V. Incentive Reductions

SB 1 adds Section 2851(a)(1) to the Public Utilities Code and states that:

The incentive level authorized by the commission shall decline each year following implementation of the California Solar Initiative, at a rate of no less than an average of 7 percent per year, and shall be zero as of December 31, 2016. The commission shall adopt and publish a schedule of declining incentive levels no less than 30 days in advance of the first decline in incentive levels. The commission may develop incentives based upon the output of electricity from the system, provided those incentives are consistent with the declining incentive levels of this paragraph and the incentives apply to only the first megawatt of electricity generated by the system.

In D.06-01-024, the Commission adopted and published a declining solar incentive schedule, with reductions in incentives at the earlier of MW levels of program participation or the start of each calendar year. The incentives declined in 10 steps, with incentives ending on December 31, 2016. Later, in D.06-08-028, the Commission modified its earlier incentive reduction schedule and adopted an incentive structure that declines only as MW levels of program participation are achieved, rather than after a specified period of time. Each of the incentive "step" reductions adopted by the Commission is larger than 7%. These reductions, however, are not necessarily linked to a calendar year.

The ALJ ruling asked parties to comment on whether the Commission's MW-based incentive reduction plan adopted in D.06-08-028 is now inconsistent with SB 1 and, if so, what changes should be made to the incentive reduction plan to bring it into compliance with SB 1. In addition, parties were asked to comment on whether SB 1 could be interpreted to allow the Commission to maintain a MW-based incentive reduction scheme, as long as incentives decline by an average 7% rate when assessed over a multiple-year period.

Comments from the solar industry (ASPv and the Joint Solar Parties), PG&E, and SDREO maintain the Commission should keep the MW based incentive reduction schedule it adopted in D.06-08-028. These parties generally contend that the language in SB 1 allowing "an average" incentive reduction signals the Commission should monitor incentive declines over the 10-year duration of CSI and adjust incentives as needed to meet the statute's requirements. They stress this approach will allow the CSI program the best chance of meeting the 3,000 MW goal enunciated in SB 1.

A few parties suggest modifications to the incentive schedule adopted by the Commission in August 2006. SDG&E/SoCalGas suggest the Commission should return to the incentive reduction schedule adopted in D.06-01-024, which involves a MW based reduction or an annual decline, whichever is sooner. SDG&E/SoCalGas reason that this approach avoids premature exhaustion of funds. SCE suggests a variance on this to effectively manage incentives over time. Specifically, SCE proposes a 7% incentive decline if the MW triggers set in D.06-08-028 have not yet been reached. CARE suggests the Commission modify the incentive structure to provide a higher incentive level to systems under 30 kW, and allow these small systems to receive compensation for excess energy production through a power purchase agreement. SCE claims CARE's proposal is not allowed under the existing net energy metering statutes, which were not modified by SB 1.

We find the incentive reduction schedule adopted in D.06-08-028, which provides incentive reductions in steps larger than 7%, is consistent with the intent of SB 1 as long as we monitor incentive levels to ensure they decline no less than an average of 7% per year and incentives are zero as of December 31, 2016. In D.06-08-028, the Commission established a periodic review of CSI. We will use this periodic review to evaluate the average incentive reductions per year and make any appropriate adjustments to incentive levels to ensure the SB 1 requirements are met.

We established the current MW-based incentive reduction schedule after careful consideration of alternatives in D.06-08-028. Our reasoning there still applies, namely that incentive reductions based on volume are simple, transparent and predictable and correspond to the economics of the solar marketplace without resource intensive reviews. The schedule we adopted in D.06-08-028 can comply with SB 1 as long as we ensure the reductions achieve an average decline of no less than 7% per year, and incentives are zero as of December 31, 2016.

The modifications proposed by SCE and SDG&E/SoCalGas are aimed at managing funds over time. In our view, these modifications are unnecessary and could create confusion and less certainty in incentive levels, which are outcomes that parties specifically urged us to avoid. As we stated previously:

It is unreasonable to assume that incentive levels in California can by themselves impact the market price for solar. We agree with several parties who have pointed out that solar labor and material costs are independent of Commission incentive levels and set to a significant degree by a worldwide market. If we reduce incentives each calendar year before target MW levels are achieved, we run the risk of the solar market stalling in California while solar panels and installers move to other more lucrative markets. It is more reasonable to link our incentive reductions to actual levels of demand. (D.06-08-028, p. 87.)

Therefore, we will not modify our previous incentive reduction schedule.

Further, SB 1 requires the Commission to "adopt and publish a schedule of declining incentive levels no less than 30 days in advance of the first decline in incentive levels." In D.06-08-028, we published a schedule of declining incentives for the entire 10-year duration of CSI, and required publication of real-time information on a public website of the total MWs in incentive applications so that interested persons can monitor pending incentive reductions. We find our adopted schedule complies with SB 1's requirements.

In comments on the proposed decision, several parties commented that the Commission should clarify that Step 2 of the incentive reduction schedule, which specifies the incentive rate for the next 70 MW of solar installations under CSI, begins on January 1, 2007. The Joint Solar Parties suggest the MWs associated with 2006 solar incentive applications should not count towards Step 2. They also maintain that the Commission has drawn a bright line between SGIP and CSI in terms of budget and program rules.

We disagree with this interpretation of the incentive reduction schedule. Step 2 of the incentive reduction schedule, which was initially established in D.06-01-028 and then modified in D.06-08-028, has already begun. Once the first 50 MW in solar applications were reserved earlier this year through the SGIP, Step 2 began. Incentives are now reserved and paid at the Step 2 levels set in D.06-08-028. Parties should not confuse the method for setting the incentive dollar amount through our previously adopted incentive reduction schedule with other CSI program rules and budgets that we refine and conform to SB 1 in this order. We decline these parties' suggestion that we increase the size of Step 2 by allowing all applications in 2006 above the 50 MW level to not count as part of CSI. Even though these applications are made under the SGIP program rules and budget, we measure them and use them to adjust solar incentives per our adopted incentive reduction schedule.