IV. Adopted CSI Program Elements
In this section, we elaborate somewhat on the positions of the parties and the reasoning for our program design. Overall, we are encouraged by the parties' expressions of support for an expanded program to motivate solar development. Because we believe solar technologies hold some promise of becoming a cost-effective, reliable source of energy in California, we adopt a solar incentive program that builds on the existing SGIP and the CEC's ERP.
Relationship to existing solar incentive programs. Currently, the CPUC oversees a program that provides incentives for solar PV of 30 kW capacity or more through the SGIP, which is funded by distribution rates. The CEC administers a program that provides incentives for smaller solar PV through the ERP, which is funded by the public goods charge according to AB 1890. The CEC's program targets PV projects under 30 kW capacity and funding is scheduled to end by 2011. The programs contain similar eligibility rules and project standards. Almost all parties commented that all solar incentive programs should be consolidated, believing that a single program would be customer-friendly, simpler to navigate and more consistent in its management approaches than a program that is divided between two agencies. SB 1 also envisioned a single program administered and overseen by the CEC. (We distinguish program oversight from program administration in this regard. We use the term program oversight to mean those activities that involve formal decision-making on program elements, funding levels and ratemaking, which are the lawful obligations of the Commission or, in the case of the ERP, the CEC. Program administration involves day-to-day operations requiring little discretion and in compliance with state rules and decisions. Such activities are described in more detail in the section of this order that addresses program administration.)
We certainly understand the logic of having the two agencies combine their programs into a single incentive program for all qualifying solar technologies. Existing law, however, limits our options in this regard and could compromise our ability to fashion a program that is responsive to the goals articulated by the Governor, the Legislature and according to our own Energy Action Plan. This is because the CEC does not have independent authority to order the utilities to fund an expanded solar program, which we believe would be required. Also limiting the CEC's formal decisionmaking role is the fact that this Commission cannot legally delegate our authority to the CEC to oversee a utility-funded program. Therefore, our choices are to oversee a solar program that is comprehensive and overseen by this Commission or to limit some elements of the program to whatever the CEC is authorized to administer according to existing legislation.
Rather than limit the program parameters, we move ahead with a comprehensive program. That is, we authorize funding and establish guidelines for a program that provides incentives to large and small solar projects for all types of qualifying technologies. The CEC has stated its interest in focusing on programs aimed at solar installations on new construction, as described in the attached staff report.
A related issue is whether we continue to include solar projects or some subset of them as part of the SGIP or initiate a completely independent program for all solar projects. In order to focus our efforts on solar technologies, permit administrative flexibility and simplify program administration for customers, we state our intent that the CSI will be managed and administered separately from the SGIP. The SGIP will continue to be administered as it is today with the exception that it will not provide incentives to solar projects starting in 2007.
CSI Program objectives. The Governor's proposal and SB 1 presume a solar program that would provide 3,000 MW of capacity within 10 years. The staff report used this capacity goal as a foundation for its analysis but does not analyze whether the goal is the appropriate or only achievable goal. Several parties raise concerns that a 3,000 MW goal for the CSI program may be more expensive than policy makers have presumed and that it may not be realistic in any event. Some suggest the Commission cap spending on CSI and consider other ways of reaching the 3,000 MW goal.
We do not have definitive information in this proceeding to determine whether a 3,000 MW goal is attainable with the program funding level proposed by SB 1. However, based on our staff analysis presented in the attached staff report, we believe it is a reasonable starting point and that our adopted program budget is sufficient to meet this goal. However, at this time, we do not adopt an absolute goal based on installed capacity. Instead, we determine a reasonable level of funding, state a commitment to developing a variety of program elements designed to reward efficient project performance and promote cost-effective investment, and state our intent to monitor the program's progress. We may reconsider whether to adopt a capacity goal at a future date, depending on the market's evolution and the impacts of our CSI program on investment and technological development.
CSI Program Duration. The staff report envisions a 10-year program, consistent with SB 1 and the Governor's public statements, and consistent with our desire to promote a stable, sustainable approach to a solar program. No party objected to our adoption of a 10-year program, although several suggested that the Commission monitor program results to assure funds are spent wisely during all program years. SDREO and a number of solar industry representatives advocated in favor of a 10-year program in order to motivate production of solar equipment and improvements to it.
The development of solar energy projects is consistent with state policies generally that support environmentally sound energy resources and an energy infrastructure that is diverse and disbursed. We state our commitment to a 10-year program because we believe it is necessary to move solar markets in the direction of becoming self-sustaining and, as SDREO observes, we believe it will send a signal to manufacturers that will motivate innovation and efficient production. As we discuss further in other sections, we also state a commitment to monitoring the progress of solar technologies and markets during the program period, and making adjustments where necessary to promote cost-effective and otherwise responsible use of program funds.
Qualifying Technologies. The staff report recommends expanding the incentive program now in the SGIP to include solar water heating in the program. CLECA, SDG&E/SoCalGas and PG&E support this expansion of the program and no party explicitly opposes it. SDG&E/SoCalGas caution that incentives for solar water heating technologies may not be required because those technologies are already demonstrated to be cost-effective.
We agree that all solar technologies should qualify for incentives. Although solar water heating does not normally reduce electric demand (since most hot water heaters are gas), the need for reductions in gas usage is increasingly critical as natural gas commodity prices fluctuate nationwide. On the other hand, solar water heating may already be cost-effective and providing incentives under the circumstances may have the unintended effect of increasing the cost of solar water heaters. In the past, this Commission provided incentives for installations of solar water heaters and later determined that the impact of the incentives was mainly to increase the cost of the technology, which suggested that sellers received a windfall profit and that public funds were not required to motivate product sales.
Because solar water heating can reduce demand for expensive natural gas, we intend to include that technology in the CSI to promote its use. In order to avoid a recurrence of the type of problem we observed in the past, the CSI program should include incentives for solar water heaters as a pilot program, which we may monitor and modify as necessary.
Currently, SDREO administers the SGIP program in San Diego and has already designed a program element that would provide performance-based rebates for solar water heating units. We will direct SDG&E to offer a contract to SDREO to administer a pilot program for solar water heater incentives. The program should, as the staff report recommends, provide upfront rebates following installation at levels that reflect a system performance index. The details of the program should be included in a program implementation plan, which should be submitted to and reviewed by Commission and CEC staff, and which may be funded following an ALJ ruling approving the program implementation plan. The plan should include an element for evaluating the market impacts of the program, including a comparison of solar water heater prices in regions with and without incentives and over the course of the program term. This pilot program would operate for 18 months and evaluation of its impacts on equipment prices, demand, and overall cost-effectiveness should begin at the end of the 12th month. At the request of any party or the staff of the Commission or the CEC, we will consider extending the program before the 18 month program period is over with preliminary evaluation results that suggest positive results.
In addition, as the attached staff report indicates, it is our intention to include solar heating, ventilation, and air conditioning equipment in the program, as well as concentrating solar technologies deployed in distributed applications. The details of incentive levels will be the subject of further workshops and comments during 2006 before inclusion in the program. We need further information about the technologies involved in solar heating and air conditioning before committing to include them in the SDREO pilot program on solar water heating.
In sum, the CSI program will provide incentives to solar PV, solar thermal, solar water heating, and solar heating and air conditioning technologies. We seek the assistance of SDREO is designing and implementing a pilot program for solar water heating offered to SDG&E residential, commercial and industrial customers and which would set rebate levels according to thermal output.
Project Size and Ownership Requirements. Currently, the SGIP program allows participation by projects not exceeding 5 MW in size, although the actual incentive is capped at 1 MW.
PG&E supports continuing the incentive cap to avoid exhausting limited funding on single large projects. CLECA and CMTA comment that the existing cap is somewhat arbitrary and may dampen investments in cost-effective larger projects. The utilities also propose that they qualify for incentives.
We retain the program size restriction now set at 5 MW, and increase the rebate limit from 1 MW to 5 MW. The CSI is intended to be a program which promotes cost-effective retail projects to serve onsite load. Historically installations over 1 MW were viewed as wholesale projects for which investors already had opportunities for long term subsidies in contracts that would fulfill the utilities' Renewable Portfolio Standards. In practice, the capacity size of the majority of solar projects which have entered into RPS contracts is much higher. If a customer's onsite load is sufficiently large to accommodate an installation over 1 MW in size, we do not want to stifle these large customer-site projects. And, as the CLECA/CMTA comments point out, an investment in a large solar installation provides just as much benefit to the environment as a larger number of smaller projects.
A related issue is whether to place a limit on capacity size relative to onsite load. Currently, the SGIP allows systems to be sized up to 200% of peak load. At present, net metering laws do not require the utilities to purchase solar production that exceeds the customer's annual electric consumption, so any excess energy goes into the utility grid uncompensated. Solar customers could enter into wholesale power purchase contracts with the utility, which would require the solar generator to register as a qualifying facility with FERC, which is a different concept altogether than a customer-side retail project.
As stated in the order which opened this rulemaking, we intend to explore the jurisdictional issues surrounding net metered and wholesale solar transactions. The need to resolve these issues becomes more urgent as the number and capacity of solar projects interconnecting to the grid increases. In the meantime, we do not find it prudent to pay incentives for capacity above the on-site load that may potentially be unutilized. We therefore reduce eligible system size to 100% of historic peak load, beginning with SGIP applications received on or after the effective date of this decision.
Also initially, the utilities will not qualify for CSI funds. They have capital budgets, an obligation to serve and adequate incentives to invest in solar projects. If the utilities wish to construct cost-effective large solar projects themselves, such investments are recoverable in utility rate base following general rate case review. We will reconsider utility eligibility when we undertake our first program review in 2009.
Treatment of federal tax incentives. The federal Energy Policy Act of 2005 provides for tax incentives for solar projects, which mainly benefit larger projects. The staff report addresses federal tax credits but does not recommend CSI levels incorporate their impacts at this time.
The record is unclear as to how federal tax credits may affect investment decisions. In some cases, federal tax credits may not overcome the hurdle posed by the initial equipment cost. In others, they may obviate the need for some or all state-sponsored incentives. Because we wish to develop the most cost-effective program possible, we do not wish to provide funding for projects that do not need them. As the staff report suggests, we intend to gather more information on this subject and later adopt ways to reflect federal tax credits in the computation of CSI payments.
