualpricewillvarybyjurisdictionandtechnology.)

11
JohnCrider,GainesvilleRegionalUtilities,ImplementingtheGainesvilleFeedInTariff.
http://www.oregonrenewables.com/Assets/Reports/Implementing_the_Gainesville_Feed_In_Tariff.pdf.
12
GainesvilleRegionalUtilities,GainesvillesEnergySupplyPlan,Presentation,June1,2011.

HKSCaseProgram 6of25 CaseNumber1963.0

2) Arequirementtopurchaseallelectricityatthisprice(musttakeprovision)andaccesstothegrid.
However,ifthepowerisnotprovided,thesystemownerisnotpaid.Inotherwords,aFITisa
performanceincentive.

3) Alongtermcontract,oftenforfifteentotwentyfiveyears.
Together,theserulesaimtoprovideastableinvestmentframeworktoincreaserenewableenergy
deployment.
13
Withahighenoughprice,arequirementtobuyalltheelectricityandalongtermcontract,
investorscanbeassuredthattheywillrecouptheircostsandmakeareasonablereturn.
Inpractice,FITsareadiverseclassofpolicyinstruments,whichhavevariedtremendouslyintheir
designandimplementation.AFITcanbeusedforalmostanytypeofelectricity,includingsolar,wind,
biomass,smallscalehydropower,landfillmethanecaptureandgeothermalenergy.FITscanbedesignedto
differentiatebetweenthesizeoftheinstallation(e.g.5kWto10MW),thetypeoftechnology(e.g.solarPV,
wind)andthepriceinanygivenyear(e.g.adecliningtariffovertime).Afeedintariffsflexibilityisseenas
oneofitsmainstrengths,asgovernmentsupportcanbetailoredtothetechnologyscosts,andthereby,its
stageofdevelopment.
Inmostcases,aFITisapricebasedpolicymechanism,meaningthecapacityisuncertainand
dependsontheunderlying,unknowncostcurve.Thisisincontrasttoarenewableportfoliostandard(RPS),
whichsetsthequantitybutletsthemarketdeterminetheprice.TheuncappedqualityofsomeFITshasled
toexplosivegrowthinrenewableenergy,makingtherateimpactsforconsumersdifficulttomanage.
Takentogether,aFITisoftenviewedasapolicyapproachtobuildnewmarkets,decarbonizethe
electricitysystemanddrivetechnologicalchange.
14
FITsarearguedtobeaneffectivepolicymechanism
becausetheyreduceriskonthepartoftheinvestor,andthereby,reducethecostoftheoverallmechanism
(theriskpremium).
15,16
TheEuropeanCommissionechoedthisviewpointin2008,stating,welladapted
feedintariffregimesaregenerallythemostefficientandeffectivesupportschemesforpromoting
renewableelectricity.
17
Inaddition,FITsallowfordiverseparticipationacrosssociety,sinceindividual
pricesandcontractsdonothavetobenegotiated.Thisdesignallowssmallscaleandcommunitybased
projectsinloadcenterstoparticipate,increasingdistributedgenerationcapacity.Inaddition,largeprojects
areabletouseaFITcontractasapowerpurchaseagreement,enablingthemtosecurefinancing.

13
C.Mitchell,D.Bauknecht,andP.M.Connor,EffectivenessThroughRiskReduction:aComparisonoftheRenewable
ObligationinEnglandandWalesandtheFeedinSysteminGermany,EnergyPolicy34,no.3(2006):297305.
14
Jacobsson,StaffanandVolkmarLauber,ThePoliticsandPolicyofEnergySystemTransformationExplainingthe
GermanDiffusionofRenewableEnergyTechnology.EnergyPolicy34,no.3(2006):256276.
15
C.Mitchell,DBauknecht,andP.M.Connor,EffectivenessThroughRiskReduction:aComparisonoftheRenewable
ObligationinEnglandandWalesandtheFeedinSysteminGermany,EnergyPolicy34,no.3(2006):297305.
16
MiguelMendonca,FeedinTariffs:AcceleratingtheDeploymentofRenewableEnergy(EarthscanPublicationsLtd.,
2009).
17
EuropeanCommission,TheSupportofElectricityfromRenewableEnergySources,(2008).

HKSCaseProgram 7of25 CaseNumber1963.0

Renewableadvocatesarguethatrenewableenergyisrelativelyimmatureandthusshouldreceive
deploymentsubsidies.Asdeploymentincreases,innovationtheoryassertsthatpricesshoulddecline,in
whatisoftentermedtheexperiencecurve.
18
Feedintariffpoliciesareoftendesignedrecognizingthisfact,
withdegressionschedulesthatdecreasethepriceovertime.Inthisway,solardevelopersthatsignuplater
receivealowerprice,reflectingprojecteddecreasesinequipmentandinstallationcosts.Intheory,this
provisionencouragesearlyadopterstotakefinancialriskandspursinvestment.
AlthoughFITshavebeensetformanytechnologies,solarPVandwindarethemostcommon.Solar
photovoltaic(PV)technologyisrelativelyimmature,andinpartbecauseoflimiteddeployment,remains
quiteexpensive.Comparedtoconventionalelectricitygeneration,solarprojectshavehigh,upfrontcapital
costsandlowoperationalcosts.SolarPVsystemsgenerateelectricityindirectcurrent(DC),andthus
typicallyrequireaninvertertofeedintothealternatingcurrent(AC)grid.Thesesystemscanbeinstalledin
adistributedmanner,ontheroofsinurbanenvironments,orcanbelargescalegroundmountedsystems,
typicallyinruralareas.Solarinstallationscanrangeinscalefrom1kWto100MW.Largescaleground
mountedsystemsbenefitfromeconomiesofscaleandaretypicallylowercostonakWhbasis,asroofs
mayoftenneedupgradesbeforeinstallingthesystem.Homeownersandcommercialpropertyownerscan
applydirectlyorleasetheirroofspacetoathirdparty,whoisabletotakefulladvantageoftheavailable
stateandfederaltaxincentives.
FITsforSolarinGermanyandSpain
AlthoughFITpoliciesnowexistglobally,thefirstFITpolicywaspioneeredinGermany.
19
In1990,
GermanypassedtheFeedinLaw,whichincludedaprogramaimingtoputsolarPVson1,000rooftops.By
1993,5.3MWofsolarPVwereinstalled.
20
Atthesametime,severalmunicipalutilities,includingAachen,
beganimplementinglocalFITs.In2000,GermanyreformeditsFITpolicy,passingtheRenewableEnergy
SourcesAct,whichfixedcontractswithrenewableenergygeneratorsfortwentyyearsandincludeda
degressionschedule.Overtime,theprogramexpandedwithFITratesforanumberofdifferent
technologies,includingonshorewind,offshorewind,solarPV,biomass,hydropowerandgeothermal.
21

Underthisnewprogram,theratesforsolarPVwereconsiderablymoregenerousthaninthe
1990s.By2003,thesolarPVrateswereraisedagainto5457eurocents/kWh,dependingonthesizeofthe
project.
22
TheseincreasedpricesledtoalargesolarboominGermanybeginningin2004.Overtime,prices

18
BobVanderZwaanandAriRabl,TheLearningPotentialofPhotovoltaics:ImplicationsforEnergyPolicy,Energy
Policy32,no.13(2004):15451554.
19
SomeconsidertheUSPublicUtilitiesRegulatoryPoliciesAct(PURPA)of1978asthefirstFIT,althoughpricesinthat
casewerebenchmarkedagainstoilprices.
20
VolkmarLauberandLutzMez,ThreeDecadesofRenewableElectricityPoliciesinGermany.Energy&Environment
15,no.4(2004):599623.
21
JudithLipp,LessonsforEffectiveRenewableElectricityPolicyfromDenmark,GermanyandtheUnitedKingdom.
EnergyPolicy35,no.11(2007):54815495.
22
In2008,thecurrencyexchangeratewas$0.711to1Euro.

HKSCaseProgram 8of25 CaseNumber1963.0

declined,andby2008theFITpricesrangedfrom3143eurocents/kWh.
23
InGermany,therateswere
calculatedbytakingallcapitalandoperatingcostsintoaccountandaddinga7%premium(seeExhibit3).As
aresultofthehighercosts,theFITforsolarPVwassignificantlyabovetheretailpriceforpower.Toassure
thatthisincrementalcostdidnotfallunevenlyonafewutilities,andthereforetheircustomers,costswere
equalizedacrosseveryconsumerinthecountry.Underthisprogram,neithertheutilitynorthegridhadthe
optiontorefusetopurchasepowerfromaFITeligiblefacility.Thepricewasfixedandthusinvestorsknew
thepreciselevelofcompensationoverthecontractstwentyyearduration.Asaresultofthepolicy,
Germanyledtheworldformostinstalledsolarcapacity,accountingfornearly50%oftotalworldsolar
capacityin2009(seeExhibit4).
TheGermanFITwasperceivedbymanyasahugesuccess,havingstimulatedtheproductionof
64,000GWhsofrenewableelectricitytwothirdsofwhichwerefromwindandsolar.Germanycurrently
producesmorethan15%ofitspowerfromrenewablesources.ConsideringthatGermanyisoneofthe
worldscloudiestnations,thisisanimpressiveachievement.OneestimatefromtheGermanMinistryofthe
Environmentfound250,000peopleemployedintherenewableenergysectorby2007(50,000insolarPV),
withprojectionsof400,000jobsby2020.Still,theneteffectwasunclear,asthesejobsmayhavealso
representeddeclinesinjobsinthefossilfuelsector;whilethegovernmentprojectedanetgainof50,000to
120,000jobsby2020;otherstudiesfoundlossesof~20,000jobswithintwentyyears.
24
Asthesefindings
suggest,documentingjobcreationfromrenewableenergyislessthanstraightforward.
Bythebeginningof2010,Germanvoters,miredintheeconomicdownturn,startedtocomplain
thattheprogramwastooexpensiveandoverlyregressive,thatis,adisproportionatecostburdenfellon
lowincomeusers.SomeGermanutilitiesalsocomplainedthathavingtoconnectthousandsofsmall
renewableproducerswasbothcostlyandinefficient,notonlyincreasingtheircosts,butmakingtheoverall
systemlessreliable.SomeelectedofficialssupportedloweringtheFITprices,butothersarguedthatsuch
actionwoulderodetherenewableindustriesthatGermanyhadcreated.
In2007,SpaininstitutedasimilarprogramtoGermanysFIT,withapricesetat44eurocents/kWh
forthefirstyear,andagoalofdeploying400MWby2010.
25
Interestintheprogramwassostrongthatthe
400MWtargetwassurpassedwithinthefirstyear,threeyearsaheadofgovernmentprojections.
26
Inshort,
theSpanishgovernmentmiscalculatedhowquicklysolarpanelscouldbeinstalled.Theproblemsmultiplied
assolarPVcostsdroppedsignificantlyduringthisperiod;thesechangesallowedforearlyinstallersto

23
VolkmarLauber&LutzMez,ThreeDecadesofRenewableElectricityPoliciesinGermany,EnergyandEnvironment
15,No.4,July15,2004,pp.599623.
24
HannesWeigtandFlorianLeuthold,ExperiencewithRenewableEnergyPolicyinGermany,inHarnessing
RenewableEnergyinElectricPowerSystems.Eds.BoazMoselle,JorgePadilla,RichardSchmalensee.(WashingtonDC:
Earthscan.2010).

25
BenSills,Spain'sSolarDealsonEdgeofBankruptcyasSubsidiesFounderBloombergMarketsMagazine,October
18,2010,http://www.bloomberg.com/news/20101018/spanishsolarprojectsonbrinkofbankruptcyassubsidy
policiesfounder.html.
26
PaulVoosen,Spain'sSolarMarketCrashOffersaCautionaryTaleAboutFeedInTariffs,August18,2009,TheNew
YorkTimes,http://www.nytimes.com/gwire/2009/08/18/18greenwirespainssolarmarketcrashoffersacautionary
88308.html.

HKSCaseProgram 9of25 CaseNumber1963.0

capturelargerents,sinceunlikeGermanysprogram,therewasnoautomaticdegressionscheduleas
capacityincreased.Inresponse,theSpanishgovernmentdroppedthetariffsby30%inSeptember2008,
leadingmanysolarcompaniestoarguethatthepolicywentfromboomtobustwithinayearandahalf.
Overthisshortperiod,3GWofsolarwereinstalled.
Atthispoint,thegovernmentreformedthepolicy,institutingquarterlytariffrevisionsandahard
capof500MWfor2009and460MWfor2010.However,evenwiththesechanges,problemscontinuedto
arise,sincesomanyhighcostcontractsweresignedinthefirstperiod.Spainsfinancialburdenswere
furtheramplifiedbythe2009recession.Withthebudgetproblemsinmind,SpaincuttheeligibleFITrate
paymenthoursforsolarPVinstallationsonDecember232010,notablyincludingexistingcontractsintheir
cuts.
27
Thischangemeantthatsolarinstallationswouldonlyreceiveastandardelectricitypaymentratefor
someoftheirelectricityproductionhours.ThisretroactivedecisiontoreducetheFITpaymentsforsolarPV
by30%broughtswiftcriticismaswellasmultiplelawsuits.TheSpanishFITdifferedfromtheGerman
program.Spaindeliberatelykepttheretailpriceofelectricityartificiallylow.Hence,theutilitiespaidthe
differencebetweentheFITandtheactualtariff.By2009,thisdifferencehadtotaled16billioneuro,which
thegovernmentofSpainhadguaranteedtocover.
AstheGermanandSpaincasesillustrate,settingtheFITpriceandstructureisanadministrative
decisionwithmanyvariables.TherearetwoapproacheswhenestablishingtheFITpriceschedule:(1)value
basedand(2)costbasedpricing.
1) Thevaluebasedapproachaimstopricetheexternalitiesassociatedwithconventionalelectricity
generation.Inthisway,theexternalitiesareinternalizedindirectlythroughadditionalpaymentsto
renewableenergygenerators.Thevaluebasedapproachtypicallyresultsinalowerpriceandonly
onepriceisgivenforalltypesofelectricitygeneration.Asaresult,lessexpensiverenewable
technologies(i.e.wind)maybebuiltratherthanhighercosttechnologies(i.e.solarPV).Inaddition,
therearesignificantchallengesinaccuratelyvaluingtheexternalitiesfromelectricitygeneration.
Thetariffwouldalsochangeasthetariffforpowerfromconventionalfacilitieschanges.

2) Thecostbasedapproachestimatesandpaysforthecostofinstallingagiventechnology,including
aspecifiedreturnoninvestment(ROI).Thisapproachresultsinahigherpriceandspecificprices
foreachtechnology.Thecostbasedapproachhasincreasedrenewableinvestmentmorequickly
andforawiderclassoftechnologies.IftheFITpriceissetbasedoncosts,thenmostprojectswill
beabletorecovertheircosts.Ontheotherhand,itisoftendifficultforregulatorstoknowexactly
howmuchthetechnologywillcost,particularlyinarapidlyevolvingarealikesolarPV.Variationsin

27
Notethechangesalsoincreasedthecontractspaymentperiodbythreeyears,from25to28years.BrunoAlves,
SpainApprovesRetroactiveCutstoSolarSubsidies,PEIInfrastructureInvestor,January27,2011,
http://www.infrastructureinvestor.com/Article.aspx?article=59172&hashID=0B7AED71F349AFA469BC6AFE48A19393E2
ED69EB.

HKSCaseProgram 10of25 CaseNumber1963.0

costsprovideanotherdifficulty,andprojectswithlowerthanaveragecostsmayreceivewindfall
profits.
Sinceafeedintariffisadministrativelyset,thesepoliciesposecomplexproblemsforgovernments.In
essence,theregulatorisattemptingtobalanceeconomicincentivesforrenewableenergywithcost
effectivenessandconsumerprotection,substitutingbureaucraticandpoliticaljudgmentformarket
signals.
28
Givenasymmetricinformation,projectdeveloperswillalwayshavegreaterknowledgeofcosts
thantheregulator.Whatisthecorrectpriceforrenewablecapacity,withoutamarkettorevealtheprice?
GainesvillesetsthepriceandstructureforaFIT
InspiredbytheGermanexperience,inMarch2009,thecityofGainesvillebecamethefirstU.S.city
toadoptafeedintariff(FIT).GRUsetthetariffat32/kWhforrooftopphotovoltaicunitsand26/kWh
forgroundmountedarrays.Theamountofeligiblenewcapacityinanyoneyearwascappedat4MW.The
contractrequiredGRUtobuythepowerandpaythesolarprovidersforeverykWhtheyproducedovera
twentyyearperiod.GiventhattheaverageretailpriceforresidentialcustomersinGainesvilleatthetime
was14/kWh,wholesaletariffsforrenewablesweresignificantlyhigherthanthecostofpowerforGRU
consumers.
InGainesvillescase,thepriceandstructureweredesignedinanumberofsteps.First,the
electricityconsumerswillingnesstopaywasassessedthroughasurvey.Ratepayerswereasked:Would
yousupportoropposeGRUseffortstoencouragesolarenergyinvestmentsinyourcommunityifitwould
addonedollarorlesspermonthtoallcustomersutilitybills?Afull75%ofrespondentsagreedthatthey
wouldsupportsolarenergyatthiscost.
29
FromGRUsperspective,thesurveyresultssetaceilingforany
solarPVpolicyscostandtheconsequentrateincreases.Inthisway,GRUwasaimingtokeeprateincreases
to0.51%annually,oraround75onamonthlybillwhichaveraged$125.Oncethepricewasset,they
wouldusethisupperlimitonthecosttoestablishhowmanyMWofnewsolarcapacitytheycouldaffordto
purchaseeachyear.
Oncetheyhadcalculatedanaveragecostestimateof$8.50perinstalledwatt,GRUhadtoaddress
severaladditionalquestions:
x Towhatextentshouldtheutilityincorporatebothfederalandstatetaxincentiveorrebate
programs?Ontheonehand,includingthemwouldallowGRUtolowertheFIT,butontheother,
therewasnoguaranteethatthefederalincentivesweresustainableoverthe20yearlifeoftheFIT
contracts,andthestaterebatehadalreadybeenallowedtolapse.
x ShouldGRUassumethatallpotentialinvestorscould,eitherdirectlyorindirectly,takeadvantage
ofexistingfederalrenewableenergytaxcredits?

28
JonathanA.LesserandXuejuanSu,DesignofanEconomicallyEfficientFeedinTariffStructureforRenewable
EnergyDevelopment.EnergyPolicy36(2008):981990.
29
PegeenHanrahan,Gainesville:TheNationsFirstSolarFeedInTariff,Presentation,
http://www.communityinpower.com/resources/Pegeen.Boulder.pdf.

HKSCaseProgram 11of25 CaseNumber1963.0

x IfGRUadoptedadegressionschedule,howfastshoulditdecreasethetariff,giventhattherange
ofpossiblecostreductionsforsolarwasverylarge?
x IfthemeasureoftheFITprogramscosttothesystemwasitsimpactontheutilitysfuel
adjustmenthowrapidlywouldconventionalfuelpricesincrease?
x Whatconstitutedareasonablerateofreturnforaninvestmentwithverylimitedfinancialrisks?
(SeeExhibit7forGRUsinitialassumptions.)
WhenGRUinitiallyproposeda26/kWhprice,therewassignificantcriticismfromsolar
developersthatthereturnwastoolow.GRUfeltthatthetariffshouldbeequivalenttothecostofitssolar
rebateprojects.Theinstallersarguedthepriceshouldbehigher,at42/kWh,basedontheircalculations
oftaxes,labor,equipmentcostsandareasonablereturnoninvestment.Essentially,theinstallersargued
thatsolarequipmentcostsremainedhigh,thattaxesfortheFITpaymentshadnotbeenadequately
consideredandthatlaborcostswerehigher.Importantly,theinstallersarguedthata2.5%internalrateof
return(IRR)wasinadequatetoattractfinancing.Instead,theyclaimedthatanIRRinthe1418%rangewas
neededtoattractinvestors.
TheCommissionwassympathetictotheirarguments;asthefirstpolicyofitskindintheUnited
States,theypreferredtohavethepriceinitiallysethigher,andseetheprogramsucceedthanfailduetoa
lowprice.TheCommissioneventuallysetacompromisepriceof32/kWh,providinga5%IRRaftertaxes
given$7.5/Wcosts.Ifa10kWsystemcost$53,000afterthefederaltaxcreditandgenerated~15,000
kWh/year,theprojectwouldgross$95,000overthelifeofthetwentyyearcontract.
30
Thefederaltax
creditwasessential.AsEdReganpointedout,withoutit,GRUwouldhavehadtosettheFITupto60cents
perkWh.However,GRUexpectedthestatetaxcredittoexpireanddidnotincludeitintheircalculations.
Oncethispricewasset,GRUdeterminedthatthecapacitylimitwouldhavetobe4MWannually,
toensurethattheimpactonthefueladjustmentclausewouldbenogreaterthan2.42millsperkWhafter
twentyyears.Afterthefirsttwoyears,GRUproposedpriceswoulddecline5%annually.Yetthisdegression
schedulewastentative,andGRUreservedtherighttoreevaluatepricesinfutureyearsoncetheprogram
began.
Theratewasdifferentiatedbasedonthetypeofinstallation:groundmountedprojectsreceived
lowertariffsthanroofmountedprojects(seeExhibit5).TheirmodelalsoassumedthatPVshada17%
annualaveragecapacityfactor.
31
Goingforward,GRUaimedtoacquirebetterdata,requiringallprojectsto
provideacertifiedstatementofcosts.Thiswouldhelptheutilityrespondtounderlyingchangesin
equipmentandinstallationcosts,modifyingthedegressionscheduleandallowingforbetterpricingin
futureyears.

30
Theseareroundedfiguresgivena0.17capacityfactorandfullutilizationofthe30%federaltaxcredit.
31
Afterimplementingtheprogram,GRUfoundthecapacityfactortobe16%todate.

HKSCaseProgram 12of25 CaseNumber1963.0

GainesvillesFITpolicygoals
InOctober2008,ReganmadehisfirstpresentationontheproposedFITpolicytotheCity
Commission.WhendesigningtheFIT,theCityCommissionandGRUhadtoconsideritsgoalsforthepolicy.
WhatwasaFITabletoaccomplishthatanauctionsystemorlocalRPScouldnot?Howcouldthepolicybe
designedtoensurethoseoutcomes?
WhenMayorPegeenHanrahanconsideredenergypolicyinGainesville,shewaslookingforthree
things:theeconomicviabilityoftheproposalandeffectsonGRUsfiscalposition,thepotentialstabilityof
thepolicyandtheenvironmentalimpactsofthedecision.
x Solardeployment:TheprimarygoalfortheFITwastodeploynewsolarPVgenerationandclose
someoftheutilitysprojectedcapacityshortfall.Forthisreason,theMayorwasconcernedabout
settingthepricetoolow,andwatchingtheprogramfizzlelikethenetmeteringandrebate
programsbeforeit.GRUwasalsointerestedinseeingsolarbuiltquickly,tobringneededcapacity
onlinewithintheirservicearea.

x Minimizingcosts:Fromafinancialperspective,theFITprogramallowedGRUtoinvestinnew
capacitywithouttakingondebt.Instead,projectproponentswouldassumetheriskfordeveloping
solarcapacitysincetheutilityonlypaidforperformance.Iftherewasfaultyequipment,poor
performance,stormdamageorprojectdelays,thedeveloperhadtomanagetheseproblems
ratherthanGRU.Further,theFITwouldleverageexistingfederaltaxincentives,whileprovidinga
hedgeagainstfuturegreenhousegasregulations.

x Publicengagement:Giventhestrongpublicinterestinenergypolicyoverthepreviousfiveyears,
theCommissionwaskeentohavecitizensbenefitfromtheprogram,installingsolarontheirroofs.
Withpreset,simplecontracts,theCommissionhopedhomeownersandlocalbusinesseswould
createdistributedgenerationwithinthecity.Oncetheyengagedwiththepolicyfinancially,the
CommissionandGRUalsothoughttheywouldfindsupportersforthepolicyinthefuture.Ensuring
someoftheprofitwentintolocalhandswouldlikelybuildsupport.

x Jobcreation:Aftertheeconomicdownturn,theCommissionwasinterestedinstimulatinglocal
jobs.Floridahadatraditionallystrongconstructionindustry,andmanypeoplewereoutofwork
afterthehousingmarketcollapsed.TheCommissionerssawtheFITasapotentialeconomic
developmentpolicy,whichcouldspurthehithertofledglinglocalsolarindustry.Ideally,these
installerscouldeventuallybuildprojectsinotherlocationsthroughoutFlorida.
Eventually,GRUandtheCityCommissionjointlydecidedonthestructureandpriceschedule,andon
February5,2009,theCityofGainesvillebecamethefirstU.S.citytoadoptaFIT(seeExhibit8for
calculations).Theprogramwassettocontinueuntil2016,withtheratedecreasingeachyear.Attheendof

HKSCaseProgram 13of25 CaseNumber1963.0

thisperiod,32MWofnewsolarshouldbeinstalledandoperatinginGainesville.Withthisnewpolicy,GRU
discontinueditsnetmeteringprogram,bettingtheFITwouldfarsurpasstheirpreviousefforts.
Implementationchallenges
OncetheprogramopenedforapplicationsinFebruary2009,thefirst4MWwasfilledwithinthree
weeks;threedayslater,applicationswerecompleteforthenext4MWallotmentfor2010.Atthispoint,of
thethirtysixapplicationsreceived,onlytenwereforresidentialcustomers.
32
In2010,theproposed
degressionschedulekickedin,bringingthepricedowneachyearby5%.Yetapplicationskeptpouringin.
Withinsixmonths,theentirequeuewasfilledoutto2016,whentheprogramwassettoend,with32MW
ofapplications.
33
Theartificialscarcityofdemandimposedbythe4MWcapcreatedarushontheprocess.
Yetthosescheduledtobuildprojectsfor2015wouldntreceiveanypaymentforelectricityforfouryears.
Theyhadnocertaintyastothepricetheywouldreceive,sincethedegressionschedulewasprovisional.
HadGRUsetthepricetoohigh,orwassheerexcitementdrivingtheprocess?
ByApril2010,1.7MWofsolarhadbeeninstalledinGainesville.SolarPVinstallationshadgrown
almost400%overtheoneyearperiodsincethepolicywasimplemented,muchfasterthanunderthe
earliermunicipalrebateornetmeteringprograms(seeExhibit6).
34
Nevertheless,the1.7MWfellvery
shortofthe4MWannualcapacityallocatedtotheprogram.Althoughtheentirequeuehadfilledquickly,
projectswerefailingbeforetheyhittheground,leaving6MWofprojectsinthepipelineforyearsoneand
two.AstheGeneralManagerforGRUputit,There'sbeenalotofactivitysinceitwasfirstpassed.There
hasbeenasteeplearningcurve....Wehaverunintoalotofdetailsandsituations.Manyofthoseweren't
anticipated.
35
Inpart,theseimplementationchallengesweresmallandeasilyaddressed.Forexample,GRU
wasreceivingmultipleapplicationsforthesameroof,sotheyrequiredproofthatthesolardeveloperwas
allowedtousetheroof(proofofleaseholding)goingforward.Theseweresimplyglitchesintheprocess
thatGRUwouldworkoutintimethroughexperience.However,largerproblemsarose.
Severalcompaniesfromoutofthestateappliedtodeveloplargeprojects,surprisingGRU.With
only4MWofannualcapacity,a1MWprojectcouldquicklytieup25%ofthequeue.Themostdramatic
examplewasGreenEnergyDevelopment,aLosAngelesbasedcompany,whichwascompletinga1.6MW
arrayonalocalmallcomplex.Thecompanyhadsuccessfullysecured12ofthe32MWallocatedtothe
programthrough2016.Thelocalnewspaperandsomeresidentsexpressedconcernthatoutsideinvestors
werereapingprofitsfromGRUsprogram.Whenthequeuewasfilledwithlargeprojects,therewaslittle
capacityleftforlocalcitizenstobenefitfromthepolicy.AlthoughtheCommissionoptedforhigherinitial

32
AnthonyClark,GRUSurpassesSolarFeedinCapfor2010TheGainesvilleSun,March5,2009.
http://www.gainesville.com/article/20090305/ARTICLES/903051029?tc=ar.
33
MeganRolland,GainesvillesSolarFeedinTariffisNowBookedto2016,TheGainesvilleSun,Friday,August21,

2009,http://www.gainesville.com/article/20090821/ARTICLES/908211004?tc=ar.
34
EdRegan,SolarFeedInTariffUpdate,PresentationtoGainesvilleRegionalUtilities,April1,2010,
www.cityofgainesville.org.
35
MeganRolland,GainesvillesSolarFeedinTariffisNowBookedto2016,TheGainesvilleSun,Friday,August21,

2009,http://www.gainesville.com/article/20090821/ARTICLES/908211004?tc=ar.

HKSCaseProgram 14of25 CaseNumber1963.0

FITpricestospurlocaldevelopers,thelucrativepriceswereattractingestablishedcompaniesinother
states.Theseoutsideplayersoftendidnotemploylocalcontractors.
Further,manyinvestorswerespeculatingoncontracts.Speculationwaseasy,astherewereno
costsforanorganizationtoproposeaproject;aproponentmerelydroppedoffanapplicationearlyenough
tobecountedinthequeue.Whetherornottheprojectgotbuiltwasinconsequential,asgroupscould
applyfirstandworkoutthefinancinglater.Insomecases,companiesaimedtobuildouttheprojects
quickly,capitalizingontheartificialscarcityinducedbythecap,andsellthecontractstoathirdparty.
Yet,theselargerprojectsneededoutsidefunding,andwiththefinancialcrisis,manywerenotable
topackagedeals.Furthercompaniesneededtogetthefederal30%taxcreditinordertomaximizetheir
profit.Ifthecompaniesdidnothaveadequatetaxliabilitythemselves,theypackagedintricatedealswith
multipleparties.Asalltheseeventsunfolded,projectsweremissingtheirdeadlinesbyalargemargin,with
companiesarguingthattheyneededmoretime.
MissingtheFITgoals
Inadditiontotheseimplementationchallenges,GRUalsofoundanumberofspecific,unforeseen
problemswiththepolicy:
1)Policyinflexibility:Sincetheprogramsetpricesannually,itwasntpossibleforGRUtoquicklyadaptto
changesininstallationorequipmentcosts.Solartechnologieswereimprovingrapidly,withthecostper
wattdeclining.YettheFITprogramlockedinpriceseveryyear,andoncethecontractsweresigned,prices
persistedfortwentyyears.Theproponentsarguedthatthisstructurewasnecessarybecauseasolarproject
islargelyanupfront,capitalinvestment;inorderfortheprojecttobefinanciallyviable,thefuture
paymentsmustpaybackthecapital.
ThepatchworkofgovernmentincentivesposedaparticularchallengefortheFITpolicy.Someof
theseincentivesincluded:
x Afederalproductiontaxcreditforsolarprojectspassedinthe2009federalstimuluslaw.It
allowedfora30%taxcreditforpowerfromanyresidentialsolarsysteminstalledafter2008anda
similarcreditforsystemsinstalledoncommercialbuildingsafter2008.Therewasalsoa30%
federalgrantprogram(1603Program),whichallowedgroupstoreceivethesamesupportwithout
thetaxliability;however,thegrantwassettoexpirein2012.(Recipientsofthegrantcouldnot
alsotakeadvantageofthetaxcredit.)

x UntilJune2010,FloridaofferedasolarPVtaxcreditthatprovideda$4/Wrebateupto$20,000for
residencesandupto$100,000forcommercialbuildings.ThetaxcreditexpiredinJune2010and
thestatelegislaturewasdebatingwhethertorenewit.SinceGainesvillepassedtheFITprogramin
February2009,therewassomeoverlapforearlyinstallations;however,veryfewpeopleaccessed

HKSCaseProgram 15of25 CaseNumber1963.0

boththerebateandtheFIT.

x Floridaexemptedsolarinstallationsfromstatesalestaxes.

x GRUprovidedlowinterestloansforresidentialsolarinstallations.

Theimplicationoftheseincentivesiseasilyunderstoodwithanillustration.Ifahomeowner
installeda5kWsystemontheirroofwithoutfinancing,theircostscouldrangefrom$30,000to$40,000
($6$8/W)dependingontheirinstaller,roof,electricalsystemandlocation.Givenalowcostsystemand
the30%taxcredit,theircostswoulddropfrom$30,000to$21,000forthesystem.Iftheywereableto
accesstheshortlived$4/Wstaterebateprogram,theircostswoulddropto$7,000.However,fewpeople
wereabletoaccessthestateprogram,sinceitquicklyranoutofmoney.Nevertheless,thisexample
illustratesthechallengesofsettingpriceslocallygivenchangingpoliciesatthestateandfederallevel.
Shouldthelocalregulatorincorporatethesepotentiallyshorttermtaxcreditsandrebatesintothefeedin
tariff,thusreducingit?Orshouldregulatorsignorethesetaxincentivesandthusruntheriskofallowing
investorstoreaplargewindfallprofits?
SinceGainesvilleislocatedinthesunnystateofFlorida,a5kWsystemcouldgenerate2025
kWh/dayonaverage.Withthe0.32/kWhFITpayment,thehomeownerwouldreceive$2,300to$3,000
fromGRUannually.Withalowcostsystem,theprojectwouldhaveasimplepaybackintentothirteen
years.Butifthehomeownerwasluckyenoughtoreceivebothstateandfederaltaxincentives,theycould
payoffthesystemcostsinameretwotothreeyears,withallfutureyearsoftheFITcontractbringing
revenue.
36
Sinceveryfewindividualsaccessedthestateprogram,mostpeoplelikelyhadpaybackperiods
closertoseventotenyears.
IftheFITpriceiscalculatedbasedona$7.50$8.50/Wcostestimation,buttherealcostiscloserto
$24perwattafteralltheincentives,thentheFITtariffsmaybetoogenerous,allowingsomedevelopersto
reapwindfallprofits.However,withgroupsseekfinancing,thebankswillaskhowdoesoneincorporate
federalandstatetaxcreditswithlivesoftwotofouryearsintoatwentyyearcontract?Howcanwebe
certainthatyouwillaccessthestaterebateorthatitwillbeavailable?Additionally,notallpotential
investorscantakeequaladvantageofthesecredits.Howcanpricesbesetwithchangingpoliciesatthe
stateandfederallevelanddifferentialaccesstoprogramsacrossdifferentgroups?
Further,whenGRUlookedatthecostdataforPVsystems,theyfoundalargestandarddeviation.
Therangeincostswasfrom$4.50$10/W;yet,itwasunclearwhetherthisrepresentedalongtermcost
reductiontrendorashorttermunprofitablemodel.Thisrangewasnotclearlyrelatedtothesizeofthe
installationsbutperhapsindicatedanimmaturemarket.Apolicybasedonaveragecostscouldnotcope

36
Thiscalculationrepresentsanoptimisticmodel,however,andmorecostlyprojectswouldfacelowerreturns.

HKSCaseProgram 16of25 CaseNumber1963.0

withvariation,andsomeprojectsexcessreturns.Therewasnoclearconsensusonhowtoincorporate
variationintoacalculationofstaticFITprices.
2)Minorlocaljobcreation:Beforetheprogramwasimplemented,manylocalsolardevelopershad
ambitiousexpectationsfortheprogram,foreseeinganewindustrygrowingupinGainesville.However,job
creationdidnotmeetinitialexpectations.Whencontractswereawardedtodeveloperslocatedinother
states,theyoftenbroughttheirownworkerswiththem.Evenwhenlocalcontractorsgotajobinthequeue
intime,itonlytookaweekortwotoinstallthesystem.Therewaslittlejobcontinuity.Theannualqueuing
systemcreatedafeastorfaminecycle,wheresolardeveloperswouldundergoaburstofactivity,andthen
havetowaitmanymonthsforthenextcycle.
3)Alimitedprogram:AlthoughthecapacitylimithelpedGRUboundthecostimpactsinlinewithconsumer
interests,italsolimitedparticipation,potentialjobcreationandsolardeployment.Theartificialscarcity
causedarunonapplications,limitedparticipationforsmallscalesystemsanddramaticallyreduced
potentialjobcreation,sincebusinessescouldnotjustifynewhiresgiventheprogramssmallscale.Finally,
thelimitedprogrammeantsolarcouldonlycontributeaminoramounttotheoverallsystem.Evenaftera
decadeofinvestmentinsolarPV,32MWofsolarwouldonlyaccountfor~5%ofGRUsentiresystemin
2016.
Conclusion:Reformingthepolicy
AsEdReganpreparedhispresentationtotheCommission,hereflectedonhowtheprocesshad
unfoldedoverthepasteighteenmonthsandtriedtoimaginethepolicysfuture.Whatrecommendations
shouldhemakeonreformingtheFITpolicy?Ontheonehand,demandfortheprogramwasstrong,
suggestingsolarcouldtechnicallyworkinGainesvilleifitwasgiventhechance,butatwhatcost?Manyof
theprogramsinitialgoalsremainedunfulfilled:wherewerethecitizensprojects,thejobsortheprojects
ontheground?
InotherjurisdictionsinFlorida,utilitieswereoptingforauctionsystemsthatquicklydeployed
significantsolarcapacity,oftenthroughmegaprojects.ForexampleinJacksonvilleFL,a15MWsolarfarm
wasbeingbuiltthroughanauctionprocess.Themunicipalutility,JacksonvilleElectricUtility,signedalong
termcontract,andtheprojectwassettoopeninFall2010.Yet,itwasntclearthattheseprogramswere
cheaperthantheFIT.Further,localbusinessesandhomeownerswouldntbeabletoparticipateinsucha
scheme.
Yet,localparticipationwasprovingdifficultinGainesville.WhiletheCommissionersknew
protectionismwasnotpracticable(orevenlegal),theprogramstillneededtofindawaytolimitoutside
involvement,createlocaljobs,encouragegreaterparticipation,andinsurethatprojectswereactuallybuilt.
Forsolardevelopers,policystabilitywasparamount.Tomanysolarentrepreneurs,theexperienceinSpain
illustratedthatflawedpolicydesigncouldquicklyspiraloutofcontrol,bringingthesolarindustrydown
withit.Publicacceptancewascrucial.Aswassteadyworkflowandstablepricing.

HKSCaseProgram 17of25 CaseNumber1963.0

Finally,thelargedemandforFITcontractssuggestedthatGRUcouldreducepricesfasterthanthe
5%degressionschedule.Withthenewinformationtheywerecollectingoncosts,GRUwasabletotrack
pricesmorecloselyandcouldadjustnewcontractsaccordingly.Still,thelargespreadinthecostsmade
estimationdifficult.Wouldthestandarddeviationdeclineasthemarketmaturedandcompetitionforced
companiestoimprove?Orwerelowercostbusinessmodelsunsustainableinthelongrun?Should
Gainesvilledecreasepricesfasterthantheinitial,proposed5%annualreduction,andifso,whatdatacould
theyusetosupportsuchasdecision?
AsEdReganpreparedhispresentationfortheCityCommission,heknewhewouldhavetotakeall
theseissuesintoconsideration,andcomeupwithaplanthatrespondedtoeveryonesconcerns.Ultimately,
thepolicyneededtomeetallofitsgoals:solardeployment,communityparticipation,costminimization,
decarbonizationandjobcreation.Wasallthispossiblefromonepolicyalone?

HKSCaseProgram 18of25 CaseNumber1963.0

Exhibit1

GRUElectricityFuelMix,2009(~600MW)


Source:PegeenHanrahan,Gainesville:TheNationsFirstSolarFeedInTariff.Presentation,July30,2010,
p.4,www.communityinpower.com/resources/Pegeen.Boulder.pdf,accessedJune11,2012.

HKSCaseProgram 19of25 CaseNumber1963.0

Exhibit2

RenewableEnergyPoliciesinEurope,2010

Source:FinancingRenewableEnergyintheEuropeanEnergyMarket,Ecofys,FraunhoferISI,TUVienna
EEG,Ernst&Young,October2010,p.28.

HKSCaseProgram 20of25 CaseNumber1963.0

Exhibit3

GermanysolarPVFITpriceschedule,2009

Source:AdaptedfromDBClimateChangeAdvisorsDeutscheBankGroup,PayingforRenewableEnergy:
TLCattheRightPrice:AchievingScalethroughEfficientPolicyDesign,December2009,Example9,p.29.

InstallationType
InstalledCapacity
(inkWpeak)
Tariff
(perkWhelectricity
produced)
uiounu mounteu All Cents
Roof mounteu kW peak
kW peak
kW NW peak
NW peak
Cents
Cents
Cents
Cents
*Percentagescanincrease/decreaseby1.0%ifinstallationcapacityisabove/belowacertainthreshold.
Source:AdaptedfromGermanGovernment,GesetzfrdenVorrangErneuerbarerEnergien,2008,
Section 20 and Sections 3233.

HKSCaseProgram 21of25 CaseNumber1963.0

Exhibit4

WorldSolarPVCapacity,2009andWorldGrowthinSolarPV,19952009

Source:REN21Secretariat,Renewables2010:GlobalStatusReport,REN21RenewableEnergyPolicy
Networkforthe21
st
Century,2010,figures8and7,p.19.

HKSCaseProgram 22of25 CaseNumber1963.0

Exhibit5

2012FitPricing

FixedRate$/kWhOverLife
ofContract
ReferenceInstalledSolar
CostperWatt1

Contract
Enteredinto
UnderThis
PolicyDuring
CalendarYear
FixedRateper
kWhApplied
UniformlyFrom
theDateof
Installation
Through
December31,
Class1 Class2 Class3 Class1 Class2 Class3
2009 2029 N/A $0.32 $0.26 $7.50 $7.50 $6.10
2010 2030 N/A $0.32 $0.26 $7.50 $7.50 $6.10
2011 2031 $0.32 $0.29 $0.24 $7.50 $6.75 $5.50
2012 2032 $0.24 $0.22 $0.19 $5.50 $5.00 $4.00
1
Installed Cost/Watt Data include all materials, labor and direct costs associated with
construction

Source:GainesvilleRegionalUtilities,GRUSolarFITPresentation,July2012.


HKSCaseProgram 23of25 CaseNumber1963.0

Exhibit6

GrowthinGRUSolarCapacity,20072012

Source:CraigLewis,CleanCoalition,CleanLocalEnergyAccessibleNow,MakingCleanHappeninthe
UnitedStates.Presentation.April26,2012,p.10.

HKSCaseProgram 24of25 CaseNumber1963.0

Exhibit7

Listofinputs&assumptionstakenbyGRU,October2008

PVSystemandUsage
Systemsize(kW)
Installedcost($/watt)
Capacityfactor(thepercentageoftheyearthatthepanelsproduceenergy)
Paneldegradationfactor
O&Mandrepaircosts

FinancialIncentives(Adjustments)
Staterebate($/watt)
GRUrebate($/watt)
Federaltaxrate
Federalinvestmenttaxcreditrate
Maximumincentivelevels($)

FinancialandEnergyRates
Discountrate
Renewableenergypayment($/kWh)
Renewableenergypaymentescalationfactor(%)
GSNenergyrate
GSNescalationrate

OtherAssumptions
Alllevelizedvaluesarenetpresentvalued(NPV)over20yearswitha6%discountrate
OwnerhassufficienttaxliabilitiestotakeadvantageofIRS179depreciation
Electricalpriceescalationrateof3.0%peryear
Allescalationtakesplacelinearlyoverthe20yearlifeoftheprogram
Staterebateisnotconsideredandassumedtobezerothroughouttheanalysis
FederalInvestmentTaxCreditrateof30%
IRSincometaxrateassumedtobe35%throughoutthisanalysis
FederalProductionTaxCreditsof$0.02/kWh(onlyavailablefiveyears)
PVsystemlifeofonly20years(aconservativeestimate)

Source:ProposaltoReplaceNonResidentialSolarPhotovoltaicRebateandNetMeteringFinancial
IncentivesWithASolarFeedinTariff,GainesvilleRegionalUtilities,October13,2008,ModelStructureand
Assumptions,pp.1314.

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