It's been a long time coming, but California may finally be getting its solar subsidy program right.

Last October, we looked at the Golden State's busted feed-in tariff program, noting that the fixed price for renewable energy had been set too low to attract any solar developers. A tweak to the program, expanding the coverage to projects up to three megawatts in size and bumping up the cap, didn't do anything to address this fundamental shortcoming. I noted then that SunPower (Nasdaq: SPWRA) and other companies were holding out hope for an alternative plan proposed by the California Public Utilities Commission two months prior, which would actually set prices at a competitive level.

A year later, that plan is moving forward.

Last week, CPUC proposed a new pilot renewable energy feed-in tariff program, capped at 1,000 MW, for solar projects up to 20 MW. The innovative feature here would be a "renewable auction mechanism," or RAM, through which utilities like Pacific Gas & Electric (NYSE: PCG) would select the lowest-priced projects bid into the program by developers meeting minimum viability criteria.

The idea is that this competitive bidding process would allow the market to set a subsidy level that's fair to both developers and ratepayers. Another point in favor of the RAM is that it should help sidestep a recent Federal Energy Regulatory Commission ruling that constrains states' ability to set wholesale electric rates.

In its proposal for the RAM last year, the CPUC noted a few potential downsides to taking such an approach. In essence, the auctions need to be structured so that they avoid domination by a few large, lowball bidders, and that they actually put downward pressure on prices over time. If these issues aren't addressed, it's possible to imagine firms such as First Solar (Nasdaq: FSLR) and Suntech Power (NYSE: STP) aggressively underbidding in the early rounds, and then driving rates higher after squeezing out their smaller competitors.

The CPUC says in its decision document that a "seller concentration test adds complexity that is unlikely to provide reasonable offsetting protection," and therefore chooses not to adopt any limit. The commission does say it's committed to ensuring competitiveness, however, and points to safeguards including "total program capacity, a reasonableness threshold for simplified contract review, and ongoing reporting."

The California Solar Energy Industries Association, a trade group representing many small developers, came out strongly against RAM last year. Recurrent Energy, meanwhile, prefers the auction mechanism to "the specter of administrative price-setting gone bad." It's an interesting debate, and one that really can't be settled until we see how these auctions function in the real world.

For now, I'm cautiously optimistic that this new program will help California to tackle its aggressive renewable energy goals at an acceptable cost to ratepayers -- and give a boost to firms like Yingli Green Energy (NYSE: YGE) and Suntech Power.

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