VI. Incentive Adjustment Mechanism

In the January CSI decision, the Commission established a mechanism for solar incentives to automatically decline each year by 10% over the 10 years of the CSI. (D.06-01-024, Appendix A, p. 15.) The Commission's objective in establishing a declining rebate schedule was to reduce incentives over time as technologies become more efficient and less costly, with the hope that incentive reductions would drive the market price of solar energy down to the level where ratepayer subsidies are no longer required. The adjustment mechanism adopted in D.06-01-024 reduces the statewide incentive level at the start of each calendar year or when specified MW levels, or "triggers," of solar installations are achieved, whichever occurs first. In the same order, the Commission noted that automatic annual reductions might not adequately recognize market conditions. The Commission delegated authority to the assigned ALJ to reduce incentives further, following justification for incentive changes from CEC and Commission staff and an opportunity for parties to comment. (D.06-01-024, pp. 24-25.)

In this order, the Commission makes adjustments to the 2007 starting point incentive level adopted in D.06-01-024 to incorporate a performance-based dimension and account for federal tax incentives. Thus, it is reasonable at the same time to reconsider how these new 2007 incentive levels should adjust over time. Moreover, in the first few months of 2006, the program administrators received a higher than anticipated level of solar incentive applications and the first MW "trigger" level appeared to be quickly reached. When the ALJ issued a ruling notifying parties of the trigger reduction in incentive levels, parties raised concerns with myriad implementation details surrounding the trigger reduction, particularly regarding how the Commission should determine whether the MW trigger had actually been reached.

Based on this implementation difficulty with the trigger mechanism, the Staff proposed a simple 10% annual reduction in incentive levels rather than a combination of reductions based on either calendar years or MW levels as adopted in D.06-01-024. Staff proposed a flexible approach whereby the Commission could adjust incentives to reflect breakthroughs in solar technology or could retain them at the same level for a second year if market factors do not produce a lower cost per kWh.

In response to the Staff Proposal, few parties supported the idea of a 10% annual incentive reduction. Instead, several parties, namely ASPv, Golden Sierra, the Joint Solar Parties, SDREO, and TURN, supported incentive adjustments based solely on the volume of solar installations, measured in MWs, rather than a calendar-based schedule. The Joint Solar Parties claim that a volume-based trigger is transparent, administratively simple, and allows for consistent development of the market by avoiding program stops and starts. TURN contends a volume-based approach allows external market factors such as retail energy costs, installed costs per watt, and changes in the global solar marketplace to influence incentives through market demand without the burdensome task of monitoring market conditions. In contrast, SCE and SDG&E/SoCalGas support a reduction mechanism combining calendar years and MW levels, as the Commission had adopted earlier. SCE contends a trigger based on both time and MW levels preserves the CSI budget and gives the solar industry an incentive to lower costs on a yearly basis.

A key reason the Commission adopted an adjustment mechanism for CSI incentive levels was to manage CSI funds over the 10-year program period while achieving the goal of 2,600 MW for the Commission's portion of the CSI. Although the trigger mechanism we adopted in D.06-01-024 has been in operation less than one full year, the parties have provided meaningful insight into the impacts of the trigger on the solar market going forward. Given these comments and our own experience with implementing the first incentive reduction using the trigger mechanism, we find it necessary to fine tune the incentive adjustment mechanism at this time.

There are three issues surrounding the incentive adjustment mechanism which we need to resolve: (1) whether to base reductions solely on the volume of solar MWs installed or on a combination of calendar years and MW targets; (2) whether the incentive levels should adjust uniformly statewide or vary by utility territory; and (3) whether we should provide for further review and stakeholder involvement in the incentive adjustment process. We address these issues below.

A. Incentive Adjustment Mechanism Based Solely on Volume of MWs

First, we agree with the numerous parties who urged that any adjustment mechanism should be simple, transparent, and predictable to avoid uncertainty and confusion over incentive levels in the solar market. Ideally, adjustments to the incentive levels should correspond to the economics of the solar marketplace, without requiring a complicated economic formula or a resource intensive review process.

We will modify the incentive adjustment mechanism adopted in D.06-01-024 to base adjustments purely on the volume of MWs of solar installations rather than the combination of calendar year and target MW levels. As demand for solar rebates reaches the MW levels specified in D.06-01-024, measured in conditional reservations for incentive funds, the CSI incentive level will automatically drop to the next lower level. Essentially we create a "waterfall" style trigger, where as each MW level of solar applications is attained, the incentive automatically defaults to the next lower incentive level, in a natural rhythm.

We make this change to a volume-based MW trigger mechanism because we agree with comments from the solar industry, SDREO, and TURN that we should avoid premature incentive reductions through arbitrary calendar-based adjustments. As TURN points out, an approach based solely on achieved MW levels is administratively simple and transparent and captures market factors without burdensome market monitoring. We agree with Sun Light that the Commission should let market forces determine the cost of solar and not incentive levels. We also agree with SDREO that eliminating the time dimension removes the "rush" to submit applications during the final days before a scheduled reduction. A volume-based adjustment mechanism allows the level of demand for solar facilities to drive reductions in Commission incentives.

Another reason for our modification is that we want to avoid the risk of reducing incentives before the economics of the solar industry have caught up to our incentive levels. It is unreasonable to assume that incentive levels in California can by themselves impact the market price for solar. We agree with several parties who have pointed out that solar labor and material costs are independent of Commission incentive levels and set to a significant degree by a worldwide market. If we reduce incentives each calendar year before target MW levels are achieved, we run the risk of the solar market stalling in California while solar panels and installers move to other more lucrative markets. It is more reasonable to link our incentive reductions to achieved levels of demand.

We prefer this approach even though the funds budgeted for CSI, as set forth in D.06-01-024, might be spent faster or slower than we originally envisioned. A trigger based solely on volumes of participation means the program will not stop each calendar year if an annual budget is exhausted, only to wait for the next year's budget allocation before starting up again. Instead, the incentive drops whenever MW levels of participation are reached, allowing the program to continue unabated by calendar years. Essentially, the market demand for solar power controls the pace at which incentives drop and the pace at which funds are spent. It is an unnecessary and artificial market manipulation to allow only a certain amount of dollars to be spent each year. If demand exceeds that estimated level, a waiting list develops and the market stalls, increasing the risk that solar materials and suppliers will turn to markets outside California. We find it preferable to let the solar market control the pace at which budgeted dollars are spent, rather than attempt to exert artificial control over the pace of solar market development. The overall program budget is protected by a cap on the CSI budget for each utility. (D.06-01-024, p. 6, Table 1.)

Thus, while we maintain a cap on the total CSI budget for each utility,³⁶ there is no mandate on the timing of the expenditures on a yearly basis. One utility could move through its MW triggers quickly if demand in its service territory is high. In that case, the incentive might drop several times in one year and the utility could move through funds rapidly. It would essentially borrow from future years' budget dollars, and could spend its budget in less than 10 years, ending its program early. If this occurred, the utility would have successfully installed the MWs it was targeted to achieve. If we achieve 2,600 MW of solar installations before 2016, we can happily close the program early as a success. If market demand does not materialize fully, then the associated funding would be unspent.

B. Incentive Levels May Vary by Utility Territory

On the issue of statewide uniformity in CSI incentive levels, a few parties suggested the Commission's previous decision to keep incentive levels uniform statewide should be reconsidered. TURN claims triggers by service territory will allow each distinct market to respond to incentive levels appropriately and independently. PG&E and the Joint Solar Parties agree the Commission should allow incentives to vary on a utility by utility basis. SCE and SDREO oppose the concept of different incentive levels in each utility territory. SCE reasons that since CSI is a statewide program, incentives should be available to all customers under the same set of rules.

With great reluctance, we are persuaded to modify our concept of one incentive level statewide in favor of allowing each utility territory to reduce its incentive level when conditional reservations for solar incentives in that territory reach pro rata shares of the MW targets. While it would certainly be administratively simpler to have only one statewide incentive level that adjusts everywhere at the same time, this ignores the unique characteristics of the solar market in the different geographic regions of the state. If installations in Southern California are booming and cause the first MW target to be reached, but installations in Northern California are moving more slowly, an incentive level reduction statewide to respond to demand conditions in the south could negatively impact the economics of the solar market in the north. Essentially, we must now trade the goal of program simplicity for a more complex program design that has a better chance of accomplishing the Commission's long-term solar goals.

Those most burdened by this approach will be solar companies operating in multiple regions, yet these same companies advocate this non-uniform approach as do PG&E and TURN. In the Commission's experience with SGIP incentives, PG&E often has a higher demand for incentives in its territory and uses up its budget allocation more quickly, forcing it to close its program until the next calendar year when additional funding sources are available. If PG&E were able to reduce its incentive ahead of other territories, it could manage its funds more efficiently and avoid starts and stops in its program activities.

Therefore, we will allocate our total MW goals across each utility, using the percentage contribution that each utility makes to the total CSI budget.³⁷ Incentives for each utility's service area will adjust as these MW triggers are met. The table below indicates the total MW allocations for each utility, for Steps 2 through 10 of our trigger mechanism.

Table 10

MW Allocations by Utility

Incentive Step	MWs in Step	PG&E	SCE	SDG&E	SoCalGas
1	5038	n/a	n/a	n/a	n/a
2	70	31	24	9	6
3	100	44	34	13	9
4	130	57	44	17	12
5	170	75	58	22	15
6	230	101	78	30	21
7	300	132	102	39	27
8	400	176	136	52	36
9	500	220	170	65	45
10	650	286	221	85	59
Total	2600	1122	867	332	230
	Percent	44%	34%	13%	9%

C. Additional Incentive Adjustments

Comments from solar industry participants generally request greater participation in the incentive adjustment process. ASPv suggests the Commission establish a "PV Market Assessment Group" that would meet each November to evaluate all relevant market factors related to the trigger incentive adjustment. This market assessment group would include representation from all major parties, including the solar industry, Commission staff, utilities, program administrators, environmental, and ratepayer groups. The group would review market factors including tax credits, utility rates, market acceptance of solar technology, and other relevant factors. The current program administrators oppose creation of any new market assessment group and see no reason for an additional incentive review process. Instead, they generally support the existing delegation of authority to the assigned ALJ to consider incentive adjustments through a ruling and comment process.

Given the implementation difficulty after the first trigger reduction in solar incentives in 2006, it is clear that communication of pending incentive changes is critical for the success of CSI. The solar industry needs a clear understanding of pending changes in incentive levels to provide accurate information to potential customers. In our view, the detail we adopt in this order for future incentive reductions based on predetermined MW volumes should provide sufficient advance notice to the solar industry of the schedule for incentive changes. To reiterate, we herein direct the program administrators to automatically lower incentive levels when the conditional reservations for CSI incentives reach the MW levels adopted in today's order. The administrators shall notify the ALJ and the service list of this proceeding or its successor when the MW level has been reached in their territory, and the ALJ will issue a ruling confirming the incentive reduction.

In addition, when the Commission implemented the first solar incentive reduction, the ALJ directed the program administrators to establish a website communicating solar application information so applicants could assess whether an incentive reduction is approaching. This website is now operational and is an important tool for industry participants to gauge when an incentive level reduction is approaching.³⁹

We will not create a special group or meeting to discuss incentive changes. We prefer that unscheduled incentive changes be implemented through the delegation process we established in D.06-01-024. In other words, as we stated in that order, the assigned ALJ in this or a successor proceeding may issue a ruling reducing incentives where the ALJ has received written justification from CEC and Commission staff and where that written justification has been served on all parties to this or its successor proceeding for their comment. Any ruling will clarify the effective date of the incentive change.

Moreover, we have discussed in Section IV.B.5 the CSI Program Forum where interested stakeholders can discuss on-going CSI issues. The Forum is not intended specifically to discuss incentive levels, but if the group achieves consensus on changes, it may file a petition for modification of discrete Commission orders. Absent consensus in the Forum, an interested party always has the opportunity to follow Commission rules and file a petition to modify a Commission decision regarding incentive levels if there are new or changed facts for the Commission to consider.

³⁶ The CSI Program budget for each utility is set forth in D.06-01-024, p. 7.

³⁷ These percentages are set forth in Table 2 of D.06-01-024 and are 44% for PG&E, 34% for SCE, 13% for SDG&E and 9% for SoCalGas.

³⁸ The first 50 MW are allocated on a first-come, first-served basis through the 2006 SGIP program.

³⁹ The web address for this site is http://www.sgip-ca.com.