California Adopts Feed-in Tariff for Distributed Wind and Solar Power Systems, with Nobel Prize Notes

Michael Giberson

Not all of the news this week is about Nobel prize surprises. The Los Angeles Times reports that California is adopting feed-in tariffs for distributed renewable power production:

Under AB 920, the state Public Utilities Commission will set a rate for utilities to compensate customers whose solar or wind systems produce more power than they use in a year. Under California’s current law, customers are not paid for any surplus electricity they feed back into the grid.

The state requires that when a consumer installs a solar power system, it be the right size to produce only enough power necessary for on-site use. Rebates from the California Solar Initiative, overseen by the utilities commission, discourage anything larger. So customers who later reduce their energy consumption often end up underutilizing their solar panels.

“The current system instills a perverse incentive for people to waste their solar electricity just so they don’t give it away for free to the utilities,” said Bernadette Del Chiaro, a clean energy advocate with Environment California, which sponsored the bill.

The article emphasizes how the policy fixes a problem inherent with the current rules, but doesn’t note the problems that might arise from the PUC setting rates for utility buy-back of excess power from distributed energy resources. (Or the larger problems associated with arbitrary government-selected market-share goals for certain forms of renewable energy by arbitrary government-selected dates.)

And, to connect this story back to this week’s Nobel prize announcement so I can keep up with the econoblogging elites, it is probably worth noting that state utility regulation and feed-in tariffs are just two of the the many possible governance mechanisms possible to help people capture the gains from trade in electric power.

The prize press release observes:

Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements. The research of Elinor Ostrom and Oliver Williamson demonstrates that economic analysis can shed light on most forms of social organization.

Much of the electric power restructuring debate has been conducted as if the choice is between “the virtues” and “the limitations” of markets, i.e., between either markets narrowly construed and government regulation. But, as has been discussed in various ways here before, there actual choice set is more complex.