VI. Structure of Incentives - Capacity Based, Performance Based, and Auctions

The two existing solar incentive programs managed by the Commission and the CEC have provided payments on the basis of capacity, with the exception of a small performance-based pilot at the CEC. For capacity-based incentives, a project owner is paid the full incentive on the basis of the project's size as soon as it is installed. The problem with this incentive structure is that it does not recognize power production or motivate good project management or maintenance once the project is installed. Projects may even be removed without penalty at any time.

Performance-based incentives (PBI), on the other hand, recognize good project performance by paying the project owner on the basis of energy production levels. Such a performance-based incentive structure would promote not only installation of solar projects but also their efficient operation. As PG&E and Energy Innovations observe, the risk of moving our incentive program toward a production-based system is that fewer projects will be built because of the upfront costs of installation and the need for support to get financing. The cost of monitoring performance may be more than it is worth for small projects.

SCE argues that the size of a PV unit is not necessarily indicative of value to the system. It supports performance based incentives and also suggests the Commission consider eligibility requirements pertaining to the site and which would affect performance, such as orientation of panels, amount of shading, and minimum level of annual sunshine.

Vote Solar, on the other hand, supports PBI as a way of expanding program participation with a limited budget, since PBI would be a cheaper option than capacity-based payments. It would use a pay period that is shorter than the 20 years proposed in the original staff report, observing that businesses have payback periods of 2-7 years. ASPv/PV Now also support a PBI model, initially with commercial installations and later applied to residential. ASPv/PV Solar also discuss the importance of good metering policies for a PBI program and developing incentives that complement state and federal tax policies. They support the development of a PBI program through a workshop process. CLECA also strongly supports PBI as a way of assuring a cost-effective program and advocates for consideration of tax impacts in designing a PBI program, and also good metering and program monitoring.

The record in this proceeding does not provide enough information and analysis to adopt a performance-based incentive structure today. Still, we are convinced that a good incentive program is one that promotes efficient operation of the solar project to the extent such a program is effective and readily administered. As the staff report recommends, we intend to explore this option prior to the January 2007 consolidated CSI. Parties have proposed several options, such as a pilot program for large projects, or hybrids of upfront incentives combined with performance-based payments over some subsequent period. We intend to conduct workshops on this topic in cooperation with the CEC and look forward to the recommendations of the parties and staff on this topic. We will also take the opportunity to explore PG&E's proposal to conduct an auction in which prospective solar projects who bid the lowest receive incentive funding. Because of the administrative difficulties of managing such an auction, we will conduct workshops on how to create such an auction for large projects only.

The types of issues we hope to address in workshops and a subsequent order include:

1. What types of meters would be required for PBI applications? What other types of administrative activities would be required and how should they be implemented?

2. What kind of incentive structure would be most effective for different types of installations?

3. How long should the payback period be by project size and type?

4. Is low-cost financing necessary in conjunction with PBI as a way to offset the up-front costs?

5. Should PBI be combined with a up-front capacity payment to offset initial investment costs?

6. What types of auctions or bidding systems are possible for solar installations? How should they be conducted and for what types of projects?

7. How should a PBI program recognize state and federal tax benefits?

8. How should a PBI program be monitored and evaluated?

9. If the Commission adopts PBI, which, if any, site -related eligibility requirements should be implemented?