Production Incentive Auctions to Support Large-Scale Renewables Projects in Pennsylvania and California

In June 1998, California pioneered the use of production incentives – which encourage project performance by paying on a per-kWh basis – to support large-scale renewable projects. Three production incentive auctions have now been held in the state. For a variety of reasons – most notably a lack of credit-worthy power purchasers, but also including permitting delays and general market uncertainty – more than half of all funded projects (representing more than 80% of total funded capacity) have not yet been built. In late 2000, Pennsylvania tweaked California's production incentive model to suit its own needs in supporting wind power. Though direct comparisons between the two programs are difficult and perhaps even inappropriate given somewhat conflicting program objectives, the design and early results of Pennsylvania's program are encouraging, suggesting that Pennsylvania's approach may be somewhat better suited to bring new wind capacity on line in a short period of time. This case summarizes California's production incentive program and the difficulties it has faced, and then focuses on how Pennsylvania has attempted to innovate on California's approach to bring new wind capacity on line quickly and prior to the then-expected expiration of the federal production tax credit (PTC) for wind power at the end of 2001. Innovative Features

• California's market-based program was designed to allow all renewable technologies to compete for funds, and as such has incorporated a relatively high degree of leniency to accommodate the needs of a diverse set of technologies (e.g., long development times for geothermal relative to wind).
• Pennsylvania's program – which focuses solely on wind power and has far lower funding levels – innovates on California's pioneering efforts by providing up-front payment of the production incentive, requiring more stringent bid bonds from developers, and using greater discretion in selecting projects that combine a low level of required incentive with a high probability of project completion.

Results

• In the three auctions held since June 1998, California has awarded $242 million in 5-year production incentives to 81 projects totaling 1,300 MW of new renewables capacity. So far, 36 projects totaling 203 MW have come on line.
• In late 2000, Pennsylvania awarded $6 million to 2 wind projects totaling 67 MW. One 15 MW project came on line within a year (in October 2001), and the other has been delayed by certain local opposition. Both of the Pennsylvania wind projects have secured 20-year power purchase agreements with Exelon Power Team. In July 2002, Pennsylvania issued a second, less-structured $6 million solicitation for wind power (described in a separate case study comparing competitive solicitations and unsolicited proposals).