BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 1
                                                                  Page  1

          Date of Hearing:   July 6, 2005

                               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  

               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  

          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  

          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  

          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  


                                                                  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  
          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  

          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  

          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  . 


          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)  
          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

          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)