BILL ANALYSIS SB 1 Page 1 Date of Hearing: July 7, 2005 ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT Gene Mullin, Chair SB 1 (Murray and Campbell) - As Amended: July 5, 2005 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 (kilowatts) 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. f) By 2010, 50% of all incentive money shall be spent on SB 1 Page 2 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 that the electrical work to install the solar energy system is performed under contract by a California contractor with an active C-10 license. 4)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. 5)Requires the CEC to "provide proportional program support" of not more than 10% of over all funds for installation of solar systems on affordable housing. 6)Allows the CEC, in consultation with the California Tax Credit Allocation Committee (TCAC), to establish a revolving loan or loan guarantee program for affordable housing. 7)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 SB 1 Page 3 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. 8)Requires the Public Utilities Commission (PUC) to open a new proceeding to determine the level of additional funding needed to finance the MSRI. 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.) 9)Caps the total amount of money that can be collected from customers of the three largest IOUs to fund the program at $1.8 billion. 10)Requires the PUC to require time-variant pricing for all ratepayers with a solar energy system. 11)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%. 12)Provides that a specified rate structure, in effect as of January 1, 2006, shall remain in effect for non-residential customers. 13)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. 14)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. 15)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. 16)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 SB 1 Page 4 programs at the PUC and CEC be deposited in the MSRI Trust Fund. 17)Requires municipal utilities to adopt a similar program with proportionate expenditures. 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% 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. SB 1 Page 5 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. 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. 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 are 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, SB 1 Page 6 installed solar costs in California have decreased only 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 kilowatt-hour (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 per watt; in 2004 the cost was $6.12 per watt (as compared to $9 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 11 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 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) 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 SB 1 Page 8 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, seven years after the MSRI is implemented and only four years before the incentives will terminate. This delay in implementation of the must offer provision means 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 . 7) Contractors' License : SB 1 currently requires that any installation of a solar energy system be installed only by a C-10 licensed contractor. According to the California Contractors' State License Board (CSLB), a C-10 electrical contractor is an electrical contractor who places, installs, erects or connects any electrical wires, fixtures, appliances, apparatus, raceways conduits, solar photovoltaic cells or any part thereof, which generates, transmits, transforms or utilizes electrical energy in any form or for any purpose (832.10 of the Central Contractors Registration). Also according to the CSLB, a C-46 Solar Contractor installs, modifies, maintains, and repairs active solar energy systems. An active solar energy system consists of components which are thermally isolated from the living space for collection of solar energy and transfer of thermal energy to provide electricity and/or heating and cooling of air or water. Active solar energy systems include, but are not limited to, forced air systems, forced circulation water systems, thermo siphon systems, integral collector/storage systems, radiant systems, evaporative SB 1 Page 9 cooling systems with collectors, regenerative rock bed cooling systems, photovoltaic cells, and solar assisted absorption cooling systems. A licensee classified in this section shall not undertake or perform building or construction trades, crafts or skills, except when required to install an active solar energy system. (832.46 of the Central Contractors Registration). According to the Associated Builders and Contractors or California, 60% of PV systems funded through existing California solar programs have been installed by those not holding C-10 electrical contractor licenses. Within this majority, the largest sub set is C-46 contractors, whose classification is a specialty in solar installation work. The State of California developed the special C-46 classification in consultation with representatives from the solar industry. Limiting eligibility to install solar systems, under this program, would overhaul an established structure of licensed contractors. 8) Affordable Housing Programs : SB 1 provides that up to10% of the overall funds shall be dedicated for installation of solar energy systems on affordable housing. The language in this provision is somewhat vague as to how such assistance will be administered. The committee may wish to consider incorporating provisions contained in AB 1383 (Pavley), heard earlier this year in this committee, relating to financing solar systems for affordable housing . Recent amendments to AB 1383 would establish, until January 1, 2016, the Low-Income Housing Development Revolving Loan Program to help finance solar energy systems in eligible low-income housing located in the service areas of an electrical corporation. Language currently contained in SB 1 fails to adequately describe what kinds of affordable housing would be eligible for assistance and how such funds would be applied for, distributed or monitored. Double referred: The Assembly Committee on Rules referred SB 1 to Utilities and Commerce and Housing and Community Development SB 1 Page 10 Committee. The Assembly Committee on Utilities and Commerce held an informational hearing on SB 1 on Monday, June 27, 2005 and is scheduled to be heard on Wednesday, July 6, 2005. REGISTERED SUPPORT / OPPOSITION : Support Access Capital Management Inc., Corte Madera Attorney General Bill Lockyer Akeena Solar, Los Gatos Alliance for Nuclear Responsibility, San Luis Obispo American Solar Energy Society, Boulder, Colorado American Federation of State, County and Municipal Employees American Lung Association of California Bluewater Network, San Francisco Borrego Solar Systems, San Diego California Alliance for Consumer Protection California Building Officials California Interfaith Power and Light, Oakland California League of Conservation Voters, Oakland California Student Public Interest Research Group California Public Utilities Commission Carville Sierra, Inc., Grass Valley Circle of Life, Oakland City and County of San Francisco City of Aliso Valley City of Fresno Councilmember Henry T. Perea City of Irvine City of San Diego Council Member Donna Frye City of San Jose Council Member Linda Le Zotte City of Santa Cruz City of Sebastopol City of Thousand Oaks Clarum Homes, Palo Alto Clean Power Campaign Coalition for Clean Air Community Environmental Council, San Barbara Cooperative Community Energy, San Rafael East Bay Municipal Utility District Energy Independence Now Coalition, Santa Barbara Energy Efficiency Solar Electric Solutions, Pomona Environment California, Los Angeles Fresno County Green Party Global Green USA SB 1 Page 11 Gray Panthers Green Lease, Inc., San Clemente Green Energy Network Greenpeace Industrial Environmental Association, San Diego Intu Vision, Cardiff by the Sea Iota Technology Inc., San Jose KYOCERA International, Inc., San Diego Marin County Board of Supervisors Merced/Mariposa County Asthma Coalition National Wildlife Federation Next Generation, Oakland New Vision Technologies, San Clemente Northern California Solar Energy Association, Berkeley Our Children's Earth, San Francisco Pacific Environment, San Francisco Physicians for Social Responsibility, Los Angeles Planning and Conservation League Power Light Corporation, Berkeley Public Citizen, Oakland Rainforest Action Network, San Francisco Real Goods, Hopland Redwood Rubber, Corte Madera Relational Culture Institute, Fresno Sierra Club California Solar Hydrogen Company, La Mesa Solar Integrated Technologies, Los Angeles Solar Works, Sebastopol South Coast Air Quality Management District Stop Waste.Org, San Leandro Sun Power & Geothermal Energy, San Rafael The Better World Group, Burbank Union of Concerned Scientists, Berkeley Vote Solar Initiative, San Francisco Women for: Orange County, Irvine Working Assets, San Francisco Opposition Associated Builders and Contractors of California California Chamber of Commerce Pacific Gas and Electric Company State Building and Construction Trades Council The Utility Reform Network, San Francisco SB 1 Page 12 Analysis Prepared by : Hugh Bower / H. & C.D. / (916) 319-2085