Gottstein Comment Dec. Interim Opinion addressing eligibility of Renewable-Fuel Micro-Turbines for Self-Generation Incentives and Addressing Capstone's Petition for Modification of Decision 01-03-073

ALJ/MEG/jyc DRAFT

9/5/2002

Agenda ID #954

Decision DRAFT DECISION OF ALJ GOTTSTEIN (Mailed 8/6/2002)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission's Proposed Policies and Programs Governing Energy Efficiency, Low-Income Assistance, Renewable Energy and Research Development and Demonstration.

Rulemaking 98-07-037

(Filed July 23, 1998)

INTERIM OPINION ADDRESSING ELIGIBILITY OF RENEWABLE-FUEL MICRO-TURBINES FOR SELF-GENERATION INCENTIVES

AND ADDRESSING CAPSTONE'S PETITION FOR

MODIFICATION OF D.01-03-073

1. Introduction and Summary

By Decision (D.) 01-03-073, dated March 27, 2001, the Commission adopted program incentives for demand-responsiveness and self-generation, pursuant to Public Utilities Code Section 399.15(b).¹ Today's decision addresses issues regarding the eligibility of renewable-fuel combustion technologies (e.g. micro-turbines) for self-generation program incentives under this program. We also address Capstone Turbine Corporation's (Capstone) Petition For Modification To D.01-03-073, filed on March 5, 2002.

"Self-generation" refers to distributed generation technologies (micro-turbines, small gas turbines, wind turbines, photovoltaics, fuel cells and internal

combustion engines) installed on the customer's side of the utility meter that provide electricity for either a portion or all of that customer's electric load. Under the program adopted in D.01-03-073, financial incentives are provided to three different categories (or levels) of distribution technologies:

Level 1: The lesser of 50% of project costs or $4.50/watt for photovoltaics, wind turbines and fuel cells operating on renewable fuels;

Level 2: The lesser of 40% of project costs or $2.50/watt for fuel cells operating on non-renewable fuel and utilizing sufficient waste heat recovery, and

Level 3: The lesser of 30% of project costs or $1.00/watt for micro-turbines, internal combustion engines and small gas turbines utilizing sufficient waste heat recovery and meeting reliability criteria.

The Commission authorized combined annual budgets of $125 million for the self-generation programs administered by Pacific Gas and Electric Company (PG&E), Southern California Gas Company (SoCal), Southern California Edison Company (SCE), and San Diego Regional Energy Office (SDREO) over a four-year period.² The program was officially launched on June 29, 2001.

As indicated above, the Commission did not include micro-turbines that utilize renewable fuels in the renewable incentive category (Level 1) under the program adopted in D.01-03-073. Instead of utilizing a nonrenewable fuel, such as natural gas, these micro-turbines burn biomass and waste gases derived from landfills and digesters located at wastewater treatment plants, dairy farms, agricultural processing plants and similar facilities.

In considering whether or not to provide a differential incentive for renewable-fuel micro-turbines, the Commission explained:

"We note Capstone's suggestion that micro-turbines be allowed to qualify for renewable incentive levels if they utilize renewable fuels. While it is logical to consider such facilities as providing renewable power, the incentives, that we are offering here, relate to capital cost. Capstone has not suggested that micro-turbines using renewable fuels would be appreciably more expensive to install a unit using renewable fuel than it would to install one using fossil fuels. However, it would be appropriate to enable such a facility to qualify for a normal micro-turbine incentive payment without meeting a "system reliability" test. We will consider expanding the program to include renewable-fuel micro-turbines once we determine what comprises a renewable fuel and are persuaded that a facility that once qualifies for a "renewable fuel" incentive would not later switch to fossil fuel. We seek the Energy Division's assistance in answering these questions and ask the staff to report back to us."³

As discussed in this decision, Energy Division has reported back to us on these issues. In particular, Energy Division recommends that the Commission offer renewable-fuel combustion technologies (Level 3) an incentive level that is greater than the amount currently offered to combustion technologies that utilize nonrenewable fuels. (See Attachment 1.) In its Petition, Capstone also proposes that the Commission offer a higher incentive for renewable-fuel micro-turbines, relative to those offered under the program for micro-turbines utilizing nonrenewable fuels. However, Capstone recommends a higher incentive level and per watt incentive cap than Energy Division. PG&E and SCE oppose any change to incentive levels at this time.

Today, we adopt Energy Division's recommendations concerning the definition of renewable fuels, the incentive level to be offered to Level 3 technologies that utilize renewable fuels and the project costs to include in the calculation of incentives. In doing so, we provide preferential treatment for combustion technologies (e.g., micro-turbines) that use renewable fuels, relative to those using nonrenewable fuels, in several ways.

First, we provide a differential in the percentage of project costs to be subsidized: 40% of the capital costs versus 30%. Second, we set the per-watt incentive cap for renewable-fueled Level 3 technologies higher than for those that utilize nonrenewable fuels: $1.50 per watt versus $1.00 per watt. This incentive cap differential is based on the project cost information provided by Capstone in its Petition and the cost information we have observed in implementing the self-generation program to date.

Third, for the purpose of calculating the incentive amount, we include the cost of equipment to remove moisture and other undesirable constituents from renewable fuels (e.g., waste gases) that would damage the generation equipment. We do not extend this treatment of fuel cleanup costs to projects that utilize nonrenewable waste gases. This further increases the differential between the incentive levels offered Level 3 projects that use renewable fuels, and those that do not.

In addition, we clarify that Level 3 projects that utilize renewable fuels are not subject to the waste heat recovery and efficiency standards adopted in

D.01-06-035. We find that those standards were adopted in response to specific concerns about offering incentives to nonrenewable fuels, and are not applicable to combustion technologies that utilize renewable fuels. For similar reasons, we waive the reliability criteria established in D.01-03-073 for these renewable-fueled technologies.

To address concerns that renewable-fueled projects may later switch to using fossil-fuels, we adopt a three-pronged approach based on Energy Division's recommendations.⁴ First, we require that the applicant have a suitable onsite renewable fuel (i.e., adequate flow rate) available for continuous operation of the self-generation unit. In addition, the applicant will need to submit a purchase order for renewable fuel cleanup equipment as a condition of funding. This approach requires the applicant to make an upfront commitment to a renewable fuel supply that renders a later switch to fossil fuel highly unlikely for economic reasons. It also ensures that the self-generation units are adequately sized to operate on a renewable fuel.

Second, we require applicants to submit a written affidavit that they will not switch to fossil-fuel for a period of three years, or the life of the equipment, whichever is shorter. This establishes the same warranty period for fuel use as for the equipment warranty we require for Level 3 technologies. The affidavit will include an enforcement mechanism, such as a payment retraction clause.

Third, we direct the program administrators or their consultants to conduct on-site inspections of projects that utilize renewable fuels in order to monitor compliance with the renewable fuel provisions once the projects are operational. In this way we can determine whether fuel switching has occurred and seek the appropriate recourse from projects that violate the fuel use provisions. It also provides us information with which to re-evaluate the renewable incentive categories on a prospective basis, as needed.

In our judgment, these requirements provide adequate assurance that renewable-fueled projects will not switch to fossil-fuels. They will apply to all Level 3-R technologies, as well as to Level 1 (renewable) fuel cells.

¹ D.01-03-073 has subsequently been corrected by D.01-04-048 and modified by D.01-07-028, D.02-02-026 and D.02-04-004, in response to petitions for modification. However, none of these modifications have altered the language in D.01-03-073 concerning the issues we address today. ² PG&E, SoCal and SCE are the program administrators for the self-generation program within their service territories. Per D.01-06-035, San Diego Gas & Electric Company (SDG&E) subcontracts to SDREO to administer the self-generation program within its service territory. We refer to PG&E, SoCal, SCE and SDREO collectively as "the program administrators " throughout this decision and in Attachment 1. We refer to PG&E, SoCal, SCE and SDG&E collectively as "the utilities." ³ D.01-03-073, p. 26. ⁴ The three-pronged approach described in this decision applies to Level 3 technologies utilizing renewable fuels as well as Level 1 (renewable) fuel cells.