Proposed Modifications to CSI Incentives and Budget

On July 9, 2010, the assigned Commissioner in this proceeding issued an Assigned Commissioner's Ruling (ACR) requesting comments on modifications to CSI incentive levels and the CSI budget. Given the high levels of program participation, the rapid pace of incentive steps reduction, and the fact that payments to PBI participants are greater than forecast in D.06-08-028,² the ACR recommended that the Commission again review CSI budget commitments to ensure the capacity of solar energy systems installed through the program is consistent with the program's MW goals. The ACR requested comment on modifications to three aspects of the incentive mechanism to maximize the effectiveness of the remaining CSI program budget. The proposed modifications are: 1) remove the 8% discount rate embedded in the calculation of performance-based incentive (PBI) payments; 2) reduce incentive rates for government and non-profit applicants; and 3) shift $20 million from the program administration budget to the incentive budget.

The ACR also directed the CSI Program Administrators (PAs), namely Pacific Gas and Electric Company (PG&E), Southern California Edison Company (SCE), and the California Center for Sustainable Energy (CCSE), to temporarily postpone issuing confirmed reservations for new applications seeking performance based incentives as well as any new applications seeking government/non-profit incentives pending resolution of this issue via Commission decision. A second ACR, issued on
July 29, 2010, rescinded this temporary postponement and allowed the PAs to once again process all incoming CSI applications, including those government/nonprofit and PBI applications held in queue during the postponement. We ratify the temporary postponement in issuing confirmed reservations for new applications for government/non-profit incentives and PBI in the time period between the July 9, 2010 ACR and the July 29, 2010 ACR, which ended the postponement.

The proposed modifications in the July 9, 2010 ACR are intended to help ensure the program achieves its MW goals and address a potential budget shortfall stemming largely from the greater than anticipated impact of PBI payments on the program budget. In particular, in establishing PBI payments, the Commission sought to ensure equivalency between the EPBB incentives and those paid out on a per kWh basis over five years via PBI. To do so, the Commission assumed an 8% discount rate. This necessarily results in a stream of levelized payments that on a nominal basis (i.e. the sum of the nominal undiscounted payments), exceeds the value of these incentives on a net present value basis. As such the budgetary impact (i.e., cash flow) of PBI payments is greater than the equivalent EPBB incentive. Under the incentives as adopted, on a nominal basis, a system receiving PBI payments has a budgetary impact that is approximately 22% higher than the corresponding EPBB incentive.³ The original budget in D.06-12-033 (Appendix A, Table 13) estimated the incentives dispersed per step using only EPBB incentive costs. The impacts of the difference between EPBB and PBI payments on the budget are significant, and were the program fully subscribed, could result in a budget shortfall of around $260 million.

The budget cash flow problem is compounded by the inability of the program to use accumulated interest on customer collections. The Commission envisioned in D.06-08-028 that interest earned on customers' collections waiting in interest-earning accounts would augment the funds available to support the program. To ensure adequate funds and payment certainty over the five year PBI payment period, the Commission directed PG&E, SCE and San Diego Gas & Electric Company (SDG&E) to make quarterly projections of the total five years' expected PBI payment amount for all solar projects completed in that quarter, and deposit that amount in an interest earning balancing account (Id. at Ordering Paragraph (OP) 7). The subsequent passage of a CSI budget cap in SB 1 means that any interest earned cannot increase the total dollars spent on CSI, but merely lowers total collections required from ratepayers.⁴

Additionally, there are a number of other factors that impact the program's actual budget position, several of which partially offset the adverse impact of the PBI payments. Under the rules of the program, capacity associated with projects that drop out of the program are added back in at whatever step level is current at the time the drop-out occurs. (See D.07-05-007.) To the extent the program in a given service territory has moved into later program steps in the time between when a project was reserved and when it drops out, the incentive cost of those MWs, now subscribed in a later step, will be less costly to the program. The current dropout rate is around 15% of all projects, by capacity. Moreover, relatively lower uptake of the government/non-profit incentives than was assumed for planning purposes when the program was established has also reduced some of the anticipated demand on the budget.⁵ Due to these and other mitigating factors, staff estimates the potential net shortfall is more realistically in the range of $170 million. A summary of the projected budget status and potential shortfall is provided in Appendix A.

As explained in the ACR, when the Commission established the CSI, it acknowledged that budgeting for the program was complicated by uncertainty from several sources, including those described above. Other factors that add to budgeting uncertainty include the actual performance of systems receiving PBI incentives⁶, as well as the number of systems that, although eligible for upfront incentives, elect to take performance based incentives. In light of the various sources of uncertainty, the Commission acknowledged that it would need to revisit the incentives at some point and make adjustments accordingly.
(D.06-08-028 at 106). In July 2008, Commission staff held a workshop to review the status of the CSI budget and how dropouts in the program affected the budget. Analysis by Energy Division staff for that workshop indicated that no program adjustments were necessary at that time, but that periodic review should be conducted. However, as stated, more recent review by Energy Division staff of the incentive dollars currently allocated under the program indicated that obligations for payments to PBI program participants are greater than was budgeted in Table 13 of Appendix B of D.06-12-033. If the incentive levels and corresponding incentive budget are unmodified, the Energy Division believes that the program incentive budget would be depleted well before the program achieves its overall capacity goals. Under current estimates, the program would need an additional $170 million in order to attain all of the MWs in the CSI step table. Since the last two steps of the CSI step table (when incentives are at their lowest) are quite large, the program would be an estimated 500 MW short of its capacity target if the budget is short $170 million.⁷

Table 2: CSI Step Levels as of September 15, 2010⁸

	PG&E	SCE	CCSE
Residential	Step 7	Step 5	Step 7
Non-Residential	Step 8	Step 7	Step 7

Comments on the ACR were received from the Association of California Water Agencies (ACWA), the California Solar Energy Industries Association (CALSEIA), the Community College League of California (CCLC), CCSE, City of San Jose, CleanTech San Diego (CleanTech), Solar Alliance, SolFocus, Inc. (SolFocus), PG&E, SCE, and The Utility Reform Network (TURN). Reply comments were received from CALSEIA, CCSE, Michael Kyes, PG&E, Solar Alliance, SolarTech Consortium, and SCE. In addition, the Commission received letters from the general public pertaining to the proposals in the ACR. These letters were placed in the correspondence file and considered as part of today's decision.

Each proposed modification, and the comments on that specific proposal, is discussed in the appropriate section below.

² See Appendix A, Tables 1 and 2, which provide estimates of the current CSI budget status.

³ Appendix A, Table 3, details the methodology used to convert EPBB payments to PBI payments and it shows how PBI payments compare to EPBB payments in nominal dollars.

⁴ See Pub. Util. Code § 2851(e) which states: "In implementing the California Solar Initiative, the commission shall ensure that the total cost over the duration of the program does not exceed three billion three hundred fifty million eight hundred thousand dollars ($3,350,800,000)." Pub. Util. Code § 2851(e)(1) goes on to identify the allocation of this cost to be borne by the customers of SDG&E, SCE, and PG&E establishing a cost cap of $2.1668 billion.

⁵ In D.06-08-028, the Commission assumed that government/non profit applicants would make up 20% of the program (or 30% of the non-residential sector), residential applicants would make up 33%, and other commercial applicants would make up the remaining 47% of the program participants. (Id. at 104.) The Commission stated that if those assumptions proved invalid, review of incentive levels would occur. (Id. at 105.)

⁶ In D.06-08-028, the Commission considered whether to cap PBI payments for better budget control, but the Commission rejected a performance cap on PBI projects.
(D.06-08-028 at 33.)

⁷ Step 10 was originally estimated to cost $105 million and attain 350 MW. Step 9 was originally estimated to cost $108 million and attain 285 MW.

⁸ See www.csi-trigger.com.