BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 1
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          Date of Hearing:   April 17, 2006

                               Lloyd E. Levine, Chair
                      SB 1 (Murray) - As Amended:  April 4, 2006

           SENATE VOTE  :   30-5 
          SUBJECT  :   Energy: renewable energy resources: California Solar  
          Roofs Initiative.

           SUMMARY  :   Makes statutory changes necessary to implement the  
          California Solar Initiative (CSI), a solar incentive program  
          developed by the California Public Utilities Commission (PUC)  
          with the goal of installing 3,000 MW of solar power in  
          California by 2017.  Specifically,  this bill :   

          1)Requires the PUC in implementing the CSI to : 

             a)   Authorize the award of monetary incentives for eligible  
               solar energy systems that must decline by an average of 7%  
               per year until the rebate is zero in 2017.

             b)   Adopt a performance based incentive (PBI) program by  
               2010, such that at least 50% of rebate funds are expended  
               on performance based incentives.

             c)   Require reasonable and cost effective energy efficiency  
               improvements in existing buildings as a condition of  
               providing incentives for the installation of solar energy  

          2)Prohibits the PUC from allocating money from the CSI for  
            research, development, and demonstration projects. 

          3)Requires the PUC to submit an annual report to the Legislature  
            on the success of the CSI. 

          4)Requires the California Energy Commission (CEC) to develop  
            eligibility criteria for solar energy systems that qualify for  
            the rebates, including:

               a)     The solar energy generated by the system must be  
                 used to offset part or all of the customer's electricity  


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               b)     The solar energy system must have at least a 10-year  
                 manufacturer's warranty.

               c)     The solar energy system must be located on the same  
                 premises of the end-use customer where that customer's  
                 electricity demand is located. 

          5)Raises the net metering cap from 0.5% to 2.5%. 

          6)Requires the CEC to:

               a)     Provide educational materials and assistance to  
                 builders to help them understand how to integrate solar  
                 energy systems into new construction. 

               b)     Conduct random audits of installed solar energy  
                 systems to evaluate their operational performance. 

               c)     Evaluate the costs and benefits of having an  
                 increased number of solar energy systems as part of the  
                 electrical systems with respect to the solar energy  
                 systems' impact on distribution, transmission, and the  
                 supply of electricity.

               d)     Develop incentives that require or encourage siting  
                 and installation of solar energy systems to maximize the  
                 performance of the systems so that the solar energy  
                 system produces the greatest energy production per  
                 ratepayer dollar. 

               e)     Develop incentives that require or encourage optimal  
                 solar production during peak demand periods. 

               f)     Develop incentives that require or encourage energy  
                 efficiency improvements in the structure where the solar  
                 energy system is to be placed. 

               g)     Initiate a public proceeding to determine under what  
                 conditions a solar energy system shall be required on new  
                 buildings. Restricts the CEC from require solar energy  
                 systems on new residential structures unless it is  
                 determined to be cost effective. 

          7)Requires municipal utilities to adopt a similar program with  


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            proportionate expenditures.

          8)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, 2011.

           EXISTING LAW  :

          1)Specifies the development 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 is collected on the basis of usage.

          2)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 via photovoltaic or other  
            renewable generation as specified in statute.  Larger net  
            metering programs require the customer to calculate how much  
            electricity has been placed and taken off the grid via  
            customer generation in order to calculate the appropriate  
            generation charge to credit and collect public goods charges.

          3)Establishes incentive programs for photovoltaic 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 photovoltaic cells.

          4)Establishes tax exemptions for property taxes, 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.

          5)Requires investor-owned utilities (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.  PUC regulations have  
            accelerated this goal to 20 percent by 2010. 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. 


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           COMMENTS  :   The purpose of this bill is to make statutory  
          changes necessary to implement the California Solar Initiative  
          (CSI) adopted by the PUC; to codify certain aspects of the CSI;  
          and to correct aspects of the CSI that are inconsistent with the  
          intent of the Legislature. 

          1)  History  : In 2005, this committee considered a different  
          version of SB 1 which would have created the Million Solar Roofs  
          Initiative (MSRI). The goal of SB 1 and the MSRI was to install  
          3,000 MW of solar power in California by 2017 through a $2.5  
          billion declining rebate program. The declining rebate program  
          was specifically designed to drive down the costs of solar  
          panels such that by 2017 solar energy systems would be cost  
          effective without the use of public subsidies. The MSRI as  
          developed in SB 1 was also designed to maximize production of  
          solar power at times of peak electricity demand. SB 1 passed  
          this committee on a vote of 7 to 0. However, the bill was  
          substantially amended on the Assembly Floor and was referred  
          back to this committee but was not considered again before the  
          Legislature adjourned for the Interim Recess. 

          In December 2005, the PUC approved a decision that created the  
          CSI as a $3.2 billion solar program with the goal of installing  
          3,000 MW of solar power by 2017.  Since the PUC jurisdiction is  
          limited to IOUs and since certain aspects of the MSRI required  
          specific statutory changes, the CSI differs from the MSRI in  
          several key aspects: 

          |         |    Million Solar Roofs    |     California Solar      |
          |         |        Initiative         |        Initiative         |
          |         |                           |                           |
          |Costs    |Caps total IOU costs at    |Total funding for CSI will |
          |         |$1.8 billion. Anticipates  |be $3.2 billion            |
          |         |that municipal utilities   |with no municipal utility  |
          |         |will contribute $700       |contribution. There is no  |
          |         |million for a total cost   |hard cost cap.             |
          |         |of $2.5 billion.           |                           |
          |Builder's|Builders of new home       |No builder's mandate. This |
          | Mandate |projects of 50 or more     |would require legislation. |
          |         |homes for which            |                           |


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          |         |applications for tentative |                           |
          |         |maps are completed after   |                           |
          |         |Jan. 1 2010, shall offer   |                           |
          |         |solar systems to all       |                           |
          |         |buyers.                    |                           |
          |Funding  |Orders the PUC to open a   |Costs would be paid by     |
          |         |proceeding to determine    |electricity and natural    |
          |         |how to fund the solar      |gas customers.             |
          |         |program. The PUC then has  |     Contains exemption   |
          |         |authority to increase      |    for CARE customers but |
          |         |electricity rates to fund  |    not FERA.              |
          |         |the program.               |    Will exempt customers |
          |         |      The rate increase   |    whose use is below     |
          |         |     would apply to all    |    130% of baseline.      |
          |         |     customers including   |    Legislation would be   |
          |         |     those that use less   |    needed to change the   |
          |         |     than 130% of          |    rate structure.        |
          |         |     baseline.             |                           |
          |         |       The rate increase  |                           |
          |         |     would not apply to    |                           |
          |         |     CARE customers        |                           |
          |         |     (income below 180% of |                           |
          |         |     poverty level) or     |                           |
          |         |     FERA customers        |                           |
          |         |     (families under 220%  |                           |
          |         |     of poverty level).    |                           |
          |Rebate   |Rebates starting at $2.80  | Declining rebate         |
          |Mechanism|per watt in 2007. ($5,600  |  programs similar to      |
          |         |per average residential    |  Million Solar Roofs      |
          |         |unit) and decline by 7%    |  Initiative (MSRI).       |
          |         |per year until the rebate  |  Will look into idea of  |
          |         |is $0 in 2015.             |  increased rebates for    |
          |         |                           |  new construction energy  |
          |         |                           |efficient homes.           |
          |Performan|Requires that by 2010 at   | Agencies will work on    |
          |ce Based |least 50% of all rebate    |  developing PBI.          |
          |Incentive|money be used for          |  Incentives may be        |
          |s (PBI)  |performance based          |  limited only to largest  |
          |         |incentives.                |  customers.               |
          |         |                           |  Appears that PBI will   |
          |         |                           |  only apply to retrofits  |
          |         |                           |  and not new              |


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          |         |                           |  construction.            |
          |Rebates  |At least 10% of the funds  |Sets aside 10% of funding  |
          |for      |must be set aside for      |for affordable housing.    |
          |Affordabl|affordable housing.        |                           |
          |e        |                           |                           |
          |Housing  |                           |                           |
          |Technolog|1)SB 1 only applies to     |1)Will also apply to solar |
          |ies      |  solar systems that       |  heating and cooling      |
          |Allowed  |  produce electricity.     |  systems.                 |
          |         |2)Caps size of units to no |2)  Caps the size at 5 MW. |
          |         |  larger than 1 MW.        |                           |
          |Municipal|Requires municipal         |No requirements for        |
          |         |utilities to adopt their   |municipal utility          |
          |Utilities|own solar homes program    |participation. Legislation |
          |         |consistent with the        |would be needed to include |
          |         |Million Solar Roofs        |municipal utility          |
          |         |program.                   |participation.             |
          |Net      |Raises the current cap on  |Legislation would be       |
          |Metering |net metering from 0.5% of  |needed to raise net        |
          |Cap      |total peak load to 2.5% of |metering cap.              |
          |         |total peak load in each    |                           |
          |         |IOU's service territory.   |                           |
          |Misc.    |1)Requires the CEC to      |1)No reporting             |
          |Provision|  annually report to the   |  requirements. Though     |
          |s        |  Legislature.             |  annual evaluations will  |
          |         |2)Requires the PUC to      |  be conducted by third    |
          |         |  create time-variant      |  parties.                 |
          |         |  pricing tariffs for all  |2)PUC will require time    |
          |         |  customers.               |  variant pricing for      |
          |         |3)Requires new             |  commercial customers.    |
          |         |  installation standards   |  Will study time variant  |
          |         |  for solar panels.        |  pricing for residential  |
          |         |                           |  customers.               |
          |         |                           |3)  No requirements for new |
          |         |                           |installation standards.    |
          |Energy   |1)  Requires the CEC to    |1)Requires energy          |
          |Efficienc|  develop standards for    |  efficiency audits to     |
          |y        |  energy efficiency        |  receive solar incentive  |
          |         |  improvements on          |  funding.                 |


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          |         |  buildings where solar    |2)  Requires new           |
          |         |  systems are installed.   |  construction             |
          |         |                           |  applications to          |
          |         |                           |  participate in utility's |
          |         |                           |  energy commission        |
          |         |                           |programs.                  |

          2)  The Legislature now needs to act  : Several necessary aspects  
          of a successful statewide solar program cannot be implemented  
          through PUC action and instead requires legislation. SB 1 now  
          addresses several of these issues. 

          First, for solar panels to be economically feasible to the  
          customers, they must be able to sell unused power back to the  
          utility through a process know as net metering. Current law caps  
          the amount of power that can be net metered in Pacific Gas and  
          Electric's (PG&E) and Southern California Edison's (SCE) service  
          territory to 0.5% of total peak load in the service territory  
          and in San Diego Gas and Electric's service territory to 50 MW.  
          However, the cap will be reached in PG&E's service territory  
          this year and within the next two years for SCE's service  
          territory. This bill raises the cap to 2.5%.

          Second, the CSI does not apply to municipal utilities since the  
          PUC has no authority to require municipal utilities to implement  
          a solar program. Since municipal utilities represent 27% of the  
          total load served in California, a successful statewide solar  
          program must include municipal utilities. The PUC has tried to  
          address this problem by imposing a surcharge on all IOU natural  
          gas customers in the state to help fund the CSI. All natural gas  
          customers that pay the surcharge are then eligible for solar  
          rebate programs. Since most Californians who are customers of  
          municipal electric utilities receive natural gas from the IOUs,  
          this surcharge mechanism is a rough way of capturing municipal  
          utility customers and creating a statewide solar program.  The  
          problem is that it results in ratepayers who receive both their  
          natural gas and electricity from an IOU paying the surcharge  
          twice and ratepayers who receive their electricity from a  
          municipal utility and natural gas from an IOU only paying one  
          surcharge even though all customers would be equally eligible  
          for the same rebates. 

          SB 1 now corrects part of this problem by requiring municipal  
          utilities to implement their own solar programs consistent with  


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          the goals of SB 1.  However, SB 1 does not eliminate the natural  
          gas surcharge. The committee may want to consider amending the  
          bill to specifically eliminate the natural gas surcharge so  
          customers are not required to pay into the CSI multiple times  . 

          Additionally, since SB 1 expresses much of the municipal utility  
          language in terms of legislative intent, concerns have been  
          raised these intent provisions may allow some municipal  
          utilities to avoid meeting their targets.  To address this  
          concern the committee may want to consider amending the bill to  
          strike the intent of the Legislature language so that the  
          provisions are clearly affirmative requirements  . 

          Third, the MSRI developed in the 2005 version of SB 1 contained  
          a builder's mandate that required builders of new developments  
          of 50 or more homes to offer the option of installing solar  
          energy system to all buyers. The PUC could not implement this  
          provision but it continues to be a provision of this bill. 

          3)  The CSI can be made better  : There are multiple areas where  
          further legislative action is not necessary to implement the CSI  
          but should be addressed to help guarantee that the CSI reaches  
          its goals of creating 3,000 MW of solar power in California and  
          of creating a self-sustaining solar market. SB 1 now implements  
          some of these provisions. 

          SB 1 requires that the rebates must decline over time and shall  
          be zero by 2017, and codifies that a portion of the rebates  
          shall be used for performance based incentives where rebates are  
          only given for power that is actually produced.  While the PUC's  
          CSI contains these provisions, some parties are concerned that  
          it is too easy for the PUC to change these provisions if prices  
          for solar panels do not fall. Codifying these provisions will  
          send a strong message to the solar industry that they must lower  
          their costs. 

          The bill also requires that, as a condition of receiving solar  
          rebates, building owners must make reasonable and cost-effective  
          energy efficiency improvements in their existing buildings.  The  
          CSI requires new buildings to meet certain energy efficiency  
          standards but does not require existing structures to make  
          needed upgrades. Requiring energy efficiency upgrades helps  
          maximize overall ratepayer benefits from the solar program. Some  
          parties have argued that requiring energy efficiency upgrades  
          would increase the overall project costs of installing a solar  


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          energy system and thus make it uneconomical in some cases.   
          However, the PUC has also required the IOUs to spend $2 billion  
          on energy efficiency programs over the next three years and  
          these programs can be used in conjunction with the CSI funds to  
          pay for needed energy efficiency upgrades.  

          The MSRI initiatives also required the CEC to develop design and  
          installation standards for eligible solar energy systems to  
          ensure that ratepayer money was only used to fund panels that  
          were built and installed to maximize output. The PUC did not  
          specifically address this issue in the CSI. SB 1 will require  
          the CEC to develop these standards. 

          4)  Other provisions of the MSRI not in the CSI  : There are  
          several other provision that were included in the MSRI which  
          most parties believed would have helped the program reach its  
          overall goals that are not addressed in the CSI or in the  
          current version of SB 1.  In order to assure that the CSI reaches  
          its goals and is an effective use of ratepayer money, the  
          committee may wish to consider the following amendments:
           a)Imposing an absolute cost cap  . The MSRI contained in SB 1  
            capped the total amount of ratepayer funds that could be used  
            on a rebate program at $2.5 billion ($1.8 billion from IOU  
            ratepayers, $700 million from municipal utilities). This cap  
            was developed based on information provided to the Legislature  
            from the solar industry and solar advocates on what was the  
            maximum potential cost. The cap was intended as a means of  
            signaling developers that they must lower their costs over  
            time or the program funding would end and as a means of  
            insuring that costs did not spiral out of control.

          These same advocates then told the PUC that the solar program  
            could not be implemented for less that $3.2 billion. The CSI  
            uses the $3.2 billion number to establish their estimated  
            total costs ($2.8 billion will come from a new ratepayer  
            surcharge administered by the PUC and $400 million dollars  
            from existing solar programs administered by the CEC). The  
            $3.2 billion dollar figure could be increased by the PUC at  
            anytime.  To ensure that the programs costs do not continue to  
            grow and in order to send appropriate signals to developers  
            that they must lower their costs, the committee may want to  
            consider amending the bill to impose a cost cap on the CSI  
            based on the cost estimates developed by the PUC  . 


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           b)Time variant pricing  . The MSRI developed in SB 1 required the  
            PUC to make the option of time-variant pricing available for  
            all ratepayers with a solar energy system. This provision was  
            to reward customers for placing solar energy panels on their  
            buildings to maximize electricity production during the time  
            of day when California faces peak electricity demand, in the  
            late afternoon. Time variant pricing results in larger  
            decreases in customer bills when solar power is produced at  
            peak demand periods.  In the CSI, the PUC requires time  
            variant pricing for business customers but not for residential  
            customers.  Statutory provisions prevent the PUC from  
            designing effective time variant pricing for residential  
            customers.  The committee may want to consider amending the  
            bill to make the statutory changes needed to allow for  
            time-variant   pricing for residential customers and to require  
            the PUC to make that option available for residential  
           c)Cost shifts  . The MSRI contained in the prior version of SB 1  
            that was approved by this committee provided that all  
            electricity ratepayers, excluding low income ratepayers, paid  
            the surcharge for the MSRI. This included residential  
            customers that used less than 130% of their baseline usage  
            each month. Current law prohibits the PUC from increasing  
            rates for electricity usage below 130%. Consequently, in  
            implement the CSI the PUC was able to exempt low income  
            ratepayers from the CSI surcharge, but could not impose the  
            surcharge on the below 130% of baseline customers. This  
            results in the costs of the program being shifted to larger  
            residential customers and business customers.  To avoid this  
            cost shift, the committee may wish to consider amending the  
            bill to restore the prior SB 1 language that required all  
            ratepayers, excluding low income ratepayers, to fund the CSI  . 

           d)Eligible solar energy systems  . The MSRI contained in the prior  
            version of SB 1 that was approved by this committee limited  
            the solar energy systems that were eligible for rebates to  
            systems that converted the sun's energy into electricity and  
            were less than 1 MW in size. In the CSI, the PUC allows rebate  
            money to be used for solar systems that do not actually  
            produce electricity, but instead do other things like heat hot  
            water and allows rebates for solar energy systems that are up  
            to 5 MW in size.  To assure that the CSI meets the goal of  
            creating 3,000 MW of solar electricity, the committee may wish  
            to consider amending the bill to limit rebate money to those  


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            systems that produce electricity and may want to consider  
            amending the bill to limit the rebates to cover the cost of up  
            to 1 MW of solar installations  . 


          Environment California (sponsor)
          Better World Group
          California Public Interest Research Group (CALPIRG)
          Clarum Homes
          Clean Power Campaign
          Global Green USA
          League of Conservation Voters
          Pacific Gas & Electric (PG&E) (if amended)
          Pacific Environment
          PV Now
          Sierra Club California
          Southern California Edison (SCE) (if amended)
          Union of Concerned Scientists
          Vote Solar

          California State Association of Electrical Workers

           Analysis Prepared by  :    Edward Randolph / U. & C. / (916)