5. Discussion of Revised Incentive Structure

As CALSEIA points out, in its first two years the CSI Thermal Program has fallen far short of the goals envisioned in D.10-01-022 and in the statute.⁴ To achieve the goals of the CSI Thermal Program, we agree with CALSEIA that D.10-01-022 must be modified to adjust the incentive structure for residential and commercial customers. This decision adopts a new incentive structure similar to that proposed by CALSEIA. The revised incentive structure for natural gas-displacing systems is set forth in Table 1.

The CSI Thermal Program's purpose is to increase the size of the SWH market by encouraging adoption of SWH technologies, support reductions in the cost of SWH systems by increasing market size, increase consumer confidence and understanding of SWH technology, and reduce market barriers to SWH adoption. The original incentive structure considered how system costs influence adoption rates. However, participation in the CSI Thermal Program has been lower than anticipated in D.10-12-022. In particular, program participation by single-family customers has lagged. Multifamily and commercial customers have also been slow to participate. By increasing incentives early in the program, we will increase interest in the program, which should result in higher adoption rates in the near future. We expect the program to maintain and build on this early momentum.

5.1. The Revised Incentive Structure

Under the incentive structure adopted in this decision, there will be separate rates for the two classes of customers: rates for single-family homes will be increased by 45% (from $12.82 to $18.59) at the Step 1 incentive level, and by 27.78% (from $10.26 to $13.11) at the Step 2 incentive level. To accommodate this change, there will be adjustments in the amount of incentive funds available in each step and between the two customer classes. Incentive rates for Step 4 are reduced by approximately one-third compared to the original incentive structure. The maximum incentive per single-family installation remains capped at 125% of the average single-family incentive.

For multifamily and commercial customers, rates will be increased by 13.33% at the Step 1 incentive level. As with single-family rates, the rate for Step 4 will be decreased by approximately one-third compared to the original incentive structure. The maximum incentive per multifamily or commercial installation remains capped at $500,000.

These changes do not change the total incentive budget, which remains at $180 million of gas-displacing systems. The table below shows the new incentive levels and the budget allocation for each step.

Table 1: Revised CSI Thermal Gas Displacing Incentive Structure

Step	Customer Class	Incentive per therm displaced	Budget Allocation	Annual Therms Displaced (in thousands of therms)	Equivalent Single-Family Residential Systems5
1	Single-Family Commercial/Multifamily	$18.59 $14.53	$29,000,000 $34,000,000	1,560 2,340	13,334 20,000
	Subtotal		$63,000,000	3,900	33,334
2	Single-Family Commercial/Multifamily	$13.11 $9.88	$23,000,000 $26,000,000	1,755 2,632	14,992 22,493
	Subtotal		$49,000,000	4,387	37,485
3	Single-Family Commercial/Multifamily	$7.69 $6.55	$18,000,000 $23,000,000	2,340 3,510	20,000 30,007
	Subtotal		$41,000,000	5,850	50,007
4	Single-Family Commercial/Multifamily	$3.23 $3.13	$11,000,000 $16,000,000	3,404 5,106	29,094 43,647
	Subtotal		$27,000,000	8,510	72,741
	Total		$180,000,000	22,647	193,567

5.2. Determination of Revised Incentive Amounts

Although we agree with CALSEIA that there should be a restructured incentive program with greater incentives early in the program, we do not agree with the amount of the increases proposed by CALSEIA.

It is clear that increasing incentives will encourage participation in the program. The success of the EBRP program, which implemented an incentive increase early in the program, supports the idea that increasing incentives in the CSI Thermal program will increase participation. However, CALSEIA did not propose any bases or evidence supporting its proposed increase amounts. The PAs support an increase for single-family customers, but they declined to endorse a specific increase amount.

In light of this, it is reasonable to base the new incentive structure on the goals, strategy and program design principles set forth in D.10-12-022. These considerations include the importance of participation by single-family customers, the need to smooth the transition between incentive level steps, the need to reach the statutory goal of 200,000 systems installed, budgetary limits and the need to have consistent incentive structures for natural gas-displacing and for electric-displacing systems.

The revised incentive structure stays within the statutorily mandated parameters of the program. The incentive structure retains many of the original features of the program, will achieve the same system equivalent thermal displacement goal, and adhere to the same budget. As required by AB 1470, the goal for natural gas-displacing systems continues to be 585 million therms (the equivalent of 200,000 single-family systems over the 25-year life of the systems).

With the marketing campaign launching in April 2012, it is important to maximize market stability by staying close to the original incentive structure. The revised incentive structure provides for the same total amount to be available for incentives ($180 million for gas-displacing systems, not including incentives for low-income customers, and $100.8 million for electric-displacing systems). The number of program step levels and customer classes also remains the same: four step levels, for each of two customer classes (single-family and multifamily and commercial).

Table 2: Comparison of Original Incentive Structure and Revised Incentive Structure

In keeping with CALSEIA's proposal, and the rationale set forth in D.10-12-022, we have shifted incentive funds from the later steps to earlier steps - increasing the amount of incentive funds available for both Step 1 (for all customer classes) and Step 2 (for single-family customers). Increasing the incentives at these step levels should result in higher adoption rates in the near future.

Table 3: Comparison of Projected Average Incentive Amounts for
Single-Family Residential Customers

Step	Original Incentive per Therm Displaced	Revised Incentive per Therm Displaced	Original Incentive for Average Residential SWH System6	Revised Incentive for Average Residential SWH System
1	$12.82	$18.59	$1,500	$2,175
2	$10.26	$13.11	$1,200	$1,535
3	$7.69	$7.69	$900	$900
4	$4.70	$3.23	$550	$380

In addition to shifting funds to the early steps of the program, the new incentive structure will increase funds available to single-family customers by changing the allocation of funds between customer classes.

Single-family homes are an important part of the program. Indeed, one important benchmark for measuring program goals is based on displacing natural-gas water heating systems equivalent to 200,000 single-family home systems. As Environment California stated in its comments in R.08-03-008, residential customers will contribute substantially to the program and this market represents tremendous opportunity for market penetration and renewable energy investment. (D.10-01-022 at 34.)

Program participation by single-family customers has been slower than participation by multifamily and commercial customers. A residential customer installing a SWH system does not benefit from the same economies of scale as a multifamily or commercial customer.

By shifting funds from the multifamily and commercial budget to the single-family budget, we will be able to increase incentives for single-family homes thereby supporting this key aspect of the CSI Thermal Program. This, in turn, should increase the number of consumers with confidence and an understanding of the SWH technology, furthering the goal of market transformation. Based on this, it is reasonable to allocate more funds to single-family systems.

Table 4: Allocation of Incentive Budget Between Customer Classes

Customer Group	Original Allocation	Revised Allocation
Single-family	40%	45%
Multifamily/commercial	60%	55%

It is also reasonable to provide larger incentives for single-family customers. The new incentive structure provides that, at each incentive step level, the per-therm or per-kilowatt hour incentive rate for single-family customers is higher than the corresponding incentive rate for multifamily and commercial customers.

For each customer class and step level, the number of therms displaced should remain the same. For example, the total number of therms to be displaced by single-family SWH systems in Step 1 is the same under the original incentive structure and the revised incentive structure.

Table 5 shows the therms that will be displaced annually and the equivalent number of single-family home systems by step level. The step levels and goals for displacement are the same in both the original and the revised incentive structure.

Table 5: Gas-Displacing Incentives by Customer Class for both the Original and
the Revised Incentive Structures⁷

The decline between step levels should be minimized to create market clarity and stability. Incentive declines are triggered based on the incentives committed for a customer class. (D.10-01-022 Appendix A at 6.) Abrupt changes in incentive amounts could cause disruption in the market. For example, a dramatic difference in incentives will discourage customers looking to invest in SWH when installations are nearing a capacity reservation trigger for an incentive decline. By smoothing the decline between steps, we will minimize the risk of disruption. Although the new incentive structure for both single-family and multifamily and commercial customers will result in steeper declines between steps, the declines are still reasonable.

For single-family customers under the restructured incentive program, the decreases between steps will be relatively consistent (averaging $4.65 between steps). However, the decrease from Step 1 to Step 2, and from Step 2 to Step 3, will be over $5.00, compared to under $3.00 in the previous incentive structure.

For multifamily and commercial customers, under the restructured incentive program, the decreases between the steps will be relatively consistent equal (averaging $3.63), but the decrease from Step 1 to Step 2 will be more than $1.00 greater than under the previous incentive structure.

Other than these changes, the incentive structure will remain the same, including the proportion of funds allocated to each service territory.

5.3. Incentive Structure for Electric-Displacing Systems

In keeping with our conclusion in D.10-01-022, the incentive structure for electric-displacing systems parallels the above structure for gas-displacing systems. Although the incentive rates differ, the step levels will decline in the same manner and at the same time as the steps for natural gas-displacing systems.

Table 6: Electric-Displacing Incentive Structure from D.10-01-022

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

Table 7: Revised Electric-Displacing Incentive Structure

Step	Customer Class	Electric-Displacing Incentive ($/kWh)	Incentive for Average Residential System
1	Single-Family	0.54	$1,467.33
1	Multifamily Commercial	0.42	N/A
2	Single-Family	0.38	$1,048.42
2	Multifamily Commercial	0.29	N/A
3	Single-Family	0.22	$601.70
3	Multifamily Commercial	0.19	N/A
4	Single-Family	0.10	$263.24
4	Multifamily Commercial	0.09	N/A

5.4. Effective Date

The potential for a change in incentive amounts will cause uncertainty in the market. Once the proposed decision has been issued, the SWH market will be aware of the potential for greater incentives. Therefore, it is reasonable to allow the incentive changes to apply to all CSI Thermal Program applications received after the date the proposed decision is issued, if the Commission adopts these higher incentives. The decision will apply to applications submitted after the date the proposed decision is issued for comment. The PAs suggest that we should wait until after the marketing and outreach plan has been implemented and evaluated before implementing any incentive changes. We disagree. First, as indicated above, knowledge of the potential for higher incentives will cause uncertainty in the market. Second, given the relatively short remaining life of the program, it is essential to make changes to the incentive structure without delay.

For purposes of this determination, an application shall be considered submitted on the initial "Application Review" status date. For multifamily and commercial applications, the "Application Review" status date is the date by which both the Reservation Request Forms and the Incentive Claims Forms have been submitted. If a system is eligible for the adjusted incentive amount, but the incentive has already been paid out, the PA will issue an incremental payment to the system owner.

5.5. Cost Effectiveness Analysis Already Resolved

In determining how best to restructure the incentives, it is not necessary to revisit the cost-effectiveness analysis. Neither AB 1470 nor D.10-01-022 requires us to revisit the cost-effectiveness analysis prior to making a change to the incentive structure. To revisit the cost-effectiveness analysis now would require months of additional proceedings resulting in a delay in restructuring the incentive program. With only five years left before the program ends in December 2017, any delay would be untenable. In addition, a delay now that the program has already been implemented would create a cloud of uncertainty around incentive amounts. Finally, although projections and assumptions made today would be different from those made originally, these new projections would be subject to the same level of uncertainty.

5.6. Low-Income Program

The incentive rates for low-income customers will remain the same. In D.11-10-015, the incentive rates for qualifying single-family low-income customers were set at 200% of the applicable general program incentive level, and the incentives for qualifying multifamily affordable housing customers were set at 150% of the applicable general program incentive levels set forth in D.10-01-022. As shown in Table 8 below, the low-income incentive levels will continue to be based on the incentive levels established for the general program in D.10-01-022. The PAs proposed changing the low-income program. We disagree. Because this program is comparatively small, and began operations only a few months ago, it is not reasonable to make changes to this portion of the incentive program at this time.

Table 8: SWH Incentive Levels for Single-Family and
Multifamily Low-Income Applicants

⁴ According to the data available on the Go Solar website as of May 30, 2012 for both gas and electric-displacing systems, less than 5% of target displacement has been reached. See downloadable Excel file at ( http://www.gosolarcalifornia.com/solarwater/index.php).

⁵ The annual therm displacement in each step is converted to an equivalent number of single-family residential SWH systems based on the assumption an average residential system displaces 117 therms per year.

⁶ Assumes average residential system displaces 117 therms per year.

⁷ The number of annual therms displaced for the Step 1 incentive level will be slightly higher than the numbers shown here because of program commitments made for SWH systems prior to this Decision.