5. Goals, Strategy and Program Design Principles

The Staff Proposal suggests four primary goals for the CSI Thermal Program, which are to:

· Significantly increase the size of the SWH market in California by increasing the adoption rate of SWH technologies, including:

· Achieving the installation of natural gas-displacing systems that displace 585 million therms;

· Achieving the installation of electric-displacing SWH systems that displace 150 megawatts (MW) by the end of 2017; and

· Achieve an expansion of the market for other solar thermal technologies that displace natural gas and electricity use, in addition to SWH.

· Support reductions in the cost of SWH systems of at least 16% through a program that increases market size and encourages cost reductions through market efficiency and innovation;

· Increase consumer confidence and understanding of SWH technology and their benefits; and

· Engage in market facilitation activities to reduce market barriers to SWH adoption, such as high permitting costs, lack of access to information, and lack of trained installers.

Although AB 1470 sets a program goal of the installation of 200,000 SWH systems, the Staff Proposal translates this goal into 585 million therms, which is the equivalent natural gas displacement provided by the installation of 200,000 single-family residential systems.7 According to staff, this approach is taken because reducing California's dependence on natural gas and displacing fossil energy usage are noted in AB 1470 and are primary program goals. In addition, staff notes that the Interim Evaluation found that paying incentives to larger commercial and multi family SWH projects is more cost-effective than funding only small, residential systems. Staff reasons that setting goals and paying incentives based on energy displacement will promote the deployment of the most cost-effective SWH systems across all customer classes.

For SWH incentives that displace electricity, staff proposes a goal of installing systems with a combined capacity that is equivalent to 150 MW of photovoltaic capacity. This goal is derived by assuming the average single-family SWH system displaces 2735 kilowatt-hours (kWh) of electricity per year. Dividing this quantity of energy by the amount of energy that a kilowatt (kW) of photovoltaic (PV) will produce (1752 kWh per year assuming a 20% capacity factor) equals 1.56. In other words, the typical residential electric-displacing SWH system displaces an amount of electricity that is equivalent to what would be displaced by a 1.56 kW PV system. If we assume an average incentive for electric-displacing SWH systems of $1000, the $100.8 million budget available for electric-displacing solar thermal technologies can support 100,800 systems. This is equivalent to approximately 157 MW of solar PV,8 which the Staff Proposal suggests rounding downwards to a goal of 150 MW.

Next, staff proposes a program strategy and design principles that address the barriers to growth in the SWH market in California, namely installation costs, lack of public knowledge about SWH, permitting costs and requirements, and a potential shortage of experienced installers. The first barrier is addressed through incentives to lower the upfront cost of SWH installation. The latter three barriers can be mitigated by targeted market facilitation and outreach expenditures.


In response to the Staff Proposal, SCE and Environment California disagree with a goal based on therms displaced. These parties state that AB 1470 calls for a program to not only reduce demand for natural gas but also to spur a self-sufficient SWH market in California. Both SCE and Environment California urge program goals based on the number of system installations to aim the program at developing a thriving single-family residential SWH market.

In contrast, Sopogy and CALSEIA support a program goal based on total natural gas displaced. CALSEIA suggests the Commission could revisit this goal annually to review whether all market segments are participating in the program and if program adjustments are necessary. Despite its support, CALSEIA cautions that focusing the program on therms displaced and rewarding high performance systems may lead to oversized systems, which in turn could lead to overheating and reduced system life. CALSEIA recommends rewarding systems that are "properly sized and installed."

Regarding electric-displacing SWH incentives, PG&E and CALSEIA agree with the proposed program goal of displacing 150 MW.

TURN provides comments on the overall program design. Instead of an incentive program, TURN urges the Commission order the utilities to fund a revolving fund to provide zero-interest financing for commercial entities, and possibly for residential customers, to install SWH systems as part of an expanded "on-bill financing" program. According to TURN, numerous studies point to upfront costs as a key barrier to SWH installation and a financing program could overcome this hurdle without relying on ratepayer subsidies.

PG&E claims TURN's suggestion for a loan program is redundant and unnecessary since SWH systems are already eligible for on-bill financing programs approved as part of 2009-2011 energy efficiency programs. SDG&E/SoCalGas oppose on-bill financing, noting the long paybacks of residential equipment are not conducive to on-bill financing as longer loans increase the risk of defaults. CALSEIA disagrees with TURN's proposal and recommends implementation of an incentive program first, with consideration of a loan program at a later date.

5.2. Discussion

First, with regard to a program goal based on thermal displacement, we agree with the Staff Proposal that a primary goal of the program envisioned by AB 1470 is reduction in natural gas usage. We also note that Section 2863(b)(2) allows the Commission latitude to design a program to reach "the equivalent output of 200,000 [SWH] systems." Staff's Proposal explains how displacement of 585 million therms is the equivalent of 200,000 residential SWH systems. Staff's approach blends efforts to achieve both residential and commercial installations, similar to the program design reviewed by Itron to maximize program cost-effectiveness. If we were to focus exclusively on a residential system installation goal, as SCE and Environment California suggest, we would potentially sacrifice some level of program cost-effectiveness, and fail to stimulate the market for commercial systems. We must balance the multiple goals enumerated in AB 1470 which include spurring installations, developing a thriving SWH market, reducing natural gas demand and the greenhouse gases created by natural gas consumption, and creating a program that is a cost-effective investment for gas customers.

Given the language in Section 2863(b) and our desire to balance all of the program goals enumerated in Section 2862, we find it appropriate to adopt a program goal based on the displacement of natural gas equivalent to 200,000 systems. We will also adopt staff's proposed goal of installing systems with a combined capacity equivalent to 150 MW of PV systems, but we will characterize it in a slightly different way. Specifically, we will set a goal for electric-displacing SWH systems in terms of kWh displacement, as this is more consistent with our thermal displacement goal for gas-displacing SWH systems. If we use the assumption that the $100.8 million budget can provide an average $1,000 incentive to 100,800 systems, then collectively, these systems will yield electricity savings of approximately 275.7 million kWh per year.9 We therefore adopt an electric-displacing SWH system goal of 275.7 million kWh, which represents the amount of electricity that should be displaced on an annual basis by electric-displacing SWH systems by the end of 2017.

Regarding CALSEIA's concern that our goal could lead to oversized systems, we will direct the program administrators (PAs) to propose methods to counteract this incentive as part of the Program Handbook, discussed further in Section 6.2. For example, the PAs could require applicants to provide data on the number of building occupants using hot water, and use that information to properly size SWH systems.

We also adopt the other program goals and design principles enumerated by staff, which were not strongly contested by the parties.

In response to TURN's request for on-bill financing rather than up-front incentives, we agree with CALSEIA that we should establish the incentive program first, and consider financing alternatives at a later date, if they do not materialize on their own. As the Staff Proposal notes, the implementation of this incentive program could help facilitate third-party loan programs, such as the municipal financing programs that have recently developed and work in concert with both our CSI PV incentive program and the energy efficiency programs administered by the IOUs. We agree with TURN that convenient and attractive financing can play an important role in improving the overall cost-effectiveness of solar water heating, as indicated by the Itron Report . Therefore, we encourage parties to evaluate the manner in which AB 811, or Property-Assessed Clean Energy (PACE) municipal financing programs, and other low cost loans can be made available to help support solar water heating deployment. With regard to TURN's on-bill financing proposal specifically, many questions remain about the total costs of these programs, which, rather than guaranteeing to improve the cost-effectiveness of the measures they support, have their own costs when supported by ratepayer funds. Such proposals need to be assessed with regard to the balance of expenditures for utility-arranged loans versus incentive programs. Furthermore, due to the constraints of federal and state consumer lending laws, on-bill financing programs are available only for non-residential customers at this time.  The Commission noted concerns about the need to look at both utility incentive program costs and on-bill financing costs in D. 09-09-047 (p. 289-90). In light of this, we will not pursue on bill financing for solar water heating as an additional element to an incentive program at this time.

7 Assuming the average residential SWH system displaces 117 therms per year over a 25-year system life, total thermal displacement is calculated as follows:

117 therms/year x 25 year life x 200,000 systems = 585 million therms displaced.

8 100,800 systems x 1.56 kW = 157,248 kW = 157.2 MW.

9 100,800 systems x 2735 kWh per system per year = 275.7 million kWh per year.

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