4. Incentive Structure

The Staff Proposal contains a two-track incentive structure, allowing program applicants - namely affordable housing building owners or operators - to opt for either a fixed, up front solar incentive or the opportunity to apply for a higher incentive if applicants can prove their solar installations will provide a quantifiable benefit to tenants, e.g., lower their monthly electricity bills or monthly expenses.

Specifically, Track 1 would provide fixed, up front rebates for qualifying solar energy systems, using the Expected Performance Based Buydown (EPBB) methodology applied in the general market CSI program to estimate solar system performance based on system orientation and design.9 The proposed incentive rates would vary as follows, depending on whether the system offsets common area loads or tenant loads:

Table 1: Proposed Track 1 Incentive Rates

Staff proposes incentives for systems that offset common area load based on the theory that incentives for these types of systems can reduce building operating costs, thereby making it possible for affordable housing developers to better serve more low-income tenants. Staff's proposed incentives are based on an analysis of the economics of incorporating solar during the federal Low Income Housing Tax Credit (LIHTC) refinancing "window," in which many affordable housing projects participate. According to Staff, the proposed incentives are intended to make solar cost-effective for as many affordable housing developments as possible, and in some case, the incentives combined with other financing sources could cover 100% of PV system costs.

For Track 2, Staff essentially proposes a grant program, wherein applicants may receive a higher incentive level than Track 1 provides, if they can justify the need for a higher incentive and prove the system will provide a "direct tenant benefit." The Staff Proposal defined the term "direct tenant benefit" as "any operating cost savings from solar that is shared with tenants of affordable housing buildings through a recurring payment or financial credit." (Staff Proposal, p. 18.) Moreover, staff suggested that applicants for Track 2 funds must prove the extent and duration of the direct tenant benefit. The total direct tenant benefit must exceed 70% of the additional incentive sought above Track 1 levels and must occur in no more than five years. (Id., p. 19.)

We adopt the basic incentive structure proposed by Staff, i.e., a two-track approach, with Track 1 providing up front incentives to systems that offset either common area or tenant load, and Track 2 providing an opportunity to compete for higher incentives through a grant program. Parties generally supported this approach, although they provided detailed comments about the incentives levels and other program details for Track 1 and Track 2, which we address below. Track 1 and Track 2 incentives are designed to be paid in a lump sum, up front payment at the time of verified system installation. Track 1 incentives are based on an estimate of system performance, using the same EPBB methodology used in the general market CSI program. Track 2 incentives will be assessed based on a competitive application process, described in further detail later in this order.

Only a few parties provided different proposals for the overall program structure. SDG&E proposes an "Energy System Pilot Program" wherein the Commission would allow SDG&E to install, own and operate solar energy systems on multifamily affordable housing buildings as a pilot program. These systems would be included in SDG&E's rate base and would not receive incentives otherwise due to owners of CSI solar generation systems. SDG&E suggests this approach could enhance the market for solar in its service territory and achieve synergies with SDG&E's energy efficiency programs. A WISH opposes SDG&E's proposal because it fails to explain how residents of multifamily affordable housing units would benefit from the proposal or how the idea comports with SB 1.

CARE and SDG&E each propose enhancement of the Staff Proposal to include loans to multifamily affordable housing developments for solar installations. SDG&E proposes on-bill financing for such a program. CARE proposes low-interest loans to affordable housing owners, in partnership with financial institutions, and further suggests building owners could collect a "solar surcharge" from tenants. In response, A WISH urges careful scrutiny of loan schemes to ensure affordable housing residents, who do not have discretionary income to pay back loans, are not impacted by on-bill financing and placed at risk. SCE opposes CARE's loan proposal, arguing further details are needed.

We decline to adopt SDG&E's Energy System Pilot, or the loan concepts suggested by both SDG&E and CARE at this time. SDG&E describes its Energy System Pilot proposal only briefly, and does not explain how solar installations owned and operated by the utility would benefit affordable housing owners, developers, or tenants. Section 2852 requires us to use at least 10% of CSI funds for incentives to low-income residential housing, including multifamily affordable housing, as defined in that section. Under SDG&E's pilot concept, the utility would not receive any CSI incentive funds. Thus, it appears we would still need to design a program that uses at least 10% of CSI funds to pay incentives to low-income residential housing. Moreover, the CSI program was specifically designed to provide incentives to qualifying solar technologies "except those owned or operated by investor- and publicly-owned gas and electric distribution utilities."10 Therefore, we will maintain our focus on a non-utility incentive program as opposed to solar owned and installed by the utility.11 We decline to adopt the loan proposals suggested by SDG&E and CARE because neither concept is proposed in sufficient detail. Moreover, we foresee complications surrounding administration of a loan program which require further scrutiny. We agree with A WISH that loan programs require careful monitoring to ensure affordable housing tenants are not negatively impacted by such programs. We prefer to establish our incentive program first and pursue financing concepts if needed, depending on the demand for and participation in this multifamily affordable housing incentive program.

4.1. Track 1 Incentives

We now turn to the specific incentive levels and other details of Track 1 incentives. First, several parties suggest the incentives for Track 1 in the Staff Proposal should be increased. LISC/NHA12 comment the proposed incentives are too low because assumptions in the Staff Proposal concerning the availability of housing tax credits and the financing structure for affordable housing, including investment tax credits, have changed in recent months and may not be accurate. According to the experience of LISC/NHA, only a very small number of properties are appropriate candidates for the program as written because very few affordable housing projects will take advantage of tax credit financing. They contend it is more reasonable to assume that new solar energy systems on existing properties will be purchased and owned by a third party. (LISC, p. 8.) LISC/NHA assert the proposed incentives are too low for properties without access to investment tax credit financing.

PG&E recommends the Commission raise incentives offered under the MASH program to match either CSI incentives to low-income homeowners or the CEC's NSHP incentive levels. The Commission established a program for CSI incentives to low-income homeowners in D.07-11-045, and these incentives range from $4.75 to $7.00 per watt, depending on a homeowner's income. The CEC's NSHP offers affordable housing properties incentives of $3.30 per watt for common area installations and $3.50 per watt for systems that offset tenant load. Global Green, Sunfund, and the Joint Solar Parties echo the comment that Track 1A incentives for common areas of affordable housing complexes should mirror those under the NSHP.

SCE suggests gaming could occur between the MASH and NSHP programs if MASH incentives for offsetting tenant load are higher than NSHP incentives, causing applicants to seek out the highest possible incentive.

A WISH proposes the Commission adopt a larger differential between incentives for common and tenant areas. It also proposes that all incentives under this program be higher, at least 125% of the general market CSI incentive levels. CARE echoes these comments by suggesting substantially higher incentives for systems that offset tenant load.

PG&E/SCE and Joint Solar parties recommend the Commission reserve the option to adjust incentives later, both the dollar amount and the amount allocated to each Track. Global Green contends incentives should decline at least 7% per year as mandated in SB 1 and in keeping with the general market CSI program.

We will adopt a Track 1A incentive level of $3.30 per watt, the same as the NSHP, and a Track 1B incentive level of $4.00 per watt, as proposed by staff. We agree with those parties who suggest matching the NSHP incentive for common area installations under Track 1A. We find it reasonable to offer common area incentives that at least match the NSHP levels, given that costs for solar on a retrofit are unlikely to be less than solar costs for new construction. For Track 1B incentives to systems offsetting tenant load, we find the $4.00 per watt rate proposed by staff reasonable because it is based on an Energy Division Staff analysis, described in the Staff Proposal, which reviewed the costs of retrofitting existing multifamily affordable housing and recognizes the unique financial constraints of affordable housing developments. (Staff Proposal, pp. 16-17.) All Track 1 incentives will be paid up front, using the same EPBB calculator as in the general market CSI program.

Although LISC/NHA contend the Staff analysis only applies to a small subset of properties, we will rely on it to set these Track 1A and 1B rates while acknowledging that these incentives will benefit some affordable housing properties, but perhaps not all. We are not experts in affordable housing financing, and we accept the contention from LISC/NHA that Track 1 incentives may be too low for some properties. For this reason, we offer a Track 2 incentive program to allow developers to submit proposals for higher incentives in line with their financing needs. If Track 2 experiences more demand than Track 1, we can realign the program accordingly.

In response to gaming concerns expressed by several parties and because our Track 1B incentives for tenant systems are higher than the incentives offered by NSHP, we will adopt SCE's suggestion to require qualifying affordable housing properties to have an occupancy permit for at least two years prior to applying for MASH incentives.

We decline to adopt a trigger for automatic incentive reductions for MASH incentives. Instead, we commit to reassessing incentive levels periodically. We interpret the mandate in SB 1 that incentives decline 7% per year as applying to the CSI program overall. In our assessment, decreases in incentives in the general market program, which have been greater than 7% per year, achieve the overall intent of statute. Furthermore, we committed in D.06-12-033 to evaluating the average incentive reductions in CSI to ensure we conformed to the mandates of SB 1. (D.06-12-033, pp. 9-10.) Thus, rather than automatic incentive declines on a calendar basis or volume of application basis, we reserve the option to revisit these incentive levels and adjust as needed based on solar costs or other relevant market factors. In D.07-11-045, where we adopted our LISF incentive program, we described a process for minor incentive reductions. We adopt the same process here. We delegate to the assigned ALJ, in this or any successor proceeding, the authority to reduce MASH incentive levels by up to 10% per year, using the same process outlined in D.07-11-045 and D.06-01-024. Increases to incentives, or reductions larger than 10%, will be handled by Commission order.

SCE and Global Green recommend the Commission set a minimum amount of tenant load that a system must offset to qualify for the higher Track 1B incentives. SCE is concerned a building owner can qualify for the higher Track 1B incentive by only offsetting 1% of tenant load. Global Green suggests a system must offset 50% of tenant load to qualify for Track 1B incentives. We herein clarify that a building may receive both Track 1A and 1B incentives for the same project if the project will offset both common area and tenant load. Track 1 incentives, which are capacity-based and determined using the EPBB calculator according to the general market CSI program rules, will be apportioned between Track 1A and Track 1B according to how the system provides electricity. For example, if a 100 kilowatt (kW) solar installation offsets both common area and tenant load, and 60% of the electricity output of the system is dedicated to common area load and 40% of the electricity output is dedicated to tenant load, the applicant will receive Track 1A incentives for 60 kW, and Track 1B incentives for 40 kW.

To implement Track 1 incentives as soon as possible, we will require the Program Administrators to jointly file an advice letter within 60 days of this order with proposed amendments to the CSI Handbook to incorporate the MASH program. The handbook should address Track 1 incentives and all elements of the MASH program necessary for implementation of Track 1, as set forth in this order. The filing does not need to address Track 2 incentives or a Virtual Net Metering (VNM) tariff, which we will discuss later in this order and implement on a different timeline.

4.2. Track 2 Incentives

Only a few parties provided comments specific to Track 2. CCSE maintains that the Commission will need strong guidelines to prevent program abuse in Track 2. For example, CCSE suggests applicants could inflate alleged project costs to appear eligible for a larger grant. CARE comments that the term "direct tenant benefits" is not well defined.

For Track 2, we adopt the concept specified in Staff Proposal, with a few alterations. In our view, the concept of allowing applicants to tailor incentives to their financing needs while at the same time requiring them to share enhanced incentives through "direct tenant benefits" is appealing. CARE criticizes the staff's original definition of direct tenant benefits, but does not propose specific enhancements to it. We adopt the Staff's proposed definition of direct tenant benefits as "any operating cost saving from solar that is shared with tenants of affordable housing buildings through a recurring payment or financial credit." We clarify that these operating cost savings may include energy efficiency investments or upgrades provided to tenant units.

Although we adopt this definition, we will not adopt Staff's suggested requirement that an applicant pass on 70% of any increased incentives to tenants within five years. Instead, we will establish Track 2 as a competitive application process, managed by each Program Administrator in its service area, where applicants will compete for heightened incentives over Track 1. Program Administrators should evaluate applications on the basis of the incentive level sought, the amount of direct tenant benefit to be shared (i.e, tenant bill credits, tenant bill reduction or energy efficiency investments to benefit tenants), the method and timing to provide direct tenant benefits, outreach and training, and the reasonable use of program funds. In our view, a competitive process is the best way to encourage innovative models for solar on affordable housing by forcing applicants to compete for limited program funds.

Applications for Track 2 incentives should provide total system costs and explain why incentives greater than those under Track 1 are sought. Applicants may seek Track 2 incentives to cover capital costs of the project as well as ongoing operation and maintenance costs. Each Program Administrator will review applications every six months for projects in its service area, and award Track 2 incentives from its individual program budget.

To ensure the Program Administrators apply consistent criteria to evaluate Track 2 applications, we will require them to coordinate to develop a standardized statewide Track 2 application and review process as well as the handbook changes necessary to implement Track 2, which they should jointly file as an advice letter, within ninety days of this order. In developing this statewide application and review process, the Program Administrators should seek advice and input from members of the affordable housing community and other interested parties to this proceeding.

We will not mandate a time period or maximum percentage of benefit sharing. In place of prescriptive mandates, a competitive application process should mitigate the concern expressed by CCSE that applicants could inflate project costs to achieve higher incentives. Moreover, a competitive process should encourage applicants to design creative benefit sharing proposals in order to win additional incentives for their projects, and to seek only as much incentive funds as they need without claiming inflated project costs. Nevertheless, we think CCSE's concern is legitimate and we will require close monitoring of average system costs and incentives under Track 2 as part of MASH program evaluation.

Finally, because Track 2 proposals will be considered every six months, each Program Administrator may award no more than 20% of its Track 2 budget in each cycle. Program administrators may file an advice letter if they want to deviate from this budget limit. Energy Division may authorize deviations from the 20% limit if the advice letter demonstrates how the proposed deviation will further the goals of the MASH program.

9 See D.06-08-028, Section III.C, for further explanation of the EPBB incentive methodology.

10 D.06-01-024, Appendix A, p. 2.

11 SDG&E has since filed Application 08-07-017 requesting approval of a utility owned solar project, which is currently pending before the Commission in that proceeding.

12 LISC is a national nonprofit organization which partners with community development organizations to transform distressed communities. NHA is a nonprofit association comprised of members who support, build, and finance affordable housing.

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