BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE MARTHA M. ESCUTIA, CHAIRWOMAN SB 1 - Murray/Campbell Hearing Date: April 26, 2005 S As Amended: April 25, 2005 FISCAL B 1 DESCRIPTION Current law and regulations establish subsidy programs for the installation of solar photovoltaic (PV) systems administered by California Energy Commission (CEC) and the California Public Utilities Commission (CPUC). Current law establishes a "net metering" program primarily for PV systems. This net metering program credits the customer for any electricity produced by turning the electricity usage meter backwards. Net metering is limited to 0.5% of the utilities' or energy service providers' demand. Current law requires investor-owned utilities (IOUs) to increase their existing level of renewable resources by one percent of sales per year until a portfolio of 20 percent renewable resources is achieved by no later than 2017. Municipal electric utilities are not subject to these standards, but are required to implement and enforce their own renewable resource procurement programs. Current law provides a 7.5% state tax credit for the installation of residential- and commercial-sized PV and wind energy systems. Current law excludes residential- and commercial-sized PV and wind energy systems from property taxes. This bill requires the CEC to develop, implement, and fund a program to install 1,000,000 PV systems, or the generation capacity equivalent of 3,000 megawatts (MW) on residential and commercial customer sites by 2018. This is to be accomplished through subsidies which start at current subsidy levels of $2.80/watt (or about $10,000 for a typical residential system) and decline steadily to zero by the end of 2016. Higher subsidy levels are authorized for homes with superior energy efficiency. This bill authorizes the CEC to develop a PV subsidy program for affordable housing projects. This bill requires the CPUC to develop a solar energy program to accomplish the goals of this bill. The cost of this program is to be recovered from IOU ratepayers, including those residential customers protected from cost increases under current law. This bill requires municipal utilities to adopt a similar program with proportionate expenditures. This bill requires the CEC to commence a proceeding by July 1, 2006, and conclude that proceeding within 3 years, to consider if and when solar energy systems should be required on new buildings. This bill requires sellers of production homes, as defined, to offer PV systems on new homes for which tentative subdivision maps are completed on or after January 1, 2010. This bill raises the net metering cap from 0.5% to 2%. After the CPUC has developed a special rate design for PV customers which recognizes that the value of energy varies by time of day and season, the net metering cap will increase to 5%. This bill extends the existing 7.5% tax credit for the installation of residential- and commercial-sized solar and wind energy systems until 2017. This bill extends the existing property tax exclusion for residential- and commercial-sized solar and wind energy systems until 2017. BACKGROUND This is the Governor's Million Solar Rooftops proposal. It establishes ambitious goals for the installation of solar energy systems for residential and commercial customers. The solar energy systems embraced by this bill are PV systems which directly convert sunlight to electricity and are located on the customer premise. This bill does not include solar thermal systems, which use sunlight to heat water, nor does it include large wholesale solar electric generators. What's a PV System? A PV system has two main parts, the roof-mounted PV panels which transform sunlight into electricity and the inverter which transforms the direct current created by the PV panels into alternating current which is usable in the home or on the electric grid. The orientation of the PV panels is crucial to the success of the system; they must be south- or west-facing. The panels must not be shaded and should be angled to capture the most sunlight. A typical residential PV system is 2kw - 4kw. The installed cost is about $9000/kw so a 3kw system would cost $27,000. Rebates have been as high as $4500/kw and are now at $2,800/kw, so the 3kw system would today cost $18,600 after rebates. A state tax credit would further reduce the price by 7.5% to $17,205. For commercial customers the final after-tax cost is much lower because of greatly accelerated depreciation and a 10% federal tax credit. Current Subsidies California has several subsidy programs targeted specifically at PV systems. The CEC administers a program for residential- and small commercial-sized PV systems that provides a rebate for a portion of the installed cost of a PV system. That rebate was initially $4.50/watt, or about 50% of the system cost, and has since been lowered to $2.80/watt. This program is funded through the Public Goods Charge (PGC), which is a surcharge on all IOU electric customers, and is budgeted at about $30 million annually, though in 2004 the program spent $70 million on PV. The CPUC administers a similar program for commercial-sized customer-owned generation, including PV systems. This program, known as the Self-Generation Incentive Program (SGIP), costs $125 million annually and is paid for out of electric rates. The SGIP PV subsidy is $3.50/watt and is oversubscribed. In addition to these two subsidy programs there are numerous other state and federal programs which substantially reduce the after-tax cost of PV systems, particularly for commercial customers. These include a 10% federal tax credit, accelerated depreciation, a 7.5% state tax credit, accelerated depreciation for state taxes, and favorable property tax treatment. By themselves these tax benefits for commercial customers are worth more than the state subsidy, according to CEC estimates. Other state subsidies are net metering, which reverses the electric meter as electricity is produced, and an exemption from exit fees. Since 1976 California has provided just over $1 billion in tax credits for solar energy systems. In 2003 the credit was $8 million. As of the end of 2004 there were 12,000 PV systems in California with an aggregate rated capacity of 93 MW. (This includes the PV capacity in municipal utility territory.) It will be heavy lifting to reach the program goal of 1,000,000 PV systems or 3000 MW in 13 years. By any measure, California has been a leader in the pursuit of alternative energy sources and energy efficiency. Every year customers of California's IOUs, through a PGC, pay an extra $228 million to fund energy efficiency and conservation, $135 million for renewable energy, and $62.5 million for energy research, development and demonstration. Legislation authorizing the PGC was enacted in 1996 (AB 1890 - Brulte: Chapter 854 of 1996) and again in 2000 (AB 995 - Wright: Chapter 1051 of 2000), both on a bipartisan basis. California's Renewable Portfolio Standard is an additional commitment to renewable energy. It requires utilities to increase their purchase of renewable energy by 1% annually until 20% of their energy is from renewable sources. California Electricity Rates Among the Highest in the Nation California's electricity rates are the highest in the continental United States. Typical are the rates paid by Southern California Edison residential, commercial, and industrial customers, which are 55%, 94%, and 146% higher than the national average, respectively.<1> Prior Efforts Last year the Governor introduced a Million Solar Homes proposal late in the legislative session. That proposal, contained in SB 199 (Murray), differed from this bill in several important ways. SB 199 SB 1 Homes only Homes and non-industrial buildings Authorizes an increase of up to No cap on the rate increase 0.05 cents/kwh Homebuilders required to offer solar Homebuilders required to offer solar when subdivision map is complete by 1/1/07 when map is complete by 1/1/10 SB 199 was not successful. Instead AB 135 (Reyes: Chapter 867 of 2004) was enacted which authorized internal borrowing within CEC programs so that existing PV programs could continue. --------------------------- <1> Comparison for 2003 based on data compiled by the California Energy Commission and the Energy Information Administration's 2003 Annual Energy Review. QUESTIONS FOR THE COMMITTEE Given current state and federal PV programs, what problem does this bill solve? Should California establish a new multibillion dollar subsidy program specifically for the PV industry? Is this the best use of ratepayer and taxpayer resources compared to other public purpose investments such as energy efficiency and other renewable technologies? How can the program established in this bill be improved to increase the likelihood of success and reduce costs? COMMENTS 1. Letting the Sun Shine . Supporters believe that PV is a unique technology because it is clean, produces electricity during peak times when it is needed most, and can be installed on customer premises. Supporters see this bill as the catalyst for a strong, indigenous, self-supporting solar industry. By establishing a long-term commitment to PV and long-term purchase incentives, PV sales will predictably increase leading to increased investment by solar manufacturers and installers. This generates scale economies which in turn reduce prices leading to even more sales. This virtuous, self-reinforcing circle will lead to enough sustained demand that subsidies will no longer be needed within 11 years, according to supporters. The Japanese experience with PV incentives is often cited as the model for this bill. In 1994 the Japanese government established a goal of 70,000 homes with 3kw systems by 2000 and half of new homes by 2010. Supporters indicate that those targets are likely to be met and that the federal subsidy has decreased from $12/watt to almost nothing. The goal of this bill is to create 3000MW of clean electricity and to transform the PV industry so that it can compete without government subsidies. (By way of comparison, 3000MW is about the size of 6 large powerplants.) The cost of doing this is unknown, but supporters believe that $2 billion - $2.5 billion in ratepayer subsidies is a reasonable guess. To accomplish its goals the bill does three things: 1) establishes a PV rebate program, 2) requires production home builders to offer PV, and 3) extends current PV tax breaks. 2. Why Is This Bill Needed ? California's Electric Needs Are Being Met -- Since 2001 California policymakers have spent a great deal of time ensuring that electricity shortages are not repeated. Legislation regarding electricity procurement and planning has been enacted, and the CPUC has established a competitively bid procurement process. Earlier this year this committee was told by the CPUC that energy supplies, while tight, are adequate. Consequently, this bill is not necessary to meet California's electricity needs. PV Programs Continue Without this Bill -- Nor could this bill be necessary to sustain the PV industry. If this bill fails both the CEC and CPUC PV programs continue, though the CEC's program will need to find additional revenue as it will run through even the additional revenue provided by AB 135 last year. The CPUC program will continue through 2007 and will not run out of funding as the CPUC has the authority to increase rates to raise revenues. And, the existing net metering statutes remain. Because San Diego Gas & Electric is close to the net metering cap there is a potential problem, but SB 816 (Kehoe), which passed this committee without opposition, deals with that. A Good Investment? -- If this bill isn't necessary to meet California's electricity needs or to keep the PV industry viable, then the only remaining reason for this bill is that it is a good investment for ratepayers. This bill requires ratepayers to invest about $2 billion for clean energy that is produced during peak hours. But the actual investment is far greater if the investment by taxpayers is also considered. The value of state and federal tax breaks to commercial PV purchasers is greater than the value of the rebate proposed by this bill. Supporters have presented an analysis which they believe demonstrates that the rebates are cost effective over the 13 year period covered by this bill based on the savings from substituting the PV generated electricity for purchased electricity. While the merits of that analysis can be debated, it is clear that if the substantial cost of the state and federal tax breaks are also considered the program envisioned by this bill is not a sound ratepayer and taxpayer investment. However, that analysis does not consider the value of a growing California-based PV industry that does not rely on government subsidies, to the extent that this is an outcome of the bill. Another analysis offered by supporters details the benefits of PV systems, assigning a range of values to each benefit (e.g. avoided carbon dioxide emission, avoided transmission and distribution costs). That analysis shows that PV power is potentially highly valuable, though at the low end of the range a large subsidy as proposed by this bill is not justified. Opponents dispute this analysis arguing that some of the PV benefits are illusory. Why 3000 MW? -- The primary goal of this bill is to obtain 3000 MW of PV capacity. This number is not rooted in any particular assessment of electrical capacity shortage, though it is the number you get when you take one million homes and multiply that by an average PV system size of 3kw. There appears to be no magic to 3000 MW. 3. Cheaper Ways to Get it Done . Assuming that peak demand reduction is desirable, there are many ways to achieve it in addition to investments in PV. Energy efficiency and other renewable energy sources may be less costly options, for example. When the Legislature decided that less reliance on fossil and nuclear fuels was in the public interest, it passed a Renewable Portfolio Standard (RPS) with overall goals and a budget. Rather than choose a specific renewable technology the RPS legislation identified a variety of technologies. Then, using a competitive bidding process, renewable energy is procured based on the lowest cost. If those costs are higher than market prices for non-renewable energy the extra cost is paid for out of the PGC as long as funds are available, thereby limiting ratepayer risk. The RPS process took advantage of competition to reduce costs, making our renewable energy goals more attainable. This bill does just the opposite. It picks a winning technology, thereby eliminating much of the competitive pressure to reduce price and innovate. And it provides a ratepayer and taxpayer subsidy which could easily reach several billion dollars. 4. Will the Bill Achieve Its Goals ? Things Change -- One of the goals of this bill is to encourage investment in PV installation infrastructure and to reduce PV costs so that PV will no longer need a government subsidy. Those with a long memory will recall that those same promises were made in 1996 by renewable energy advocates when they urged implementation of a 10-year PGC. It should be no surprise that we've found that 10 years was not enough; the PGC has been extended for an additional 5 years. Similar promises were made when net metering legislation first came before the Legislature in 1995. Unfulfilled promises are nothing new in the Legislature, not withstand the sincerity of the promisers. The real question is whether any state legislation can be comprehensive and far-reaching enough to guarantee the growth of an entire industry. The problem is that state legislation has a limited scope. It cannot control events in other states, changes to federal law and taxes, global competition for PV products, inflation, the cost of competing technologies, cultural norms, and the many other variables that will effect the growth of any industry. Things change that are far outside the reach of state government. The most obvious example of the effect of unforeseen and uncontrollable events on PV growth is California's 2001 electricity crisis. Blackouts and a 40% increase in electric rates spurred unprecedented growth in PV demand, something that the existing state and federal PV support programs were unable to do. But if the CPUC ever succeeds in reducing electricity prices and ensuring supply reliability those factors will reverse and the attractiveness of PV will diminish. Changes to federal tax law could also vastly change the economics of PV, particularly for commercial customers. If this bill is enacted it is difficult to believe that ten years from now the PV industry won't be back in Sacramento with a perfectly valid reason why a new subsidy program is necessary. In a term-limited world, those reasons may well resonate. Other factors out of the control of state legislation are influencing PV prices today. Germany has initiated a large and expensive PV program. It has attracted a lot of PV supply, so much so that there are reports of PV panel shortages and accompanying increases in PV system prices in California. It is perhaps giving ourselves too much credit to believe that any state, even one as big as California, can do enough or spend enough to drive a global industry to substantially reduce its prices. 5. Making the Program More Effective . Focus on New Homes -- The second largest component of PV system cost is the cost of installation. The vast majority of PV systems are installed on a custom basis, mostly by retrofitting homes. These costs could be reduced if the PV systems were standardized and installed en-masse. New production homes would be ideal for this. A number of additional benefits arise as well. By designing the PV system with the home architecture the efficiency of the PV system could be maximized through roof design, orientation of the house, and placement of landscaping. Design and engineering costs could be minimized because the designs could be reused for other homes in the subdivision. Marketing costs would be minimized because the systems could be sold to builders of hundreds of homes rather than owners of individual homes. Financing costs would be minimized as the cost of the PV system could be included in the home mortgage. And most new homes are being built in the hotter, sunnier areas of the state where PV is ideal. This bill requires production homebuilders only to offer PV by 2010, a much less aggressive requirement than in the Governor's solar bill from last year. It further requires the CEC to consider whether PV should be required in new homes by 2009. Given the substantial additional benefits of PV on production home construction, the author and committee may wish to consider phasing in a mandate to include PV on a percentage of homes. Not only would this guarantee the sales volume, but it would also eliminate the ratepayer subsidy for this part of the program. Performance-Based Incentives -- Recent evaluations of PV systems raise questions about their performance. An analysis of the large PV installations showed that at California's 2004 peak electric demand, those systems was producing only 39% of their rated capacity.<2> An earlier report analyzing a much smaller sample of older systems showed that the actual capacity of the PV systems was 30% less than the rated capacity and that the capacity factor, or the output of the PV systems as a percentage of the theoretical maximum, was 13%.<3> These studies indicate that PV systems may be underperforming, which highlights the need for performance-based incentives. Current PV rebates are awarded up front and are based on the rated capacity of the PV system. If instead of up-front rebates the incentives were based on electricity production the PV customer would have a much greater incentive to install the system in a way to maximize production and to maintain the system to achieve optimum performance. This bill authorizes the CEC to develop installation guidelines to encourage maximum energy production. But these guidelines will be effective only if they are enforced, and it's unlikely the CEC will have sufficient resources to inspect one million PV installations. Because performance-based incentives will be self-enforcing they will be more effective. The CEC has just commenced a pilot program using performance based rebates. The author and committee may wish to consider requiring the use of performance-based incentives. Progress Report -- Supporters are asking the Legislature to authorize a ten year, multi-billion dollar program without any guarantees of benefits. But rather than establish a program and set it on auto-pilot for 10 years, perhaps it would be better to give the industry a shorter time frame to demonstrate progress. After a successful mid-term evaluation the program could then continue. This is what the Legislature required of the PGC, where it was reviewed after five years and renewed based on performance. The author and committee may wish to consider establishing a review of this program after four years of experience, and ------------------------- <2> CPUC Self-Generation Incentive Program Fourth-Year Impact Report (Final Report ), submitted to Southern California Edison and the Self-Generation Incentive Program Working Group, prepared by Itron, April 15, 2005, p.8-5. <3> Measured Performance of California Buydown Program, Residential PV Systems by Kurt Scheuermann, Regional Economic Research, Inc., for the California Energy Commission, undated. to annually track the progress of the program in publicly-available reports. If the program is judged to have met the expectations of the Legislature as established in this bill, the subsidies could then continue for its final five years. Only One Program -- Staff understands that it is the intent of this bill is to encompass all the state PV programs into a single program, though that is a little unclear in the bill language. The author and committee may wish to consider clarifying that this bill establishes a single program. The author and committee may also wish to consider barring any other PV incentive programs except for those specifically created in this bill. 6. Another Way to Raise the Money . Supporters believe that this bill will require $2 billion to $2.5 billion in ratepayer subsidies. The bill authorizes the CPUC to add a surcharge to electric bills to raise sufficient funds to achieve its objectives. That surcharge would be about two tenths of a cent per kwh ($0.002/kwh). The effect on individual ratepayers would be relatively small, about $15/year for residential ratepayers according to supporters. But electric rates are made up of a lot of relatively small components. It is easy to make the mistake of looking at any one component of the bill as relatively small but not seeing that the cumulative effect is to make California's electricity rates the highest in the country. California currently has two PV programs. The CEC's program is paid out of the PGC. In 2004 the CEC spent $70 million in rebates. About $30 million was ongoing funding and the remainder from internal borrowing. The CPUC's SGIP program is $125 million annually, the vast majority of which is PV. Current PV subsidies are therefore anywhere from $100 million to $150 million in ongoing funding. This current funding level is not far from the $200 million annually that would be required to provide $2 billion over 10 years. Simply extending the subsidy duration from 10 to 15 years would result in about $2 billion in subsidies without requiring a rate increase. The author and committee may wish to consider deleting the authority for a new rate increase and instead earmark the existing PGC and SGIP funding, as well as extend the life of the SGIP funding, for the PV program for 15 years. 7. Who Benefits ? For those who can afford it and who have a long-term perspective, the PV program envisioned by this bill, in conjunction with the tax credits, makes installing a PV system an attractive option. But the cost of the PV system makes it impossible for low- and middle-income customers to even consider. As those customers will never be able to participate in the rebate program, the author and committee may wish to consider whether they benefit before making them pay for it? Under this bill the cost of this program is exempted from the existing protections against rate increases for residential customer usage up to 130% of the baseline quantities. Supporters argue that the electricity generated by the PV systems will reduce the amount of electricity needed to meet peak demand. As that electricity is the most expensive, PV systems reduce the overall cost of electricity which benefits all customers. This argument is true, but only partly. Peak demand is most severe and costly during summer weekdays, and for those costly peak hours PV systems are most valuable. But PV systems generate during hours that aren't peak, like summer weekends, weekday mornings, and days that aren't hot. Also, as summer shifts into fall and winter, peak demand shifts into later hours of the day so that by winter the peak demand occurs well after sunset. While this program provides some benefits to all customers, it is hard to see how those benefits overcome the cost of the program for low- and middle-income customers. The author and committee may wish to delete the override of the rate increase protection for residential usage up to 130% of baseline. (If the suggestion to simply use funding from the existing CEC and CPUC programs is accepted this issue will have to be handled differently as all customers and all usage contributes to the cost of both programs.) 8. Other Issues . Labor Issues -- An insurmountable issue in the Governor's solar bill last year was whether PV projects which received state subsidies should be subject to prevailing wage laws. This bill does not require prevailing wage. The authors and interested parties are discussing the issue. Municipal Utilities -- Municipal utilities are required to establish a comparable PV program and to spend comparable amounts of money. This raises the same questions for municipal utilities as it does for IOUs: Is there a problem which this bill solves, and does it solve that problem in a cost-effective way? With municipal utilities the questions are more acute because these utilities are in lesser need of resources than the IOUs and may have a climate which is not conducive to PV installations. Rather than establish consistency among utilities for its own sake, the author and committee may wish to consider giving the municipal utilities more flexibility to meet whatever problem they are alleged to have. Renewable Energy Credits -- There is an ongoing discussion about requiring utilities to purchase renewable energy and to establish a credit trading program to facilitate meeting that requirement. The creation of renewable energy credit (REC) trading creates wealth for those who have the REC because they can sell it to those who have to buy it. PV systems create renewable energy and hence RECs. These could potentially be extremely valuable, as were the air pollution credits during the 2001 electricity crisis. This bill does not speak to who owns the REC from a subsidized PV system. There are many competing claims on the REC, including the PV system owner, the ratepayer, and the taxpayer, all of whom have paid for part of the PV system. If REC trading is permitted, revenues from selling PV generated RECs may be useful in helping pay for the program created in this bill. Affordable Housing -- This bill authorizes the CEC to set aside support for PV systems on affordable housing. The author and committee may wish to require the CEC to set aside support for affordable housing. Rooftops Only -- While this bill is called the Million Solar Rooftops initiative, there is no bar on putting PV panels on the ground. This may be an unwise use of land, and has become somewhat of a controversy for a very large PV installation in Butte county. Overdue reports -- The CPUC was required to provide the Legislature and the Governor with an analysis of the costs and benefits of net metering by January 1, 2005. A report was submitted on March 29, 2005 but it fails to provide a cost/benefit analysis. Instead it reports on the CPUC's progress at developing such an analysis, which will not be ready in time to assist the Legislature in evaluating this bill. The Governor was required to create an independent panel to review the PGC expenditures and submit a report to the Legislature by January 1, 2005 on whether to change or eliminate the PGC on or after January 1, 2007. This report has not been provided, nor has the independent panel been established. POSITIONS Sponsor: Author Support: -------------------------------------------------------------------- |Schwarzenegger Administration |Merced/Mariposa County Asthma | |Akeena Solar |Coalition | |Alliance for Nuclear |National Wildlife Federation | |Responsibility |New Vision Technologies | |American Federation of State, |NorCal Solar | |County and |Our Children's Earth | | Municipal Employees |Pacific Environment | |American Lung Association |Pacific Gas and Electric Company | |American Colar Energy Society |(if amended) | |Bluewater Network |Physicians for Social | |California Alliance For |Responsibility | |Consumer Protection |Planning and Conservation League | |California Building Officials |Powerlight Solar Electric Systems | |California Interfaith Power & |Public Citizen | |Light |PV Manufacturers Alliance | |California League of |Rainforest Action Network | |Conservation Voters |Real Goods | |California Public Interest |Relational Culture Institute | |Research Group |Sempra Energy (if amended) | |California Public Utilities |Sharp Solar | |Commission |Sierra Club California | |City of Santa Cruz |South Coast Air Quality Management | |Clarum Homes |District | |Clean Power Campaign |Sun Power & Geothermal Energy | |Coalition for Clean Air |The Better World Group | |Community Environmental Council |Union of Concerned Scientists | |East Bay Municipal Utility |Vote Solar | |District |Working Assets | |Environment California |World Council for Renewable Energy | |Global Green USA |Yolo county Board of Supervisors | |Gray Panthers |Several | |Green Lease, Inc. |individuals | |Greenpeace USA | | |Henry T. Perea, Councilmember | | |7th District KYOCERA | | |International, Inc. | | | | | -------------------------------------------------------------------- Oppose: California Manufacturers & Technology Association Southern California Edison The Utility Reform Network Randy Chinn SB 1 Analysis Hearing Date: April 26, 2005