BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 1637| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 1637 Author: Low (D) Amended: 8/18/16 in Senate Vote: 21 PRIOR VOTES NOT RELEVANT SUBJECT: Energy: greenhouse gas reduction SOURCE: Author DIGEST: This bill expands and extends the fuel-cell net energy metering program (FC NEM) and doubles the budget of the self-generation incentive program (SGIP). ANALYSIS: Existing law: 1) Establishes the California Public Utilities Commission (CPUC) and authorizes it to fix the rates of public utilities, such as investor-owned electric utilities (IOUs) that provide electricity service. (California Constitution Article 12) 2) Establishes certain costs of IOUs to be recoverable on a nonbypassable basis. (Public Resources Code §366.1(d)(1) and Public Utilities Code §367 and §379) AB 1637 Page 2 3) Makes certain exemptions to the requirement to pay nonbypassable charges (NBCs). (Public Utilities Code §374) 4) Directs the CPUC to require each IOU to identify a separate nonbypassable rate component to collect the revenues to fund several public purpose programs - energy efficiency; public-interest research and development; and programs provided to low-income customers, such as targeted energy efficiency services and the California Alternative Rates for Energy (CARE) program. (Public Utilities Code §381) Specific to net energy metering. 5) Requires, generally, every electric utility to offer a NEM tariff to a customer-generator using an onsite renewable energy generation facility of no greater than one Megawatts (MW) until the total generating capacity used by eligible customer-generators exceeds five percent of the electric utility's aggregate customer peak demand or until July 1, 2017, whichever is earlier. (Public Utilities Code §2827) 6) Requires the CPUC, by December 31, 2015, to develop a successor program to the NEM program, which the IOUs must offer to customer-generators using an onsite renewable energy generation facility (Public Utilities Code §2827.1) 7) Requires each IOU, until January 1, 2017, to offer a NEM tariff for a customer who generates electricity using an onsite fuel cell electrical generating facility not greater than one MW until total installed fuel cell electrical generation resources reaches the IOU's proportional share of 500 MW. This is known as FC-NEM. (Public Utilities Code Section 2827.10) 8) Requires each IOU, by July 1, 2015, to submit to the CPUC a distribution resources plan proposal to identify optimal AB 1637 Page 3 locations for the deployment of distributed resources. (Public Utilities Code §769) 9) Directs the Air Resources Board (ARB) to adopt a certification program and uniform emission standards for electrical generation technologies, such as distributed generation systems, that are exempt from local air district permitting requirements. (Health and Safety Code §41514.9) Specific to the Self-Generation Incentive Program. 10)States the intent of the Legislature that SGIP deployment of distributed generation and energy storage systems facilitate the integration of those resources into the electrical grid, improve efficiency and reliability of the distribution and transmission system, and reduce emissions of greenhouse gases (GHGs), peak demand, and ratepayer costs. 11)Authorizes the CPUC to require the IOUs to collect funds, up to $83 million annually, from ratepayers, through December 31, 2019, to be used to provide incentives, under SGIP, for distributed energy resources the CPUC, in consultation with ARB, determines will achieve reductions in emissions of GHGs. 12)Authorizes CPUC to set the amount of SGIP incentives and requires the CPUC to provide an additional incentive of 20 percent from existing program funds for the installation of eligible distributed generation resources manufactured in California. 13)Requires the CPUC to ensure distributed energy resources in SGIP are made available to all ratepayers. 14)Prohibits recovery of SGIP costs from customers who participate in the CARE program. AB 1637 Page 4 15)Excludes solar technologies from eligibility for SGIP incentives and further limits eligibility to resources the CPUC determines to meet following criteria: a) Shifts onsite energy use to off-peak time periods or reduces demand from the grid by offsetting some or all of the customer's onsite energy load, including, but not limited to, peak electric load. b) Is commercially available. c) Safely utilizes the existing transmission and distribution system. d) Improves air quality by reducing criteria air pollutants. 16)Requires the CPUC, on or before July 1, 2015, to update the factor for avoided GHGs for distributed energy resources based on the most recent data available to the ARB for GHGs from electricity sales in the SGIP administrators' service areas as well as current estimates of GHGs over the useful life of the distributed energy resource, including consideration of the effects of the California Renewables Portfolio Standard. (Public Utilities Code §379.6) This bill: 1) Expands, from one MW to five MW, the size limit applicable to a fuel cell electrical generation resource eligible for the existing FC-NEM. 2) Extends, from July 1, 2017, to December 31, 2021, the sunset on the existing FC-NEM program. 3) Requires ARB, in consultation with the California Energy Commission (CEC), by March 31, 2017, and updated every three years thereafter, to establish an annual GHG emission AB 1637 Page 5 reduction standard for a fuel cell electrical generation resource. The standard is to ensure each fuel cell electrical generation resource eligible for the FC-NEM program reduce GHG emissions compared to electrical grid resources, including renewable resources, that the fuel cell electrical generation resource displaces. 4) Limits eligibility for the FC-NEM program to customers who use fuel cell technology that meets (a) ARB's annual GHG emission reduction standard as described in the preceding paragraph and (b) ARB regulations for distributed generation authorized by existing law. 5) Doubles, from $83 million to $160 million, the amount the CPUC is authorized to require to be collected annually for SGIP, through December 31, 2019. Background CPUC levies NBCs to recover costs shared by all IOU customers. To provide electric service to their customers, the IOUs face certain fixed costs and program costs. These costs include: " Power purchase costs that occurred prior to energy deregulation in 1996. " Bonds issued to finance a portion of the historic cost of power purchased by the Department of Water Resources (DWR) to serve electric customers. " Electricity generation acquired prior to 2003, as well as the costs of all generation resources acquired by the utilities since they resumed procurement for their customers in 2003. " Funds required for site restoration when the IOUs' nuclear power plants are removed from service. " Statutorily mandated low-income, energy efficiency and renewable generation programs. Following the energy market crisis early in this century, some IOU customers were able to receive all, or a portion, of their AB 1637 Page 6 electric service from a source other than the IOU. Generally, those alternative sources of electricity were either "Electric Service Providers" - a nonutility entity that provides electric service using the IOU's transmission infrastructure - or an electric generation facility installed on the customer's premises, the output to be used by the customer. This situation resulted in concerns over "cost shifting," that is, the ability of customers who receive electricity service from a provider or source other than the IOU to avoid paying fixed and program costs for which all IOU customers had been responsible. To avoid this cost shifting, the CPUC, acting according to statutory authority, has authorized the IOUs to recover certain fixed and program costs through a number of "nonbypassable" charges (NBCs), meaning charges that are paid by all customers in an IOU service territory, regardless of the source of a given customer's electricity. The NBCs approved by the CPUC are: " Ongoing Competition Transition Charge: Recovers the cost of qualifying facilities and power purchase agreements executed prior to 1996 that are in excess of a market benchmark determined by the CPUC. " DWR Bond Charge: Recovers the cost of bonds issued to finance a portion of the historic cost of power purchased by DWR to serve electric customers. " Power Charge Indifference Adjustment (PCIA): Either a charge or credit, intended to ensure that customers who purchase electricity from nonutility suppliers pay their share of cost for generation acquired prior to 2003, as well as costs of all generation resources acquired by the utilities since they resumed procurement for their customers in January of 2003. " Nuclear Decommissioning Charge: Provides the funds required for site restoration when the IOU's nuclear power plants are removed from service. " Public Purpose Program Charge: The source of funds for low income, energy efficiency and renewable generation programs. AB 1637 Page 7 It is therefore well-established state policy to require all IOU customers, including customers who install onsite electric generation facilities, to pay IOU fixed and program costs through NBCs. But, no matter how well established the policy, there are exceptions, the state's NEM programs among them. NEM programs encourage installation of onsite electricity generation. NEM programs allow a customer who has installed an on-site electricity generation facility to receive a payment at a prearranged price for the electricity produced by the customer. California law has established two types of NEM programs, one for facilities that use technologies eligible for the state's Renewable Procurement Standard (RPS) program, and another program for fuel-cell facilities. The renewable NEM program (open to many technologies, though, in practice, mainly solar photovoltaic systems) offers a qualifying customer credit for electricity generated on-site equal to the rate that the customer would have paid for energy consumption, according to their otherwise applicable rate structure. In other words, the monthly NEM credit for excess electricity generated by onsite RPS-eligible technologies is equal to the retail rate of electricity, which includes the cost of generation, as well as a variety of other costs, such as fixed costs and NBCs. In contrast, FC-NEM offers a less generous financial credit than does the renewable NEM program. Customers of FC-NEM receive for the electricity they produce the wholesale rate the IOU would have paid; that is, the cost only to generate the electricity, but not the fixed costs or NBCs. Perhaps this rate of compensation explains the lack of customer participation to date in the FC-NEM. (According to the CPUC, customers of the three largest IOUs have installed only 76MW of FC-NEM-eligible generation resources, out of a program cap of 500MW.) Whether retail or wholesale, the rate of compensation for net-excess electricity supplied to the grid is likely a relatively minor financial inducement to the installation of onsite electricity generation. This is because the NEM programs require participating customers to size their onsite electricity AB 1637 Page 8 generation facility to meet load. This requirement has the effect of limiting generation by a NEM customer that is exported to the grid for compensation. Payments for electricity generation aside, NEM customers of all types receive another financial benefit: NEM customers do not pay NBCs on the electricity they generate onsite. For FC-NEM customers in particular, the value of this exemption from NBCs is likely greater than the value of the compensation they receive for electricity generation. Of course, the costs represented in NBCs do not disappear simply because NEM participants do not pay them on the electricity they generate. Fixed costs must be paid; research and low-income customer support must be funded. To the extent these NBCs are not paid by NEM customers they must be paid by the IOU's other customers who do not participate in a NEM program. This phenomenon is sometimes referred to as a "cost shift." So, why would the state establish programs that shift costs from one group of IOU customers to another? Proponents justify the cost shift by contending that the benefits of small distributed electricity generation facilities participating in the NEM programs outweigh the costs imposed on other customers. In theory, all distributed generation can benefit the electric system. Those benefits come in the form of reduced need for generation during peak periods of demand. In addition, distributed generation may provide locational benefits, such as relief of congestion or diminished need to build transmission, though CEC staff, while not denying the potential for such locational benefits, caution that distributed generation installed at some locations may add costs to the electric system and note that the CPUC is undertaking a proceeding to better identify and quantify the locational benefits of distributed generation. In addition, NEM distributed generation can help to reduce the emission of traditional air pollutants and GHGs. This air quality benefit is easy to see with NEM customers using renewable technologies. Such technologies generally produce no AB 1637 Page 9 or very few emissions, so the electricity generation they displace is almost certainly considerably dirtier than the electricity produced by the renewable technology. The air quality benefits are less obvious when considering the electricity generation of FC-NEM customers. This is because fuel-cells use conventional natural gas to produce electricity through a chemical reaction. (A fuel-cell might use renewable biogas to produce electricity, thereby potentially qualifying it as an RPS-eligible renewable resource. However, a NEM customer using biogas in a fuel cell could participate in the relatively more-generous renewable NEM program.) However, the emissions profile of typical natural-gas-using fuel cell is substantially cleaner than the average emission profile of the electric grid, which includes a variety of generation resources, including new and old natural gas powerplants, coal-fired powerplants, nuclear power, hydroelectric power and an increasing amount of RPS-eligible renewable energy facilities. This bill goes one better than the generic emissions profile described above. First, it requires that any fuel cell electricity generating facility must comply with ARB's regulatory requirements for distributed generation facilities. Second, it requires a facility to meet or exceed the GHG emissions reduction standards established by ARB, pursuant to this bill. To establish that GHG emissions reduction standard, this bill directs ARB, in consultation with the CEC, to ensure a fuel cell electrical generation resource reduces GHGs compared to electrical grid resources, including renewable resources, that the fuel cell displaces, accounting for both procurement and operation of the electrical grid. ARB is to complete this work by March 31, 2017, and update the schedule every three years, with standards for each intervening year. So, fuel cells in the FC-NEM program will be cleaner than the grid, and stay cleaner than the grid, which itself is getting cleaner by the year (or, by RPS compliance period, at least). The primary policy question for the Legislature, then, is whether the benefits of FC-NEM, which, absent legislative action would expire at year's end, are sufficient to justify burdening other customers with the cost of IOU investments and public AB 1637 Page 10 purpose programs. It is difficult to estimate the magnitude of the cost shift this bill would create, though it is likely to be minimal for any given customer. A customer participating in FC-NEM would pay no NBCs on the electricity generated by the fuel cell electrical generating resources. Each of the NBCs is a fraction of a penny per kilowatt hour. (For example, the NBCs levied by PG&E on its customers range from $0.00049 for the Nuclear Decommissioning charge to $0.013 for the Public Purpose Program charge.) Yet, for a large individual customer, the NBCs may total a significant dollar amount. Escaping the NBCs, especially in concert with other subsidies provided by IOU customers, such as those given by the SGIP program, may prove a powerful incentive to customers considering installation of on-site fuel cell electrical generation resources. Self-Generation Incentive Program. The SGIP provides incentives for installation of distributed energy resources that are located at a customer's site and sized no larger than what is needed to meet on-site energy needs. Current law authorizes the CPUC to require the IOUs to collect $83 million per year from ratepayers through distribution rates through 2019 to fund SGIP and to administer the program through 2020. This bill would double the amount of money the CPUC is authorized to require the IOUs to collect from ratepayers, through 2019. Recent legislation (SB 861, Committee on Budget and Fiscal Review, Chapter 35, Statutes of 2014 and AB 1478, Committee on Budget, Chapter 664, Statutes of 2014) extended the SGIP program by several years, corresponding to the dates in the preceding paragraph. In addition, the bills each directed the CPUC to modify the SGIP program in response to concerns with the program's past performance. Recently, the CPUC adopted the program changes. (See CPUC decisions D.16-05-06-055 and D.15-11-027.) In short, the program changes refocused the program on energy storage, lowered the program GHG emissions threshold, and modified the monetary incentives so that AB 1637 Page 11 incentive amounts decrease as distributed generation resources are installed. More specifically, the CPUC SGIP program changes as follows: Tighter GHG standard. Set 350 kilograms (kg)/Megawatts per hour (MWh) (down from 379 kg/MWh, the current standard) as the maximum level of CO2 emissions allowed for technologies participating in SGIP in year 2016. And increasingly tighter. Decreases the GHG threshold for each successive program year to reflect the increasing renewables targets imposed by SB 350, with a final GHG threshold of 337 kg/MWh in 2020. Biogas, and more biogas, a must. Beginning in 2017, generation projects must use 10 percent biogas - this escalates up to 100 percent by 2020. Mainly storage. Storage is allocated 75 percent of funds (15 percent carved out for residential projects). Generating technologies are allocated the remaining 25 percent (40 percent carved out for renewable generation). Different requirements for different sizes of storage. Large storage will address grid benefits through requirement to dispatch two hours a day, five days a week for six months of the year (260 hours); small storage only two hours a week for 12 months (104 hours). First-come is no longer first served. A lottery will replace first-come first-served system, with lottery done by budget category. Energy storage projects paired with renewables or located in an Aliso Canyon affected area will be given priority in the lottery. No one big winner. A 20-percent developer cap replaces the previous 40-percent manufacturer cap. Californian? Prove it. California supplier adder remains, but now requires third-party certification to show that 50 percent of value addition is done in California. AB 1637 Page 12 Greater oversight of program administrators. Program administrators are directed to host quarterly meetings and undergo audits of their administrations and budgets. In addition, program incentives will now be structured on a declining stair step, similar to incentives for the California Solar Initiative. The new SGIP incentive structure is shown below: ------------------------------------------------------------------- | SGIP Incentives for Generation Technologies | | (25 percent of program budget) | ------------------------------------------------------------------- |--------------+--------------+--------------+--------------+--------------+--------------+--------------| | | Step 1 | | Step 2 | | Step 3 | | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| | | | Max Rebate | |Max Rebate w/ | |Max Rebate w/ | | | | w/ biogas | | biogas | | biogas | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| |Wind | $0.90 | n/a | $0.80 | n/a | $0.70 | n/a | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| |Waste heat to | $0.60 | n/a | $0.50 | n/a | $0.40 | n/a | |power | | | | | | | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| |Pressure | $0.60 | $1.20 | $0.50 | $1.10 | $0.40 | $1 | |reduction | | | | | | | |turbine | | | | | | | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| |ICE CHP | $0.60 | $1.20 | $0.50 | $1.10 | $0.40 | $1 | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| |Microturbine | $0.60 | $1.20 | $0.50 | $1.10 | $0.40 | $1 | |CHP | | | | | | | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| |Microturbine | $0.60 | $1.20 | $0.50 | $1.10 | $0.40 | $1 | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| |Gas turbine | $0.60 | $1.20 | $0.50 | $1.10 | $0.40 | $1 | |CHP | | | | | | | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| |Fuel cell CHP | $0.60 | $1.20 | $0.50 | $1.10 | $0.40 | $1 | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| AB 1637 Page 13 |Fuel cell | $0.60 | $1.20 | $0.50 | $1.10 | $0.40 | $1 | |electric only | | | | | | | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| | | | | | | | | -------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- | SGIP Incentives for Storage Technologies | | (75 percent of program budget) | ------------------------------------------------------------------- -------------------------------------------------------------------- |Large Scale - 10 kW | Step 1 | Step 2 | Step 3 | Step 4 | Step 5 | -------------------------------------------------------------------- |Without Investment Tax |$0.50/Wh|$0.45/Wh|$0.40/Wh|$0.35/Wh|$0.30/Wh| | Credit (ITC)| | | | | | -------------------------------------------------------------------- | With ITC|$0.36/Wh|$0.31/Wh|$0.26/Wh|$0.21/Wh|$0.16/Wh| | | | | | | | -------------------------------------------------------------------- |Small Scale - <10 kW | | | | | | |-----------------------+--------+--------+--------+--------+--------| | Energy storage |$0.50/Wh|$0.45/Wh|$0.40/Wh|$0.35/Wh|$0.30/Wh| | | | | | | | | | | | | | | -------------------------------------------------------------------- Prior/Related Legislation AB 1530 (Levine, 2016) excuses from nonbypassable, otherwise levied against all electricity used by customers of an electrical corporation, the electricity used by customers who use certain onsite generation technologies to produce that electricity. The bill passed the Senate Committee on Energy, Utilities and Communications and is pending consideration in the Senate Committee on Environmental Quality. SB 861 (Committee on Budget and Fiscal Review, Chapter 35, Statutes of 2014) extended SGIP annual collections of $83 million per year through December 31, 2019. AB 1478 (Committee on Budget, Chapter 664, Statutes of 2014) AB 1637 Page 14 modifies eligibility requirements for incentives under SGIP to clarify eligibility for technologies that shift electricity load off peak and make technical changes that clarify performance measures under the program. AB 427 (Mullin, 2013) would have exempted bottoming cycle combined heat and power from NBCs. The bill failed to pass the Assembly Committee on Utilities and Commerce. AB 365 (Mullin, 2013) was similar to AB 1530. The bill passed this committee on a vote of 7-2 but was held in Senate Committee on Appropriations. AB 327 (Perea, Chapter 611, Statutes of 2013) required IOUs to submit plans for deploying distributed energy resources to the CPUC. AB 2165 (Hill, Chapter 603, Statutes of 2012) raised the statewide and IOU-specific caps for FC-NEM. AB 1150 (Pérez, Chapter 310, Statutes of 2011) extended SGIP funding through 2014, authorized CPUC to adjust incentive amounts, and added additional program interests, including ratepayer relief, energy efficiency, peak-load reduction, load management and environmental characteristics. SB 412 (Kehoe, Chapter 182, Statutes of 2009) extended SGIP through 2015, defined eligible technologies as those the CPUC determined will reduce GHG emissions, set the annual program budget at $83 million, and added bonus incentive for California suppliers. AB 970 (Ducheny, Chapter 329, Statutes of 2000) established the SGIP program in response to the energy crisis. AB 1637 Page 15 FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: No Unknown with recent amendments. SUPPORT: (Verified 8/19/16) None received OPPOSITION: (Verified 8/19/16) None received ASSEMBLY FLOOR: 51-26, 4/28/16 AYES: Alejo, Arambula, Atkins, Bloom, Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Dodd, Eggman, Frazier, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Roger Hernández, Holden, Irwin, Jones-Sawyer, Levine, Lopez, Low, McCarty, Medina, Mullin, Nazarian, O'Donnell, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark Stone, Thurmond, Ting, Weber, Williams, Wood, Rendon NOES: Achadjian, Travis Allen, Baker, Bigelow, Brough, Chang, Chávez, Dahle, Beth Gaines, Gallagher, Grove, Harper, Jones, Kim, Lackey, Linder, Maienschein, Mayes, Melendez, Obernolte, Olsen, Patterson, Steinorth, Wagner, Waldron, Wilk NO VOTE RECORDED: Daly, Hadley, Mathis Prepared by:Jay Dickenson / E., U., & C. / (916) 651-4107 AB 1637 Page 16 8/22/16 10:03:57 **** END ****