BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                            Senator Carole Migden, Chair

                                           1 (Murray and Campbell)
          
          Hearing Date:  5/23/05          Amended: 5/16/05
          Consultant:  Lisa Matocq        Policy Vote: E, U & C 10-0 
          _________________________________________________________________ 
          ____
          BILL SUMMARY: SB 1 would establish the Million Solar Roofs  
          Initiative (MSRI), the goal of which is to place one million  
          solar energy systems, or 3,000 megawatts (MW), on new or  
          existing residential and commercial buildings by 2018. 
          _________________________________________________________________ 
          ____
                            Fiscal Impact (in thousands)

           Major Provisions               2005-06     2006-07    2007-08    Fund
                                                                   
          PUC                                 $  140           $  279       
              $ 279        Special*
                                                Costs should be recovered  
          from fee revenues.
          CEC                                 $  705           $1,385       
             $1,485    Unspecified
          State agencies' energy costs                             See  
          comments below               Various                            
          *Public Utilities' Reimbursement Account (PURA) 
          _________________________________________________________________ 
          ____

          STAFF COMMENTS: This bill meets the criteria for referral to the  
          Suspense File.   

          Current law, (SBX2 82, Ch. 10, St. of 2001), requires the  
          Department of General Services, in consultation with the  
          California Energy Commission (CEC) to ensure that solar energy  
          equipment is installed, no later than January 1, 2007, on all  
          state buildings and state parking facilities where feasible and  
          cost-effective, as specified. Apparently, very few systems have  
          been installed as a result of this statute. 

          Existing law also establishes numerous subsidy programs for  
          solar photovoltaic (PV) systems.  For example, the  
          Self-Generation Incentive Program (SGIP), within the Public  
          Utilities Commission (PUC), provides incentives to customers for  










          the installation of qualifying (greater than 30 kW) solar, wind  
          turbines, etc. The current incentive is $3.50/watt. The SGIP is  
          funded by a charge imposed on utility bills, which generates  
          about $125 million annually, of which the PV portion is about  
          $70 million.  The PUC has imposed an administrative sunset of  
          December 31, 2007.  A cost-effectiveness report of the SGIP is  
          due in July 2005. 

          Current law also establishes the Emerging Renewables Program  
          (ERP), administered by the CEC, for systems less than 30 kW,  
          which provides a rebate of $2.80 per watt for installation of PV  
          systems. In addition, there are a number of other solar  
          subsidies available, such as: 

                 7.5% personal income and corporate tax credit for  
               taxpayers who purchase solar or wind systems. Approximately  
               4,000 taxpayers claimed the solar credit in 2003; 


          SB 1
          Page Two

                 property tax exemption for solar energy systems  
               installed between January 1, 1999 and January 1, 2006; 
                 net metering program for PV systems, which credits the  
               customer for electricity produced by spinning the meter  
               backwards; 
                 federal tax credits.   
           
          Since 1976, the state has provided more than $1 billion in tax  
          credits for solar energy systems. In addition, the PV portions  
          of the CEC and PUC programs mentioned above generate about  
          $100-110 million annually.  This bill proposes to increase the  
          number of PV systems in the state from about 12,000 to one  
          million, or increase solar capacity from about 93 MW to 3,000 MW  
          (about the equivalent of six small power plants) by increasing  
          electricity rates and offering solar subsidies. Specifically,  
          the bill:  

                 requires the CEC to develop, implement and fund the  
               MSRI, and establish solar subsidies, not to exceed the  
               subsidy level in existence on January 1, 2006 (probably  
               $2.80-3.00/watt, or about $7,250 for a 2.5kW residential  
               system), which decrease annually to zero by the end of  
               2016; 
                 requires the CEC, in implementing the MSRI, to evaluate  










               the costs and benefits of having an increased number of  
               solar systems as part of the electrical system, as  
               specified. STAFF NOTES that such a cost-benefit analysis  
               would not identify individual homeowner costs and benefits  
               over the life of the system; 
                 requires the PUC to adopt a program by January 1, 2007  
               to implement and finance the MSRI, and to include the  
               reasonable cost of the program in the distribution revenue  
               requirements of electrical corporations; 
                 requires the PUC program to be a cost-effective  
               investment by ratepayers in peak electricity generation  
               capacity, as specified;
                 requires municipal utilities to adopt similar programs  
               with proportionate expenditures;
                 requires production home builders to offer solar as an  
               option; 
                 requires the CEC to conduct random audits of solar  
               energy systems to evaluate their operational performance; 
                 provides that upon implementation of the MSRI, the PV  
               portions of the ERP the SGIP shall be discontinued and  
               their respective funding (about $100-110 million) deposited  
               into the MSRI Trust Fund at the 2004-05 levels;
                 exempts low-income customers participating in the  
               California Alternate Rates for Energy (CARE) program from  
               any rate increases necessary to fund the program;
                 and makes related changes.

          The average annual electricity bill for a homeowner in  
          California is $1083, and the average homeowner will consume  
          8,760 kWh per year of electricity (Environment
          California Research and Policy Center).  An average residential  
          PV system is about 2.5 kWh (Tucson Electric Power Company) and  
          costs about $22,500 ($9,000/kw per the
          Senate Energy, Utilities and Communications Committee analysis).  
           For illustrative purposes, the existing CEC rebate on a system  
          of this size would be $7,000, the 7.5% state tax credit would be  
          $1162, bringing the system cost down to $14,338, a reduction of  
          36%.  The cost may be further reduced by federal and property  
          tax credits, among
          SB 1
          Page Three

          other subsidies.  Assuming a 28.5% reduction in electricity  
          consumption (source:  Tuscon Electric Power Company), this  
          system should generate electricity cost savings of approximately  
          $309 annually, or $6180 over 20 years.  In this case, and taking  










          into consideration direct costs and benefits only, it does not  
          appear that this system is cost-effective. However, supporters  
          point out that solar energy provides additional benefits such as  
          pollution reduction, averting the need to build additional power  
          plants, cost avoidance on transmission grid maintenance, etc.  
          and that these factors should be taken into consideration in a  
          cost-benefit analysis.  

          The bill anticipates that technological advances in the solar  
          industry and increased demand will drive down the cost of solar  
          systems over the next 10 years. On the other hand, some would  
          argue that providing increased subsidies eliminates much of the  
          competitive pressure to reduce price and promote innovation.   
          STAFF NOTES that the author and committee may wish to consider  
          amending the bill to make continuation of the MSRI after a  
          certain period, say for example, five years, contingent upon a  
          finding by the CEC that the benefits, both statewide and to  
          consumers, exceed the costs.  
           
          The total costs of the MSRI are indeterminable, and depend on a  
          number of factors, such as participation, mix of residential to  
          small commercial to industrial, future costs of solar, etc., but  
          are likely to be in excess of $2 billion, and could be as high  
          as $7 billion (based on PG&E projections).  STAFF NOTES that the  
          author and committee may wish to consider imposing a cost cap,  
          and/or rate increase cap to better control costs. 

          Washington recently passed a solar subsidy bill.  It provides a  
          production-based incentive where customers can earn a credit of  
          15 cent per kWh of electricity generated by renewables - up to  
          $2,000 annually. With a production-based incentive, the rebate  
          is paid over time, promoting maximum efficiency of the solar  
          projects over the  +  20-year life expectancy.  With a  
          capacity-based incentive, like California's, the subsidy is paid  
          up front, and there is no guarantee that the system will perform  
          as expected or that the owner will maintain the system to ensure  
          performance.  STAFF NOTES that the author and committee may wish  
          to consider amending the bill to make the subsidy program  
          production-based.  The author and committee may also wish to  
          consider a progressive subsidy, i.e., where the amount of the  
          subsidy is based on need.   

          California's electricity rates are among the highest in the  
          nation.  The electricity cost savings associated with 3,000 MW  
          are indeterminable, but significant. On the other hand, rate  
          increases will help fund the subsidy program.  STAFF NOTES that  










          energy costs of state agencies are in excess of $500 million  
          annually. For illustrative purposes, a 1% increase in the  
          state's energy costs could result in increased costs of $5  
          million annually. 
          
          STAFF RECOMMENDS that the bill be amended to:

             1.   clarify that only one solar program is to be  
               established; 
             2.   clarify which existing subsidy, the PUC's or CEC's, is  
               referred to in the subsidy cap language on page 12, lines  
               15-17; 

            SB 1
            Page Four

             3.   allow the CEC to recover its administrative costs,  
               either from surcharge revenues or a subsidy application  
               fee; 
             4.   clarify the language regarding the rollover of funds  
               from the existing CEC and PUC solar programs at the same  
               level as the 2004-05 fiscal year, because arguably, the CEC  
               had no funding in 2004-05 and was required to borrow; 
             5.   establish a sunset on the provisions of the bill that  
               are to sunset in 2018.  

          PUC staff estimate increased costs of $279,000 annually for  
          three personnel years (1 PURA IV and 2 PURA IIIs, including  
          benefits).  PURA revenues are derived from an 
          annual fee imposed on utilities.  Therefore, any increased costs  
          to the PUC should be recovered from fee revenues. 

          Net increased costs to the CEC could range from $490,000 to  
          $920,000 in the first year, and increase to $1.4+ million by  
          2007-08, and up to $2+ million by year 10. Costs include  
          database setup, eight staff (avg. salary and benefits of  
          $87,000) to review and process up to 80,000 applications,  
          $300,000 for technical support annually, two to five accounting  
          staff, materials and training for builders and contract services  
          ($300,000 to $900,000 annually), and ongoing database  
          maintenance and periodic spot checks of system performance.  

          SB 1017 (Campbell), pending in Senate Revenue and Taxation  
          Committee, would extend the sunset dates on the on the personal  
          income and corporate tax, and property tax exclusion. The  
          Franchise Tax Board estimates a revenue loss of about $2 million  










          annually in 2006-07 and $4 million annually in 2007-08. 

          AB 1099 (Leno), pending in the Assembly, makes the property tax  
          exemption permanent, as specified. 

          SB 199 (Murray) of 2004 dealt with genetic privacy when it was  
          in the Senate.  The bill was amended in the Assembly to contain  
          some provisions similar to this bill. It failed passage in the  
          Assembly Utilities and Commerce Committee. 

          SB 118 (Bowen) of 2004 dealt with conflict of interest  
          provisions of the Public Utilities Commission (PUC) when it was  
          in the Senate.  It was amended in the Assembly to establishes a  
          Solar Energy Peak Procurement Program, within the PUC, to award  
          solar rebates for the installation of grid connected solar  
          energy systems and required the establishment of a Solar Peak  
          Energy Affordable Housing Revolving Fund in the State Treasury.   
          It also contained legislative intent to fund the program at $100  
          million annually, without raising rates or fees.  It died in the  
          Assembly. 

          SB 289 (Murray) of 2003 required (1) that an unspecified  
          percentage of single-family residences, constructed on or after  
          January 1, 2006, include a solar energy system, and (2) the CEC  
          to make a determination, by January 1, 2008, of the sufficiency  
          of a two-kilowatt solar energy system to meet at least 50% of  
          the energy needs of a single-family residence.  It was held on  
          this Committee's Suspense File.