California Hits a Renewable Energy Home Run

The California Public Utility Commission may be redefining the way we view subsidies for renewable energy. Instead of a government defined feed-in tariff, which is often slow to react and leads to wild swings in demand, California is instituting an auction system that acts similar to a Dutch auction. This is an auction plan looks eerily similar to a reverse auction this Fool suggested months ago.

How it works
The three California investor-owned utilities Pacific Gas & Electric (NYSE: PCG  ) , Edison International's (NYSE: EIX  ) Southern California Electric Company, and San Diego Gas & Electric, will have a standard renewable auction mechanism. The process is designed to reach the lowest levelized cost of energy through bids by developers for the lowest price they can afford. The bids will have standard protocols, contracts, and power purchase agreements for each utility.

This doesn't replace massive projects being built by First Solar (Nasdaq: FSLR  ) and SunPower (Nasdaq: SPWRA  ) , but is instead designed for 1.5 MW to 20 MW size projects. Right now, the program is planned to be for 1 GW of total power over two years.

Differs from Germany
I recently applauded Germany's new feed-in tariff program because of its regular reductions based on installation levels. California's plan is different from what Germany implemented, but is much better in ways.

Regulators and utilities can control the number of megawatts that go up for auction each year, leveling out installations. This will keep the state from going boom to bust the way Germany and Italy have done in the first half of 2011.

This design is also best for customers because it ensures the lowest cost for power that is actually delivered.

So, in the end the auction should be better for manufacturers and utility customers.

And the winner is...
The clear winners out of the gate will be developers with capacity and knowhow to compete in the bidding process quickly; a.k.a. First Solar and SunPower. It could also help firms like Ameresco (NYSE: AMRC  ) , which provides renewable energy services to customers that don't have the desire to go through the bidding process themselves.

Manufacturers like Yingli Green Energy (NYSE: YGE  ) and Trina Solar (NYSE: TSL  ) , which are building a large presence in the U.S., will also benefit from module sales to developers. But they'll be more tied to a developer's choice of modules unless they add more development capabilities in the U.S.

The first auction is set to take place in the fourth quarter and I'll keep an eye on who is winning business and how low bids are from developers. Use My Watchlist to keep up with which solar company is winning business in California.

• Add Yingli Green Energy Holding to My Watchlist.
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• Add PG & E to My Watchlist.
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