Government/Nonprofit Incentive Differential

The ACR requested comment on modifying D.06-08-028 to reduce the differential given to government/nonprofit applicants for both EPBB and PBI incentives. According to the ACR proposal, government/nonprofit applicants would still receive higher incentives than commercial customers, but the differential between the two rates would be reduced.

As explained in the ACR, Commission data suggests that many government/non-profit applicants are using third-party financing and are therefore receiving the lower commercial incentive rate because the third-party system owner claims the tax credit, and the government/non-profit applicant does not qualify for the higher incentive. Program records indicate that government/non-profit applicants are the "host customer" in over 33% of the projects, on a capacity basis, but about one-half of these choose a third-party financing mechanism. Thus, it appears that since many government/non-profit applicants are taking advantage of third-party owner financing arrangements, the incentive differential adopted in D.06-08-028 may not be essential to spur installations at these sites. The ACR suggested that if the Commission decreased the differential between commercial and government/non-profit applicants by 50%, it would preserve additional budget dollars to install more MWs in the last steps of the program.

The Table below indicates the current government/nonprofit rates and the ACR's proposed 50% reduction in the premium paid to non-taxable entities rates on an EPBB and PBI basis.

Table 3: Current Government/NonProfit Rates and Proposed Changes

Step Level	Current EPBB rate	Current PBI rate	Proposed EPBB rate	Proposed PBI rate9
110	n/a	n/a	n/a	n/a
2	$3.25	$0.50	$2.88	$0.36
3	2.95	0.46	2.58	0.33
4	2.65	0.37	2.28	0.26
5	2.30	0.32	1.93	0.22
6	1.85	0.26	1.48	0.17
7	1.40	0.19	1.03	0.12
8	1.10	0.15	0.73	0.08
9	0.90	0.12	0.58	0.07
10	0.70	0.10	0.45	0.05

Similar to the comments on reducing the 8% discount rate included in PBI payments, comments were nearly universally opposed to lowering government/nonprofit incentive rates. The City of San Jose argues that the level of the reduction would fundamentally undermine the ability of municipal governments to move forward with their plans to deploy solar. For San Jose in particular, the planned deployment of up to 15 MW of solar across 40 city facilities would be jeopardized. The proposed modification would also put at risk the ability of municipalities, and California more generally, to take advantage of the Clean Renewable Energy Bonds (CREB) and Qualified Energy Conservation Bonds that have been allocated to California under the American Recovery and Reinvestment Act (ARRA).¹¹ The City of San Jose also observes that the proposed modification to the government/non-profit incentives is much deeper, on a percentage basis, than what has been proposed for commercial systems participating on a PBI basis.

CCSE raises similar concerns, observing that government/non-profit entities are more vulnerable to the adverse impacts of incentive reductions. CCSE voices concerns about the near term opportunities under ARRA-funded bond programs that may be lost if the proposed incentive reduction is implemented. CleanTech expresses concern over the implications of the proposed incentive reductions on the ability of San Diego to take advantage of $150 million in CREBs allocations and on the state's ability to utilize the
$640 million in CREBs funding it received under ARRA. PG&E echoes this latter concern. ACWA asserts that government/non-profit entities, such as the water and wastewater agencies it represents, need certainty in incentive levels and any disruption of current incentives will lead these agencies to abandon approximately 20 MW in planned installations.

The Solar Alliance notes that the state's budgetary challenges make government/non-profit entities particularly sensitive to incentive reductions. CCLC argues that the proposed changes disproportionately impact government and non-profit entities and that any changes should be done on an equal percent basis so that both taxable and non-taxable entities bear a proportionate share of the change. CCLC also argues that the ability and willingness of government/non-profit entities to pursue third party PPAs as an alternative to owning their own systems is overstated. According to the CCLC, PPAs are generally viewed as more risky owing to their relatively greater legal complexity which reduces the willingness of community colleges to pursue these arrangements. CCLC maintains that experience with PPA providers suggests that PPAs can be fraught with uncertainty due to PPA provider financing realities, and because PPAs may be less valuable in the long-run than systems that are owned outright by a community college. CALSEIA argues that the adverse impact of the proposed incentive change on the ability of government/non-profit entities to move forward with solar projects far outweighs the limited upside the proposal offers in terms of reducing the projected budget shortfall.

The sole party supporting the proposal to decrease government/nonprofit incentives was SolFocus, which advocates eliminating sector differentiated incentives altogether. SolFocus argues that higher incentives are not justified because the availability of low cost CREB financing makes up for the inability of government/non profit entities to take advantage of tax credits.

Although we disagree with CALSEIA that the impact on the projected budget shortfall of this modification would be modest,¹² we are sensitive to making changes that preserve budget at the expense of an entire class of program participants. As several parties have noted, the proposed incentive modifications disproportionately impact government/non-profit entities, if measured in terms of the percent reduction from the existing incentives. Parties note that the current financial challenges faced by government entities in particular, make their projects particularly sensitive to incentive reductions and place at risk the substantial federal support provided under ARRA via CREB allocations. While SolFocus' arguments that CREBs offset federal tax credits have some merit because CREBs provide an option for many California governmental entities, we are not convinced that all government/nonprofit entities have access to CREBs. Lastly, the arguments presented by CLCC regarding the practical realities of the choice between relying on a PPA as opposed to owning a system are compelling. While it remains true that many government/non-profit entities have deployed solar through third party PPAs, this does not necessarily make PPAs a viable or preferable option in all circumstances.

In light of all of the foregoing, we decline to adopt the ACR's proposal to reduce the differential between the incentives provided to taxable entities and government/non-profit entities. Based on comments, it appears that this modification, while offering substantial budgetary savings, would prove deleterious to the participation rates of government/non-profit entities which we view as important participants in the solar market. Furthermore, the basis for the incentive differential for government/non-profit entities, namely the fact that non-taxable entities are unable to take advantage of federal tax credits, remains true. This further bolsters the concerns expressed by parties that the proposed change would greatly limit the ability of non-taxable entities to deploy solar.

⁹ Proposed rates in this column also include 0% discount rate

¹⁰ Step 1 was administered in 2006 through SGIP, rates are shown as "not applicable" to CSI.

¹¹ The CREBs program is administered through the Internal Revenue Service (IRS) as part of the American Recovery and Reinvestment Act of 2009 and provides for public agencies to issue tax-credit bonds that finance renewable energy projects for public facilities. The public agencies do not have to pay the interest on the bonds because the bondholders receive a tax credit in lieu of an interest payment.

¹² Staff estimates the impact of this change would reduce the shortfall by an estimated $45 million. See Appendix A.