NREL is a national laboratory of the U.S. Department of Energy, Office of Energy 

Efficiency & Renewable Energy, operated by the Alliance for Sustainable Energy, LLC.

Contract No. DE-AC36-08GO28308

Procurement Options for New 

Renewable Electricity Supply

Claire E. Kreycik 

National Renewable Energy Laboratory

Toby D. Couture 

E3 Analytics

Karlynn S. Cory 

National Renewable Energy Laboratory

Technical Report

NREL/TP-6A20-52983

December 2011
NREL is a national laboratory of the U.S. Department of Energy, Office of Energy 

Efficiency & Renewable Energy, operated by the Alliance for Sustainable Energy, LLC.

National Renewable Energy Laboratory

1617 Cole Boulevard

Golden, Colorado 80401

303-275-3000 • www.nrel.gov

Contract No. DE-AC36-08GO28308

Procurement Options for New 

Renewable Electricity Supply

Claire E. Kreycik 

National Renewable Energy Laboratory

Toby D. Couture 

E3 Analytics

Karlynn S. Cory 

National Renewable Energy Laboratory 

Prepared under Task No. SM10.2464

Technical Report

NREL/TP-6A20-52983

December 2011
NOTICE

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iii

Acknowledgments

This work was funded by the U.S. Department of Energy’s (DOE’s) Solar Energy 

Technology Program. The authors wish to thank participating DOE employees, Jennifer 

DeCesaro and John Bartlett, for providing insights and guidance along the way. The 

authors are also grateful for feedback from NREL management: David Kline and Robin 

Newmark. The authors would also like to thank the individuals who reviewed various 

drafts of this report, including Lori Bird, David Hurlbut, and Travis Lowder, all of 

NREL. 

The authors also thank Pamela Doughman of the California Energy Commission and 

Michael Bull of Xcel Energy for their helpful review comments. Special thanks go to 

Robert C. Grace of Sustainable Energy Advantage for his direction at the early stages of 

this effort. Finally, the authors offer their gratitude to Mary Lukkonen in NREL’s 

Technical Communications Office for providing editorial support. 
iv

List of Acronyms

ERCOT Electric Reliability Council of Texas 

FERC Federal Energy Regulatory Commission 

FIT feed-in tariff

IOU investor-owned utility 

IPP independent power producer 

IRP integrated resource plan

ISO independent system operator 

LSE load-serving entity

PBI performance-based incentive

PPA power purchase agreement

PUC public utility commission

PURPA Public Utility Regulatory Policies Act

PV photovoltaics 

RAM renewable auction mechanism

REC renewable energy certificate

RFP request for proposals 

RPS renewable portfolio standard

RTO regional transmission organization
v 

Executive Summary

State renewable portfolio standard (RPS) policies require utilities and load-serving 

entities (LSEs) to procure renewable energy generation. Utility procurement options may 

be a function of state policy and regulatory preferences, and in some cases, may be 

dictated by legislative authority. Utilities and LSEs commonly use competitive 

solicitations or bilateral contracting to procure renewable energy supply to meet RPS 

mandates. However, policymakers and regulators in several states are beginning to 

explore the use of alternatives, namely feed-in tariffs (FITs) and auctions to procure 

renewable energy supply. A FIT is a procurement mechanism that offers guaranteed grid 

access and guaranteed energy payment over a long-term contract to all developers within 

a set of eligible technologies, project sizes, and locations. FIT contract prices are 

typically set administratively based on location-specific cost criteria. Renewable energy

auctions and competitive solicitation are bidding processes, in which developers submit 

project proposals. The difference between auctions and solicitations is that solicitations 

include a number of non-price criteria, while auctions select bids based on price alone 

(although potential bidders must meet a set of criteria in order to submit a bid). 

As compliance obligations expand, there may be an increasing emphasis on the 

effectiveness and efficiency of different procurement mechanisms and their best 

applications. This report does not make recommendations about what approaches (or 

combinations of approaches) LSEs and states should adopt to procure renewable energy. 

Rather, it evaluates each approach while assessing a number of important tradeoffs that 

affect how risks are assigned between developers, utilities, and utility customers. 

This report evaluates four procurement strategies (competitive solicitations, bilateral 

contracting, FITs, and auctions) against four main criteria: (1) pricing; (2) complexity and 

efficiency of the procurement process; (3) impacts on developers’ access to markets; and 

(4) ability to complement utility decision-making processes. These criteria were chosen 

because they take into account the perspective of each group of stakeholders: ratepayers, 

regulators, utilities, investors, and developers. The primary conclusions of the report are 

summarized below.

Pricing

Competitive solicitations and auctions select for cost-effective projects. A policymaker 

seeking to promote least-cost generation may want to consider using one of those options. 

Additionally, in competitive wholesale electricity markets with regional transmission 

organizations, bilateral contracts may result in cost competitive contracts. However the 

bilateral contracting approach does not always result in the lowest cost contracts because 

there may not be other projects to compare against. FITs set prices paid administratively, 

and consequently may not result in least-cost projects. It can be challenging to design 

FITs that adjust to market realities and keep prices accurate over time. This can lead 

either to over-compensation, which can trigger a boom, or under-compensation, which 

can cause development to halt. Recent FIT policy innovations attempt to address these 

possibilities, but it is too early to access their relative success. However, there are several 

benefits of FIT policies. FITs provide price certainty and price transparency, which can 
vi 

increase the investment pool and encourage sustained deployment. Additionally, 

scheduled declines in FIT payment level may place increased pressure on manufacturers 

to lower cost of generation (Couture et al 2010). 

Complexity and Efficiency of the Procurement Process 

Competitive solicitations are generally considered an efficient way of selecting between 

projects; however, a significant amount of time and resources are required of utilities, 

regulators, and developers under this approach.1 The complexity of using a bilateral 

contract approach depends on the level of regulatory oversight required for the LSE, but 

bilateral contracts may be faster and less costly for utilities and regulators to implement 

than contracts resulting from a competitive solicitation. Bilateral contract negotiation 

may also reduce contract failure rate. Auctions and FITs require extensive upfront 

analysis on the part of regulators and policymakers,2

Impact on Developers’ Access to Markets

 but these approaches can allow for 

rapid deployment of renewable energy. Auctions must meet a complex set of conditions 

in order to function properly. Markets must be sufficiently deep and liquid to lead to 

accurate prices, and there has to be homogeneity of product and of project completion 

risk to ensure that the process is fair.

During the competitive solicitation process, obligated LSEs select for technically

proficient and creditworthy independent power producers (IPPs). Small developers who 

are new to a market may not be able to contend in a competitive solicitation. The bilateral 

contracting approach may in some cases increase access to markets for new developers 

but may also select for established market players. Auctions typically set pre-conditions 

for technical aptitude and then contracts are awarded on the basis of price alone, so new 

developers may not be able to qualify or to compete. Due to the non-discriminatory 

nature of a FIT standard offer, the FIT approach can increase market access for a number 

of participants and encourage traditionally risk-averse investors to begin investing in 

renewable projects. By providing standard contract terms at attractive payment levels, 

FITs can be seen as a way to increase market access to a wide array of potential 

developers. 

Issues Raised for Utilities

Utilities are comfortable with procurement strategies that allow them to balance their 

priorities of cost and reliability. Competitive solicitations, auctions, and bilateral 

contracting allow utilities to exert control over factors like quantity procured, generation 

profile, project siting, and reliability. Under a FIT procurement program, LSEs may have 

less control over project siting, timing, and quantity procured. However, there are ways to 

 

1 Time spent by government, utilities, and developers in each type of procurement may vary greatly. This 

selection criterion focuses mostly on time spent by regulators and utilities. Yet, the amount of time and 

money that developers must invest is greatest under competitive solicitations, especially if measured by the

total of all developers’ money per megawatt actually installed. 2

 Due to the specificity of utility procurement practices and a host of jurisdiction-specific factors, 

comparing or quantifying the administrative costs of each of the procurement mechanisms is beyond the 

scope of this paper.
vii 

design FITs to mitigate some of these concerns (Corfee et al. 2010). FITs can also “overdeliver” leading to a greater volume response than expected, which can create challenges 

for LSEs, ratepayers, and system operators. In response to this problem, some 

jurisdictions are beginning to introduce FIT capacity caps, while others are exploring 

auction-based mechanisms to control the rate of development. However, underbidding 

may be a significant concern for LSEs that are implementing auctions, as bidders 

compete for market share. 

Conclusion

Regardless of the type of procurement approach used, utilities are unlikely to move 

aggressively on procuring new electricity supply (both renewable and conventional) 

without having the right to rate recovery. States could choose to use different 

procurement mechanisms in concert with some benefits. For example, holding a 

competitive procurement could provide utilities with a competitive price benchmark upon 

which to set FIT payment levels. Additionally, several procurement mechanisms could be 

used to help meet different policy objectives (e.g., auctions and FITs could be used to 

support distributed generation). Ultimately, using these mechanisms with a greater 

awareness of their strengths and weaknesses can provide utilities with greater flexibility 

in meeting renewable electricity targets on time and at low cost. 
viii

Table of Contents

Acknowledgments .................................................................................................................. iii

List of Acronyms.......................................................................................................................iv

Executive Summary ................................................................................................................. v

List of Tables .............................................................................................................................ix

1 Introduction.......................................................................................................................1

1.1 Background on RPS Mandates.........................................................................................1

1.2 Renewable Procurement to Meet RPS Mandates......................................................2

1.3 Market Contexts and Procurement................................................................................3

2 Evaluation Framework ..................................................................................................6

3 Current Procurement Strategies ................................................................................8

3.1 Competitive Solicitations...................................................................................................8

3.1.1 Application of Evaluation Criteria...........................................................................................8

3.1.2 Summary.........................................................................................................................................12

3.2 Bilateral Contract Negotiations.................................................................................... 13

3.2.1 Application of Evaluation Criteria........................................................................................14

3.2.2 Summary.........................................................................................................................................15

4 New Procurement Strategies in the U.S. Context............................................... 17

4.1 Feed-In Tariffs .................................................................................................................... 18

4.1.1 Application of Evaluation Criteria........................................................................................18

4.1.2 Summary.........................................................................................................................................21

4.2 Auctions ................................................................................................................................ 23

4.2.1 Auction Preconditions and Design Considerations.......................................................24

4.2.2 Implementation Example: Auctions in Brazil..................................................................25

4.2.3 Application of Evaluation Criteria........................................................................................26

4.2.4 Summary.........................................................................................................................................27

5 Policy Objectives and Procurement....................................................................... 29

5.1 Customer-Sited Distributed Generation ................................................................... 29

5.2 Wholesale Distributed Generation ............................................................................. 30

5.3 Utility-Scale Generation.................................................................................................. 32

6 Conclusions ..................................................................................................................... 35

6.1 Pricing ................................................................................................................................... 35

6.2 Complexity and Efficiency of the Procurement Process...................................... 35

6.3 Impact on Developers’ Access to Markets ................................................................ 35

6.4 Issues Raised for Utilities ............................................................................................... 36

References................................................................................................................................ 37
ix

List of Tables

Table 1. Application of Evaluation Criteria to Competitive Solicitations.............................................12

Table 2. Summary of Application of Evaluation Criteria to Bilateral Contract Negotiation...............16

Table 3. Summary of Application of Evaluation Criteria to Feed-In Tariffs.........................................22

Table 4. Summary of Application of Evaluation Criteria to Auction-Based Mechanisms..................28

Table 5. Comparison of Procurement Approaches for Customer-Sited Distributed 

Generation ...................................................................................................................................30

Table 6. Comparison of Procurement Approaches for Wholesale Distributed Generation...............32

Table 7. Comparison of Procurement Approaches for Utility-Scale Generation................................34
1 

1 Introduction

This report explores utility-driven procurement options for incremental supply of 

renewable generation. It attempts to provide U.S. policymakers and regulators with 

information, analysis, and special considerations about policy options for renewable 

electricity procurement. The report compares four contrasting mechanisms3

1. Competitive solicitations

for 

contracting with independent power producers (IPPs): 

2. Bilateral contracting

3. Feed-in tariffs (FITs)

4. Auctions. 

This section provides background on renewable portfolio standard (RPS) mandates and 

how renewable energy generation is commonly procured across different regulatory 

contexts. Section 2 identifies criteria against which to evaluate these four different 

procurement mechanisms. This evaluation framework is used to draw conclusions about 

relative advantages and challenges with each procurement mechanism. Section 3 

describes competitive solicitations and bilateral contracting mechanisms and applies the 

evaluation criteria. Section 4 describes FITs and auction-based procurement of new 

renewable supply and applies the evaluation criteria. Section 5 discusses the approaches

best suited for particular applications in the United States. Section 6 offers broad 

conclusions about the merits and drawbacks of each procurement approach and the ones 

best suited for various applications. 

1.1 Background on RPS Mandates

In the United States, 29 states and the District of Columbia have implemented mandatory 

RPS policies to promote renewable energy generation, while another 7 states have 

adopted non-binding goals (DSIRE 2011a). Although their designs differ considerably 

from one state to another, RPS policies typically establish an obligation for utilities or 

load serving entities (LSEs) to procure a certain proportion of renewable energy by a 

specified date (Wiser and Barbose 2008). In recent years, a number of federal proposals 

for renewable energy standards have also been advanced (Berry and Jaccard 2001; 

Sullivan et al. 2009). RPS policies will remain an integral part of the U.S. renewable 

energy policy landscape for years to come, as most RPS requirements carry through to 

2020 or longer. 

While their design varies, RPS policies have the common objective of delivering a 

quantity of renewable energy as cost effectively as possible. The competition between 

 

3 This report does not address procurement under Public Utility Regulatory Policies Act (PURPA) 

contracts, which represents a fifth species of procurement for small (< 80 MW) qualifying renewable 

facilities. The reason that PURPA is not addressed as a distinct procurement option is that PURPA 

contracts are rarely signed today. The vast majority of PURPA contracts were signed in the 1980s; most 

have either elapsed or been terminated (Wilson et al. 2005). In today’s policy dialogue, PURPA has been 

identified as a potential mechanism to enact feed-in tariffs (Hempling et al. 2010)
2 

renewable developers may reduce the cost of compliance by driving the most economical 

projects to the top, though it may also allow for speculative project bidding that can result 

in contract failures and stranded development costs. 

Since RPS policies were first enacted by states in the late 1990s, many have been 

strengthened and refined to meet evolving state objectives. RPS policies have been 

identified as one of the most important factors driving new renewable deployment in the 

United States (Wiser and Barbose 2008). Mechanisms for promoting specific 

technologies or applications, limiting ratepayer impacts, and encouraging in-state 

generation have also been incorporated into RPS policy design. These new policy 

objectives underscore the importance of evaluating different procurement mechanisms so 

that their contribution to the RPS target, as well as their anticipated interaction with each 

other, can be clarified. 

1.2 Renewable Procurement to Meet RPS Mandates

Depending on the regulatory environment, a regulated entity’s compliance with RPS 

mandates can be satisfied through ownership of renewable generation, purchase of 

tradable renewable energy certificates (RECs),

4

In most cases, procurement is conducted by the obligated LSE, but some states have 

experimented with central procurement administered by a special purpose agency. This 

approach is currently used in New York and Illinois (Wiser and Barbose 2008). Some 

states have established “tiered” targets or set-asides within their RPS, often for resource 

types and vintages that may not be least-cost. These RPS design provisions may impact 

what procurement mechanism is used.

entry into long-term binding contracts, or 

a combination of these approaches. This report primarily focuses on procurement of longterm contracts, which can either be signed for the RECs generated by a new renewable 

project (“REC contract”) or the generation output bundled with the RECs (“bundled 

contract” or “power purchase agreement”) (Wiser et al. 2005; Cory et al. 2008). Power 

purchase agreements (PPAs) signed between an LSE and an IPP usually include energy 

payments, capacity payments, and REC payments and may include a fixed-price 

escalator. Power sold under a PPA with a fixed escalator will increase in price at a 

predetermined rate—usually 2%–5% per year—though there are variations in this 

structure (Cory et al. 2009). 

Competitive procurement (through competitive solicitations or RFPs) is the most 

common way that LSEs select renewable generation for RPS compliance in the United 

States (Tierney and Schatzki 2008; NESCOE 2010). Under some circumstances, LSEs 

use bilateral contract negotiation to secure long-term contracts for electric generation 

from renewable projects (Wiser and Barbose 2008; Grace 2010, personal 

communication). These two mechanisms can also be used in concert with one another 

 

4 Some renewable development has also taken place on a quasi-merchant basis, where private developers 

undertake projects and do not secure power or REC purchase agreements to cover their entire expected 

output. While selling a portion of their power or RECs on the spot market to interested buyers, these 

developers often use electricity or natural gas derivatives to cover the lower-end revenue risks, while also 

providing potential for increased upside earnings (Cory et al. 2008).
3 

(e.g., projects are selected by means of a competitive solicitation and then enter into a 

bilateral contract negotiation to establish a PPA). These procurement mechanisms will be 

discussed in detail in Section 3. 

In the last four to five years, several U.S. jurisdictions have experimented with FIT

policies as a means of procuring renewable generation, particularly from small-scale 

generators.5

 FIT policies, as developed and refined in Europe, require utilities to offer 

open and standardized contracts to renewable energy producers for the electricity they 

produce for a predetermined period of time. There is no single definition of a FIT, but 

versions typically will include a standardized long-term contract on the order of 15–20 

years, the assurance of grid access, and an administratively set payment level that can be

based on the cost of renewable generation or the avoided cost of electricity (Mendonça 

2007; Couture et al. 2010). While their use has been limited in the United States, FITs are 

the predominant renewable energy support policy in the European Union6

Finally, the concept of using auctions for RPS procurement is emerging as an alternative 

to traditional long-term contracting mechanisms. Auction structures are variable, but for 

the purpose of this report they are defined as a formal process in which—after meeting 

pre-bid qualifications—the winners are determined by price (sometimes price and 

volume). As with other contracting mechanisms, auctions can also be conducted for 

RECs or bundled energy. Section 4 will discuss the recent rise in interest in the use of 

auctions to procure bundled electricity contracts in the western United States (Vote Solar 

Initiative 2009; CPUC 2009a; Oregon PUC 2010; Arizona Corporation Commission 

2010).

and have been 

implemented in over 60 countries worldwide as of early 2011 (REN21 2011). 

FITs and auctions may be explored as options for utilities or LSEs to meet RPS 

mandates. Regulators may have to approve the special use of auctions for renewable 

procurement or auction-based contracting. Legislative or regulatory action is typically 

required before utilities can employ FITs.

7

1.3 Market Contexts and Procurement

Note that in RPS markets with retail 

competition, implementing mandatory alternative supply procurement strategies (e.g., a 

FIT must-take provision) may require further regulatory change. This point will be 

further explored in Section 4. 

Electric industry structure and state policies related to procurement of electricity supply 

have a sizeable impact on how LSEs purchase renewable generation. 

 

5 For example, Hawaii’s project size cap is 5.0 MW, California’s is 3.0 MW, and Vermont’s is 2.2 MW 

(DSIRE 2010c; DSIRE 2010d). 6 By 2009, the majority of countries in the European Union (EU) (20 out of 27 EU member states, covering 

over 88% of the total EU population) chose to use FITs as their primary procurement mechanism (REN21 

2009; EUROSTAT 2009).

7 Regulatory action needs to be exercised under PURPA and not state law. See Cory 2011 for more details.
4 

In traditionally regulated markets,

8

On the other hand, in states with retail electric generation competition, electricity 

suppliers have greater latitude for complying with RPS as they see fit. Often these areas 

overlap with competitive wholesale electricity markets, managed by a regional 

transmission organization (RTO) or independent system operator (ISO). In organized 

RTO markets, the approaches used to procure renewable electricity include competitive 

solicitations, centralized auction or exchange, and bilateral contracting. Where there is a 

sufficiently competitive supplier market, bilateral contracting through forward or future 

trading can be used in addition to competitive solicitations (Yu et al. 2010; Kirby 2007). 

utility-driven procurement is typically conducted for 

incremental supply. Many of these states have chosen to issue rules or policy guidelines 

that specify when and how LSEs should undertake procurements (Tierney and Schatzki

2008). Here, LSEs largely rely on long-term contracts for RECs bundled with electricity. 

A reason for this is that these vertically integrated utilities are generally responsible for 

electricity supply decisions through integrated resource planning (IRP). Integrating the 

utility’s RPS compliance into resource planning helps to ensure planned additions are 

consistent with the size, type, geographic location, and timing of resources needed by the 

utility. Furthermore, in some states, including Colorado, Iowa, Montana, Nevada, and 

North Carolina, policymakers encourage or require utilities to enter long-term contracts 

with renewable energy suppliers as a strategy to facilitate financing and improve RPS 

compliance (Wiser and Barbose 2008). 

Unbundled RECs are more commonly used to demonstrate RPS compliance in 

deregulated and RTO markets. Renewable electricity may be procured either 

independently of, or in combination with, basic non-renewable service (often called full 

requirements service) (NESCOE 2010). Since the future load obligations of LSEs may be 

uncertain, REC contracts tend to be shorter in duration than in states with traditional 

utility structure; often LSEs buy RECs on the spot market to retire for RPS compliance 

(Wiser and Barbose 2008). 

Frameworks concerning renewable procurement are still evolving in some states with 

deregulated utility markets. For example, Illinois and New York have vested power in

central state authorities to conduct specialized procurements of renewable power on 

behalf of LSEs (Wiser and Barbose 2008). Connecticut, Delaware, New Hampshire, and 

Rhode Island have new requirements for IRPs, which may lead to requirements for their 

LSEs to procure new renewable generation to add to their portfolio (NESCOE 2010; 

Tierney and Schatzki 2008). Furthermore, distribution utilities are often encouraged or 

required to enter long-term contracts to bring on new renewable generation (see 

Connecticut, Maryland, Massachusetts, and Rhode Island.)9

 

8 These statements also apply to markets, such as California and Montana, that previously underwent 

restructuring but currently do not have retail choice or full divestiture of power plants.

 Remaining states may not 

9 Connecticut’s “Project 150” requires the Connecticut Clean Energy Fund to solicit long-term contracts on 

behalf of the two LSEs for 150 MW of Class I renewables (CCEF 2010). Maryland’s requirement is limited 

to solar REC contracts (Wiser and Barbose 2008). Massachusetts’ electric distribution companies must 

conduct at least two solicitations for long-term contract proposals from renewable energy projects between 

July 1, 2009, and June 30, 2014, under the Green Communities Act (NESCOE 2010). Beginning July 1, 
5 

have mandatory requirements for long-term contracts, but their regulators may encourage 

long-term contracts or at least have statutory authority to approve long-term contracts 

(NESCOE 2010; Union of Concerned Scientists 2008). The Federal Energy Regulatory 

Commission (FERC) has adopted actions to support the use of long-term contracting in 

organized RTO markets; for example, they do this by assuring long-term transmission 

rights (FERC 2009). FERC Order No. 719 highlighted proposed actions that would 

facilitate long-term contracts but not compel buyers and sellers to enter long-term 

contracts (FERC 2009). Most recently, FERC Order No. 1000 requires that RPS 

requirements be taken into account as regions plan for new transmission (FERC 2011). 

 2010, Rhode Island’s electric distribution companies must solicit proposals annually from renewable 

energy developers (NESCOE 2010).
6 

2 Evaluation Framework

This report does not make recommendations about the approaches (or combinations of 

approaches) LSEs and states should use or adopt to procure renewable energy. Instead, 

the report considers the interaction between important tradeoffs that affect how risks are 

assigned between utilities and their customers. Criteria were developed to evaluate the 

procurement strategies and the implications of their tradeoffs. The criteria below were 

selected because they look at procurement from the perspective of all the stakeholders: 

ratepayers, regulators, utilities, investors, and developers. How a jurisdiction weights the 

importance of each stakeholder's perspective is dependent on state objectives and other 

factors (e.g., staffing constraints at the regulatory commission). After evaluating the 

procurement mechanisms against the following criteria, general conclusions are made 

about advantages and challenges of each approach. 

Pricing is an umbrella category that considers: 

• Cost effectiveness: Does the procurement mechanism select for least-cost 

generation? 

• Ability to capture current pricing conditions: Do prices track market 

conditions? Are they indicative of local supply and demand? 

• Underbidding: Does mechanism design allow for or mitigate speculative bids 

that may ultimately fail to deliver successful projects? 

Complexity and efficiency of contracting processes is a broad category that evaluates:

• Administrative burden: How involved is the process (in terms of time and 

expense) for utilities and regulators?

• Speed of contract negotiation: How long is the bid-to-contract duration? 

• Need to “over-procure”: Does a procurement mechanism necessitates “overprocurement” of renewable resources in order to meet targets? 

The impacts on developers’ access to market criterion addresses how procurement 

mechanisms impact market entry and supplier concentration. The following elements 

may impact ease of market entry, the size of the pool of investors and developers, and 

market concentration of executed contracts: 

• Transaction costs: How much will developers have to expend in order to 

obtain a contract?

• Price transparency: Are awarded prices public information? 

• Timing of project financing: How does the procurement mechanisms affect 

when financing occurs in the development cycle? 

• Access: Are particular classes of developer or sizes of projects excluded from 

particular procurement approach? 
7 

The final criterion is how well the procurement mechanism is suited to address utility 

concerns and to work within utility decision-making processes. The following questions 

are addressed: 

• IRP processes: Do contracting mechanisms fit with long-term IRP processes? 

• Build v. buy: Do procurement mechanisms allow utilities to choose between 

building and buying generation resources? 

• Rate recovery: Are utilities granted rate recovery for procurements of this 

type? 

• Grid reliability: Do contracting mechanisms allow utilities to select resources 

that best fit with current and projected load (and allow them to maintain grid 

reliability)?10

• Project siting and integration: Can utilities exert control over project siting 

and integration as to reduce transmission and distribution costs? 

 

• Consideration of non-price factors: What are the non-price factors that should 

be considered when evaluating a project (e.g., developer experience, site 

control, and location)? 

These criteria are applied in a qualitative manner, based on case studies and review of 

existing literature. While a few of the criteria would be amenable to some kind of 

empirical measurement, this analysis was not undertaken. 

The goal of this report is to provide a conceptual framework about RPS procurement, and 

in doing so, allow readers to formulate their own conclusions about the best uses and 

inherent limitations of each procurement type. The authors argue that a qualitative 

approach remains valid because the purpose of this work is to encourage readers to think 

about implications and tradeoffs in a novel way. The authors try to acknowledge any 

outliers and tee them up for discussion. 

 

10 Note that this may not be an issue in markets that are managed by an RTO.
8 

3 Current Procurement Strategies 

3.1 Competitive Solicitations

Competitive solicitations are widely used in the electricity industry for new renewable 

resource procurement. Solicitations are designed to encourage competition between 

project developers, so as to secure new renewable supply at the lowest cost to ratepayers 

(Rader and Norgaard 1996; Menanteau et al. 2003; Lauber 2004; Wiser et al. 2007). 

A competitive solicitation is a formal process under which the procurement agent 

(usually the LSE) issues a request for proposal (RFP), collects and evaluates qualifying 

bids, and executes contracts with winning bidders. The approach typically involves 

contract negotiation either with the highest-ranking bidder or with a short list of bidders. 

Weight is given to both price and non-price criteria, and regulators are typically involved 

in creating evaluation metrics and ultimately approving contracts (Tierney and Schatzki 

2008). Competitive solicitations for new renewable supply are often tied to the entity’s 

near-term RPS requirements (Cory and Swezey 2007). 

3.1.1 Application of Evaluation Criteria

3.1.1.1 Pricing

Since price terms are commonly the principle selection criterion under an RFP, 

competitive solicitations will usually select projects based on their cost effectiveness. If 

issued frequently, RFPs can be effective at tracking market price trends, as each new 

solicitation provides a snapshot of prevailing market prices. However, due to the 

competitive nature of RFPs, some developers are reported to underbid in the solicitation 

process to secure a contract (Wiser et al. 2005; CEC 2006; Grace 2010, personal 

communication). Underestimation of development costs—particularly cost, complexity, 

and time required to address transmission, interconnection, and permitting issues—may 

lead to contract failure. Contract failure is a veritable resource drain on both utilities and 

developers and can compromise a state’s achievement of its RPS targets (Wiser and 

Barbose 2008).11

Conversely, the competitive procurement process can also lead to overestimation of 

pricing, as developers may incorporate added transaction costs and risk premiums into 

their bids. Developer risk at this stage derives from the uncertainty about how long 

contract approval will take, whether or not the regulator will enforce the rules requiring 

fairness and objective processes, and whether or not the regulator will reopen the process, 

throw out solicitation results, alter the rules, or allow utilities to circumvent the 

procurement (Tierney and Schatzki 2008). 

 Moreover, consistent underbidding on the part of the developers could 

skew the utilities’ and regulators’ pictures of prevailing market prices. 

 

11 Based on a 2006 survey of 21 North American utilities, KEMA, Inc., consultants suggested that a 

minimum overall contract failure rate of 20%–30% should generally be expected for large solicitations 

conducted over multiple years (CEC 2006). More recently, California’s three investor-owned utilities 

claimed historical failure rates of 30%–50% in their own jurisdictions (CPUC 2011a). The California 

Energy Commission records indicate that 14% of contracts from utility RFPs (representing 8% of expected 

gigawatt-hours) have failed (DRA 2011). Notwithstanding these estimates, the exact rates of contract 

failure are unknown across all utilities and regulatory contexts.
9 

3.1.1.2 Complexity and Efficiency of the Contracting Processes 

Procurement through competitive solicitation places an administrative burden on both the 

LSE, who receives the bids and manages selection, and the regulator, who monitors the 

solicitation process. Evaluating bids is inherently complex because of the vast array of 

technical details in each project proposal and the critical differences in contract structure, 

risk, and benefits profiles. LSEs and regulators may find it challenging to be both 

rigorous and efficient in assessing the bids with respect to non-price factors (Tierney and 

Schatzki 2008). It is possible to simplify bid comparisons to a certain extent by either 

specifying desired project characteristics (e.g., size, technology type, or commercial 

operating date) or by standardizing contract terms and structures.12

However, in spite of this complexity, competitive solicitations may still be a favored 

approach because in-depth project analysis allows LSEs to select the best projects with 

respect to cost and viability. Additionally, screening projects carefully may reduce the 

incidence of contract failure.

 

13

The level of scrutiny that is typical of bid evaluation may mean that the process takes a 

number of months from solicitation to execution of contracts. Tierney and Schatski 

(2008) suggest that the whole cycle takes three to four months on average and sometimes 

significantly longer. In certain cases an unintended consequence might be that the lapse 

of time between the launch of the RFP and the actual time of construction may surpass 

the shelf life of the bid itself, and the contract may require renegotiating (CEC 2006). 

Moreover, RFP processes tend to occur on an as-needed basis and sometimes do not have 

predictable timing. This unpredictability can be challenging for developers and investors, 

planning their activities.

 

3.1.1.3 Impact on Developers’ Access to Markets

An implicit requirement of a competitive solicitation is that bidders demonstrate 

creditworthiness and technical ability. For this reason, competitive solicitations favor 

experienced, well-capitalized players. Furthermore, project financing typically occurs 

after PPAs are negotiated and signed, so smaller, less-established players may have 

trouble covering the costs of conducting due diligence and of submitting an attractive bid. 

Also, provisions are occasionally included that require the developer to have a portfolio 

of previously built renewable energy projects. Combined, these and other factors can 

make it difficult for new players to gain a foothold in the market. 

 

12 In some cases, utilities include in their bid submission documents a formatted/standardized pro forma for 

bidders to use (CPUC 2009b; NV Energy 2010; AEP 2009). This does not mean that contract terms are 

always standardized. Often, bidders can request exceptions to standard form agreements in their 

submission, or post-bid negotiations may further modify terms and conditions (NV Energy 2010; AEP 

2009). 

13 Some analysts suggest that contract failure remains a significant problem in competitive procurement. 

Based on a 2006 survey of 21 North American utilities, KEMA, Inc., consultants suggested that a minimum 

overall contract failure rate of 20%–30% should generally be expected for large solicitations conducted

over multiple years (CEC 2006). Exact rates of contract failure are unknown across all utilities and 

regulatory contexts.
10 

If developers are tied up in a lengthy bid evaluation process, they may be constrained 

from offering their resources into other markets. While their offers are being considered, 

they may need to maintain firm price terms in spite of market changes. Therefore, delays 

in the RFP evaluation stages can increase a bidder’s opportunity costs for participating in 

the procurement (Tierney and Schatzki 2008). 

A competitive solicitation approach may not effective at encouraging diversity of project 

size or ownership. For example, small, distributed generation projects may not be 

selected in an RFP because of their higher cost profiles. Distributed generation 

historically has not been represented in RFP short lists and is instead incentivized by 

rebates and other support mechanisms (for a discussion of how California is addressing 

this problem, see the text box in Section 4.3). Additionally, several classes of potential 

developers may not have the resources to compete in an RFP. Utility customers (e.g., 

homeowners or small businesses) may be interested in their own distributed generation 

projects but may not have the time, money, or inclination to submit a bid (this issue is 

addressed further in Section 5). If diversity of project sizeor ownership structure is a state 

objective, other procurement mechanisms should be considered. 

Local and community investment in renewable energy projects has been limited to date in 

the United States (Bolinger 2004; Mendonça et al. 2009; Wiser and Bolinger 2010). For 

example, the “community wind”14

Accordingly, the competitive solicitation approach may form a barrier to small customersited projects or community-owned projects. If these are considered policy objectives of 

the state’s RPS, an alternative procurement mechanism may be advisable. 

market represented less than 2% of the overall U.S. 

wind market at the end of 2009 (Wiser and Bolinger 2010). Bolinger (2011) emphasizes 

that raising seed capital (to be spent on development costs) may be a significant hurdle 

for community wind projects, particularly those of smaller size. Due to the expense 

required to conduct due diligence and submit a bid, community-based developers may 

not be able to compete with larger IPPs in competitive solicitations. 

3.1.1.4 Utility Decision Making

In general, RFPs correspond well to utility planning and decision-making processes. 

After IRP informs the need for new generation resources to fit future load, utilities will 

typically issue RFPs for particular types of generation or capacity (e.g., meets a seasonal 

load or a need for dispatchable or baseload power). RFP issuance is variable by state and 

utility. California’s three investor-owned utilities (IOUs) hold annual RFPs for the 

procurement of renewable power. Other utilities may issue RFPs on an as-needed basis,

contingent upon their compliance with the RPS. 

Beyond cost, utilities are highly concerned with selecting resources that can be well 

integrated into the utility system. Conducting an RFP allows utilities to rank bids based 

on a host of other ancillary characteristics, including dispatchability, siting with respect to 

 

14 Generally “community wind” refers to relatively small utility-scale wind power projects that sell into the 

wholesale electricity market and that are developed and owned primarily by local investors (Bolinger 

2011).
11 

load centers, permitting with respect to site control, time of delivery, and cost and ease of 

integration. California has codified these ancillary services in a 2004 public utility 

commission (PUC) decision adopting the “least-cost, best-fit” selection criteria that

utilities must employ when procuring renewable resources. These resources must be 

“least-cost” in their energy delivery (relative to other resources) and “best-fit” in terms of 

their compatibility with utility system needs (CPUC 2004). 

Finally, competitive solicitations are a fairly flexible approach to procurement. LSEs can 

define the product solicited as broadly or narrowly as they wish. More open and flexible 

solicitations may allow the market to come up with creative alternatives to meet LSEs’ 

needs most cost effectively (Tierney and Schatzki 2008). Additionally, an LSE could 

theoretically request that bidders submit prices for transferring ownership outright to the 

utility, so that they can own and operate it themselves. Examples of recent RFPs 

demonstrate that utilities are requesting bids for buying projects outright (NV Energy 

2010; Sustainable Business 2010). 
12 

3.1.2 Summary

Competitive solicitations have the benefit of procuring least-cost renewable electricity 

generation independent of technology type. The approach is central to renewable 

electricity procurement in most regulatory environments and may provide utilities or 

LSEs with some flexibility and control over the type, size, and timing of renewable 

additions to a utility system. However, the RFP process may have significant 

administrative costs associated with the length of the solicitation and contract negotiation 

process. RFPs may not have predictable timing, which could limit developer and investor 

interest. RFPs can also foster non-trivial rates of contract failure, which have afflicted 

RPS states, such as California and Nevada. 

Table 1. Application of Evaluation Criteria to Competitive Solicitations

Criteria Advantages Challenges

Pricing • RFPs select competitively priced 

projects (and are technology neutral)

• The approach can be effective at 

tracking market prices if RFPs are 

issued frequently enough

• Developers may underestimate 

development costs when submitting a 

bid; this may factor into contract 

failure

•

Complexity/ 

Efficiency of 

Contracting 

Processes

• Competitive procurements can be as 

broadly or narrowly designed as the 

LSE requires

• LSEs can ask bidders to submit 

standardized pro formas, which may 

reduce the time and expense of 

evaluating bids

• Significant administrative burden (on 

both LSE and regulator) to issue 

RFP, evaluate bids, negotiate 

contracts, and seek PUC approval

• Contracts are negotiated on an 

individual basis

• The time between the RFP launch 

and construction may surpass the 

shelf life of the bid itself, meaning that 

contracts may need renegotiation

• RFPs may not have predictable 

timing, which could limit developer 

and investor interest

Impact on 

Developers’ 

Access to 

Markets

• RFPs favor creditworthy developers 

with technical capability

• Competitive solicitations are open to 

all who can submit a bid

• RFPs are often open and flexible, 

allowing for bidders to develop 

creative, mutually beneficial 

proposals

• RFPs do not facilitate market entry 

for less established players

• Being tied up in a bid evaluation 

process may present developer 

opportunity costs

• RFPs generally do not allow for 

diversity of size and ownership

Utility 

Decision

Making

• RFPs may be issued as needed to 

complement integrated resource 

planning

• LSEs can tailor RFP issuances as to 

encourage bidders to submit project 

proposals that fit their needs and 

preferences, which can mitigate 

reliability issues

• RFPs allow for a high degree of 

consideration of non-price factors

• 
13 

3.2 Bilateral Contract Negotiations

Under the bilateral contract approach, contracts for new renewable capacity are signed 

between the two entities without resorting to an official competitive solicitation (Wiser et 

al. 2005). Bilateral contracts are private, two-party transactions used in both regulated 

and competitive RTO markets. Either the developer or the LSE can initiate bilateral 

contract negotiation.

In regulated markets, bilateral contract negotiation may occur on a case-by-case basis if

an LSE solicits a bid from a particular developer or if a developer approaches an LSE 

with a proposal to develop new electrical capacity within a utility’s service area.15

Bilateral contracts are sometimes signed in extraordinary situations with a high level of 

regulatory oversight. An example of this is the contract negotiations for the Deepwater 

Wind offshore wind facility in Rhode Island. In addition to the typical parties involved 

(utility, developer, and regulator), the Rhode Island governor and legislature played a 

major role in pushing through a bilateral contract between the offshore wind developer 

Deepwater Wind and the utility National Grid (Providence Business News 2010). The 

PUC rejected the initial PPA on the basis of cost. In response, the legislature, backed by 

Governor Carcieri, submitted a bill to clarify the intent of the state’s long-term 

contracting requirement (Gov Monitor 2010). The passing of this bill was a key step 

leading to PUC approval of the contract. The bill caps the price of the power to the level 

in the PPA previously filed with the PUC. The renegotiated PPA was approved on the 

condition that it contains an “open book” approach that requires Deepwater Wind to 

disclose (and the Division of Public Utilities and Carriers to verify) the construction and 

development costs of the project. If the Division of Public Utilities finds that the project 

costs less to develop, the PPA price shall be adjusted downward (GovMonitor 2010). 

As 

with contracts resulting from RFPs, bilateral contracts are subject to approval by state 

utility regulators. Municipally owned utilities, cooperatives, and other electricity service 

providers are sometimes given greater latitude to engage in bilateral negotiations, 

depending on the market structure (Grace 2010, personal communication). Some states 

allow the bilateral contract approach for IOUs but encourage the use of competitive 

bidding. For example, Massachusetts requires that competitive procurement processes be 

used to “the fullest extent practicable” (Massachusetts 2008). This rule likely stems from 

policymakers and regulators preference for lowest cost contracts. Our literature review 

did not uncover any data sources that compare contract prices achieved through 

competitive solicitations versus bilateral negotiations. 

In competitive wholesale electricity markets, LSEs sometimes enter bilateral contracts if 

the RTO market is sufficiently competitive. Using the bilateral contract negotiation 

approach, utility buyers can shop around for the best price without the formality of an 

RFP (Hurlbut 2011). However, a lack of market competition or a propensity towards 

collusion among suppliers could limit the effectiveness of bilateral contracting.

 

15 If utilities find that the proposals are of reasonable cost and feasibility and are desirable additions to their 

generation mix, they may pursue bilateral contract negotiations.
14 

In the New England ISO and the New York ISO, competitive solicitations are most often 

used, and bilateral contracts are scarce (NESCOE 2010; Wiser and Barbose 2008). As 

mentioned previously, in New York and Illinois, central agencies hold competitive 

procurements on behalf of LSEs. On the other hand, bilateral energy trades are common 

in the Electricity Reliability Council of Texas (ERCOT), where the bilateral electricity 

market volume far exceeds the hourly market (Kirby 2007).16

The bilateral contract negotiation approach has different advantages, challenges, and 

considerations than the RFP approach. The next section explores the evaluation criteria as 

applied to bilateral contracts.

 

3.2.1 Application of Evaluation Criteria

3.2.1.1 Pricing

With bilateral contracts, the parties agree upon PPA pricing through negotiations. In 

regulated markets, although utilities and regulators may be cognizant of prevailing 

market prices from recent RFPs, the lowest price projects may not be selected because 

bilateral contracts are infrequent and do not open the market to competition. The lack of 

competition between project developers is likely to result in less accurate price discovery, 

as no concurrent comparison is being made between different market players. On the 

other hand, underbidding is less likely to be a concern. 

3.2.1.2 Complexity/Efficiency of Contracting Processes 

Since contracts are negotiated individually, this approach may reduce the chances of 

contract failure (Grace 2010, personal communication), thereby reducing the overall 

administrative burden on utilities and regulators. However, capacity additions via 

bilateral contracting may still be a lengthy process in the case of regulatory oversight and 

may hinder a utility’s ability to move rapidly on renewable targets. In RTO markets, on 

the other hand, bilateral contracting can be efficient. If the market is robust and it is easy 

for the utility to take its business elsewhere, a bilateral contract could actually be 

concluded more quickly than would be the case in an RFP (Hurlbut 2011).

3.2.1.3 Impact on Developers’ Access to Markets 

The bilateral contract approach may or may not facilitate entry by new market players in 

regulated markets. If the objective of bilateral negotiations is to add capacity 

expeditiously, the LSE may still decide to select experienced developers with strong track 

records to develop projects. It is possible that these bilateral negotiations would occur 

between firms that have prior business ties. On the other hand, some LSEs use the 

approach to support projects with technical risks that may not be competitive in an 

ordinary RFP. In this way, bilateral contracting may increase access to markets for 

certain developers rather than decrease it. Bilateral negotiation can be particularly 

 

16 Note that since the publication of this report, the ERCOT market has undergone structural changes (i.e., 

the introduction of a day-ahead and real-time locational-marginal-pricing-based nodal market) (Smith et al. 

2010), but the majority of ERCOT electricity sales are brokered through bilateral agreements (Yu et al. 

2010).
15 

valuable for these types of projects because it is more likely that they will obtain the 

terms needed to be viable (Grace 2010, personal communication).17

Similar to the competitive solicitation section of this report, utilities go through official 

negotiated contracts with IPPs providing utility-scale generation. The bilateral 

contracting approach would not be used for small project sizes or for working with small 

utility customers seeking to develop renewable energy systems.

 

18

Bilateral contracting is often applied in a competitive environment, like in an RTO 

market. As with an RFP process, developers seeking bilateral contracts in RTO markets 

must be creditworthy, have technical ability, and also be well versed in wholesale 

electricity market dynamics.

 Additionally, a 

developer must be technically skilled with comparable experience to be considered by a 

utility for a bilateral contract. Certain classes of developers, such as community investors, 

may not have the resources to initiate these financial negotiations. 

3.2.1.4 Utility Decision Making

The bilateral contract approach can be initiated on an as-needed basis or as developers 

approach the utilities. The approach may be desirable because capacity can be added 

incrementally without the administrative cost and long timeline of an RFP. Bilateral 

contracting provides flexibility to the utility to select projects that meet utility-defined 

targets for resource acquisition as defined by an IRP. The approach may provide an 

outlet to procure supply that may not be least-cost but may have grid benefits. 

3.2.2 Summary

Bilateral contracting provides flexibility for an LSE to choose desirable resources. A 

bilateral contract may take less time to implement than issuing a solicitation and 

executing a contract with a bid winner. However, since regulators may not provide a 

guarantee of cost recovery for utilities initiating bilateral contracts, some utilities in 

regulated markets may be dissuaded from using the approach. Additionally, time and 

resources are invested in negotiating each contract individually. 

 

17 However, the bilateral approach does not guarantee that projects will reach completion, especially for 

unproven or expensive technologies, because obtaining a PPA is only one step in the project development 

process. 

18 These projects use other mechanisms like net metering, for example. 
16 

Table 2. Summary of Application of Evaluation Criteria to Bilateral Contract Negotiation

Criteria Advantages Challenges

Pricing • PPA terms are subject to negotiation

• Developers may be more likely to 

receive the price that they need to 

develop a project

• 

• Bilateral contracts may not result in 

lowest-cost PPAs 

• In regulated markets, pricing is not 

competitively derived

• Bid or offer pricing may not be 

disclosed, potentially impacting 

developer participation

•

Complexity/

Efficiency of 

Contracting 

Processes

• Bilateral contracting may be efficient 

in competitive RTO markets

• Individualized contracts may take 

longer to negotiate and approve than 

standard offer contracts

• An iterative process may be needed 

to settle on PPA terms and conditions

Impact on 

Developers’ 

Access to 

Markets

• In extraordinary situations with 

regulatory oversight, developers of 

emerging technologies who cannot 

compete in RFPs may be able to 

obtain contracts through bilateral 

contract negotiations

• Unsolicited bids may not be accepted 

by LSEs depending on need for 

generation capacity, bid pricing, and 

other variables

• Bilateral contract negotiation may 

favor established market players

• Bilateral contract negotiation is 

generally not feasible for small 

projects

Utility 

Decision

Making

• Utilities may choose to accept or 

reject unsolicited bids based on 

resource planning needs

• Bilateral contracting allows for full 

consideration of non-price factors

• In some jurisdictions, cost recovery 

from bilateral contracts may not be 

guaranteed
17 

4 New Procurement Strategies in the U.S. Context

New market players emphasize that it may be difficult to enter the market given 

traditional utility renewable energy procurement strategies. In the interest of supporting a 

robust renewables manufacturing sector and rapid deployment of renewable energy, some 

market players have come out in support of new mechanisms for utilities to procure 

renewable energy—those that utilize standardized contracts and open access to all 

developers with viable projects. This outlook has been aligned with the support of FIT

policies and auctions. 

In the last few years, some U.S. states have begun to debate whether or not FITs should 

be used to support renewable projects, specifically small- to mid-scale projects in their 

jurisdictions. Proponents, including industry groups like the Clean Coalition,19

While FIT policies are relatively new in the United States, they are beginning to be 

implemented in a number of states, often as a means to accomplish limited policy 

objectives, such as in promoting distributed generation or specific technologies, such as

solar photovoltaics (PV) (Couture and Cory 2009). U.S. implementers have exerted 

caution regarding the scope of their programs, and the boom-bust cycles in Spain, France, 

the Czech Republic, and other nations has potentially deterred some domestic interest in 

the policy mechanism. Additionally, FERC jurisdictional issues (i.e., whether states can 

set rates that exceed utility’s avoided costs) have added uncertainties (Hempling et al. 

2010). However, recent FERC rulings have clarified states’ abilities to set special 

avoided-cost rates for renewable generators under the Public Utility Regulatory Policies 

Act (PURPA) (Cory 2011). 

 suggest 

FIT policies as a mechanism for obligated utilities to meet their RPS compliance 

requirements, in addition to or replacing the need for competitive solicitations. Mostly, 

support for FITs has come from solar market stakeholders and is emphasized in the 

context of small to mid-sized projects.

In Vermont, FITs are beginning to be used as a primary mechanism to meet the state’s 

RPS goal, which may become mandatory by 2013 (DSIRE 2011b). The Vermont FIT 

program solicits PV, landfill gas, wind, biomass, hydroelectric, municipal solid waste, 

and anaerobic digestion projects up to 2.2 MW in capacity (DSIRE 2011b). Similar 

proposals have been made for the states of Indiana, Michigan, Minnesota, Washington, 

and Wisconsin, as well as at the federal level (Grace et al. 2009; Couture et al. 2010). 

The United States has also recently seen growing interest in auction programs for 

procuring new renewable supply. Section 4.3 and 4.4 evaluates the use of auction-based 

procurement for new renewable electricity generation and describes auction 

preconditions and design considerations. The California PUC’s new Renewable Auction 

Mechanism (RAM) program will also be discussed. 

 

19 Clean Coalition. http://www.clean-coalition.org/. Accessed October 6, 2011.
18 

4.1 Feed-In Tariffs

FIT policies encourage the development of new renewable energy generation by offering 

open access to long-term purchase contracts for the sale of renewable electricity (Lipp 

2007; IEA 2008). The obligation to purchase electricity is established in law and enforced 

by the respective PUC or other regulatory body. 

Much like RPS frameworks, FITs have taken a number of different forms at the state and 

municipal levels (Rickerson et al. 2008; Couture and Cory 2009). Some U.S. FIT policies 

set payments based on estimated generation costs of representative projects,

20

4.1.1 Application of Evaluation Criteria

while 

others base payments on a utility’s avoided cost. Some FITs are available only for solar 

PV, while others have been extended to other technologies (California 2009; DSIRE 

2011b; DSIRE 2011c; DSIRE 2011d; Couture and Cory 2009). For the most part, FITs in 

the United States are only available for behind-the-meter projects or projects feeding into 

the distribution grid (e.g., California’s FIT is offered to systems up to 3 MW in size). 

4.1.1.1 Pricing

Typically, FITs are administratively set standard offer rates for the procurement of new 

renewable energy generation. Most jurisdictions with FITs review and adjust payment 

levels periodically, every one to four years.

21

Interestingly, the price transparency of a FIT may have a positive effect on component 

pricing. Scheduled declines in payment level may place increased pressure on 

manufacturers to lower cost of generation (Couture et al 2010).

 However, annual review may not be enough 

to keep payment levels in line with cost trends (particularly for modular technologies like 

PV). Thus, in the interim between program reviews, policymakers have created 

secondary payment level adjustment mechanisms. One common policy design is 

degression, whereby payment levels decline by a predefined percentage annually. 

Degression ensures that projects coming online at a later date receive a lower payment, in 

accordance with cost declines that result from technology advancements and economies 

of scale (Mendonça et al. 2009; Couture et al. 2010). Alternatively, for technologies with 

rapidly evolving costs (e.g., solar PV), “responsive” payment level adjustments have also 

been used. Jurisdictions, including Germany and Spain, adjust FIT payment levels based 

on how much capacity has been installed during a predefined period of time (Kreycik et 

al. 2011). 

Also impacting cost to ratepayers, policymakers often differentiate the payment levels 

offered to different projects according to their characteristics—that is, a different set of 

payment levels can be offered for different technology types and project sizes or for 

projects benefiting from higher resource quality (Mendonça 2007; Couture et al. 2010). 

By differentiating projects in this way, a wider variety of project types can be financed, 

 

20 Since payment levels are based on representative projects, the price offered might be either higher or 

lower than the level that any specific project needs to be economically viable. Since projects volunteer to 

participate in a FIT, presumably all of those projects believe the rate is higher than what they need. 21 Policymakers may require IPPs receiving FIT payments to report on generation costs to inform future 

rate setting. This can help in keeping payment levels accurate over time. 
19 

built, and operated in a given jurisdiction. Many RPS policies have set-asides for a 

targeted amount of generation from a specific technology or project type (e.g., customersited). Differentiated payment levels may facilitate reaching a set-aside. 

Most FITs not only target low-cost technologies but also provide contracts to higher-cost 

technologies. Resulting contracts may increase costs to utility ratepayers relative to

procurement mechanisms that target only least-cost technologies (Elliott 2005; Lesser 

and Su 2008). Compounding this effect, experience in Europe suggests that high tariffs 

can trigger rapid deployment and lead to more deployment than targeted by policymakers 

and regulators (Couture et al. 2010). 

4.1.1.2 Complexity/Efficiency of Contracting Processes

Regulators administering FIT programs must invest time into setting FIT rates and 

adjusting them on an ongoing basis. Whereas a lot of work goes into establishing FIT 

policies and payment levels, the actual contracting process can be more streamlined and 

efficient than under RFPs or bilateral contracts because contracts are standard and nonnegotiable. Time between FIT contract application, evaluation, and acceptance may be 

significantly shorter because contract terms are standard. This can relieve administrative 

burden on developers, LSEs, and administrators and help accelerate the pace of 

renewable deployment. 

One important consideration is that FIT programs can be subject to “speculative queuing” 

issues. If developers perceive that a FIT program cap will soon be reached or that an 

administrative change impacting project economics is eminent, they may attempt to 

reserve a spot in the queue without doing due diligence on their projects. Careful design 

of queuing protocols can help alleviate this problem (Couture et al. 2010). 

4.1.1.3 Impact on Developers’ Access to Markets

FIT policies may positively impact developers’ access to the market. First of all, 

providing a consistent support framework through a FIT can play an important role in 

fostering a stable and growing renewable energy market (Deutsche Bank 2009). Also, 

FIT policies typically support a wide variety of developers including: homeowners; 

business owners; federal, state, and local government agencies; private investors; nonprofit organizations; and sometimes utilities (Hvelplund 2005; Mendonça et al. 2009). 

Wide eligibility can significantly increase the investor pool and increase the overall 

amount of activity and liquidity in the market. 

As described previously, FIT policies provide long-term purchase obligations, transparent 

prices, and standardized contracts. All three of these elements increase investment 

security and reduce risk, thereby improving developers’ access of project financing 

(Couture et al. 2010).22

 

22 Furthermore, the overall revenue stability provided by the fixed-price contract can reduce the risks of 

renewable energy investments and provide a regulatory environment that enables participants to make use 

of lower-cost debt to finance projects, rather than relying solely or primarily on equity (Deutsche Bank 

2009; Couture and Cory 2009).

Additionally, the availability of financing may be clear early on 

in the project development cycle, which may not be the case under other procurement 
20 

mechanisms. Contract standardization may also reduce transaction costs for developers 

and eliminate the need for multi-party negotiations and complex financial structures 

(Lewis 2010). Standard contracts make renewable energy financing easier for a wider 

number of prospective investors. By extension, this can facilitate market entry by new 

developers. 

However, the fact that the renewable energy incentives in the United States are built into 

the tax code may still inhibit new market players. Even with a FIT, tax equity will still be 

required to monetize the investment tax credit, production tax credit, and accelerated 

depreciation benefits in order to achieve cost-effective project economics. Developers 

must have knowledge of how to syndicate tax credits, as well as the ability to partner 

with tax equity investors, in order to make the most of their investment. 

Finally, queuing under a FIT may impact developers’ access to the market, especially 

where caps are imposed. Developers may object on the basis of fairness if protocols for 

accepting or rejecting new projects are not transparent.

4.1.1.4 Utility Decision Making

Many utilities have voiced concerns about the FIT approach. One concern is that FITs 

might promote projects that provide lower value to utilities and their customers, in terms 

of cost, reliability, and production efficiency, relative to projects that are procured via 

competitive solicitation (Bull 2010a). Standard offers can result in less-than-optimal site 

selection, when viewed from a utility’s standpoint, as developers typically seek out the 

sites with the best resources first (Couture et al. 2010). Utilities see FITs as conflicting

with IRP processes that place great emphasis on obtaining the desired mix of generation 

capacity in the areas where generation is needed most (Bull 2010b). However, it is 

possible to design FITs to work in parallel with transmission planning and mitigate this 

concern (Corfee et al. 2010). 

Additionally, from the utility perspective, FITs may exacerbate utilities’ concerns over 

renewable integration and grid reliability (Bull 2010b). Utilities obligated to buy from 

sellers under the FIT may have less flexibility in selecting projects or load profiles that 

best fit with their specific needs. Under a FIT, developers apply for and receive contracts 

on a first-come, first-served basis, and utilities must respond by planning for transmission 

build-out and dispatchable capacity to help balance load. This can lead to transmission 

bottlenecks, creating issues particularly in areas where grid requirements are projected to 

grow and where utilities are not assured rate recovery on grid upgrades. Clear provisions 

dealing with accepting and rejecting projects based on generation profile can help 

mitigate these issues.

Moreover, FITs can potentially lead to system-wide electricity price decreases, as has 

been the case in Germany and Spain (Mendonça et al. 2010). When decisions are made 

about electricity dispatch, units with near-zero marginal costs are dispatched first. Due to 

the typically low variable costs of renewable generators, their dispatch has contributed to 

lower system wide costs in countries using FITs, a phenomenon known as the “meritorder effect.” German and Spanish industry analysts reported declines in average-market 
21 

price of electricity on the order of €6–8/MWh in 2006 due to the FIT (Mendonça et al. 

2010). 

4.1.2 Summary

FIT policies provide an alternative procurement mechanism for utilities to add renewable 

generation capacity quickly. Contract standardization may expedite the development of 

new renewable capacity. FIT policies open the market to a wide variety of developers and 

can promote technology diversity by providing revenue certainty for many different types 

of projects. However, policymakers and utilities are concerned that FIT policies do not 

target least-cost generation and may have higher ratepayer impacts than other approaches. 

Concerns over the inability of FITs to closely track market pricing trends have led to 

interest in auction-based pricing mechanisms and other ways to adjust payments more 

responsively to market trends. 

The FIT approach can lead to queuing issues (especially if caps are imposed) (Kreycik et 

al. 2011) and create tensions if protocols for accepting or rejecting new projects are not 

transparent. The geographic distribution of renewable electricity development under FITs 

can also require investments in new grid capacity, which can reduce the willingness of 

utilities to cooperate unless rate recovery is assured. 
22 

Table 3. Summary of Application of Evaluation Criteria to Feed-In Tariffs

Criteria Advantages Challenges

Pricing • FITs can be designed to 

provide a targeted rate of 

return to developers of many 

kinds of renewable 

generation projects

• FITs can be used to support 

distributed generation, often 

left out of RFPs and bilateral 

contracting

• 

• Aligning the FIT contract price with actual 

technology costs over time may prove to be 

challenging

• FIT policies seek to encourage a variety of 

technology types and applications and do not 

target least-cost generation

• There can be significant price risk (over- or 

under-compensation) when FIT contracts are 

provided to large projects; this risk can be 

mitigated with good policy design

• Because FIT prices are set based on generic 

projects, they are very unlikely to be 

appropriate for any specific project

• Administratively-set prices will lag the market 

price

Complexity/

Efficiency 

of 

Contracting 

Processes

• Contracting is streamlined 

because FIT contracts are 

standard and non-negotiated

• 

• Administering FIT programs requires a time 

investment on the part of regulators for 

setting FIT rates and conducting ongoing 

analysis

• Open-ended standard offers may lead to 

queuing issues; projects in the queue may not 

represent viable projects unless screening 

and evaluation measures are taken

Impact on 

Developers’ 

Access to 

Markets

• The consistent support 

framework of a FIT can play 

an important role in fostering 

a stable and growing 

renewable energy market

• FIT policies explicitly widen 

developer eligibility and may 

provide bonus incentives for 

certain ownership 

configurations

• FIT purchase obligations 

tend to increase investment 

security and reduce risk for 

developers

• Standard offer contracts may 

reduce transaction costs and 

increase access to finance

• Queuing under a FIT may impact developers’ 

access to the market, especially where caps 

are imposed

Utility 

Decision

Making

• FIT policies can include clear 

provisions dealing with 

accepting and rejecting 

projects based on grid 

availability

• FITs might promote projects that provide 

lower value to utilities and their customers, 

relative to projects that are procured via other 

methods

• FITs may exacerbate utilities’ concerns over 

renewable integration and grid reliability

• FITs could lead to sub-optimal geographic 

selection from the utility’s perspective (unless 

policy is designed to mitigate this effect)
23 

4.2 Auctions 

Auctions are another potential option for new renewable electricity procurement. Under a 

formal auction framework, IPPs bid into the auction expressing a willingness to sell a 

given product at a given price, soliciting from others their willingness to buy at that price. 

Auctions have been used in bid-based energy markets, where electricity producers 

effectively “bid” into a marketplace at a price that approximates their marginal cost 

(Sioshansi 2008). For example, New Jersey electricity distribution companies employ 

“descending-price clock”23

Renewable energy auctions are similar to RFP processes; the difference being that 

auctions generally rely on the price criterion only after bidders are qualified. Most 

electricity market auctions are conducted as sealed-bid auctions, meaning that no contract 

negotiation is permitted. Eliminating all non-price bid factors, procurement agents obtain 

a pared-down competitive process, which may take significantly less time to administer. 

Historical experience with conducting auctions for incremental renewable supply in the 

United States includes early PURPA implementation in some states, such as Virginia 

(Hirsh 2001).

auctions to procure three-year contracts for “basic generation 

service” (Tierney and Schatzki 2008). By extension, auctions could potentially be used to 

procure renewable electricity (or RECs).

24

Several jurisdictions in the western United States are currently considering or 

implementing renewable energy auctions for long-term bundled electricity contracts for 

small to mid-sized renewable energy generators (so-called “wholesale distributed” 

generators). The California PUC is in the midst of implementing the Renewable Auction 

Mechanism (RAM) program for systems between 1 MW and 20 MW in size (see the text 

box in Section 4.3; CPUC 2010). Oregon’s Volumetric Incentive Rate program is 

employing a similar methodology for solar projects between 100 kW and 500 kW 

(Oregon PUC 2010). The Arizona Corporation Commission has also expressed interest in 

the use of this type of auction in lieu of a FIT policy (ACC 2010).

 An auction approach has also been used occasionally to procure RECs, 

but evaluation of these programs is outside of the scope of this report. 

25

 

23 A process whereby the auction's initial bidding level is lowered in increments until the amount of the 

product offered equals the amount sought (NY PSC 2006).

 

24 In 1986, Virginia Power began issuing auctions for specific blocks of new capacity as part of its 

implementation of PURPA. In that year, it issued an auction for 1,000 MW of electrical capacity to come 

online by 1990. In this particular case, it received offers from 53 companies for over 5,000 MW of new 

capacity. By 1989, seven states (Connecticut, Colorado, Maine, Massachusetts, New Jersey, New York, 

and Virginia) had adopted auction mechanisms, and by 1991, over half of the states in the United States

had experimented with or allowed auctions to be used to satisfy the requirements of PURPA (Hirsh 2001, 

p. 342).

25 It is important to note that former Arizona Corporation Commission Chair Kris Mays was a driving force 

behind this decision and Arizona renewable energy policy. Mays’s term expired in January 2011 (ACC 

2011), and there is no clear successor for her leadership on renewable energy.
24 

4.2.1 Auction Preconditions and Design Considerations

There are multiple challenges with implementing auctions for new renewable supply. 

Some of these challenges are inherent to adopting an auction-based method of 

procurement, while others could potentially be mitigated through better auction design. 

First, in order to yield a functionally competitive auction, the marketplace must be liquid; 

that is, the market size must be sufficiently large (Grace 2010, personal communication). 

Policymakers can influence market size by controlling the frequency of auctions and 

quantity of renewable energy being procured. Additionally, a technology-neutral design 

can increase the pool of investors but may produce imbalanced outcomes (i.e., if bids of 

only one technology are liquid and price competitive). An insufficient pool of players can 

readily lead to collusion effects, which risks decreasing the economic efficiency of the 

mechanism and can ultimately corrupt the price discovery process. Indeed, New York 

considered the creation of an auction for its centralized procurement mechanism but 

abandoned the approach because they concluded that the market was not sufficiently 

competitive to yield cost-effective outcomes (Grace 2010, personal communication).

California Renewable Auction Mechanism

In December 2010, the California PUC adopted the RAM, which establishes a technologyneutral, reverse auction program to be implemented by the state’s three IOUs—Southern 

California Edison, Pacific Gas & Electric, and San Diego Gas & Electric. The RAM program 

requires each of these utilities to conduct biannual auctions over the course of two years to 

streamline the procurement of an aggregate capacity of 1,000 MW of “wholesale distributed 

generation” (projects between 1 MW and 20 MW in size) (CPUC 2011c). 

Each utility is responsible for establishing bidding protocols and providing solicitation 

materials, including standard contracts, to potential bidders. Auctions are to be held 

biannually (with a cap fulfillment timeline of two years) for the solicitation of three different 

products: baseload, peaking as-available, and non-peaking as-available renewable electricity 

supply. 

Bids are to be selected on the basis of price alone. Selected projects will receive their 

proposed payment level and standard contract terms with no negotiation permitted. In order to 

create a reasonable level of financial homogeneity, the California PUC has established 

minimum project viability criteria, including proof of site control, documented developer 

experience, the use of commercial technologies, and an interconnection agreement filed by the 

date of the auction. Once a bid is selected, there is a stringent requirement for placing the 

project online within 18 months of executing the contract, with a 6-month extension for 

regulatory delays. Development and performance deposits are also required for winning 

bidders, creating further product homogeneity through equivalent repercussions for nonperformance (CPUC 2011c). 

In order to maximize competition, the California PUC ruled that each utility’s auction must be 

held concurrently, and project developers are permitted to submit bids into all three auctions. 

Proposed and existing projects are eligible for bidding, though they must be within one of the 

three IOUs’ service territories. The first auction under the RAM program is slated for the last 

quarter of 2011 (CPUC 2011c).
25 

Second, in price-only auctions products, homogeneity is critical because there are no 

factors other than price upon which to compare bids. The homogeneity concept extends 

to homogeneity of product and homogeneity of project completion risk (Grace 2010, 

personal communication). Auctions can be designed to make bids more uniform in 

several ways, including by auctioning long-term contracts for RECs, by requiring electric 

generation to be firmed or shaped, or by creating separate auctions for baseload, peaking, 

and variable-output electricity products (Kreycik et al. 2011). Achieving homogeneity of 

project completion risk in an auction is challenging because permitting, developing, and 

financing risk can vary significantly from project to project (Corfee et al. 2010). It is 

difficult to achieve financial homogeneity between bidders with projects that have not yet 

reached commercial operations. Therefore, auction design must include preconditions 

that establish developer experience and project viability or financial repercussions for 

nonperformance (Kreycik et al. 2011). 

4.2.2 Implementation Example: Auctions in Brazil

Other countries have used renewable electricity auctions extensively in recent years, 

including Brazil and China. In Brazil, auctions are carried out for resource adequacy 

purposes and standardized contracts are awarded for electricity delivery beginning three 

or five years after the bid selection. The auctions are held centrally—that is, electric 

distributors determine their demands for future delivery, and these estimates are 

aggregated into a large market block indicating new electricity requirements (Moreno et 

al. 2010). From 2004 to 2009, Brazil carried out 16 long-term contract auctions for 

renewable energy, contracting 37,000 average MW26

The auctions are conducted in two rounds: a descending price clock auction and a final 

pay-as-bid round (Moreno et al. 2010). In the first round, the auctioneer initiates the 

auction with a high-energy price that is anticipated to create excess supply. Generators 

bid in the quantity they would supply at this price. As the clock advances, while there is 

still excess supply, the auctioneer decreases the energy price. This phase is known as the 

classification phase, as it aims to provide price discovery. In the second round, 

generators bid a final sealed price, which cannot be higher than the price disclosed by the 

classification round (Moreno et al. 2010). 

 of firm energy (from both new and 

existing generators) (Moreno et al. 2010). 

After a 2010 auction, Brazil’s distribution utilities signed contracts with 89 projects 

representing 2.9 GW of potential installed capacity (Zindler 2010). Contract prices were 

competitive: winning biomass developers received PPA prices averaging 

US$83.50/MWh for 713 MW of potential capacity, and winning wind developers 

received on average US$74.40/MWh for 2.1 GW of potential capacity (Zindler 2010). 

Bloomberg reports that though these wind contracts are well within the range of current 

wind levelized cost of energy (LCOE) estimates, the average price for wind contracts 

represents a 42% decrease from those signed under Brazil’s PROINFA renewable energy 

subsidy program, which ran between 2002 and 2005 (World Resources Institute 2010; 

 

26 An average megawatt is 1 MW of capacity produced continuously over a period of one year. 1 MWa= 1 

MW x 8,760 hours/year = 8,760 MWh = 8,760,000 kWh. 
26 

Zindler 2010). Furthermore, some winning bidders projected annual average capacity 

factors as high as 55% for their wind projects, which may be considered optimistic. These 

results suggest that some underbidding by wind developers (Zindler 2010). 

4.2.3 Application of Evaluation Criteria

4.2.3.1 Pricing

Theoretically, pricing under an auction-based system is more likely to approximate 

market prices, all else being equal. The California proposal has drawn interest because it 

is anticipated that such auctions could be effective at selecting lower-cost projects and 

that they could efficiently capture pricing changes in installed costs over time (CPUC 

2010; Vote Solar Initiative 2009). Additionally, if there is transparency of awarded 

prices, an auction system could strengthen the quantity of public data about the cost 

structure of renewable energy plants, as compared to competitive solicitations and 

bilateral contracting. 

If financial repercussions for non-performance are not strict, under-bidding can be a 

problem in auction-based procurement (Crider 2010; Grace 2010, personal 

communication). Additionally, because bids are non-negotiable, administrators may find 

that projects are not built if market pricing for renewable systems shifts subsequent to the 

auction. Auctions with an insufficient number of players are also susceptible to gaming, 

which could undermine the competitiveness of the process. 

4.2.3.2 Complexity/Efficiency of Contracting Processes

Contracts resulting from “sealed-bid” auctions are typically standardized and nonnegotiable, so bid evaluation and approval under auction procurement is relatively simple 

for LSEs and regulators. Thus, bid-to-contract length may be shorter under auctions than 

under competitive solicitations, where disparate contract structures, risks, and benefits 

profiles make an apples-to-apples comparison more difficult. Additionally, auctions can 

be conducted via online platforms, where automation can reduce transaction costs. The 

California PUC staff expects that an auction-based approach may reduce transaction costs 

for buyer, seller, and regulator, though this has yet to be shown in practice (CPUC 

2009a). 

4.2.3.3 Impact on Developers’ Access to Markets 

Auction-based procurement is likely to negatively impact access to markets, particularly 

for smaller and less-established players (Crider 2010). Such participants, particularly 

those without access to large volumes of capital, may have trouble meeting minimum 

project viability criteria since financing occurs later in the project development process 

(CPUC 2009a). These developers might also be deterred by the cost of mounting a bid, as 

in other procurement mechanisms discussed in this report. 

One possible issue with a price-only auction is that winning contracts may be 

concentrated within the hands of a few larger players. Market concentration could be 

mitigated through better auction program rules, but by virtue of the design, more 

experienced developers are likely to have a distinct advantage. Under the California 

RAM proposal, concerns have been expressed that the resulting contracts would be 
27 

skewed towards large projects developed by large developers since smaller projects 

might not be competitive strictly on price (Woody 2009). 

If the state’s objective is to promote smaller distributed projects or specific technologies, 

the administrator might consider creating separate auctions for those project types. This 

would foster greater homogeneity in the auction products and could create different bands 

of activity in projects at different scales and in different technologies.

Part of the challenge of implementing auctions is to strive for the correct frequency to 

ensure that auctions are functionally competitive. Regulators may require utilities to hold 

a certain number of auctions per year or according to a pre-established schedule. 

Providing a predictable schedule that is publically available can ensure that developers

have fair access. Holding regular auctions can help continuity in project development and 

can draw more developers and investors into a particular region. 

4.2.3.4 Utility Decision Making

Auctions can take a number of forms (e.g., auctions for specific technologies, specific 

project sizes, or specific load characteristics). LSEs can customize the type of generation 

that they solicit and use auctions to meet specific utility load requirements. The 

California RAM proposal bases its auctions on the load profiles the capacity will solicit, 

and as such meshes with utility IRP (Bull 2010a). For projects under 10 MW, the 

California PUC has proposed setting up auctions for (1) peaking “as-available” 

renewable products, (2) non-peaking “as-available” products, and (3) baseload products 

(CPUC 2010). 

Nonetheless, auctions could expose LSEs to supply or price risk if auction administrators 

do not conduct thorough analyses on demand and supply markets beforehand. 

Conducting initial analysis on costs and market dynamics can inform price or quantity 

caps. To reduce price risk, administrators can set “reserve prices” to represent the 

maximum amount buyers will pay for the generation, capacity, and RECs. Alternatively, 

to reduce supply risk and contain program costs, administrators can set revenue 

requirement caps or quantity caps (CPUC 2009a). 

4.2.4 Summary

Auctions for new renewable capacity are not guaranteed to work. They have not yet been 

proven in the U.S. and have additional market requirements. In order for an auction to be 

functionally competitive, there must be market liquidity and sufficient homogeneity 

(Grace 2010, personal communication). If these conditions are met, well-designed 

auctions could potentially result in low-cost contracts that can be executed relatively 

quickly. Auctions can be integrated into utility decision-making by designing the auction 

to target specific project features (e.g., on-peak supply). However, auctions may also 

exclude a number of participants from entering the market, partly by design and partly 

due the high upfront costs of putting forth a bid (though this may not be singular to just 

auctions). 

In theory, project viability requirements can help reduce contract failure and help ensure 

that LSEs meet their targets on schedule, but developers may run into difficulties meeting 
28 

requirements or may find that a previously viable bid is no longer economic given 

changing market conditions. Administrators may want to review contract failure rates and 

the time it takes winning bidders to place projects in service and adjust requirements 

accordingly. 

Table 4. Summary of Application of Evaluation Criteria to Auction-Based Mechanisms

Criteria Advantages Challenges

Pricing • The potential for market-based price 

discovery

• Auction procurement provides an

additional competitive process for 

LSEs to use to enter contracts 

• Auctions must be functionally 

competitive in order to lead to 

accurate price discovery

• Under-bidding may be a problem if

financial repercussions are not strict

Complexity/

Efficiency of 

Contracting 

Processes

• Bid-to-contract length may be 

shorter than under competitive 

solicitations

• Contracts resulting from auctions 

are standardized and non-negotiable

• It may be difficult to ensure that there 

is homogeneity and liquidity in the 

market

Impact on 

Developers’ 

Access to 

Markets

• Auctions are open, transparent 

processes

• There is upfront cost/risk in preparing 

a bid, with uncertainty of receiving a 

contract, so less experienced 

developers may be excluded from 

participating

• Financial homogeneity screens will 

limit the developer pool

• There is potential for market 

concentration unless mitigated by 

auction rules

Utility 

Decision

Making

• Auctions can be held as needed by 

the LSE to ensure that renewable 

targets are reached

• Auctions can be structured to obtain 

particular types of generation 

products (e.g., baseload and

peaking)

• There is potential for price and supply 

risks

• Contract failure rates could potentially 

be significant; there are no data from 

the California program available yet
29 

5 Policy Objectives and Procurement

State statutes and regulations directly influence how utilities go about renewable 

electricity procurement. State legislatures can set up purchase obligations for certain 

types of renewable energy generation, or they may foster market mechanisms to promote 

specific policy objectives. FITs and auctions are potential alternatives to utility RFPs or 

bilateral contracting (mechanisms that have historically been used to select least-cost 

renewable energy generation). Each option has distinct advantages and challenges and 

may be well suited for a specific purpose. 

In this section, we compare options for promoting specific types or quantities of 

renewable energy generation. As determined by a state’s policy objectives, states may 

want to encourage: 

• Customer-sited distributed generation 

• Wholesale distributed generation 

• Utility-scale generation

5.1 Customer-Sited Distributed Generation 

Some states seek to promote customer-sited generation at the residential and small 

commercial scales (typically project sizes up to 1 MW in capacity). Specific strategies for 

encouraging on-site generation have been net-metering policies, loan programs, tax 

assessment programs, and the creation of tax incentives, rebates, or performance-based 

incentives to reduce payback periods and eliminate barriers for property owners. For 

solar PV, the Department of Energy-funded Solar ABCs project27

State policymakers have also promoted distributed generation using market mechanisms, 

such as RPS set-asides or multipliers, allowing utilities to dictate what programs to use. 

Often utilities establish specific programs to promote and manage the development of 

customer-sited renewable energy systems. Utility programs may provide further financial 

incentives for the sector so that they can meet their distributed generation compliance 

requirements. Incentive availability, and its exact level, are based on how much 

distributed generation the LSE wishes to interconnect. 

 focuses on policy 

analysis and barrier reduction for this market segment. A recently published report 

provides an in-depth analysis of the policy options for promoting distributed PV (Fox and 

Varnado 2010). 

Customer-sited distributed generation is not typically procured in the same way that 

utility-scale generation is procured. Competitive solicitations and bilateral contracting are 

not particularly feasible procurement options for distributed generation due to the high 

administrative costs per megawatt of capacity procured by the LSE. Furthermore, this 

class of developer typically does not have the expertise, time, or money to reply to a 

 

27 Solar America Board for Codes and Standards. http://www.solarabcs.org. Accessed October 6, 2011.
30 

competitive solicitation or to negotiate a bilateral contract. This is not to say that 

aggregators could not potentially compete in RFPs or sign contracts with utilities to 

develop a portfolio of small projects.

For distributed generation procurement, state-mandated FITs or auctions could be an 

alternative to other utility-managed distributed generation programs. The following table 

compares the use of:

• Traditional incentives (rebates, performance based incentives, or REC 

compensation) and net metering 

• Utility buy-back programs (FITs).

The pivotal difference between rebates and FITs is that rebates reduce upfront costs, 

while FITs make projects bankable through steady, and typically profitable, revenue 

streams. Consequently, the subset of the market that policy attempts to reach would be a 

crucial determinant of whether a FIT or rebates would work best. Some market players 

may be more comfortable with a rebate structure, but more behavioral analysis would be 

needed to draw any conclusions about the market acceptance of rebates versus FITs for 

the residential and small commercial sectors, for example.

Table 5. Comparison of Procurement Approaches for Customer-Sited Distributed 

Generation

Mechanism Advantages Challenges

Financial 

Incentives 

and Net 

Metering

• Only 1 meter is required, and 

customers consume the energy 

they produce; self-generation of 

electricity motivates consumer 

investment in the market (Fox and 

Varnado 2010)

• These incentives can be targeted 

towards specific submarkets

• Rebates reduce upfront costs of 

installing systems

• Production-based incentives

provide a revenue stream that can 

help obtain financing

• Effective program implementation 

relies on a wide range of incentives, 

regulations, and policies

• 

Feed-In 

Tariffs

• FITs provide a revenue stream 

that can help obtain financing

• Distributed generation FITs can 

be administered cost effectively 

due to standardization

• Changing cost profiles of renewable 

energy technologies may require 

frequent payment level revisions

• If several neighbors participate, there 

could be local balancing/ reliability 

issues

5.2 Wholesale Distributed Generation

There are distinct considerations if the policy objective is to promote larger distributed 

generation systems on the supply side (as opposed to the customer side) of the utility 

meter. These facilities, typically on the scale of 1 MW to 20 MW, may not require new 

transmission or substantial distribution upgrades. There may be a variety of players in 

this emerging market, and there may be interest in stimulating diversity of participants.
31 

Recently it has been argued that competitive solicitations may be limited in their ability 

to stimulate the development of wholesale distributed generation systems and that 

auctions may be a more effective procurement mechanism for this market. For example, 

in California the market for wholesale distributed generation has not yet been tapped; 

over 60% of RPS projects under development or pending approval in California are 

greater than 20 MW in capacity (CPUC 2011b) despite California’s transmission 

constraints. The advocacy group Vote Solar has argued that the California RAM program 

could stimulate immediate development activity in California by establishing a market 

for smaller renewable projects, which may be easier to finance and build (Vote Solar 

Initiative 2009). 

Further considerations, advantages, and challenges are summarized for each RPS 

procurement option in supporting the development of wholesale distributed generation 

facilities. 
32 

Table 6. Comparison of Procurement Approaches for Wholesale Distributed Generation

Mechanism Advantages Challenges

Competitive 

Solicitations

• Smaller system-side generators 

are increasingly cost competitive

• The mechanism might spur 

developers to reduce costs of 

wholesale distributed generators 

to compete with utility-scale 

generators 

• Projects of this size have not yet 

been competitive in RFPs (might 

require a separate solicitation)

• RFPs typically do not weigh the 

benefits of wholesale distributed

generation very highly

•

Bilateral 

Contracts

• Developers may be more likely to 

obtain the PPA terms they need 

to develop a project

• LSE can clearly relay location 

preferences to developer

• Fewer procedural efficiencies than 

under an RFP

• Due to project size, LSEs may want 

to procure more than one of these 

types of facilities concurrently

Feed-In 

Tariffs

• FIT policies could specifically 

target this type of generation and 

provide cost recovery to these 

generators

• FIT policies may lead to an 

immediate boom in the market

• Changing cost profiles of 

technologies may require frequent 

payment level revisions

• LSEs may need to specify where 

these facilities would have the most 

benefit to the utility system, so that 

these generators are optimally 

located

Auctions • Projects of this scale may be 

conducive to auction procurement 

because they are not yet 

competitive with utility-scale 

projects, but costs may be 

changing rapidly for this sector

• Auctions could lead to faster ramp 

up of small projects, which can 

provide immediate benefits, such 

as alleviating grid congestion

• There are likely to be more 

potential project developers in 

wholesale distributed generation 

space than in larger/central 

station utility market

• Even with small projects, project 

completion risk may not be 

homogeneous

• Auctions may not be the best 

mechanism to increase the diversity 

of participants because of the 

selection criteria and cost of 

mounting a bid

5.3 Utility-Scale Generation

As stated earlier, competitive solicitations and, less often, bilateral contracts are used 

most often to procure utility-scale generation in the United States. In Europe and around 

the world, FITs have been used to support utility-scale generation. In the United States, 

no proposals have been made to replace competitive procurement with FIT policies for 

large-scale generators. In states with RPS policies, LSEs have been directed to procure 

least-cost renewable generation. 

Auctions could be a potential way to procure utility-scale generation supply, although the 

approach has not been used in the United States. However, large projects are complex, 

and the lack of homogeneity in the utility-scale market makes it risky to limit the bid 
33 

evaluation criteria to price only. Proponents of FIT policies argue that FITs are a costeffective mechanism for reaching renewable energy targets (e.g., Klein 2008), while 

opponents find that FIT policies are inherently limited because they are not market-based 

mechanisms, and there is too much risk of getting the payment levels wrong. Table 7 

summarizes the relative advantages and challenges of the different procurement 

approaches addressed in this study. 
34 

Table 7. Comparison of Procurement Approaches for Utility-Scale Generation

Mechanism Advantages Challenges

Competitive 

Solicitations

• RFPs are effective at procuring 

least-cost utility-scale projects, 

while also considering non-price 

factors

• Competitive solicitations mesh 

well with IRP processes

• An RFP can clearly indicate 

quantity of supply required 

• RFPs can be issued as needed to 

meet a long-term renewable 

energy target

• RFPs are complex and time intensive

• It may be difficult to make a fair 

comparison between different project 

proposals for selection

• Traditionally high contract failure 

rates might undermine the 

effectiveness of an RFP to reach a 

renewable energy target

• LSEs may have to compensate for 

contract failures by “over-procuring”

• Between solicitations, opportunities to 

develop renewable projects may be 

limited

Bilateral 

Contracts

• Developers may be more likely to 

obtain the PPA terms they need 

to develop a project (especially 

important for innovative 

technologies)

• LSEs can choose to pursue a 

contract or not, according to need

• In competitive RTO markets, 

utilities can shop around for the 

best prices for bilateral contracts, 

without the formality of an RFP

• In regulated markets, bilateral 

contracts are not competitively 

derived and could see fewer 

procedural efficiencies than under an 

RFP 

• 

Feed-In 

Tariffs

• FIT policies are effective at 

spurring rapid deployment of 

renewable energy, which will help 

jurisdictions reach their renewable 

energy and climate goals

• FIT policies can include interim 

targets/caps that will help an LSE 

in the pursuit of a longer-term 

target

• Projects receiving a FIT rate may 

be more attractive to debt lenders, 

which may reduce financing costs

• In the absence of interim 

targets/caps, FITs might lead to a 

rush in development in the near term, 

which could lead to high ratepayer 

impacts

• There is greater price risk when FITs 

are applied to larger projects

• Auctions • Auctions are effective at procuring 

least-cost projects

• The lack of homogeneity in the utilityscale market makes it risky to limit 

the bid evaluation criteria to price 

only; there are a myriad of complex 

considerations for large-scale 

generators (e.g., transmission 

requirements, siting, permitting, 

ownership structure), which may 

necessitate careful examination on 

the part of the LSE and regulator

• There is no relative advantage of 

introducing price-only auctions in the 

place of traditional RFPs
35 

6 Conclusions

LSEs have a variety of mechanisms at their disposal when seeking to procure new 

renewable capacity. State policy and regulatory structure influence what procurement 

options are used in a jurisdiction. The four procurement approaches evaluated in this 

report have distinct advantages and challenges and affinities to particular markets, 

policies, and applications. Decision makers may want to weigh the following criteria in 

evaluating the optimal procurement approach to achieve their goals: pricing, 

complexity/efficiency of contracting processes, impact on developers’ access to markets, 

and interaction with utility decision making. Summarized here are primary conclusions 

about each procurement approach under each criterion. 

6.1 Pricing

Competitive solicitations, bilateral contracts (in competitive RTO markets), and auctions 

can select cost-effective, competitively priced projects. A policymaker seeking to 

promote least-cost generation may want to consider using one of those three options. 

FITs set prices paid administratively and consequently may not result in least-cost 

projects. It can be challenging to design FITs that adjust to market realities and keep 

prices accurate over time. This can lead either to over-compensation, which can trigger a 

boom, or under-compensation, which can cause development to halt. However, one 

benefit of FIT policies is that they can be used to provide support to projects of a variety 

of sizes, resource qualities, and technologies. 

6.2 Complexity and Efficiency of the Procurement Process

Competitive solicitations are considered an efficient way of selecting projects; however, 

RFP implementation time can be protracted. The complexity of using a bilateral contract 

approach depends on level of regulatory oversight required for the LSE. Bilateral contract 

negotiation may reduce contract failure rate. Auctions and FITs require extensive upfront 

analysis on the part of regulators and policymakers, but these approaches can allow for 

rapid deployment of renewable energy. Auctions require a complex set of conditions in 

order to function properly. Markets must be sufficiently deep and liquid to lead to 

accurate prices, and there has to be homogeneity of product and of project completion 

risk to ensure that the process is fair.

6.3 Impact on Developers’ Access to Markets

During the competitive solicitation process, obligated LSEs select for technically 

proficient and creditworthy IPP counterparties. Small developers who are new to a 

market may not be able to compete in a competitive solicitation. The bilateral contracting 

approach may in some cases increase access to markets for new developers but may also 

select for established market players. Auctions typically set pre-conditions for technical 

aptitude and then contracts are awarded on the basis of price alone, so new developers 

may not be able to qualify or to compete. Due to the non-discriminatory nature of the 

standard offer, FITs can increase market access for a number of participants and 

encourage traditionally risk-averse investors to begin investing in renewable projects. By 

providing standard contract terms at attractive payment levels, FITs can be seen as a way 

to increase market access to a wide array of potential developers. 
36 

6.4 Issues Raised for Utilities

Utilities are comfortable with procurement strategies that allow them to balance their 

priorities of cost and reliability. Competitive solicitations, auctions, and bilateral 

contracting allow utilities to exert control over factors like quantity procured, generation 

profile, project siting, and reliability. Under a FIT procurement program, LSEs may have 

less control over cost, siting, reliability, timing, and quantity procured. FITs can also 

“over-deliver” leading to a greater volume response than expected, which can create 

challenges for LSEs, ratepayers, and system operators. In response to this problem, some 

jurisdictions are beginning to introduce FIT capacity caps, while others are exploring 

auction-based mechanisms, which introduce a capacity limit into the standard offer 

structure. 

In summary, decision makers may want to evaluate procurement success in their 

jurisdictions and consider key tradeoffs in accessing alternative procurement methods. As 

the debate in the United States continues concerning the ways in which alternative 

procurement mechanisms can be used to help meet RPS policies, experience elsewhere in 

the world suggests that different procurement options can function together, and that they 

can even do so synergistically (Rickerson et al. 2007; Grace et al. 2009; Couture and 

Cory 2009; Cory et al. 2009). 
37 

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