Is a Reverse Auction Feed-in Tariff “Market-Based”?

Lynne Kiesling

Proponents say yes, but I’m not convinced. Here’s the story: the California Public Utilities Commission is considering some regulatory innovations to increase the share of renewables in the state’s generation portfolio, including a reverse-auction procurement solicitation for the provision of renewable power:

In what might be a world first, the California Public Utilities Commission on Thursday proposed letting developers bid on contracts to install green energy projects. A solar company that offers to sell electricity to one of California’s three big utilities at a rate lower than its competitors would win a particular power purchase agreement.

A few things to note here. First, procurement reverse auctions are pretty common, and do have some appealing economic efficiency properties as a market design — if a single buyer is issuing a solicitation for a common-value resource (i.e., something that is not too heterogeneous and subjective in its value, such as art), a reverse auction can avoid a winner’s curse and can reveal otherwise private information about the costs of producing the resource. In terms of dynamic efficiency, the reverse auction can provide price signals that lead to technological change; innovation may enable an entrepreneur to offer a lower price and win the reverse auction. It’s easy to see how that incentive can be important in the evolution of renewables technologies. The linked article does a decent job of communicating these benefits, as well as point out that such a reverse auction would avoid the problems of the overly-generous feed-in tariffs that have been used in Europe (particularly Spain).

Another thing to note, though, is how deeply embedded this whole regulator-induced utility procurement process is in the historical, traditional business and regulatory model of a utility. Just look at the framing and the language in the quote I pulled above — regulators would “let” renewable power developers bid to provide power to the three regulated investor-owned utilities in the state, for them to then sell on to their retail customers. Despite all of the protestations about this being innovative and market-based, this is still a regulatory model and a business model that Sam Insull would recognize, with regulators having their hands on the throttle of the generation of electricity, determining top-down what the generation portfolio will be and who will be allowed to participate in it. This model is premised on the idea that only the regulators can determine what generation portfolio is in the best interests of the residents of California — the best decisions can only come from the political elite, not from the aggregation of distributed individual decisions.

That’s why I do not believe the argument put forth by the CPUC that such a reverse auction is market-based. Here’s the argument that it is market-based, from the Green Inc. article linked above:

An auction would essentially let the market set electricity rates for photovoltaic projects that produce between one and 20 megawatts in California and can be built within 18 months.

“This mechanism would also allow the state to pay developers a price that is sufficient to bring projects online but that does not provide surplus profits at ratepayers’ expense,” utilities commission staff wrote in its proposal. “Providing a clear and steady long-term investment signal rather than providing a pre-determined price can create a competitive market.”

As far as this argument goes, it is valid. But look at what it takes as given, what is missing: the bureaucratic, administrative decision about how much renewable power capacity should be built, “the state” paying developers to bring projects online, and the fact that all of this behind-the-scenes and top-down control of the electricity consumption decisions of individuals is taking place in an environment where individual consumers have no control, no choice, no options, no freedom. California electricity consumers cannot choose among competing retailers — if they live within the physical footprint of the historical utility, they have to buy retail service from that utility, with their consumption provisioned through these wholesale procurement contracts (both for renewables and for conventional generation). Calling such mandated, regulated, forced wholesale renewables procurement “market-based” just because it uses a reverse auction is not quite as much Orwellian Newspeak as what Mike posted about last week, but it’s not that far off.

Regulator-mandated wholesale renewable power procurement using a reverse auction is not market-based. It remains as much about centralized control and about lack of individual consumer choice in retail markets as has been the case for the past century. Even though it uses an auction design for procurement, the procurement is still centralized and as centrally-driven as has been the case for the past century.