BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 412
                                                                  Page 1

          Date of Hearing:  July 6, 2009

                       ASSEMBLY COMMITTEE ON NATURAL RESOURCES
                                Nancy Skinner, Chair
                      SB 412 (Kehoe) - As Amended:  May 28, 2009

           SENATE VOTE :  37-0
           
          SUBJECT  :  Self-generation incentive program

           SUMMARY  :  Extends the Public Utilities Commission's  
          self-generation incentive program (SGIP) and expands  
          eligibility, currently limited to wind and fuel cell  
          technologies, by giving the PUC discretion to authorize  
          subsidies for technologies it determines support the state's  
          greenhouse gas (GHG) emission reduction goals.

           EXISTING LAW  :

          1)Requires the PUC to administer the SGIP program until 2012 and  
            limits eligibility to fuel cell and wind technologies  
            beginning in 2008.  Under the SGIP, utilities provide  
            ratepayer-funded rebates for distributed generation projects  
            up to five megawatts in size.

          2)Requires the PUC to administer a separate program for solar  
            technologies pursuant to the California Solar Initiative.

          3)Requires the Air Resources Board (ARB) to adopt a statewide  
            GHG emissions limit equivalent to 1990 levels by 2020 and  
            adopt regulations to achieve maximum technologically feasible  
            and cost-effective GHG emission reductions pursuant to the  
            California Global Warming Solutions Act (AB 32).

           THIS BILL  :

          1)Replaces the authorization to the PUC to administer SGIP until  
            2012 with a requirement to collect funding through 2011 and  
            administer the program until all funds have been allocated.

          2)Repeals provisions limiting eligibility to fuel cell and wind  
            technologies, and instead provides that eligibility is limited  
            to technologies the PUC determines support greenhouse gas  
            emission reduction goals pursuant to AB 32.









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          3)Requires combined heat and power (CHP) units to meet an  
            existing GHG emission performance standard that applies to  
            utility investments in power plants.

          4)Requires customers receiving incentives to maintain CHP units  
            so the unit continues to meet efficiency and emissions  
            standards.

          5)Requires the PUC to ensure that distributed generation  
            resources are made available for all ratepayers.

          6)Prohibits recovery of SGIP costs from customers participating  
            in the California Alternate Rates for Energy program, a  
            utility discount for low-income customers.

           FISCAL EFFECT  :  According to the Senate Appropriations  
          Committee, regulatory oversight of the program would cost  
          $50,000 annually from the PUC Utilities Reimbursement Account.

           COMMENTS  : 

           1)Background.   The PUC established the SGIP in 2001 to offer  
            incentives for renewable and "super clean" distributed  
            generation resources.  The SGIP has offered rebates for  
            installation of photovoltaics, wind, fuel cells, and, until  
            2008, certain renewable and fossil fuel combustion resources  
            meeting specified emissions and efficiency standards.

            In 2006, the CPUC adopted the California Solar Initiative,  
            which established a much larger rebate program for  
            photovoltaic technologies.  As a consequence, solar was  
            severed from the SGIP, leaving a much smaller program for  
            wind, fuel cells and combustion projects which was to continue  
            until 2008.  In 2006, AB 2778 extended SGIP for wind and fuel  
            cells only until 2012.  

            Currently, rebates are available for wind and fuel cell  
            projects up to five megawatts - the electric load of a fairly  
            large industrial facility.  Based on current incentive levels,  
            eligible projects can receive payments up to $2.625 million  
            each for wind, $4.375 million each for conventional fuel cells  
            and $7.875 million each for renewable fuel cells.  Based on  
            previous incentive levels for combustion projects, those  
            project could receive payments up to $3 million each if they  
            were rendered eligible by this bill.  SGIP's current annual  








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            cost to ratepayers is $83 million and approximately $200  
            million in unspent funds have accumulated from prior years.

            A 2005 report commissioned by the PUC to study the  
            cost-effectiveness of the SGIP program concluded that the SGIP  
            program is marginally cost-effective for participants (i.e.  
            recipients of funding), but is not cost-effective to  
            non-participants (i.e. those who pay for it).  Because SGIP is  
            funded by distribution rates, its costs are disproportionately  
            borne by residential ratepayers.  However, because only larger  
            projects have been eligible for SGIP, residential ratepayers  
            haven't been able to access the incentives.

           2)Is restoring subsidies for fossil fuel combustion necessary  
            and beneficial?   New fossil fuel combustion generators will  
            increase emissions of criteria air pollutants and GHG.  The  
            range of emissions depends on the efficiency of the generator,  
            but none are zero.  Like any other incremental addition to the  
            electric supply (or efficiency), an environmental benefit  
            would result if the new power displaces existing dirtier  
            power.  Whether the payment of a subsidy is necessary to  
            achieve this benefit is unclear, and no evidence has been  
            presented to support the need to subsidize fossil fuel  
            generators.

            In general, new distributed generation turbines appear  
            somewhat less efficient than recently-built central-station  
            power plants in terms of direct electrical efficiency.   
            However, distributed generators in combined heat and power  
            (CHP) installations, where waste heat is recovered and put to  
            use in a way that saves natural gas, overall efficiency  
            improves significantly.  Actual efficiency varies widely by  
            system.  The best systems can achieve efficiencies between 80  
            and 90 percent.  Minimum efficiency required for SGIP  
            eligibility is 60 percent [total energy output (electricity  
            plus heat) divided by fuel input].

            The NOx emission limit in the statute (0.07 lbs/MWhr) is  
            comparable to NOx emission levels achieved by new  
            central-station power plants, although the central-station  
            plants also must obtain offsets from other stationary sources  
            to mitigate the NOx they do emit.  This NOx limit is based on  
            emission standards adopted by ARB and was placed in the SGIP  
            statute in 2003 as an incentive for early compliance with the  
            ARB standards.  Six years later, ARB's 2007 limit is now in  








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            effect, so this provision reflects the standard for  
            distributed generation subject to ARB certification, rather  
            than a step forward.   The author and the committee may wish to  
            consider  whether more stringent emission and efficiency  
            standards are justified for the program over the four years  
            authorized by this bill.

            Another environmental consideration is that non-renewable  
            distributed generation displaces renewable energy developed  
            under the Renewables Portfolio Standard (RPS).  Distributed  
            generation is exempt from the RPS, so at a 20 percent RPS,  
            every five megawatts of distributed generation reduces a  
            utility's obligation to buy renewable energy by one megawatt.

           3)Recent study indicates air quality and climate change benefits  
            for renewable fuels, but not for non-renewable fuels.   AB 2778  
            required the California Energy Commission (CEC), in  
            consultation with the PUC and ARB, to evaluate the costs and  
            benefits of providing ratepayer subsidies for renewable and  
            fossil fuel distributed generation, including recommendations  
            for eligibility and subsidy levels.  The evaluation was  
            included in the CEC's 2008 energy report.  According to the  
            report:
           
                The environmental analysis indicates that the  
               self-generation installations yielded a net reduction  
               in both particulate matter (PM2.5) and GHGs when  
               compared to a baseline of natural gas fired combined  
               cycle combustion turbine power plant.  However, the  
               reductions are small and largely attributable to  
               photovoltaic installations that are no longer eligible  
               for the program. Furthermore, the program's  
               installations have net emissions of air quality  
               pollutants including VOC, NOx, and CO. 

            The report showed small increases in emissions for  
            non-renewable micro-turbines and gas turbines, and significant  
            increases in emissions for internal combustion engines.  The  
            combined increases in GHG emissions attributable to  
            non-renewable combustion cogeneration projects funded by SGIP  
            offsets all of the GHG benefits achieved by photovoltaics  
            funded by SGIP.  (Total capacity installed under SGIP is  
            fairly evenly divided between cogeneration and photovoltaic  
            projects.)  In contrast, projects using renewable fuels,  
            including combustion, showed emissions benefits across the  








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            board.

            This bill expands eligibility to any technology if the PUC  
            determines that a distributed generation resource "supports  
            the state's goals for the reduction of emissions of (GHG)  
            pursuant to (AB 32)."  This standard is unclear, as AB 32 does  
            not set objective "goals" that the PUC could apply.  AB 32  
            requires ARB to adopt a statewide GHG emissions limit and  
            adopt regulations achieve GHG emission reductions.  If SGIP  
            eligibility is to be extended to combustion projects using  
            non-renewable fuels, as this bill suggests,  the author and the  
            committee may wish to consider  giving guidance to the PUC to  
            select technologies that actually achieve reductions in air  
            pollution and GHGs, as determined in consultation with ARB.

            The bill also applies a somewhat misplaced requirement that  
            CHP units meet an existing GHG performance standard developed  
            to prohibit the approval of utility long-term financial  
            commitments in dirty power plants.  As such, the standard  
            itself reflects a relatively low bar for emissions  
            performance.  The standard was never intended to apply to  
            self-generation projects or to be a benchmark to judge whether  
            subsidies should be paid.  It operates as a minimum standard  
            to prevent continued reliance on dirty out-of-state coal  
            plants.   The author and the committee may wish to consider   
            deleting this provision (page 4, lines 11-13).

           4)Amendments recommended by Utilities and Commerce Committee.    
            When this bill was approved by the Utilities and Commerce  
            Committee June 29, the author and committee agreed to  
            amendments, with adoption deferred to this committee.  The U&C  
            amendments require the PUC to collect funding through 2010,  
            rather than 2011, cap annual collection at the amount  
            collected in 2008 ($83 million), allow collected funds to be  
            spent until 2016, and require any remaining funds to be  
            returned to ratepayers.

           5)Related legislation.   AB 1536 (Blakeslee), approved by this  
            committee April 27 and pending in the Senate Energy, Utilities  
            and Communications Committee, expands SGIP eligibility to  
            include energy storage facilities.  The two bills amend the  
            same section in inconsistent ways.  If both bills proceed,  
            they will need to be reconciled to avoid a chaptering  
            conflict.









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           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          California Manufacturers and Technology Association
          California Pubic Utilities Commission
          Engine Manufacturers Association
           
            Opposition 
           
          None on file


           Analysis Prepared by  :  Lawrence Lingbloom / NAT. RES. / (916)  
          319-2092