VI. Performance-Based Incentives

In D.06-08-028, the Commission adopted performance-based incentives (PBI) for systems of 100 kilowatts (kW) and larger, but does not move to PBI for systems of 30 kW and larger until 2010. SB 1 specifies that the Commission phase in PBI for systems under 100 kW on a faster schedule. Specifically, SB 1 adds Public Utilities Code Section 2851(a)(2), which provides that:

The commission shall adopt a performance-based incentive program so that by January 1, 2008, 100 percent of incentives for solar energy systems of 100 kilowatts or greater and at least 50 percent of incentives for solar energy systems of 30 kilowatts or greater are earned based on the actual electrical output of the solar energy systems. The commission shall encourage, and may require, performance-based incentives for solar energy systems of less than 30 kilowatts. Performance-based incentives shall decline at a rate of no less than an average of 7 percent per year.

To conform to SB 1, the ALJ ruling proposed the following modifications to D.06-08-028 to phase in PBI more quickly:

Systems 100 kW and larger PBI beginning January 1, 2007

Systems 50 kW and larger PBI beginning January 1, 2008

Systems 30 kW and larger PBI beginning January 1, 2010

In addition, the ALJ ruling proposed the Commission regularly assess whether this approach meets the targets of SB 1. For example, the Commission could review total incentive dollars committed or paid in 2008 to ensure that 50% of incentive funds are paid based on actual output, and make adjustments going forward as needed.

ASPv, the Joint Solar Parties, and SDG&E/SoCalGas agreed with the approach proposed in the ALJ ruling. The Joint Solar Parties support the approach because it focuses on total incentives paid and meets the practical needs of system owners discussed at length in D.06-08-028. SCE proposed an alternative approach wherein starting in 2008, the Commission would require program administrators to pay 50% of incentives to each project between 30 kW and 50 kW on a PBI basis.

We will adopt the PBI phase-in approach proposed in the ALJ ruling rather than the approach proposed by SCE because it is likely to be easier and less costly to administer. In addition, the Commission will annually assess the total incentive dollars committed or paid to ensure this approach meets the targets of SB 1, and make appropriate adjustments as needed. We will require quarterly reporting by the program administrators to the Director of the Energy Division on the percent of incentives committed or paid on a PBI basis. We decline to adopt SCE's approach because it would require program administrators to both monitor actual system output and make an up-front incentive payment to projects in the 30 kW to 50 kW size range. Administering two types of payments to these smaller projects could prove burdensome and costly, and we find it more efficient, and still in compliance with SB 1, to phase in PBI for systems above 30 kW as the solar industry adapts to sales and financing mechanisms associated with PBI over the next few years.

Both PG&E and SCE point out that the language of SB 1 does not allow any exemptions from the PBI requirement for solar installations on new construction projects. In D.06-08-028, the Commission had exempted new construction from PBI, allowing such projects to receive incentives on an up-front basis instead. We agree with PG&E and SCE that our decision must be modified to remove the PBI exemption for new construction, and so modify it by this order.