5. Discussion

In D.01-03-073, we were urged by several parties to exclude non-renewable systems from the distributed generation incentives program initiated pursuant to AB 970. As we stated in that decision, we had concerns about the inclusion of non-renewable systems, particularly fossil fuel applications, in the program:

"Several parties argue that incentives are not required or warranted for non-renewable self-generation systems. They argue against funding these systems because they are less efficient and more polluting than combined cycle technologies without waste heat recovery. We find merit in these concerns. Section 399.15(b) requires the Commission to establish both `incentives for...distributed generation to be paid for enhancing reliability" as well as "differential incentives for renewable and super clean distributed generation resources.' We agree with PG&E that many fossil fuel applications would fail to satisfy any of these criteria.²

To mitigate those concerns, we required that fossil fuel applications demonstrate a contribution to the reliability of the transmission or distribution system, in order to be eligible for incentives. In addition, we required that non-renewable technologies utilize waste heat recovery at the customer site.

With respect to the reliability requirement, we find no merit to SCE's arguments that this policy is inconsistent with the intent of the Legislature. The statute is silent as to what specific technologies should qualify for distributed generation incentives, how the term "distributed generation" should be defined, or how we should establish "differential" incentives or requirements for eligible technologies. However, the Legislature was not silent as to its purpose, as stated in Section 2 of AB 970 (emphasis added):

"(a) In recent years there has been significant growth in the demand for electricity in the state due to factors such as growth in population and economic activities that rely on electrical generation.

"(b) In the past decade efforts to construct and operate new, environmentally superior and efficient generation facilities and to promote cost-effective energy conservation and demand-side management have seriously lagged.

"(c) As a result, California faces potentially serious electricity shortages over the next two years, which necessitates immediate action by the state.

"(d) The purpose of this act is to provide a balanced response to the electricity problems facing the state that will result in significant new investments in new, environmentally superior electricity generation, while also making significant new investments in conservation and demand-side management programs in order to meet the energy needs of the state for the next several years."

It is within the context of this overall Legislative purpose, as well as the specific language of § 399.15(b) that we designed the program. The language of § 399.15(b) clearly states that incentives should be used for technologies that enhance reliability, but does not define that term. It also permits us to establish "differential" incentives for renewable or super clean distributed generation resources. As we stated in D.01-03-073, a fossil-fired system is not renewable or super clean, and therefore would only qualify if it contributed to system reliability.³ SCE's argument that "reliability" must refer to generation reliability for these technologies makes no sense in the context of the stated purpose of the statute. This would mean that the environmental impacts of distributed generation technologies were of no interest to the Legislature since, by definition, any on-site generating system contributes to the reliability of generation. Such an interpretation is inconsistent with the plain language of the statute.

SCE also laments that a demonstrable enhancement to the transmission or distribution system is a difficult burden to meet. This may be so, but SCE's recommendation that we therefore drop the requirement is not a viable solution. We anticipated that some of the implementation details would require further development, and this particular one is no exception.⁴ Energy Division has been meeting with the program administrators to select final program details for statewide implementation, including the transmission and distribution reliability requirements for fossil-fueled applications. We note that PG&E has already proposed an approach to defining transmission and distribution reliability that appears workable and appropriate in the context of paying incentives for the AB 970 program. We direct Energy Division to make the final selections for program implementation, without further delay. No further Commission action is required by D.01-03-073 for this purpose.

In sum, our policy of establishing "differential" incentives or eligibility requirements for fossil-fired systems, e.g., requiring them to contribute to the reliability of the transmission or distribution system, is fully consistent with the intent of AB 970 and our goals for the program. We deny SCE's Emergency Petition. However, given the current electricity crisis facing California, it is important to bring new generation capacity on-line this year. Therefore, it is appropriate to suspend the transmission and distribution reliability requirement for fossil-fueled projects that are seeking funding this year.

With respect to waste heat recovery standards, we find the arguments against adopting the Joint Parties' proposal compelling. As PG&E points out, the Joint Parties' proposal does not include a minimum amount of waste heat to be recovered by a distributed generation unit. This does not satisfy our clear direction that non-renewable technologies be required to utilize waste heat recovery at the customer site, in order to be eligible for incentives.⁵ Similarly, RealEnergy's proposal ignores this direction.

PG&E and SCE correctly observe that we established a waste heat recovery requirement to address our concerns about the relative efficiency and environmental impact of non-renewable distributed generation technologies on the electrical generation system:

"Without waste heat recovery, certain non-renewable generation technologies may be less efficient and more polluting than combined cycle technologies. Requiring that these technologies utilize waste heat recovery at the customer site mitigates these concerns and is consistent with our goal of improving the overall efficiency of the electrical generation system. " (D.01-03-073, mimeo. p. 43, Finding of Fact 16.)

However, the 40% efficiency standard proposed by the Joint Parties falls below standards used by this Commission for determining the eligibility of waste heat recovery, or "cogeneration" facilities for rate discounts.⁶ As we articulated in D.90-12-019, those standards are set forth in Pub. Util. Code § 218.5:

"Cogenerators which do not meet efficiency standards should not receive gas rate discounts. Rate discounts for cogenerators are designed to promote efficient energy production and to the extent they are provided, other customers must pay higher rates. Because of these effects on other rates, gas discounts should be provided only to customers which are engaged in `cogeneration,' according to the efficiency standards defined for cogeneration in Section 218.5." (D.90-12-019, 38 CPUC 2d, 345, 350.)

Joint Parties propose a lower efficiency threshold (40% versus 42.5%) and propose to use a formula that will overstate efficiency levels, relative to the one embodied in Pub. Util. Code § 218.5. This is because the Joint Parties would credit all of the unit's thermal output towards the calculation of total output in determining system efficiency, whereas § 218.5 calculates total output using only one-half of the thermal output. Moreover, the seasonal variation proposed for units smaller than 250kW could allow these units to qualify with annual efficiencies much less than 40%, even using the Joint Parties' formula.⁷

We decline to adopt a standard that lacks a specific minimum requirement for waste heat recovery, or that significantly relaxes current efficiency standards used by this Commission.

We also agree with PG&E that there is no reason to "reinvent the wheel" with respect to waste heat recovery standards. As discussed above, to be eligible for other forms of financial incentives authorized by this Commission (e.g., rate discounts), cogenerators must meet the standards set forth in § 218.5. Adding the additional FERC standard for systems over 50kW, as SCE proposes, would introduce a dual set of standards across our incentive programs for cogenerators. Moreover, we note that the difference between the FERC and § 218.5 standard is relatively small, in terms of the threshold efficiency level (i.e., 2.5% for systems over 50kW with less than 15% useful thermal output).

With respect to NRDC/ACEEE's proposal, we do not have sufficient data or basis in this record to adopt a waste heat recovery standard and formula that has not been widely discussed, and may not be familiar to the industry. NRDC/ACEEE's recommendation that we incorporate emission standards currently under development is simply premature. However, nothing in today's decision is intended to exempt distributed generation facilities participating in the AB 970 program from applicable emission standards, once they are developed and made effective by statute or by the California Air Resources Board.