BILL ANALYSIS SB 1 Page 1 Date of Hearing: July 6, 2005 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Lloyd E. Levine, Chair SB 1 (Murray and Campbell) - As Amended: June 23, 2005 As proposed to be amended, RN 17080 SENATE VOTE : 30-5 SUBJECT : Energy: renewable energy resources: Million Solar Roofs Initiative. SUMMARY : This bill establishes the Million Solar Roofs Initiative (MSRI), the goal of which is to place one million solar energy systems, or the equivalent 3,000 megawatts of capacity, on new or existing residential and commercial buildings by 2018. Specifically, this bill : 1)Requires the California Energy Commission (CEC) to develop, implement, and fund the MSRI, and establish an incentive program for solar energy systems, as follows: a) The incentives shall not exceed the subsidy level in existence on January 1, 2006 ($2.80/watt, or $7,000 for a 2.5kW residential system). b) The incentives will decline by 7% per year until the rebate is zero in 2016. c) The incentives can be increased by 50% for zero energy homes or zero energy commercial structures. The CEC shall develop definitions for zero energy homes or zero energy commercial structures. d) The incentives can be increased by 25% for solar energy systems that are installed on structures that that exceed the CEC's established energy efficiency building standards. e) Incentives shall not be granted for eligible solar energy systems installed on the premises of individuals or entities that are not contributing to the MSRI, except that incentives can be granted to CARE customers and to an electrical corporation. SB 1 Page 2 f) By 2010, 50% of all incentive money shall be spent on performance incentives that are based on the actual output of the solar energy system. 2)Requires the CEC to develop eligibility criteria for solar energy systems to qualify for the rebate, including: a) That the incentives only be used for distributed generation installations and not for large facilities that are owned by the electric utility or by companies that sell the electricity directly to the utility. b) The solar energy system must have at least a 10 year manufacturer's warranty. 3)Requires the CEC to develop incentives that require siting and installation of solar energy systems to maximize the performance of the systems during peak demand periods and energy efficiency improvements in the structure where the solar energy system is to be placed. 4)Authorizes the CEC to develop a solar energy subsidy program for affordable housing projects. 5)Requires the CEC in developing the MSRI to: a) Implement, to the extent appropriate, financing options to lower the financing costs of solar energy systems. b) Provide educational materials and assistance to builders to help them understand how to integrate solar energy systems into new construction. c) Conduct random audits of installed solar energy systems to evaluate their operational performance. d) Evaluate the costs and benefits of having an increased number of solar energy systems as part of California's electrical system with respect to the solar energy systems impact on distribution, transmission, and supply of electricity. 6)Requires the PUC to open a new proceeding to determine the level of additional funding needed to finance the MSRI. SB 1 Page 3 Requires cost of this program to be recovered from all investor owned utilities (IOUs) ratepayers, except ratepayers participating in the California Alternate Rates for Energy (CARE) program. (To be eligible to participate in CARE the household income must be below 175% of the federal poverty level.) 7)Caps the total amount of money that can be collect from customers of the three largest IOUs to fund the program at $1.8 billion. 8)Requires the PUC to require time-variant pricing for all ratepayers with a solar energy system. 9)Raises the net metering cap from 0.5% to 2%. After the PUC has developed a time-variant net metering rate, the cap will be increase to 5%. 10)Provides that a specified rate structure, in effect as of January 1, 2006, shall remain in effect for non-residential customers. 11)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 residential and commercial buildings. 12)Requires the CEC to issue an assessment of the success of the MSRI to the Legislature by January 1, 2009, and every third year thereafter. 13)Requires sellers of production homes, as defined, to offer solar energy systems on new homes for which tentative subdivision maps are completed on or after January 1, 2010. 14)Requires that existing photovoltaic (PV) programs administered by the PUC and the CEC be terminated when the MSRI is funded and that all money that would have funded the programs at the PUC and CEC be deposited in the MSRI Trust Fund. 15)Requires municipal utilities to adopt a similar program with proportionate expenditures. SB 1 Page 4 EXISTING LAW 1)Requires the implementation of a public goods surcharge to fund energy efficiency; renewable energy; and research, development and demonstration programs from January 1, 2002, to January 1, 2012. The surcharge is a nonbypassable element of the local distribution service and collected on the basis of usage. 2)Establishes a program of assistance for low-income electric and gas customers called the California Alternate Rates for Energy (CARE) program that establishes a discount on electric and gas bills for eligible customers. 3)Establishes a net metering program whereby residential and other customers can receive credits to their monthly electricity bills for up to 12 months for producing and placing electricity on the grid from PV or other renewable sources as specified in statute. 4)Establishes incentive programs for PV technologies within the CEC and PUC. These programs offer varying degrees of incentive payments per kilowatt-hour for residential or commercial customers purchasing certain types of renewable technology like PV cells. 5)Establishes tax exemptions for property tax, interest on loans, or personal or corporate income tax credits for customers as a result of increasing energy efficiency or purchasing renewable technology like solar or wind. 6)Requires 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. FISCAL EFFECT : Unknown. COMMENTS : This is the Governor's MSRI. It establishes the ambitious goal of installing solar energy systems on one million residential and commercial properties by 2018. Additionally, the bill requires builders of new production homes to offer solar energy systems on all homes at some point after 2010. SB 1 Page 5 1) 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 installation 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 charges (PGC), which is a surcharge on all IOU electric customers. Currently, the program is allocated $125 million per year. The PUC 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. Both programs are oversubscribed with the demand for subsidy far exceeding the available rebate money. Solar advocates believe that this has made it difficult for a larger number of consumers to benefit from the rebate programs and is a reason why the MSRI is needed. 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, a 7.5% state tax credit, and favorable property tax treatment. According to CEC estimates, these tax benefits for commercial customers are worth more than the state subsidy. Other state subsidies are net metering, which reverses the electric meter as electricity is produced, and an exemption from exit fees. 2) The results of the current programs : As of the end of 2004, there were 12,000 PV systems in California with an aggregate rated capacity of 93 megawatts (MW) (this includes the PV capacity in municipal utility territory). Both of the current solar programs are oversubscribed and the programs currently are borrowing money from future years to help meet the demand for rebates today. Under, these solar programs over 85% of the total installed solar capacity in the United States is located in California. According to a recent PUC staff report on the MSRI, even with California's leading role in promoting solar energy, "After eight years and close to $1 billion of subsidies, installed solar costs in California have decreased only SB 1 Page 6 slightly, and the industry has made little progress in reaching a self-sustaining market." Compared to the worldwide market, in 2004 California installed 51 MW of new solar capacity. This represents 5.5% of the total solar capacity installed worldwide in 2004. The two countries that have aggressive solar energy programs, Japan and Germany, accounted for 30% and 39% of the total world market installations in 2004. Overall, Japan leads the world with 39% of the total installed solar capacity, compared to 25% for Germany and 11% for the United States (using 2003 figures). 3) Programs outside of California : The State of Washington recently passed a solar subsidy bill. It provides a production-based incentive where customers can earn a credit of 15 cents 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 of the solar panels. Washington's program also provided for higher incentives for solar energy systems that are manufactured in Washington. Japan initiated a solar rebate program in 1994 that started at $9.00 per watt and declined to $0.45 per watt in 2004. The rebates are set to expire in 2006. As the rebate levels declined so did the average system cost. In 1994, average installation costs were close to $20.00 per watt; in 2004 the cost was $6.12 per watt (as compared to $9.00 per watt in California today). The combination of declining rebates and declining system costs has meant that the out of pocket expenses for customers has remained about the same. The eleven-year program budget exceeds $1.5 billion. Residential electricity rates in Japan are substantially higher than California. These higher rates make solar electricity more cost competitive than in California. Germany's solar incentive program is a performance-based program. Incentives are based on the actual energy produced by the solar energy system over a 20-year period. To help offset the initial installation costs, the program provides low interest loans. The per kilowatthour (kWh) incentives vary from $0.70 for residential customers to $0.55 for large industrial customers. SB 1 Page 7 4) What the MSRI means to solar customers: A typical residential PV system is between 2kW - 4kW. The installation cost is about $9,000/kW ($9/watt), so a 2.5 kW system would cost $22,500. With the current rebate of $2,800 per kW ($2.80/watt) the rebate would bring the cost of the system to $15,500. A 7.5% state tax credit would bring the system cost down to $14,338. The state tax credit is set to expire at the end of this year. At best, under the current rebate structure and the net metering program that credits consumers electric bills for selling excess electricity back to the utility, over the life of solar energy system the customer would break even on their investment. For commercial customers, the final after-tax cost is much lower because of greatly accelerated depreciation and a 10% federal tax credit which does not apply to residential installations. As the rebates decline under the MSRI, the customer cost may increase. However, the proponents of the measure believe that as the solar market grows prices will decrease, and even with the smaller rebates customers will continue to break even on their investments. 5) What the MSRI will cost ratepayers : The total costs of the MSRI are indeterminable, and depend on a number of factors, such as participation; mix of residential to small commercial and industrial; and the future costs of solar energy systems. The costs will not only include the direct incentive programs created in SB 1 but also potentially include other indirect subsidies such as net metering which requires the utilities to credit customer bills for excess power produce at a rate that will far exceed the utility's generation costs. Actual estimates on costs offered by supporters and opponents of the bill range from between $2 billion and $7 billion over the life of the program. 6) What is net metering : SB 1 increases the current cap on the number of residential solar customers that can be eligible for net metering from half of 1% (0.5%) of total peak load to 3.0% of total peak load and eventually to 5.0% of peak load. Under net metering, all electric utilities are required to buy back any electricity generated by a customer-owned solar system. This buy back works by having the generated electricity spin the meter backwards. By spinning the meter backwards the excess SB 1 Page 8 solar power offsets the power the customer already consumed from the utility. The end result of a net metered transaction is equivalent to the utility buying the excess solar power at the utilities retail rate (which includes the utility's transmission and distribution costs, PGCs, taxes, and the utility's return on equity) instead of the average generation costs of the utility. By requiring the utility to buy the power at the retail rate, the utility's remaining customers subsidize these net metered customers. The higher utility costs are passed on to all ratepayers. Additionally, net metering allows most solar customers to avoid paying PGC associated with the electricity they consume from the utility. This means they do not contribute to PGC funds used to fund low income assistance programs or used to fund the energy efficiency and renewable power programs. This creates a cost shift to all other utility ratepayers since they are left to pay a greater share of the programs. It appears that the intent of the net metering provision is to raise the net metering cap for all retail sellers of electricity including California's investor owned utilities (IOUs), municipal utilities, and energy service providers. However, as drafted, the bill could be read to only raise the net metering cap for energy service providers. If the intent of this bill is to raise the cap for all retail sellers of electricity, the committee may want to consider amending the bill to clarify that it will also raise the cap on the IOUs and municipal utilities . 7) Is this a peak load reduction program : Advocates for SB 1 argue that solar power will benefit all Californians because of its ability to meet peak demand. They argue that because solar power is most abundant at the times of the year when the weather is hot and demand for electricity is highest and consequently costliest, installing solar power will ultimately lead to lower rates for all ratepayers. The solar panel will replace the need to procure peaking power, which generally comes from the most expensive power plants that only operate at times of peak demand. Currently, California's solar electricity production is at its peak between 1:00 pm and 2:00 pm in the afternoon, while total peak demand is generally later in the day between 3:00 pm and 7:00 pm when people come home from work and turn on their air conditioners. This means that while solar helps reduce peak SB 1 Page 9 demand, solar does not currently maximize the reduction in peak demand and there will still be a need to operate a large number of peaker plants on hot days. Most solar panels in California are installed to maximize total electricity production (generally facing south) and not to maximize production at the time of day power is needed the most. A solar panel facing south will produce more total electricity than any other configuration, but it will not maximize electricity when the state needs it the most, at times of peak demand. If however, the panels are configured so they point southwest; their peak production will coincide with peak demand and may offset the need to operate peaker plants. Recent amendments to the bill will require at least 50% of all MSRI funds be used for performance based incentives that will place a higher value production at times of peak demand and will require that all solar customers are billed on a time-of-use basis. These amends will create strong incentives for customers to optimize their solar panels for peak load production. 8) Builder's Must Offer Mandate: This bill requires all builders of new home developments with 50 or more units (production homes) to give potential home buyers the option of purchasing a solar energy system when the customer purchases the house (a must-offer requirement). The author believes this must-offer requirement will work in the same way new home buyers choose what type of flooring or cabinets to have installed: when they buy the house they will go down a list of optional features in the house, and solar energy will be one of the options. Currently, this bill provides that the must-offer requirement apply to all production homes for which a subdivision tentative map is completed on or after January 1, 2010. A subdivision tentative map must be approved before construction can begin and it can be years after a subdivision tentative map is approved before a production home is offered for sale. While the time lag can vary, on average it takes three years between the approval of the map and the first production home being offered for sale. This average time lag means that the must offer provision in the bill will not go into full effect until 2013, 7 years after the MSRI is implemented and only 4 years before the incentives will terminate. This delay in implementation of the must offer provision means SB 1 Page 10 that the provision will likely have little impact on the success of the MSRI, since it will not take effect until very late in the program. To assure that the must-offer requirements start to have actual impact by 2010, the committee may want to consider amending the bill to advance the applicable date for completion of the subdivision tentative maps to 2007 . 9) Utility Participation in the MSRI : Recent amendments to this bill allow the IOUs to receive rebates for solar energy systems they install on a customer's premises if the electrical corporation does not recover the value of the incentive in rates and the solar energy system is designed to only meet the customer's load. As drafted this provision would allow the IOU to recover its cost beyond the incentives in rebates from its ratepayers. However, the value to ratepayers created by the MSRI is dependent on the fact that a third party is paying a portion of the cost of installing the solar energy system. Under this provision the ratepayers will pay the entire costs of the systems. They will pay a portion of the costs through the incentive program and the remainder of the costs in basic rates to the IOU. To assure that the MSRI does add value to ratepayers, the committee may want to consider amending the bill to allow IOU eligibility for solar rebates only if none of the costs of solar energy system is recovered in rates . 9) Ratemaking through Legislation: Recent amendments to this bill contain a provision that requires a specified net metering rate for solar energy systems in Southern California to remain in place forever. This committee has generally rejected any bill that calls for a specific tariff or rate. Instead, the committee's policy has been to leave ratemaking discretion to the PUC, since the PUC has the personnel to fully analyze rate design implications and can better assure that rates are fairly allocated. The committee may want to consider deleting the specific rate design in the bill . 10) Report to the Legislature : This bill require the CEC to prepare multiple reports, some on a quarterly basis and one only every three years. Over the past few years this committee has approved several bills aimed at consolidating the number of overlapping reports prepared by the CEC. To assure that the committee's efforts to consolidate reporting requirements are not undone, and to assure that the Legislature continues to SB 1 Page 11 receive timely summaries of the MSRI, the committee may want to consider amending the bill to consolidate the mandated reports into one annual report from the CEC . REGISTERED SUPPORT / OPPOSITION : Support Akeena Solar Alliance for Nuclear Responsibility American Federation of State, County and Municipal Employees (AFSCME) (Support) American Lung Association American Solar Energy Society Bluewater Network California Alliance For Consumer Protection California Building Officials California Conference of Carpenters (Support if Amended) California Interfaith Power & Light (Support) California League of Conservation Voters California Public Interest Research Group California Public Utilities Commission California Student Public Interest Research Group (CALPIRG) (Support) City of Berkeley (Support if Amended) City of Santa Cruz City of Santa Monica (Support) City of West Hollywood (Support) Clarum Homes Clean Power Campaign (Support) Coalition for Clean Air Community Environmental Council East Bay Municipal Utility District (EBMUD) (Support) Environment California (Support) Global Green USA Gray Panthers Green Lease, Inc. Greenpeace USA Henry T. Perea, Councilmember 7th District KYOCERA International, Inc. Individual letters (14) (Support) Merced/Mariposa County Asthma Coalition National Wildlife Federation Natural Resources Defense Council (NRDC) (Support if Amended) New Vision Technologies SB 1 Page 12 NorCal Solar Our Children's Earth Pacific Environment Pacific Gas and Electric Company (if amended) Physicians for Social Responsibility Planning and Conservation League Powerlight Solar Electric Systems Public Citizen PV Manufacturers Alliance (PVMA) Support) Rainforest Action Network Real Goods Relational Culture Institute Sempra Energy (Support if Amended) Sharp Solar Sierra Club California (Support) South Coast Air Quality Management District Sun Power & Geothermal Energy The Better World Group Union of Concerned Scientists Vote Solar Working Assets World Council for Renewable Energy Yolo county Board of Supervisors Opposition Associated Builders and Contractors of California (ABC) (Oppose) Building and Construction Trades Council of California, Counties of Fresno, Madera, Kings, Tulare and San Louis Obispo (Oppose Unless Amended) California Chamber of Commerce (Oppose) International Brotherhood of Electrical Workers (IBEW) Locals: 413,340, 47, 18, 45, 11, 639, 551, 40, 332, 6, 595, 100, 180, 234, 1245, 440, 441, 569, Orange County Electrical Training The Utility Reform Network (TURN) (Oppose) Trust (Oppose Unless Amended) Pacific Gas and Electric (PG&E) (Oppose) Southern California Edison (Oppose Unless Amended) Analysis Prepared by : Edward Randolph / U. & C. / (916) 319-2083