2. Low-Income Incentive and Financing Structure

The Energy Division Staff Proposal contains a recommended structure and implementation strategy for a $108.34 million solar incentive plan for existing single-family, owner-occupied, low-income homes.6 The single-family low-income incentive plan is targeted at homeowners who meet the definition of low-income residential housing established in Public Utilities Code7 Section 2852. Specifically, low-income residential housing means those homes financed with low-income housing tax credits, tax-exempt mortgage revenue bonds, general obligation bonds, or local, state or federal loans or grants. Section 2852 also references the definition of low-income households in Health and Safety Code Section 50079.5.8

Commission staff estimates that based on enrollment data for the California Alternative Rates for Energy (CARE) 9 program, there may be 50,000 single-family households10 that comply with the eligibility requirements of Section 2852, although there may be additional households that are not CARE-eligible but also meet the criteria.

Section 2852 defines a solar energy system eligible for subsidy as "a solar energy device that has the primary purpose of providing for the collection and distribution of solar energy for the generation of electricity, that produces at least one kilowatt" of electricity. SB 1 precludes the Commission from collecting CSI funds from gas distribution ratepayers. Thus, the Staff Proposal recommends incentives solely for solar photovoltaic (PV) systems, and not for solar water heating systems, because solar water heating does not meet the definition of solar energy system in Section 2852 and solar water heating most often replaces natural gas usage.

Staff proposes a program goal of providing access to PV systems for qualifying low-income single-family homes to decrease electricity use and electricity bills without increasing monthly household expenses. The Staff recommends partial subsidies of solar energy systems to maximize both the number of households served and energy bill savings.

Staff proposes an incentive structure to make the economics of solar systems attractive to a wide variety of low-income households that may be eligible under Section 2852. These households may or may not be eligible for the CARE program. Therefore, the recommended incentives are derived from a "sliding scale" that varies in 21 increments based on a household's eligibility for CARE rates and its estimated ability to take advantage of federal solar tax credits. The proposed incentives range from $4.80 to $5.80 per watt for non-CARE eligible homeowners, and from $6.20 to $7.20 per watt for CARE eligible homeowners. Staff derived these incentive rates by estimating the incentive amount needed to make a solar investment in a 2 kW system with an 18% capacity factor generate an internal rate of return of 10%.11 For its analysis, Staff assumed that the portion of system costs not covered by an incentive payment would be financed using a 6%, 25-year loan. Staff estimates this loan would cost a low-income solar incentive applicant between $23 and $41 per month.

The Staff Proposal envisions a one-time, up-front incentive payment to eligible customers. Moreover, the proposed incentive rates would remain level for the program duration rather than decline on the same schedule as mainstream CSI incentives. However, Staff recommends periodic Commission assessment of the low-income incentive rates relative to market changes in solar costs, and adjustments if warranted.

In order to finance any gap between incentives and total system cost, Staff recommends that applicants obtain loans through local banks and housing agencies, and that the chosen Program Manager work with private sector banks or city and county housing agencies to provide financing packages and explore flexible loan options. At this time, there appears to be few options for private sector financing of low-income homeowners. Staff proposes that the Program Manager work to identify new private sector financing providers and packages. Staff does not recommend a loan program using CSI funds, citing complications to create and administer a financing program with ratepayer funds.

2.1. Parties' Comments

Several commentors, namely A WISH, Greenlining, and SoCal Forum, do not endorse the incentive schedule proposed by Staff. Instead they recommend low-income solar incentives that subsidize the entire cost of a solar installation for low-income customers. Likewise, PG&E, SDG&E, and CSD question how low-income customers will afford a monthly loan payment as envisioned by Staff's sliding incentive structure. CSD contends the incentives in the Staff Proposal are not high enough because retrofitting expenses need to be anticipated, such as roof repair, electrical wiring, and other pre-existing safety hazards.

If the Commission does not opt for a full subsidy, Grid Alternatives recommends increases to the incentives in the Staff Proposal. Its proposal mirrors the Staff Proposal and declines for those homeowners eligible for federal tax credits.12 Grid Alternatives' proposed incentives range from $7.15 to 7.65 for CARE eligible applicants, and from $6.00 to $6.80 for non-CARE eligible applicants. Grid Alternatives contends its incentives provide immediate positive cash flow for low-income clients whereas the incentives in the Staff Proposal lead to negative cash flow in year one. In addition, Grid Alternatives bases its incentives on the proposition that the promise of a future tax credit is generally not a motivating factor for low-income homeowners because they are generally more concerned with monthly cash flow and may not have a large tax liability to offset with a tax credit. Therefore, Grid Alternative's proposed incentive structure provides positive cash flow without relying on a tax credit, but the incentives decrease as potential tax credits increase. SCE objects to some of the assumptions Grid Alternatives uses for its analysis, noting that system size, baseline information and customer usage patterns can greatly impact the economics of a solar installation.

SCE and SDG&E recommend that incentives mirror the mainstream CSI incentive program and decline on the same schedule. SCE claims the incentive structure in the Staff Proposal will be hard to communicate, and customers may find it complex and confusing.

Grid Alternatives, CCSE, A WISH, and Greenlining support the idea of "sweat equity," where incentive recipients are required to make an equity contribution by volunteering their labor, or labor of family and friends, toward the solar installation. SCE opposes "sweat equity" citing customer safety, liability, and performance concerns. SCE contends solar PV systems are sophisticated and expensive electric generators that may create safety problems for anyone other than a qualified installer.

PG&E cautions that if the low-income program offers subsidies to cover 100% of system costs, system size should be limited, perhaps to 1 kW, to reach more customers. SCE comments that if systems are fully subsidized, the Commission should revisit its decision on renewable energy credit (REC) ownership because ratepayers are fully funding the renewable investment and should derive the REC benefits.

Greenlining suggests giving priority to those ratepayers already eligible and enrolled in the utilities' Low-Income Energy Efficiency (LIEE)13 programs and families who earn less than 80% of the median income. SDG&E asks whether moderate income customers would be eligible for the CSI low-income incentive program, because the Staff Proposal implies they may qualify.

2.2. Discussion

As a threshold matter, we agree with the overall program goal articulated by Staff in its proposal. The goal of the CSI low-income incentive program should be to provide existing owner-occupied single family low-income homes with access to PV systems to decrease electricity usage and bills without increasing monthly household expenses. The program should strive to maximize households served and energy bill savings.

In reviewing the comments, we share parties' concerns that an incentive structure that only partially subsidizes solar installations, and requires low-income households to take on loans for the balance, may not be realistic for many low-income households. Instead, we are persuaded that a full subsidy is preferable because it will avoid the need for the lowest income households to take on additional debt. A full subsidy to the most needy low-income households also addresses Greenlining's suggestion to give priority to these households.

Therefore, we will provide a full-subsidy for 1 kW systems to owner-occupied households that qualify as "extremely low income" and "very low income" (i.e., up to 50% of area median income per the Health and Safety Code definitions referenced in Section 2852). We will cap this subsidy at a maximum of $10,000 per qualifying household, and we will allocate a maximum of 20% of program funds for full-subsidies to qualifying households.14 A full subsidy to the lowest income households will guarantee this subset of the low-income population has access to the benefits of solar energy. We estimate that if 20% of funds are set aside for this purpose, we can provide 1 kW systems to approximately 1,800 homes. Energy Division shall monitor participation levels in the full subsidy portion of this program and determine whether the $10,000 cap is appropriate. At any time, Energy Division may recommend to the assigned Commissioner or ALJ of this, or any successor proceeding, adjustments to the full subsidy provisions of the program, or for that matter, any element of the entire low-income solar incentive program. At the discretion of the assignment Commissioner or ALJ, and if the changes require modification of a Commission order, the change will be considered by the full Commission, following notice to parties and an opportunity for comment.

Although several parties suggested requiring applicants to provide "sweat equity" as a condition of receiving solar incentives, we will not make this a program requirement. We agree with SCE and solar industry commentors that this could raise safety concerns. In comments on the proposed decision, PG&E, Greenlining, and A WISH suggest that we encourage the Program Manager to look for ways to provide solar installation training for interested recipients of fully-subsidized systems, or use the low-income solar incentive program as a training opportunity to prepare low-income Californians for employment in solar energy. We agree this is an excellent idea. We strongly encourage entities interested in becoming the Program Manager to incorporate a workforce development and job training plan into their proposed program implementation plan.

Although SCE suggests that we revisit REC ownership for any fully-subsidized systems to low-income homeowners, we see no reason to treat REC ownership for this potentially small number of fully-subsidized low-income systems any differently than subsidies to other solar installations. As the Commission found in D.07-01-018, a solar facility owner shall own all of the RECs produced by his/her facility. In this subsidy program, the system owner is the homeowner.

Other qualifying owner-occupied low-income residential housing would receive a partial subsidy based on a sliding scale that considers an applicant's tax status and CARE eligibility. The Program Manager would seek out low-cost loans through local government housing agencies or other private sources to cover the gap between the partial subsidy and total system cost. The Program Manager should avoid applicants taking on high interest consumer credit loans. We conclude that we can maximize our program dollars and reach more low-income households by providing partial subsidies to some homes coupled with government loans or other private sector financing to fill the gap. Although a sliding scale of incentives will be more challenging to market than a single incentive amount, it will allow the Commission to maximize the number of households that can benefit from this program. Moreover, because the definitions of low-income residential housing in Section 2852 incorporate a wide range of income levels across the various counties in California, a sliding scale adjusts incentives in keeping with this variety of income levels.

We will adopt a sliding scale based on an applicant's ability to take advantage of federal tax credits for solar installations and whether the applicant qualifies for CARE rate assistance. The adopted incentive rates are similar to those proposed by Staff, but have been simplified from 21 increments to only three. These simplified incentives should be easier for a Program Manager to administer and market. The incentive rates are intended to provide a homeowner who has no federal tax liability with a positive cash flow in the first year of the installation, based on the same set of assumptions staff used in developing the rates in the original Staff Proposal Incentive rates are as follows:

Table 1

Partial Subsidy Single-Family

Low-Income Solar Incentives in $/watt

Federal Income

Tax Liability

Qualifying Low-Income CARE-Eligible Homeowners

Qualifying Low-Income Homeowners not eligible for CARE

$0

$7.00

$5.75

$1 to $1,000

$6.50

$5.25

$1,001 to $2,000

$6.00

$4.75

These incentive rates reflect a subsidy in the range of 50% to 75% of total system cost, assuming total system installed cost at $9 per watt. An applicant will be required to submit a federal income tax return from the prior year, so the Program Manager can determine estimated tax liability and CARE eligibility.15

By taking this dual approach, i.e., full subsidies to the lowest income households and partial subsidies to remaining low-income qualifying households, we can maximize the number of megawatts installed on low-income homes. If we only provided full subsidies, we would not be able to reach as many homes or install as many megawatts (MWs) of solar to benefit low-income Californians.

We will not pay incentives to "moderate income" households as defined in the Health and Safety Code cited in Section 2852, although this was implied by the Staff Proposal. Upon further review of Section 2852 and its intent to fund incentives for low-income residential housing, we conclude that subsidies under this program are intended only for lower income households as defined in Section 2852, and not to moderate income households.

Although SCE and SDG&E ask for the incentives to decline on the same schedule as incentives in the mainstream CSI program, we will not adopt this approach for the low-income incentive program. We prefer to keep incentives at a constant level to avoid customer confusion. In our view, the target low-income population will be harder to identify and reach, and there are likely to be significant barriers to overcome in marketing solar to this group. The Commission can periodically assess the incentive amount for low-income recipients and adjust it based on market changes in solar energy system costs.

To facilitate minor incentive adjustments, we delegate to the assigned ALJ, in this or any successor proceeding, the authority to reduce low-income incentives by up to 10% per year, identical to the process outlined for mainstream CSI incentives in D.06-01-024. Commission Energy Division staff shall provide a written justification for any incentive reduction to the ALJ. The ALJ shall issue a ruling with this justification, allowing all parties an opportunity to comment on the proposed low-income incentive reductions. Following a comment period, the ALJ may issue a ruling reducing low-income incentives. Increases to incentives, or reductions larger than 10% will be handled by Commission order.

We will not limit the program to LIEE enrollees, as suggested by Greenlining. On the other hand, if applicants qualify for LIEE, they must enroll in it prior to receiving incentives (as discussed below in Section 6 on Energy Efficiency).

Finally, SCE comments that the Staff Proposal does not cover incentives for renter-occupied single-family homes. Although the CSI program administrators filed a proposal in this proceeding for incentives to low-income multi-family housing,16 there is no provision for incentives to renters of single-family homes. The issues surrounding incentives to renters of single-family homes are probably more similar to the issues we will consider in reviewing the multi-family incentive proposal, particularly issues involving how renters can receive a benefit from an incentive program directed at landlords of multi-family housing. Therefore, in our review of the multi-family incentive proposal, we may consider whether and how to incorporate incentives for renters of single-family homes into that program.

6 The $108.34 million budget is half of the $216.68 million the Commission allocated for CSI low-income incentives in D.06-12-033.

7 All statutory references are to the Public Utilities Code unless otherwise noted.

8 Appendix B to this order contains relevant Health and Safety Code sections. Health and Safety Code Section 50079.5 states in pertinent part that:

9 The CARE program provides a 20% discount on electric and natural gas bills to qualifying low income households. In addition, CARE participants are not billed for higher rate tiers. To qualify, households must be at or below the income guidelines found at www.cpuc.ca.gov/static/lowincomeprograms.htm.

10 See Assigned Commissioner's Ruling Revising Schedule for Phase Two, February 5, 2007, Attachment entitled "Low Income Affordable Housing Fact Sheet," p. 1.

11 Staff also assumed system costs at $9/watt, and made assumptions for CARE and non-CARE electricity rates, rate escalation of 3% per year, and inverter replacements costs of $975 after 15 years. (See Staff Proposal, 4/17/07, p. 13.)

12 See Grid Alternatives, 5/11/07, pp. 8-10.

13 LIEE programs are offered by the jurisdictional energy utilities to low income customers that meet the CARE income guidelines. LIEE programs provide for the installation of energy efficiency measures in customer residences. Energy efficiency measures may includes weatherization, lighting, and heating/air conditioning repair or replacement, all offered at no cost to the participating customer. The program also provides customer education about energy use.

14 A household that qualifies for a full subsidy can either take the full subsidy for up to a 1 kW system or take a partial subsidy, as described below, for a larger system. But a qualifying full subsidy household cannot take advantage of both options.

15 We note that in February 2007, H.R. 550 and S.590 were introduced in Congress. The bills would remove the $2,000 cap on residential solar energy systems and allow system owners to receive a federal tax credit for up to 30% of system costs. This means a system owner can claim up to $5,400 in tax credits for a 2 kW system, assuming system costs equal $9/watt. This is a significantly larger tax credit than the one that currently exists. If these changes to the federal tax credit are passed by Congress, we will consider adjusting the low income incentive structure accordingly.

16 See "Joint Proposal of the California Solar Initiative Program Administrators Recommending a Low Income Multi-Family Solar Program," July 16, 2007.

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