6. Discussion
The key issue raised by FCE's petition is whether the Commission should deviate from prior decisions that created and retained a 1 MW cap on incentives to any one project. If we raise the incentive limit beyond 1 MW, as FCE requests, this could allow a large portion of each utility's SGIP budget to go towards a single project, or at most, a few large projects. On the other hand, parties suggest mechanisms to preserve program funds, such as raising the incentive cap for only renewable fuel cell projects, reducing incentives for projects over 1 MW, and lifting the 1 MW cap on a pilot basis.
FCE and CCSE, point out that the SGIP currently has $96 million in unused funds from prior years.5 CCSE contends that unused funds indicate potential shortcomings in the eligible technology market, the incentive rates, and/or program execution. PG&E and CCSE note that fuel cell participation in SGIP has not been high. CCSE states it has funded only $21.1 of $506.7 million in incentives to wind and fuel cell projects, or just 4%, and only 8.9 MW of 278.1 MW, or 3.2% of installed capacity. PG&E claims the renewable fuel cell market needs stimulation because no renewable fuel cell projects have been completed in its service territory, although five such projects (representing 4.7 MW in capacity) are currently pending. Our Energy Division reviewed SGIP data and found that although SGIP funded a total of 233.8 MW in 2005 through 2007, there were only 32 fuel cell project applications in SGIP in those years. Nine of the 32 projects have been completed, with a capacity of 5.7 MW. Three of the 32 applications pertained to renewable fuel cells, for a total capacity of 2.62 MW. There were five wind turbine project applications over the same period, for 3.8 MW in capacity, and none have been completed. Moreover, only six fuel cell and wind SGIP applications during that period were for projects over 1 MW, with a maximum size of 1.5 MW, and none have been completed. The fact that SGIP has not funded a completed wind or fuel cell project greater than 1 MW from 2005 to the present is consistent with the notion that the existing incentive cap is effectively functioning as a cap on wind and fuel cell project size, despite the fact that projects up to 5 MW are eligible to participate in SGIP.
CCSE maintains that providing incentives to larger installations, coupled with a tiered incentive structure that pays less than the full incentive over 1 MW, can provide for the installation of more MW of renewable fuel cell DG projects for fewer incentive dollars. In their example, the current 1 MW cap for CCSE allows them to fund 5.4 MW of renewable fuel projects. If the incentive cap were raised to 3 MW, coupled with tiered incentives, CCSE's budget could fund 8.6 MW with the same budget of $23.4 million.
In support of its petition, FCE argues the market for fuel cells is constrained by the 1 MW limit and that "larger projects are better able to deliver cost-effective solutions to the wastewater operator." (FCE Petition, 7/25/07, p. 6.) FCE also suggests that increasing the incentive cap will allow fuel cell manufacturers to reduce product costs via larger production volumes as they realize economies of scale in raw material procurement and production labor when a higher volume of fuel cells are manufactured and sold. (Id., p. 8.) FCE's amended petition attempts to bolster these assertions with additional data about fuel cell project costs and production efficiencies. UTC disputes FCE's assertions regarding production efficiencies and economies of scale.
Without relying on the disputed claims of production efficiencies and economies of scale, we find the argument by CCSE compelling that unspent funds and the low participation rates for fuel cell and wind projects suggests modifications to the current SGIP structure may be warranted. If we increase the incentive cap for both wind and fuel cell DG projects, coupled with decreased incentives for installations over 1 MW, we can attempt to install more MW with the same budget. Moreover, the existence of $96 million in unspent funds allows us to test FCE's assertions on a pilot basis. The possibility that the 1 MW incentive cap is inhibiting larger scale wind and fuel cell project development, coupled with significant unspent SGIP funds, provides sufficient reason to raise the incentive cap on a trial basis for 2008 and 2009 using carryover funds. As noted above, the original reason for the incentive cap was to prevent a few large projects from depleting SGIP funds, thus excluding broad program participation. At this juncture, given the magnitude of unsubscribed funds, it is reasonable to allow carryover funds to be used to fund larger projects.
Moreover, to the extent there is latent demand that may have been suppressed due to a lack of incentives above 1 MW, we believe it is reasonable to raise the incentive cap for all SGIP-qualifying technologies. Although FCE requests increasing the cap for renewable technologies only, we see no reason not to extend this proposal to all technologies currently supported by SGIP. Policy preferences for a given technology, as well as differences in the underlying economics, are currently reflected in SGIP through the incentive levels and Commission rules on allocation of funds between renewable and non-renewable projects. (See D.01-03-073.) We will allow all SGIP eligible technologies to apply for carryover funds, and prior Commission orders regarding allocation of funds between renewable and non-renewable (i.e., Level 2 and Level 3) incentive categories are unchanged and apply equally to carryover funds.
Thus, we will grant FCE's petition in part and allow the SGIP administrators to use carryover funds from prior budget years to provide incentives up to 3 MW to qualifying projects up to 5 MW during 2008 and 2009. We will not grant a permanent change to SGIP rules, and we will only allow projects to receive incentives over 1 MW to the extent carryover funding is available. Program administrators should adhere to all prior Commission orders regarding allocation of funds between renewable and non-renewable incentive levels. Projects applying for incentives up to a maximum of 1 MW will be funded according to standard SGIP rules from each program administrator's annual budget allocation.6 Projects applying for incentives greater than 1 MW, if approved, will receive all of their funding from carryover funds, as available. This preserves the current year's SGIP budget of $83 million for projects receiving incentives up to 1 MW. Any incentives paid over 1 MW will decline in tiers, as suggested in the amended petition. We will adopt CCSE's proposed tiering structure, because it is most conservative and will maximize the use of the carryover funds. Plus, CCSE's proposal is easily applicable to all current SGIP incentives, which vary by technology, as the tiers are based on a percentage of the current incentive. We adopt incentive levels for projects that receive incentives up to 3 MW as follows:
Table 1: Tiered Incentive Rates7
Capacity |
Incentive Rate |
0-1 MW |
100% |
1 MW - 2 MW |
50% |
2 MW - 3 MW |
25% |
In addition, we will allow eligible projects under review larger than 1 MW to be deemed eligible to apply for carryover incentive funding as set forth in this order, up to 3 MW, without the need to reapply. The program administrators should notify all such applicants to whom this might apply to determine if they wish to be considered for additional incentives. Completed projects that seek additional funding for an expansion will need to reapply.
Although we initially issued a proposed decision to deny FCE's petition, the new information regarding unspent SGIP funds and low participation rates for fuel cells and wind convinces us that we should consider testing program modifications. Therefore, we will grant FCE's amended petition in part, for all qualifying wind and fuel cell DG projects, with tiered incentives as set forth in Table 1. The increase in the incentive cap to 3 MW and tiered incentives shall apply on a pilot basis for two years, i.e., SGIP program years 2008 and 2009, and projects that apply for incentives over 1 MW, if approved, will be funded entirely from SGIP carryover funds, as available. The increased incentive cap may continue past 2009 only upon further order of this Commission, which we expect would follow a review of program participation and budgets.
Some parties suggest raising the SGIP total budget. We will not consider an increase in the annual SGIP budget at this time, in light of recent legislative restrictions that limit us to funding only wind and fuel cell DG projects through SGIP. Rather, we will use SGIP carryover funds to allow expanded program eligibility.
5 FCE and CCSE cite the SGIP administrators' website as the source of this figure. The Commission's Energy Division has corroborated this figure.
6 If the annual budget is fully subscribed with applications meeting standard program rules, the SGIP program administrators may use carryover funds to support these projects as well.
7 Current SGIP incentive levels were set by Commission order and are $1.50/watt for Level 2 renewable wind projects, $4.50/watt for Level 2 renewable fuel cell projects, and $2.50/watt for Level 3 non-renewable fuel cell projects.
