BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 1
                                                                  Page  1

          Date of Hearing:   August 25, 2005

                                   Judy Chu, Chair

                    SB 1 (Murray) - As Amended:  August 18, 2005 

          Policy Committee:                              UtilitiesVote:7-0
                        Housing and Community Development     6-1

          Urgency:     No                   State Mandated Local Program:  
          Yes    Reimbursable:              No


          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 (MW) of capacity, on  
          residential and commercial buildings by 2019.  

           FISCAL EFFECT  

          1)The CEC estimates it would incur annual special fund costs of  
            around $2.1 million for 21 positions to implement and  
            administer the MSRI and for associated information technology  

          2)The PUC would incur special fund costs of $280,000 for three  
            positions related to the MSRI financing, coordination with the  
            CEC, and time-variant pricing and net metering for solar  

          3)Estimated direct costs to electric ratepayers statewide of  
            between $1.6 billion and $2.6 billion over 10 years.

           SUMMARY (CONTINUED)  :

          Specifically, this bill:

          1)Requires the CEC to develop and implement the MSRI, with the  
            goals of: (a) placing solar energy systems on one million  
            residential and commercial sites or providing 3,000 megawatts  
            of generating capacity by 2019; (b) establishing a  
            self-sustaining solar industry in 10 years; (c) placing solar  
            energy systems on 50% of new homes in 13 years. 


                                                                  SB 1
                                                                  Page  2

          2)Requires the CEC to establish an incentive program for solar  
            energy systems, with capacity between 1kW and 1MW, and with  
            subsidies starting at the January 1, 2006 level and declining  
            by at least 7% per year until the rebate is zero in 2016.

          3)Requires the CEC, by January 1, 2010, to adopt a  
            performance-based incentive program (with incentives based on  
            maximizing electrical output) and to provide at least 50% of  
            MSRI moneys for this program.

          4)Prohibits the granting of incentives for eligible solar energy  
            systems installed on the premises of individuals not  
            contributing (through their electric rates) to the MSRI,  
            except that incentives may be granted to customers  
            participating in specified low-income energy assistance  
            programs, and to an electrical corporation (investor-owned  
            utility-IOU) under specified circumstances. 

          5)Requires the CEC to: 

               a)     Establish criteria for eligible solar energy  
                 systems, including that the electrical work for  
                 installation be performed by a contractor with a C-10  
                 license from the Contractors' State License Board. 
               b)     Provide at least 10% of MSRI program funds for  
                 affordable housing projects. 
               c)     Provide an assessment of the MRSI to the Legislature  
                 by January 1, 2009 and annually thereafter. 

          6)Establishes the MSRI Trust Fund, and authorizes expenditure of  
            moneys in the fund upon annual appropriation by the  
            Legislature in the Budget Act, with up to 2% of the funds  
            available for administrative costs. 

          7)Specifies that the MSRI will supplant existing funding for  
            photovoltaic (PV) solar energy systems provided through  
            programs administered by the CEC and the Public Utilities  
            Commission (PUC). The PV portion of those programs will be  
            discontinued and any remaining PV funding will be transferred  
            to the MSRI program.

          8)Requires the PUC to initiate a proceeding to determine the  
            amount of additional funding required to finance the goals of  
            the MSRI, and to adopt a financing program by January 1, 2007.  


                                                                  SB 1
                                                                  Page  3

          9)Limits the additional funding to an  unspecified  amount per  
            kilowatthour for any electricity customer class and limits  
            total additional funding for the MSRI from the customers  
            within the service territories of the three IOUs to $1.8  
            billion. (Customers participating in specified low-income  
            energy assistance programs would not be subject to this  

          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% of an electrical  
            service provider's aggregate peak demand, and then to 5% after  
            the PUC has developed a time-variant net metering rate. 

          12)Requires municipal utilities to adopt programs consistent  
            with participation toward meeting the goals of the MSRI.
          13)Requires builders of housing developments of at least 50  
            homes, where an application for a tentative subdivision map is  
            complete after January 1, 2010, to offer every customer a  
            solar energy system as an option and to disclose the total  
            installed cost and estimated energy cost savings associated  
            with the system.


                                                                  SB 1
                                                                  Page  4


           1)Current Solar Subsidy Programs  . 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 from a portion of monies raised through  
            the Public Goods Charge (PGC)-a surcharge on all IOU electric  
            customers that sunsets in January 2012. In 2004, the CEC  
            provided $70 million in rebates-about $25 million in ongoing  
            funding and the remainder from internal borrowing. 

            The PUC administers the Self-Generation Incentive Program  
            (SGIP) for commercial-sized customer generation, including PV  
            systems, which are currently subsidized at $3.50/watt. The  
            SGIP is funded at $125 million annually from electric rates.

            Both these programs are oversubscribed-i.e. demand for  
            subsidies far exceeds available rebate money-and the programs  
            are borrowing funds from future years' allocations in order to  
            help meet demand.  Advocates of solar energy believe this has  
            made it difficult for a larger number of consumers to benefit  
            from the rebate programs and is a reason why the Governor's  
            MSRI is needed. 

            In addition to the two subsidy programs, there are numerous  
            other state and federal programs that substantially reduce the  
            after-tax cost of PV systems, particularly for commercial  
            customers.  These include accelerated depreciation, a 7.5%  
            state tax credit (expiring at the end of this year), and  
            favorable property tax treatment. Recently enacted federal  
            energy legislation provides the following solar tax credits:  
            (a) a 30% investment tax credit on commercial installations  
            for 2006 and 2007, and a permanent 10% credit thereafter; and  
            (b) a 30% credit on residential installations, up to a maximum  
            of $2,000 each, for 2006 and 2007 only. Other state subsidies  
            include net metering, which reverses customer-generators'  
            electric meters as their solar energy system produces excess  

            As of January 2005, there were 12,000 PV systems in California  
            with an aggregate capacity of 93 megawatts (MW), which is over  
            85% of the total installed solar capacity in the United  
            States. (This country's solar installations currently  


                                                                  SB 1
                                                                  Page  5

            represents only about 11% of the worldwide total. Japan and  
            Germany, countries with aggressive solar subsidy programs,  
            account for 39% and 25% of installed capacity, respectively.) 

            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 slightly, and  
            the industry has made little progress in reaching a  
            self-sustaining market."

           2)MSRI Costs to Solar Customers  . A typical residential PV system  
            is 2kW to 4kW. With an installed cost of $9,000/kW ($9/watt),  
            a 2.5 kW system would cost $22,500. The current rebate of  
            $2,800 per kW ($2.80/watt) would bring the system cost to  
            $15,500.  A 7.5% state tax credit further lowers the cost down  
            to $14,338. (The state tax credit is set to expire at the end  
            of this year.) For commercial customers, the final after-tax  
            cost is much lower because of greatly accelerated depreciation  
            and a 10% federal tax credit.

            Under the current rebate structure and the net metering  
            program that credits consumers electric bills for selling  
            excess electricity back to the utility, a customer might break  
            even on their investment over the life of the solar energy  
            system. As the rebates decline under the MSRI, customer costs  
            may increase. However, proponents of SB 1 believe that, as the  
            solar market grows, prices will decrease, thus solar customers  
            will continue to break even on their investments. Moreover,  
            proponents argue that solar power provides other benefits such  
            as avoidance of additional power plant construction, carbon  
            dioxide emissions, and transmission and distribution costs.

           3)MSRI Costs to Ratepayers  . The total costs of the MSRI are  
            indeterminable, and will depend on factors such as  
            participation, mix of residential to small commercial  
            participants, the future costs of solar energy systems, and  
            the mix of capacity-based and performance-based incentives  
            provided. A joint report to the PUC by staffs of the CEC and  
            PUC estimated that subsidies from ratepayers of the three IOUs  
            would total $1.1 billion over 10 years for a performance-based  
            incentive program and $1.8 billion for capacity-based  
            incentive program. (Since a performance-based incentive  
            program may not be in place per SB 1 until 2010, the likely  
            costs are toward the higher end of this range.) Assuming the  


                                                                  SB 1
                                                                  Page  6

            municipal utilities provide a proportionate effort toward  
            meeting the MRSI goal and adopt similar ratepayer-financed  
            incentives, their customers would incur costs totaling between  
            $500 million and $800 million. These ratepayer costs for the  
            direct incentives do not include indirect ratepayer subsidies  
            such as for net metering.

           4)Funding Availability From Existing Solar Programs Unclear  .  
            With respect to the IOU ratepayers, the costs above do not  
            account for the extent to which funding streams for existing  
            solar programs would be used to help fund the MRSI. IOU  
            ratepayers are currently providing about $125 million annually  
            in direct subsidies for solar energy projects under the CEC's  
            renewable program ($25 million) and the PUC's SGIP ($100  
            million). The bill specifies that the MSRI will replace these  
            existing solar programs and "remaining funds shall be  
            deposited into the MRSI Trust Fund." It is thus unclear  
            whether this implies a single transfer or an annual transfer  
            for the duration of those programs, though it is staff's  
            understanding that the latter is the intent.

            The CEC indicates that solar monies (about $25 million  
            annually from the PGC) have been spent through 2008. After  
            2008, a like amount could be transferred to the MRSI for the  
            three remaining years until the PGC sunsets. Likewise, the  
            PUC's SGIP is authorized in statute through 2007, though the  
            commission staff believe that the commission could extend the  
            program administratively beyond that time. (The program was  
            originally created administratively.)

           5)Other Issues  . Among the issues raised in prior analyses of  
            this bill are:

              a)   Picking a Winner  . Assuming that peak demand reduction is  
               desirable, this can be achieved in many ways other than PV  
               investment. Energy efficiency and other renewable energy  
               sources, for example, may be less costly options. The  
               Legislature has passed a Renewable Portfolio Standard (RPS)  
               with overall goals of achieving a minimum amount of  
               renewable energy generation by a specified date. Rather  
               than choose a specific renewable technology, however, the  
               RPS legislation identified a variety of technologies, and  
               through a competitive bidding process, renewable energy is  
               procured based on the lowest cost regardless of technology.  
               This bill, conversely, picks a winning technology, thereby  


                                                                  SB 1
                                                                  Page  7

               eliminating somewhat the competitive pressure to reduce  
               price and innovate. 

              b)   Will It Work  ? As measured in megawatts, this program  
               represents more than a thirty-fold increase in installed  
               solar energy generation within California over the next 10  
               years. Given the scale and long-term nature of this  
               program, its success is highly uncertain. As an example of  
               unforeseen events that could effect the program, in 2001, a  
               40% increase in electric rates and rolling blackouts  
               spurred unprecedented growth in PV demand. If the PUC is  
               eventually successful in reducing rates and ensuring  
               reliable generation supply, the attractiveness of PV could  

             c)   Homebuilder's Must-Offer Mandate  . This bill requires all  
               builders of new home developments with 50 or more units  
               (production homes), for which a subdivision tentative map  
               is completed on or after January 1, 2010, to give potential  
               home buyers the option of purchasing a solar energy system  
               when the customer purchases the house. 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. Thus the must-offer provision 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 provision will therefore likely have little  
               impact on the success of the MSRI. It should be noted that  
               installation on new homes is less costly than retrofitting  
               existing homes. 

              d)   Contractor's License  . SB 1 currently requires that any  
               solar energy system under the MRSI be installed only by a  
               C-10 licensed contractor.  According to the Associated  
               Builders and Contractors of California, which opposes this  
               provision, 60% of PV systems funded through existing state  
               solar programs have been contractors without a C-10  
               license.  Within this majority, the largest subset is C-46  
               contractors, whose classification is a specialty in solar  
               installation work. Limiting eligibility to install solar  
               systems would overhaul an established structure of licensed  

           6)Related Legislation  . AB 1683 (Pavley), pending on the Senate  
            Appropriations Committee's Suspense file, establishes, until  


                                                                  SB 1
                                                                  Page  8

            January 1, 2016, a revolving loan program to help finance  
            solar energy systems for low-income housing within the service  
            areas of the IOUs.

            AB 1099 (Leno), currently enrolled, extends the sunset, from  
            2004-05 to 2008-09, for the exclusion of an active solar  
            energy system from the definition of new construction for  
            property tax purposes.

            SB 1016, Campbell, pending in the Senate Revenue and Taxation  
            Committee, extends through 2017 the sunsets on 7.5% state  
            solar tax credit for solar energy systems.

           Analysis Prepared by  :    Chuck Nicol / APPR. / (916) 319-2081