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April 24, 2014

Los Angeles Kicks Off Its Feed-in Tariff Program

After years of studies and pilot programs, Los Angeles Department of Water and Power (LADWP), the United States’ largest municipal utility, unveiled the 100 megawatt  FiT Set Pricing Program (FiT 100), which will start on February 1, 2013.  Long favored in Europe to encourage renewable, distributed generation, a feed-in tariff or FiT offers generators standard long-term contracts, generally at favorable rates, eliminating the need for contract negotiations with utilities.  Feed-in tariffs are being introduced into U.S.’s renewable electrical generation market to fill the void between net-metering programs and utility-scale renewable energy projects.  While a range of renewable resources are eligible for the program, solar PV systems are likely to dominate the FiT 100 program.  

The FiT 100 allocation will be meted out in five 20 MW allocations, with one allocation made available every six months.  The first 20 MW allocation for the will be available from February 1, 2013 until June 28, 2013.  LADWP is using a fixed declining tier pricing system, with the Base Price of Energy (BPE) set at $0.17 per kWh for the first 20 MW allocation and declining one cent with each additional 20 MW allocation.  The price paid under the FiT Standard Offer Power Purchase Agreement (PPA) is the product of the BPE multiplied by a time-of-delivery (TOD) factor, which ranges from 2.25 for High Season (Jun-Sep), High Peak (M-F 1pm-5pm) to 0.50 for Base (M-F 8pm-10am, all day Sat/Sun).  The BPE and TOD factor are fixed throughout the term of the PPA, which is up to 20 years. 

To qualify for the FiT 100 program, the facility must be located within LADWP’s service area, have a nameplate capacity of between 30 kW and 3 MW, have a commercial operation date after the PPA effective date, and the facility cannot consume more than 10 percent of its energy generation.  All energy produced from the FiT Facility, as well as capacity rights and environmental attributes, must be sold to LADWP, and LADWP’s off-take obligation is capped at 115 percent of the facility’s monthly production profile as submitted by the FiT applicant.  Neither the PPA seller nor the owner of the FiT facility site can apply for or participate in any net metering program or receive any ratepayer-funded incentives.  In addition, to qualify for the program at least one member of the development team must have successfully developed and constructed at least one similar project using the same technology.  Additional terms and guidelines are available at LADWP’s website.

There are two general development models for FiT facilities: 1) property owners or long-term tenants with rights to the roof, parking field, or other underutilized real estate asset develop and own the FiT facilities (self developed model); or 2) independent power producers lease that underutilized asset from the real estate asset holder and develop the FiT facility (rent-a-roof model).  The rent-a-roof model has proven to be the more popular choice in Europe.  While rooftops are not the only location for solar photovoltaic FiT facilities, they often have advantages compared to freestanding ground mounted solar photovoltaic facilities including more insolation, less shading, flatter surfaces, fewer security risks and fewer zoning issues. 

Rent-a-roof leases can be structured several ways, with the real estate owner receiving a fixed percentage of PPA revenues, a set periodic rent based on the rooftop area, or an upfront lump sum payment, or they can use a lease-to-own structure.  Alternatively, the FiT developer can build a new roof for the owner and set off that cost from the rent. Generally, the better the site’s insolation characteristics, the more favorable the terms are to the site owner. 

Even though the minimum size for a FiT 100 eligible project is 30 kW, which would only require approximately 3,000 square feet of roof area (using the generally accepted “rule of thumb” that each kW of solar PV requires about 100 square feet of roof area), expect most independent power producers to require a minimum of 30,000 square feet of flat, unshaded roof with a remaining service life of no less than ten years.  While installed solar PV costs have fallen substantially, largely due to the dramatic decrease in the cost of PV panels, the upfront development and installation costs remain significant, and developers generally believe the ability to efficiently scale those costs diminishes for systems smaller than 300 kW.

© 2014 McDermott Will & Emery

About the Author

Partner

Thomas L. Hefty is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.

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