Discussion

As the Staff Proposal explains, the vast majority of California homeowners - around 90% - use natural gas to heat water. Customers who do not have access to natural gas, usually those in rural areas, use either propane or electricity for water heating. Roughly 5% of California residents heat water with electricity and the remaining 5% heat water with propane.⁴

Although propane use is not widespread among California residents, those residents who heat water with propane constitute a market segment with a high likelihood of converting to SWH. This is because propane is significantly more expensive than natural gas so there is a substantial annual cost savings to switch from propane to SWH.⁵ The Staff Proposal analyzed data from the SWH pilot program in the SDG&E territory and Staff concludes that ratepayer funding buys more systems per dollar when the displaced fuel is more expensive. Propane is a more expensive way to heat water than natural gas. If we allow the CSI Thermal Program to pay incentives to propane-displacing SWH systems, we can encourage a promising market for SWH in California. Furthermore, if we pay incentives to propane-displacing systems at the same level as electric-displacing systems, which are lower than incentives to gas-displacing systems, the program can install more SWH systems per ratepayer dollar compared with systems displacing natural gas.

The Commission initially limited the CSI Thermal Program to gas and electric-displacing SWH systems for two reasons. First, the portion of the program funded by gas ratepayers is intended for the benefit of those gas ratepayers. Section 2863(c) of the Public Utilities Code, as adopted by AB 1470, states that "[f]unds shall be allocated for the benefit of gas customers to promote utilization of [SWH] systems." Second, for the portion of CSI Thermal funded by $100.8 million in collections from electric ratepayers pursuant to Pub. Util. Code § 2851(b), the Commission concluded in D.06-12-033 that it should limit use of those funds to solar thermal technologies that displace electricity usage. (D.06-12-033 at 24.)

We now conclude that it is reasonable to allow electric customers who use propane to heat water to qualify for incentives under the CSI Thermal Program. Customers who heat water with propane are generally electric ratepayers who choose to heat water with propane specifically because they do not have access to cheaper natural gas. We agree with CCSE and CALSEIA that we should provide fair program access to electric ratepayers, particularly when a portion of their electric bill supports the CSI Thermal Program.

Moreover, when we prevent propane-displacing SWH systems from receiving incentives, we create a perverse incentive for these customers to actually increase electric demand. This might occur if a customer who heats water with propane switches back to electricity in order to take advantage of the state rebate for electric-displacing systems. The prohibition on propane-displacing systems also prevents CSI Thermal Program participants from further reducing their electric demand by switching from electricity to propane as a backup fuel at the time they install their SWH system.

We conclude there is a public benefit to providing incentives to propane-displacing SWH systems to decrease fossil fuel combustion and greenhouse gas emissions. Indeed, excluding propane-displacing systems may result in increased electric load. It makes more sense to make propane users eligible to receive incentives to increase program participation and help facilitate reaching the State's environmental goals, which include reducing greenhouse gas (GHG) emissions. Therefore, we will allow propane-displacing SWH systems to qualify for incentives under the CSI Thermal Program.

In response to SCE's arguments, we find that the Commission does not need jurisdiction over propane gas suppliers to use funds collected from electric ratepayers to promote SWH systems, even those displacing propane usage. Senate Bill (SB) 1 allows the Commission to fund $100.8 million in solar thermal incentives and it is reasonable to use those funds for many types of SWH systems. AB 1470 finds that SWH systems can help preserve the environment and protect public health by reducing air pollution and global warming gases. (Pub. Util. Code § 2862(h).) When SWH systems reduce propane usage, these systems can help reduce air pollution, fossil fuel consumption, and GHG emissions, a key goal of the statute and AB 32.

SCE further maintains that customers who use propane to heat water do not contribute as much to the CSI Program as they otherwise would if they used electricity to heat water. Therefore, SCE contends these customers should only qualify for incentives if they displace electricity consumption. We agree with CALSEIA that the amount of an electric ratepayer's contribution to the CSI program has never been a criterion for determining participant eligibility.

For all of these reasons, we will modify D.10-01-022 to allow the CSI Thermal PAs to provide incentives to electric customers of PG&E, SDG&E and SCE who install qualifying SWH systems that displace propane - including those that switch to propane backup at the time of SWH installation. Customers seeking rebates for SWH systems that displace propane should meet all of the eligibility requirements that currently apply to electric-displacing customers. Incentive levels for propane-displacing systems should be set at the same level as incentives to electric-displacing systems. Funding for these incentives shall be on a first-come, first-served basis and shall come from the $100.8 million allocated in the general market CSI program for electric-displacing solar thermal technologies. Incentive funds used for propane-displacing systems should count against Step 10 of the general market CSI program in the same manner as funds used for electric-displacing SWH installations. (See D.10-01-011 at 40.)

CALSEIA requests that funds for CSI Thermal not be limited to the $100.8 million collected through CSI. Rather, CALSEIA suggests the Commission find new sources of electric ratepayer revenue, such as GHG allowance revenues, to fund an expansion of this program. We decline to consider that suggestion in this rulemaking, as both SB 1 that established the CSI program and AB 1470 that established the gas-displacing CSI Thermal Program contain strict monetary limits on incentive funding.

By this decision, we direct the CSI Thermal PAs who administer the electric-displacing portion of CSI Thermal (namely PG&E, SCE, and CCSE)⁶ to file a Tier 2 advice letter to modify the CSI Thermal Program Handbook within 30 days of the effective date of this decision. The CSI Thermal PAs shall begin accepting applications for SWH systems that displace propane usage no later than 30 days after Energy Division approves the CSI Thermal Handbook changes as set forth in this decision. Systems installed on or after the date the Commission released its proposal regarding incentives to propane-displacing systems, i.e. June 14, 2011, may qualify for incentives.

⁴ See California Energy Commission, 2003 California Statewide Residential Appliance Saturation Study, Volume 2, Study Results, Publication # 300‐00‐004, prepared by KEMA‐XENERGY, Itron, and RoperASW, 2004.

⁵ The Staff Proposal indicates an estimated annual cost for natural gas water heating of $136 compared to $283 for propane water heating. (Staff Proposal, Table 1, at 2.)

⁶ We will not require SoCalGas to jointly file this advice letter since these propane-displacing SWH incentives will not apply to its customers.