3. Discussion

3.1. Program Modification Requests

Six of the seven PMRs request to include new technologies into SGIP (PMRs Numbers 1 through 6). PMR Number 7 requests to modify the existing 12-month deactivation period requirement for existing generation systems prior to being eligible for SGIP participation. Energy Division recommends we deny PMRs 1 through 5 due to program ineligibility and accept PMR 7, the deactivation rule modification. There is no opposition to these recommendations and the Energy Division's recommendations are reasonable given the limitation on program eligibility. We adopt the Energy Division's recommendations to deny PMR Numbers 1 though 5 and accept PMR number 7. Below, we discuss PMR Number 6, which has opposing views among parties.

3.2. Advanced Energy Storage (AES) Systems

3.2.1. Adding AES Technology as a New SGIP Technology

StrateGen and VRB submitted PMR Number 6 requesting to include AES systems as a new technology into SGIP. Specifically, they submit information for an AES system developed by VRB that converts chemical energy into electrical energy using a vanadium redox battery system (VRB ESS) that consists of two electrolyte tanks connected by a regenerative fuel cell. They request an incentive of $2.5 per watt (W) for a stand-alone AES system and recommend that we adopt a number of operating and performance parameters defining AES system.

Energy Division and the PAs support adding AES to SGIP with certain conditions. In comments to the ALJ ruling, the PAs clarify that despite their earlier disagreement, they do recommend AES be eligible for SGIP incentives if coupled with an eligible technology (fuel cell or wind). Energy Division also recommends adding AES into SGIP, if coupled with wind or fuel cell technology, and recommends an additional incentive of $2/W of installed AES capacity. VRB increased its $2.5/W request to $3.0/W in its reply to the ACR.

We agree that due to program ineligibility, AES systems cannot be added to the SGIP as a stand-alone technology, but when coupled with wind or fuel cell, AES could increase the value of wind and fuel cell and support the goals of SGIP for peak demand reduction. When so coupled, it would be appropriate to allow such AES facility to qualify for SGIP incentives. Accordingly, we adopt the recommendation that AES systems receive SGIP incentives if coupled with an eligible distributed generation technology under the SGIP, currently wind or fuel cell technology. As SGIP PAs have requested in their comments to the proposed decision, we clarify that an AES system must be coupled with an "as current" eligible distributed generation technology under the SGIP. This means that in the future if other technologies are added to the SGIP, then an AES system coupled with those eligible technologies will also be eligible to receive the incentive adopted here.¹⁰ Likewise, if any of the currently eligible SGIP technologies (wind or fuel cell) is removed from the SGIP, then an AES system coupled with those technologies will no longer be eligible to receive SGIP incentives.

In comments to the proposed decision, the SGIP PAs request that we clarify whether the revisions apply to new or existing projects. We clarify that any SGIP project that is currently an eligible technology (wind or fuel cell), including previously installed SGIP projects, will be eligible to receive AES incentives if coupled with an eligible AES system.

3.2.2. Appropriate Incentive Level

With respect to the level of incentives for AES systems, the Working Group raises several issues and suggests the Commission conduct a workshop to address them.

First, the Working Group raises the question of whether the AES incentive should be paid on capacity kilowatt (KW) or energy (kilowatt-hour or KWh) basis. The Working Group argues that there is value to the length of discharge for an AES system, and suggests a per-KWh incentive may be more appropriate.

We adopt the recommendation that AES, if coupled with wind or fuel cell technology, should receive incentives on a per-KW basis. Wind and fuel cell technologies receive SGIP incentives on a per KW basis. Since AES technologies are required to couple with either wind or fuel cell technology, it would make sense to apply the same incentive structure to AES systems. In addition, we have noted above that an AES system coupled with wind or fuel cell technology contributes to the SGIP goal of peak demand reduction. In that context, a capacity or a per KW basis incentive is more appropriate.

We also adopt a $2/W incentive amount for AES systems when coupled with wind or fuel cell technology. While this is slightly less than that originally requested by VRB, it provides an appropriate level of incentive for AES coupled with a currently eligible SGIP technology. VRB's original PMR requested a $2.50/W incentive for a stand-alone AES system. However, the data provided in VRB's reply indicates that the economics of an AES system would improve when AES is coupled with an eligible SGIP technology. Since we are only authorizing funding when AES systems are coupled with wind or fuel cell technology, a reduction in the requested incentive level is justified. VRB's argument that a $3/W incentive is necessary for market adoption of AES is not persuasive. VRB provides an analysis based on an 11% rate of return on investment for a 400 kW AES system, with four-hour discharge, coupled with distributed wind. VRB's analysis assumes a very specific case that is not representative of all applications that would qualify for SGIP and does not sufficiently justify the need for a $3/W incentive.

3.2.3. Appropriate Incentive Structure

The Working Group also raises a series of questions related to whether there should be a size cap on the AES incentives, and if so, whether the capping metrics should be based on a KW or kWh basis. The Working Group also asks whether the tiered incentive structure that was adopted in D.08-04-049 for SGIP technologies should apply here.

We require that the size of the AES system not exceed the capacity of the accompanying SGIP generation.

In the proposed decision we required that the SGIP PAs apply the tiered incentive structure that was adopted in D.08-04-049 on a pilot basis for 2008 and 2009, to projects containing an AES system up to 3 MW in size. We noted that applying the same tier structure to projects containing AES systems would be reasonable because AES is a supportive technology to wind and fuel cell systems. We also noted that under this approach, the SGIP eligible technology and the AES system would each receive 100% of their respective incentive rates for the 0 to 1 MW of capacity, followed by 50% of their incentive rates for the 1 to 2 MW of their capacity and 25% for the 2 to 3 MW of their capacity. We also required that a single project consisting of an eligible SGIP generation technology, coupled with an AES system, may not receive incentives for more than 3 MW of total capacity.

In comments to the proposed decision, the SGIP PAs contend that the incentive structure is too complicated and may have the unintended consequence of acting as a barrier to AES participation in SGIP. They provide an example of a 3 MW renewable fuel cell project coupled with a 1 MW AES system structure, indicating that under the proposed incentive structure, the AES system would not be given an incentive since the incentives for the fuel cell system at all tiered levels will be higher than incentives for the AES system. Instead, the SGIP PAs recommend we cap the AES incentive at 1 MW. VRB, in reply comments to the proposed decision, urges us to reject the SGIP PAs proposal and recommends that we adopt the proposed decision as written, but increase the maximum incentive per project from 3 MW to 5 MW only for combined AES and SGIP projects.

While the example in the PA's comments is representative of only one specific scenario, it does indicate that applying the tiered structure while capping the incentives at 3 MW may become difficult to apply. To avoid complex implementation of the incentive structure, we remove the 3 MW incentive cap and the 5 MW size limit that we imposed in the proposed decision and clarify that for the purpose of calculating the incentive amount, the AES incentive system will be added to the accompanying SGIP generation incentive. Thus, the requirements for an eligible SGIP technology that is coupled with an AES system will be as follows:

· The size of the AES system may not exceed the capacity of the accompanying SGIP generation.

· The tiered incentive structure that was adopted in D.08-04-049 shall apply, on a pilot basis during 2008 and 2009, to eligible SGIP projects as well as the accompanying AES systems.

Table 1 below indicates the amount of incentives for all currently eligible SGIP technologies and AES systems:

Table 1: Tiered Incentive Rates¹¹

Based on the above, a hypothetical 3 MW renewable fuel cell SGIP project coupled with a 2 MW AES system, would receive incentives for the renewable fuel cell at all three tiered levels (1 MW through 3 MW) as well as incentives for the first and the second level (1 MW and 2 MW) for an AES system.

3.2.4. Funding Source

The PAs request guidance from the Commission on which funds to use to pay for AES incentives if other than the funds in the SGIP annual incentives budgets. Because the AES supports wind or fuel cell technology, it is reasonable to require that it would be funded out of the same budget that provides incentives to those technologies.¹² Accordingly, we direct the PAs to fund AES incentives from SGIP budgets.

3.2.5. Operating Parameters

The Working Group raises concerns with the VRB's proposed language to the text of the SGIP Handbook to implement inclusion of AES in the SGIP. Specifically, the Working Group cautions the Commission against making decisions regarding program eligibility strictly based on information provided by VRB.

We have determined that an AES system is eligible for SGIP incentives if coupled with wind or fuel cell technology. We have also noted that this eligibility should not be limited to the AES system proposed by VRB, but rather, all eligible AES systems should receive the same incentive. Thus, it is necessary to define "qualified advanced energy storage."

VRB has proposed a number of minimum technical operating parameters to define an AES system.

These include:

· Ability to be used daily in concert with an on-site wind resource, and still meet its 20-year lifetime requirement. The qualifying AES system must thus have the ability to handle hundreds of partial discharge cycles each day.

· Ability to be discharged for at least four hours of its rated capacity to fully capture peak load reductions in most utility service territories (required AES duration of discharge will depend on each customer's specific load shape, and the duration of its peal demand during peak utility periods).

· Ability to meet Institute of Electrical and Electronics Engineers, Inc. interconnection standards.

· Ability to operate in distributed, customer sited locations and comply with all local environmental and air quality requirements.

We adopt the technical parameters proposed by VRB, but lower the proposed 20-year minimum warranty requirement. We find it unreasonable to require a 20-year warranty term for AES, while under the SGIP, wind and fuel cell technologies are required to have only a five-year warranty. Furthermore, the PAs recommend that we "select a minimum warranty term that encourages the greatest success in roll-out of the AES technology."¹³ A 20-year warranty term seems unnecessarily excessive. Therefore, we require a five-year warranty for AES systems, consistent with the warranty requirements for wind and fuel cell technologies. We believe that the adopted definition is generic enough to allow all qualified AES systems to participate in SGIP. However, because the likelihood exists that our definition maybe overly restrictive, and in regard to the Working Group's concern, we require the PAs to monitor AES applications and report to the Commission if they find the adopted parameters are creating unfair advantages, or adversely impacting the ability of qualified AES systems to participate. In particular, as part of the SGIP measurement and evaluation, PAs should report if the definition of AES precludes AES technologies other than VRB ESS from participating.

3.3. PMR Evaluation Process

The Working Group and UTC generally agree with the proposed changes, but offer some modifications to the proposed evaluation process. The Working Group recommends all PMRs be submitted in writing 10 business days prior to the SGIP Working Group meeting or roll over to the next meeting. UTC urges the Commission to provide clear guidance on the timing of the review and allow applicant the opportunity to provide additional data or supplement the original requests in response to the Working Group's questions. UTC also recommends we modify the process by which the Working Group's recommendation is submitted to the Commission.

We adopt the Working Group's recommendation for a 10-day advance notice requirement. This would create a firm deadline for the submittal of a PMR, provide automatic notification to the applicant of the timing of the review of the PMR, and provide the Working Group reasonable amount of time to examine the PMR and ask follow up questions prior to the Working Group's meeting.

Similarly, we allow the applicant the opportunity to respond to questions and make a follow up presentation if the Working Group determines additional information is needed. However, we do not limit the timeframe in which the applicant should provide additional data to the next Working Group meeting, but leave that determination to the Working Group. We expect the Working Group to consider the extent and nature of the information requested of each applicant and allow an appropriate amount of time for a response while reasonably moving the review process for each PMR forward.

We reject UTC's suggestion to modify the process by which the Working Group's recommendation is submitted to the Commission. UTC suggests that the applicant prepare a "summary of the Working Group's recommendation" and submit that for Commission review, instead of having the Working Group submit its own recommendation directly to the Commission. UTC suggests the "summary of the recommendation" be vetted by the Working Group for accuracy and completeness before it is submitted to the Commission. UTC's proposal adds no benefits to the Working Group's recommendation submittal process. Instead, it would add an extra step that could increase the complexity of or delay the process. We maintain the existing process for the submittal of the Working Group's recommendation. Appendix A to this decision outlines the adopted PMR process.

PAs shall file an advice letter requesting appropriate revisions to the handbook in accordance with the requirements of this decision. Prior to filing the advice letters, PAs should discuss the specific revisions to the handbook with the Working Group.

¹⁰ Such AES system must still meet the required technical and operation criteria.

¹¹ The tiered incentive rates for renewable and non-renewable fuel cell, and wind were adopted in D.08-04-049.

¹² This would require applying the unspent SGIP budget for SGIP technologies as described in D.08-04-049 to the accompanying AES system.

¹³ See Comments of SGIP PAs, dated July 11, 2008.