BILL ANALYSIS                                                                                                                                                                                                    Ó          1





                 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                                  ALEX PADILLA, CHAIR
          

          AB 2165 -  Hill                                   Hearing Date:  
          June 11, 2012              A
          As Amended:         May 7, 2012              FISCAL       B

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                                       DESCRIPTION
           
           Current law  requires the state's investor-owned utilities (IOUs), 
          publicly owned utilities (POUs) (except the Los Angeles Department 
          of Water and Power), and other entities offering retail electric 
          service, to credit all electricity generated by a customer-owned 
          renewable electric generation facility against the customer's 
          usage of electricity sold by the utility, on a kilowatt hour basis 
          (kWh), a procedure known as "net energy metering" (NEM).  
          Participation by all utilities is capped at five percent of each 
          utility's aggregate peak electricity demand and the size of 
          individual renewable electric generation facilities is limited to 
          those that will offset all or part of the customer's own 
          electrical requirements to a maximum of one megawatt (MW).  This 
          program also exempts the customer from paying transmission and 
          distribution costs.  This is commonly referred to as full retail 
          NEM.

           Current law  requires the state's IOUs to credit all electricity 
          generated by customer-owned fuel cells against the customer's 
          usage of electricity sold by the utility, on a kWh basis, a 
          procedure known as fuel cell NEM.  The customer credit is based 
          only on the electricity generated and does not include 
          non-generation costs such as transmission, distribution, and 
          public purpose charges.  Eligible fuel cells can be powered by 
          renewable or fossil-fuel, are sized MW or less, and must at least 
          meet the emissions standards of combined heat and power systems.

           Current law  requires large IOUs (Pacific Gas & Electric & Southern 
          California Edison) to offer the fuel cell NEM to its fuel cell 
          customer generators until the cumulative capacity of all installed 
          fuel cells reaches 45 MWs within each service territory.  Smaller 










          IOUs (SDG&E and others) are subject to a cap of 22.5 MWs within 
          each service territory.  All interconnections are subject to a 
          statewide cap of 112.5 MWs.

           This bill  eliminates the utility-territory and statewide MW caps 
          and instead requires all IOUs, regardless of size, to offer the 
          fuel cell NEM tariff to customers until the IOU has interconnected 
          fuel cells with generation equal to one percent of the IOU's 
          aggregate customer peak demand.  The California Public Utilities 
          Commission (CPUC) would be allowed to expand the cap beyond 1% at 
          any time.  

                                       BACKGROUND
           
          What is a Fuel Cell? - A fuel cell is an electrochemical device 
          that combines hydrogen and oxygen to produce electricity, with 
          water and heat as its by-product. As long as fuel is supplied, the 
          fuel cell will continue to generate power. Since the conversion of 
          the fuel to energy takes place via an electrochemical process, not 
          combustion, the process is clean, quiet and highly efficient - two 
          to three times more efficient than fuel burning.

          The Issues of Net Metering - Utility customers that generate power 
          from a renewable facility are eligible for full retail NEM under 
          which the electricity purchases of the customer are netted against 
          the electricity generated by the customer's own renewable electric 
          facility.  When the sun is shining or the wind is blowing, for 
          example, the generated electricity spins the meter backward, 
          making it financially equivalent to using less electricity for the 
          customer with the same effect as the electric utility paying the 
          customer the full retail price for the electricity.  When the sun 
          stops shining and the wind stops blowing, the customer draws 
          electricity from the grid and their meter spins forward using the 
          credit on the meter.  In theory, depending on weather patterns, 
          system size and customer behavior, the customer will have a zero 
          energy bill at the end of a 12-month cycle.

          Although all renewable resources sized up to one MW which offset a 
          customer's load are eligible for full retail NEM, most of the 
          facilities are solar photovoltaic (PV).  Fuel cells are eligible 
          for full retail NEM if biogas is used to generate the power.  If a 
          fuel cell is powered by natural gas it is eligible for a more 
          limited NEM program which credits the customer only for the value 
          of the kilowatt hours at the time the electricity is generated.  
          Under this program or tariff, the customer pays for transmission 









          and distribution costs as well as public purpose programs.  

          The impacts of net energy metering have raised significant 
          concerns, such as:

                 At what point does net metering stop looking like energy 
               efficiency and start looking like a competitor who sells 
               higher priced electricity than could be found elsewhere?
                 Will other customers have to pay for these higher rates 
               and is that fair?
                 If net metering is adopted by a significant percentage of 
               customers in the future, how will the utility continue to 
               cover fixed costs as revenues decline? 
                 Is the utility providing a storage service with the 
               electric grid, for which the costs aren't being compensated?
                 Can renewable energy be acquired elsewhere at lower costs 
               than through net metering?

          At the same time, net energy metering can potentially provide 
          utility, social and generator benefits, such as:

                 Reduction of air emissions (social)
                 Lower costs of energy during some peak time periods 
               (utility)
                 Some peak capacity benefits (utility)
                 Avoiding transmission and distribution losses (utility)
                 Avoiding the need for batteries (generator)
                 Getting paid more for renewable electricity than wholesale 
               rates (generator)

          These issues continue to be discussed but there are few definitive 
          answers and many opinions.  

          NEM Cost Shift - In March, 2010 the CPUC issued a report which 
          analyzed the cost of full retail NEM to non-NEM ratepayers.  At 
          that point, based on 386 megawatts of installed rooftop solar, the 
          cost to non-NEM ratepayers was estimated at $20 million per year.  
          Installed rooftop solar is now over 1,200 MW so that cost has now 
          at least tripled.  Although the total net cost of the NEM at that 
          point was less than one-tenth of one percent of total utility 
          revenue average net cost, the more telling cost that was reported 
          was that full retail NEM amounted to a cost-shift of $0.12 per 
          (kWh) to non-NEM ratepayers.

          The CPUC has initiated a new study to examine the costs and 









          benefits of full retail NEM and the impacts of the program for 
          nonparticipating customers.  The study will examine the costs and 
          benefits by utility, customer class, and income group and to 
          consider possible revisions to NEM and evaluate alternatives.  

                                        COMMENTS
           
              1.   Author's Purpose  .  California's fuel cell NEM program has 
               attracted new, innovative technologies to develop their 
               industry in the state. California-based fuel cell companies 
               are counting on fuel cell NEM to encourage customers to adopt 
               fuel cells and thereby expand in-state manufacturing. Raising 
               the cap will help customers finance the purchase of these 
               technologies.

              2.   Cost-Shifting  ?  The program in this bill is intended to 
               avoid cost-shifting to other customers by only crediting the 
               fuel cell NEM customer for the time of delivery value of the 
               excess generation associated with the fuel cell, not 
               transmission, distribution and public purpose program 
               charges.  However, the CPUC reports that "raising the NEM cap 
               for non-renewable fuel cells may significantly increase 
               costs" to non-participating ratepayers.  

               The CPUC further reports that its "cost-effectiveness study 
               of the full-retail NEM program in March 2010, found that the 
               net cost to ratepayers in 2008 (for all NEM systems 
               interconnected as of 2008) was $20 million/year. The 
               installation of fuel cells under the generation-only NEM 
               tariff may represent a lower marginal cost to ratepayers than 
               the full-retail NEM program - since bill credits at the 
               generation-only rate do not include the cost for use of the 
               transmission and distribution system, the costs for public 
               purpose programs, and other bundled costs, whereas bill 
               credits under full-retail NEM include all bundled costs. 
               However, even at the generation-only rate, interconnection 
               costs and the administrative expenses of implementing NEM are 
               subsidized by ratepayers under both NEM tariffs." 
               Consequently, "this bill would likely substantially raise the 
               NEM cap for non-renewable fuel cells, which could 
               significantly raise the total costs incurred by non-NEM 
               ratepayers."

               In March 2012, the CPUC issued a request for proposals for an 
               update to the 2010 NEM Cost-Benefit Study.  The CPUC reports 









               that "the findings of this study will better inform the 
               appropriate cap for fuel cells participating under Ýthe fuel 
               cell NEM] by: a) Incorporating a significant amount of new 
               data; b) Studying the impacts of new technologies eligible 
               under NEM?; and c) Including the ratepayer impacts from NEM 
               fuel cells that receive generation-only credit.  

               With the initiation of that study, the CPUC has acted to 
               suspend full retail NEM on January 1, 2015 pending revisions 
               to the program in response to the study.  To ensure that 
               these impacts are also considered for the fuel cell NEM, and 
               to ensure consistent policy review of NEM for all 
               technologies and fuel sources, the committee may wish to 
               consider adding a sunset clause to this bill to coincide with 
               the full retail NEM program for January 1, 2015 so that the 
               reviews of both programs are accomplished simultaneously and 
               ensure that there is full awareness of the economic impacts 
               of any policy choices on all classes of ratepayers.  

               In the alternative, the committee could amend the bill to 
               forgo a sunset and remove all caps to the fuel cell NEM 
               conditioned on the requirement that the costs of the tariff 
               do not affect non-fuel cell NEM customers, thus ensuring, 
               that the fuel cell customer pays all other costs associated 
               with its load on the grid.

              3.   What is Aggregate Peak Demand  ?  The phrase has been used 
               for 14 years and has had no definition by the CPUC but was 
               left to the utilities.  Aggregate peak demand is the basis 
               for the calculation of the full retail NEM for renewable 
               facilities and has been incorporated in this bill in lieu of 
               an installed capacity cap.  Recently the CPUC decided to 
               define the phrase "aggregate peak demand" which resulted in a 
               significant and controversial expansion of the full retail 
               NEM program.  The action was contrary to legislative history. 
                Even parties to the proceeding which argued for the new math 
               and expansion of the full retail NEM cap admitted that the 
               calculation was not technically possible until the full 
               installation of Smart Meters which will not be accomplished 
               in the largest IOU territories until the end of this year at 
               the earliest.

               In its comments on this bill, the CPUC urges the use of an 
               installed megawatt program cap instead of a percent of peak 
               demand.  The current statutory cap is 112.5 megawatts.  The 









               CPUC opines that PG&E will be the first IOU to hit its 
               portion of the cap (45 MWs) and "likely will not do so for 
               another 2-3 years."  The remaining utilities have very low 
               fuel cell penetration levels and plenty of room for growth 
               within the current cap.  The affected industries argue that 
               they anticipate a 30% annual growth rate in the coming years 
               necessitating an expansion of the cap particularly in the 
               PG&E service territory.

               To avoid controversy in the future associated with the 
               definition of peak aggregate demand, the committee may wish 
               to consider utilizing an installed capacity cap of 200 MW 
               based on the ratio of the utility's peak demand compared to 
               the total statewide peak demand.  This cap would provide the 
               capacity necessary to sustain the program through the January 
               1, 2015 sunset recommended above in the previous comment.   
               It should be noted that to date, according to industry 
               representatives, the installed capacity of renewable and 
               non-renewable capacity is at 40 MWs statewide. 

              4.   Baseload Generation & NEM  .  The unique characteristic of 
               wind and solar, which are the primary beneficiaries of the 
               full retail NEM tariff, is the intermittency of the 
               electrical generation. Other renewables such as biomass and 
               biogas digesters can run to coincide with the customer's 
               electrical load.  In doing so, the customer is able to avoid 
               using the electrical grid and incurring transmission and 
               distribution costs while running the generator. Consequently, 
               the need for full retail NEM is not the same as it is for 
               solar and wind. 

               However, the author and supporters of this bill argue that 
               although fuel cells do provide baseload generation, the 
               facilities are not dispatchable and lack ramping capability.  
               Consequently, they run the generation full-time and when the 
               load of the facility drops, such as in the night, the surplus 
               electricity goes back to the grid.  The fuel cell NEM program 
               allows that generation to accumulate to the customer's credit 
               to that the customer can utility that credit during business 
               hours when the fuel cell is offsetting load but the customer 
               is also pulling generation from the grid.


              5.   Disparate Treatment  .  The mandates of this program only 
               apply to the IOUs.  There are no comparable requirements on 









               POUs which may create barriers to growth of the industry and 
               use of the technologies in very significant portions of the 
               state since the POUs serve as much as 23% of the electric 
               load in California.

                                     ASSEMBLY VOTES
           
          Assembly Floor                     (52-18)
          Assembly Appropriations Committee  (11-5)
          Assembly Utilities and Commerce Committee                      
          (10-1)

                                        POSITIONS
           
           Sponsor:
           
          Author

           Support:
           
          Bloom Energy
          California Hydrogen Business Council
          California Public Utilities Commission, if amended
          Clean Power Campaign, if amended
          ClearEdge Power
          Environmental Defense Fund
          Fuel Cell Hydrogen and Energy Association
          FuelCell Energy, Inc.
          National Fuel Cell Research Center
          Silicon Valley Leadership Group
          TechNet
          United Technologies Corporation

           Oppose:
           
          Division of Ratepayer Advocates, unless amended
          San Diego Gas & Electric Company
          Southern California Edison

          















          Kellie Smith 
          AB 2165 Analysis
          Hearing Date:  June 11, 2012