BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Carole Migden, Chair 1 (Murray and Campbell) Hearing Date: 5/26/05 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 Costs should be recovered from revenues. State agencies' energy costs See comments below Various *Public Utilities' Reimbursement Account (PURA) _________________________________________________________________ ____ STAFF COMMENTS: SUSPENSE FILE. AS PROPOSED TO BE AMENDED. 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 that an unspecified percentage of single-family residences, constructed on or after January 1, 2006, include a solar energy system, and made related changes. It was held on this Committee's Suspense File. AS PROPOSED TO BE AMENDED, the bill addresses Items 1-5 of staff recommended amendments above.