7. Incentive Design

The Staff Proposal recommends up front incentives for both gas-and electric-displacing SWH funded through the CSI Thermal Program. Incentives would be calculated based on estimated first-year therm or kWh displacement of the SWH system. According to the proposal, the incentives are set at levels sufficient to offer SWH system owners a reasonable return on their investment. All customer classes would be eligible for incentives, but applicants must be customers of PG&E, SCE, SDG&E, or SoCalGas.

For natural gas displacing SWH systems, the proposed incentive rates would decline over the eight years of the program in four steps, as shown in the table below on a per therm basis:

Table 1: Proposed CSI Thermal Natural Gas-Displacing Incentive Structure

The actual incentive paid to any qualified system would be derived by multiplying the system's estimated first-year thermal displacement based on its SRCC rating by the incentive rate. (Further details on the incentive calculation are discussed in Section 7.3.) The table also indicates the total incentive payment an average system can expect to receive. According to the Staff Proposal, the incentives represent roughly 30% of installed cost for the average residential system, similar to CSI incentive levels for PV systems.

The Staff Proposal recommends an incentive cap for residential systems of 125% of the average incentive in that step. For example, in Step 1, the incentive cap is 125% of $1,500, or $1,875. The cap is based on staff's analysis that the highest performing systems displace 145 therms per year, making them eligible for incentives of $1,859, or just under a 125% cap. For multifamily and commercial systems, the cap would be $150,000.

Incentive declines would be triggered by the total installed capacity of confirmed reservations, measured in annual energy displacement, in each utility service territory and for each customer class.14 Staff further recommends that the natural gas program incentive budget be apportioned 40% for residential customers and 60% for commercial customers. The 40% reserved for residential customers would be further divided so that 10% of the total budget is reserved for single family homes and 30% is reserved for multifamily residential properties.

In regards to gas-displacing incentive design, we must resolve four key issues, namely incentive rate, how the incentives decline, an incentive cap, and whether and how to allocate percentages of the incentive budget for residential and commercial customers. We address each issue in turn below.

CALSEIA recommends increasing the incentive level in Step 1 to $2000 and eliminating Step 4, to ensure customer interest at the start of the program and to provide a higher initial rebate. SOLID also suggests elimination of the lowest Step 4 incentive. Ecoplexus contends that a minimum of 25% of the budget should be allocated to Step 1 incentives.

We find that the Staff Proposal contains a thorough analysis of the proposed incentive levels, noting that the average incentives paid will represent roughly 30% of the installed cost of a system. We agree with the staff recommendations and will adopt the four incentive rates, although we will make a minor decrease to the incentive level in the last step in order to fund more systems at the Step 1 level while maintaining our overarching thermal displacement goals. We do not want to eliminate the fourth incentive step entirely, because we think the four steps are a key to achieving market transformation. At the same time, we agree with those parties who ask for more incentive dollars in the early stages of the program to generate greater interest and opportunity at the start of the program and thereby potentially "jump start" the SWH market.

Rather than increase the incentive rate in Step 1, as CALSEIA suggests, we will apportion more of the incentive budget to Step 1, decrease the budget allocation in Steps 2 and 3, and decrease the Step 4 incentive level to $4.70 per therm displaced. Staff had proposed $30 million at the Step 1 incentive level, which we will increase to $50 million in order to provide more systems a higher incentive rate. The table below indicates the adopted incentive structure and shows that with this reapportionment, we can still achieve our system equivalent thermal displacement goal.

Table 2: Adopted CSI Thermal Gas- Displacing Incentive Structure

Step

Incentive for Average Residential SWH System

Funding Amount

Incentive per Therm Displaced

Therms Displaced Over System Life15

1

$1,500

$50,000,000

$12.82

97,500,000

2

$1,200

$45,000,000

$10.26

109,687,500

3

$900

$45,000,000

$7.69

146,250,000

4

$550

$40,000,000

$4.70

212,727,275

 

Total

$180,000,000

  

566,164,77516

CALSEIA proposes the Commission adopt a 30-day notice before incentive levels drop to allow the SWH industry time to adjust their marketing in advance of a rebate drop. We will not adopt this suggestion, as we have not used this structure in our other rebate programs such as CSI, where incentives drop based on the demand. We prefer the same structure here, where demand for the incentives drives the decline in the incentive rate. If we provided 30-day notice in advance of incentive declines, that would likely cause a rush of applications prior to the drop and cause us to spend more incentive dollars than budgeted at a given level.

Therefore, we choose not to give 30-day advance notice of incentive declines, but we will require the PAs to use the same process established in the general market CSI program wherein PAs post weekly information on their program websites (as well as the statewide Go Solar California website) about program participation and applications so applicants can gauge whether incentives may drop soon. In addition, we will require the PAs to provide written notification of incentive reductions by letter to the ALJ, with a copy to the service list of this or any successor proceeding, within five business days following a reduction.

Moreover, we clarify that we adopt the Staff Proposal that step changes will move independently in each service territory and for each class of customer. This will ensure that incentive declines are driven by demand in each customer class, and single-family residential incentives are not driven down by high participation by commercial projects, or vice versa. Therefore, similar to the general market CSI program, incentives for each customer class and program administrator may vary based on demand in that program administrator's territory. For example, residential customers in the SCE territory may be at the Step 1 level, while residential customers of PG&E are in Step 2, and commercial/multifamily customers for both utilities may be in Step 3.

Environment California comments that a maximum incentive per installation is reasonable given limited program funds. Further, it suggests the $150,000 cap for commercial projects decline along with the incentive levels. PG&E supports a cap to protect against a few large systems receiving all the funding and to assist in market transformation.

CALSEIA does not believe an incentive cap is necessary because other program provisions will create a natural cap on system size. Sopogy contends a cap would artificially constrain opportunities to reduce natural gas consumption. CCSE also opposes an incentive cap because it might deter participants from purchasing expensive, higher performing systems. Ecoplexus opposes the $150,000 cap on commercial and multifamily systems.

We agree with the staff recommendation to cap incentives for residential applicants at 125% of the average residential incentive. As pointed out by SDG&E/SoCalGas, the incentive caps help ensure the program promotes a higher quantity of installations, in keeping with AB 1470. Although SOLID recommends limiting incentives to no more than 50% of capital costs for a single project, with a cap of $5 million per project, we do not agree with this approach. We had a similar provision at one time in SGIP, and removed it because of concern that projects were inflating capital costs to raise their incentive payment. In addition, a cap of $5 million for any one project represents too large a share of any one utility's budget for SWH. If a large portion of the incentive budget is absorbed by only a few projects, this will inhibit our efforts to ensure that many installers are able to access the program, promoting competition in the SWH market.

We will, however, raise the incentive cap on commercial systems to $500,000, to promote participation by larger systems. Despite comments asking for a much larger or no cap on incentives, we prefer to keep a cap of $500,000 for commercial and multifamily systems until we have explored the application of performance based incentives to pay systems based on their productivity and output rather than an up-front incentive payment based on an estimation of output. Energy Division may review the caps after there is one year of program data or in conjunction with application of performance based incentives, and may propose handbook changes regarding the caps, which would be handled by Commission resolution. Energy Division may alter the maximum incentive per customer, but must do so within the total incentive budget for the program, which only the Commission may modify by considering modification of this decision.

Environment California and CCSE agree with separate funding allocations for single-family and multifamily customers. CCSE and CALSEIA request flexibility to move funds between these two categories, and they suggest that commercial and multifamily allocations can be combined into one category to simplify the program and recognize that commercial and multifamily projects are often similar. TURN contends multifamily should be considered part of the residential customer class.

Environment California objects to the allocation of only 10% of funds for single-family installations based on its contention that residential customers will contribute substantially to the program and this market represents tremendous opportunity for market penetration and renewable energy investment. Therefore, it recommends an equal distribution of funds across the three market sectors, namely single-family, multifamily, and commercial. SOLID disagrees with Environment California's proposal to reserve 33% of funds for the residential market, citing the high up front costs of commercial SWH systems. SOLID suggests a split that is 20% residential, 5% small multifamily/commercial, 15% large multifamily and 60% large commercial.

SDG&E/SoCalGas disagree with specific budgets for each customer class, noting that AB 1470 does not require this. They contend that budget categories could increase administrative costs. If funds are allocated by customer class, they recommend flexibility and fund-shifting rules should funds in one class be exhausted. Likewise, Ecoplexus sees no reason to separate classes, preferring the program dollars be distributed based on actual demand.

PG&E recommends one funding category for all residential and one for all commercial customers. PG&E contends that allocating 40% of the budget to residential customers and 60% to commercial customers is not consistent with the Itron analysis which was 60% residential, 26% multifamily, and 14% commercial. However, PG&E's comparison is flawed, since PG&E refers to the portion of the Itron's analysis involving the percentage of systems installed, not the percentage of the budget allocated to that group.

We agree with the concept in the Staff Proposal to allocate the incentive budget across residential and commercial customer groups, to ensure that funds are reserved for residential projects. While the Itron analysis indicates that commercial projects are expected to be slightly more cost-effective than residential projects, we also note that the residential and multi-family markets are significantly larger than the commercial market, both in number of potential participants and the overall amount of gas and electricity used for water heating purposes. We agree with those who suggest we apportion a larger percent of the incentive funds for single-family residential projects. We will increase the 10% suggested by staff for single-family residential customers to 40% of the total incentive budget, in order to allow greater program participation by residential customers and the installers who serve them.

At the same time, we agree that multifamily projects are more similar to commercial installations, so we will combine our allocation for multifamily with commercial, and allow 60% of the incentive budget for commercial and multifamily projects. While we do not specify percentages for multifamily and commercial within this category, we do expect that not all of these funds will be spent on commercial projects and that a significant portion will be made available to multifamily projects. In addition, we will allow the PAs the flexibility to move funds from the commercial/multifamily budget to the single-family residential budget, but not vice versa.

Energy Division should monitor program implementation and notify the ALJ and assigned Commissioner if there are great disparities in participation between the residential and commercial/multifamily categories, so the Commission can consider adjusting these budget allocations. If it appears that Step 1 incentives allocated to support single-family residential SWH systems will be exhausted much earlier than those incentives allocated to commercial and multifamily systems, the Commission may consider shifting incentive dollars to allow a greater number of single-family residential systems to be installed at the Step 1 incentive level.

The table below summarizes the incentive structure, namely the incentive rates, the budget allocations in each step for single-family residential and commercial/multifamily projects, the thermal capacity displaced, and the equivalent residential systems that will be installed under each step. Incentives decline when program administrators accept applications and confirm reservations to pay incentives to their qualifying applicants equal to the budget allocation for the customer class in each step.

Table 3: Gas-Displacing Incentive Structure by Customer Class

Step

Customer Class

Incentive per therm displaced

Budget Allocation

Annual Therms Displaced

(in thousands of therms)

Equivalent

Single-Family Residential

Systems

1

Single Family Residential

Commercial/multifamily

$12.82

$20,000,000

$30,000,000

    1560

    2340

13,334

20,000

 

    Subtotal

  

$50,000,000

    3900

33,334

2

Single Family Residential

Commercial/multifamily

$10.26

$18,000,000

$27,000,000

    1755

    2632

14,992

22,493

 

    Subtotal

  

$45,000,000

    4387

37,485

3

Single Family Residential

Commercial/multifamily

$7.69

$18,000,000

$27,000,000

    2340

    3510

20,000

30,007

 

    Subtotal

  

$45,000,000

5850

50,007

4

Single Family Residential

Commercial/multifamily

$4.70

$16,000,000

$24,000,000

    3404

    5106

29,094

43,647

 

Subtotal

  

$40,000,000

    8510

72,741

 

Total

  

$180,000,000

22,647

193,567

For electric-displacing SWH systems, staff proposes incentives calculated based on estimated annual kWh displacement of the SWH system. The proposed incentive rate for all customer classes is 37 cents per kWh displaced in the first year, which is based on an average incentive of $1,000 per system. A cap of $1,250 per residential system and $100,000 per commercial system would also apply.

According to the Staff Proposal, the incentive paid to electric-displacing systems is lower than the incentive to gas-displacing systems because SWH systems that displace electricity are closer to cost-effective for the system owner. The Commission could reconsider the incentive level after two years and consider reducing it based on market growth or SWH prices.

Unlike staff's proposal for gas-displacing SWH incentives, staff recommends that for electric-displacing systems, the incentive rate remain constant over the duration of the program because electric water heating is used in only about 10% of California homes. Given this small market size, staff claims that incentive declines are unlikely to drive market transformation and are unnecessary. In addition, staff does not suggest designating funds for residential or commercial customer classes, but instead suggests that no more than 80% of total incentive funds can go to multifamily and commercial customers.

However, the Itron analysis and Energy Division report indicate that there is very little commercial electric water heating, and in fact, no analysis of cost-effectiveness was performed for commercial systems given the dearth of such customers. Therefore, we would expect that the majority of the funds for electric-displacement projects will go to residential and multifamily installations. While we do not impose a specific budget allocation between residential and commercial funding at this time, we expect the PAs and Energy Division to monitor the distribution of funds between customer types and advise us if a cap or other limitation appears warranted in the future.

Another key difference in the proposal for electric-displacing SWH incentives involves coordination with the general market CSI program. Because the $100.8 million to fund electric-displacing SWH systems comes from the general market CSI budget, staff proposes that the CSI Thermal PAs estimate the electricity displacement value of these systems in order to count these non-PV solar technologies towards the MW goals in each general market CSI incentive step level. Staff recommends using the methodology developed in the CSI program to estimate the electricity displacement associated with SWH systems and use that kW capacity value to count the total MWs of SWH installed.

CALSEIA recommends that SWH systems that displace electricity receive the same incentive level as a gas-displacing system. We do not agree. We find that staff provided a thorough and competent analysis that lower incentive levels are justified when solar is installed to replace electric water heating, given the economics of electric versus natural gas water heating. We will adopt the initial 37¢ per kWh rate proposed by staff.

CALSEIA disagrees with the proposed cap of $1,250 for residential systems, because the lower rebate level for electric-displacing SWH may cause customers to install larger PV systems to heat water instead. TURN maintains that incentives for electric-displacing systems should decline in the same manner as gas-displacing incentives. PG&E suggests incentive levels decline on a yearly basis, depending on the adoption rate of these technologies. We find that staff's proposed incentive caps are reasonable, but we agree with TURN that electric incentives should decline in the same manner as gas-displacing incentives, because the systems fundamentally rely on the same technology with the only difference being the fuel they replace. We adopt four declining incentive steps, which decline in the same percentages as the gas-displacing incentives in Table 2 as follows:

Table 4: Electric-Displacing Incentive Structure

Step Level

Electric-Displacing Incentive

($/kWh)

Incentive for Average Residential System

1

0.37

$1010

2

0.30

$820

3

0.22

$600

4

0.14

$380

As incentives decline under the gas-displacing program, a corresponding reduction should occur to the electric-displacing incentive. That is, each PA will offer incentives to electric-displacing systems at the corresponding step level that is offered to gas-displacing systems. For example, if PG&E is offering residential customers Step 2 incentives for gas-displacing systems, it should offer residential customers Step 2 for electric-displacing systems. The cap for residential incentives will also decline and be based on 125% of the average residential incentive in that step, as shown in the table above. For example, the cap in Step 1 is $1,262.50, or 125% of $1,010. The cap for commercial systems will be $250,000.

CCSE, CALSEIA, and PG&E recommend that incentives for electric-displacing SWH from CSI funds be counted against the last CSI incentive step to lessen disruption to the CSI PV incentive program. They note that Step 10 of the general market CSI program for PV has the highest target of 350 MW and the lowest incentive level. They contend that counting electric-displacing incentives against this last step will result in greater administrative simplicity.

We agree with these parties and will adopt their proposal to count electric-displacing SWH installations against Step 10 of the general market CSI program to minimize the effect of these installations on incentive levels for PV systems. (See D.06-12-033, Appendix B, Table 2 for current megawatt and budget allocations in each CSI incentive step.) In other words, every dollar of incentive paid to electric-displacing systems will come from Step 10 of the general market CSI program, which is budgeted at $105 million. If the Step 10 budget is insufficient, the PAs may use funds from Step 9 as well. We note that because electric-displacing SWH systems will be funded using the CSI budget that was allocated to support PV installations in Step 10, a high volume of electric-displacing SWH installations will materially impact the total capacity that will be installed in Step 10 (and possibly Step 9) of the CSI program, and thus the total capacity of PV that the CSI program will yield overall.

Staff proposes that the CSI Thermal program administrators should develop an on-line incentive calculation tool to estimate natural gas or electricity displacement for SWH systems based upon system location, design and expected performance. To calculate incentives for single-family residential SWH systems, Energy Division recommends using the SRCC OG-300 estimation of annual energy savings combined with the Solar Orientation Factor (SOF), which is calculated by measuring the tilt and compass orientation, or "azimuth," of the SWH installation. For commercial and multifamily SWH systems using SRCC OG-100 certified equipment, Energy Division recommends the program administrators build or license an internet-based incentive calculation tool that uses currently available tools, such as F-CHART or TRNSYS software, to estimate annual savings for custom designed systems.

CALSEIA recommends the Commission allow use of other performance modeling tools to estimate system performance, such as T-Sol, Polysun, and Retscreen. In addition, CALSEIA recommends that systems be sized based on actual metered hot water demand. CCSE recommends the Commission form a Technical Advisory Committee (TAC) to decide on the most appropriate software for calculating incentives.

SOLID suggests that production based incentives are critical and recommends using actual first-year useful energy production to calculate incentives paid after one year, rather than an upfront rebate based on a production estimate. In response, CALSEIA contends that performance based incentives should be considered at a later date so as not to delay the program start date.

SCE urges the Commission to minimize program administration complexity for the electric displacing component of CSI Thermal. SCE notes that solar water heaters have a median installation cost of approximately $5,600 to $7,400, and it therefore urges a simplified program design involving a "one step" process and a simplified upfront performance estimation tool that balances simplicity with cost.

We adopt staff's proposal that single-family residential incentives should be calculated based on the SRCC estimation of annual energy savings combined with the Solar Orientation Factor. Further, we direct the PAs to develop an on-line incentive calculation tool to calculate commercial and multifamily incentives that estimates natural gas or electricity displacement based on system location, design, and expected performance. At the same time, we agree with the parties that suggest the need for further stakeholder input on technical considerations to assist the PAs with this task. We are sympathetic to SCE's concern for a simplified estimation tool and application process. Therefore, we will direct our Energy Division to hold a workshop on the subject of the incentive calculator. A primary purpose of the workshop should be to consider the advantages and disadvantages of the various incentive calculation software tools and assist the PAs in developing the incentive calculator in time for the anticipated program start date and inclusion in the Program Handbook.

13 Staff assumes the average residential gas-displacing system will displace 117 therms per year. The Staff Proposal does not include average incentive projections for commercial systems because commercial systems vary greatly in size and design.

14 See Table 19 of Staff Proposal.

15 This analysis assumes a 25-year system life.

16 The 566.1 million in total therms displaced is 97% of the 585 million program goal in the Staff Proposal. Additional therms will be displaced by the low income SWH incentive program, when adopted.

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