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. SB 412 Page 2 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 SB 412 Page 3 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 SB 412 Page 4 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 SB 412 Page 5 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. SB 412 Page 6 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