VII. Incentive Levels - Initial Levels and Changes

D.05-12-044 reduced incentives available for qualifying SGIP solar from $3.00/watt to $2.80/watt, consistent with the incentives available for the CEC's ERP solar projects. The SB 1 and the staff report suggest incentives automatically decrease by an average of at least 1/10th each year. The incentive reduction would occur either at the end of the calendar year or by a trigger tied to the amount of capacity reserved in the program. For example, in 2007 the incentive payment is scheduled to be reduced to $2.50 per watt, but may be reduced to that level sooner if and when the reserved capacity for the program reaches 50 MW. The staff also suggests that the incentive levels may vary by sector according to demand and other factors. Accordingly, residential incentives, or those for residential new construction, could be higher or lower than incentives for commercial projects. The details of this element of the program will be established in a subsequent order, following workshops or other procedural steps.

The parties have also raised concerns that both the ERP and SGIP have borrowed funds from future years or transferred funds from other program categories to meet demand for solar incentives. Each program has experienced periods when funding was not available.

Energy Innovations is concerned that reducing the incentives from the existing levels will substantially dampen participation. SDREO, on the other hand, believes incentives in its region have been too high in some cases. It also believes that residential and commercial incentives do not need to be treated alike because the members of each sector may have different reasons for investing and face different economic circumstances. SDG&E/SoCalGas support incentive levels for CSI start at the current levels for the SGIP and ERP and decline over time.

Some parties have raised concerns that the Commission has not responded quickly enough to changing market conditions in setting incentive levels. ASPv/PV Now support the idea of a trigger mechanism but believe the details still need to be determined. SDG&E/SoCalGas support the staff report's proposal for a trigger mechanism that would reduce incentive levels if a given level of funding had been exhausted in the early stages of the funding cycle. As SDG&E/SoCalGas and PG&E observe, the level of funding commitments made in the SGIP program has been exaggerated by applications for projects that are never built. The utilities observe that this problem will be mitigated substantially with the introduction of an application fee in the SGIP program, which they believe should be applied in the CSI program as well.

Discussion. We are presented with the difficult task of setting an incentive level that is high enough to motivate cost-effective solar investments and yet not so high that ratepayers are subsidizing projects that would be built without lower incentives. Fortunately, we have some experience with incentives offered by the ERP and SGIP that provides guidance in this regard. We find no justification for setting initial incentive levels differently according to project size or customer class (indeed, today incentives are not tied to customer class but only project size). Over time, we may be able to justify different incentive levels for different sized projects according to market conditions. Right now, however, we do not have a way to justify making such a distinction. Initially, all solar PV projects will be offered the same incentives, whether they are smaller than or larger than 30 MW, as the staff report proposes. We also authorize an application fee for CSI projects, which should substantially reduce the number of unlikely projects for which administrators receive applications. Since we do not have a record that would guide our selection of reasonable application fees, we will direct the utilities and SDREO to propose fee levels that they believe are reasonable on the basis of their experience with the SGIP.

Consistent with the staff report, we state our intent to automatically reduce incentive payment levels each year by 10 percent or more if demand exceeds the targets proposed in the staff report. These payment reductions are consistent with our expressed intent to reduce incentives over time as technologies become more efficient and less costly.

We also recognize that the automatic annual reductions might not adequately recognize market conditions and believe incentive payments should change as market conditions change in ways that suggest the incentives are higher than they need to be. We believe staff experts at the CEC and the Commission are able to assess the need for incentive reductions without an elaborate formal procedure. We therefore delegate authority to the assigned ALJ in this or a successor proceeding to issue a ruling reducing incentives where the ALJ has received a written justification from CEC and Commission staff and where that written justification has been served on all parties to this or its successor proceeding. The ALJ and staff may use this procedure to change an incentive level by up to 10 percent a year, and may use the procedure to bifurcate incentive payments according to project size. The change in the incentive level shall apply to all new projects making application to the CSI as of the date of the ALJ ruling.

We also delegate to the staff and ALJ decisions regarding whether to use a future period's budget to support the current period's demand when bona fide applications seek incentives that exhaust the current period's funds. In consultation with Commission and CEC staff, the ALJ assigned to this or its successor proceeding may increase the current period's budget by up to 15% by directing the utilities to use the subsequent period's allocated funds.