SB 1 Senate Bill - Bill Analysis

BILL ANALYSIS 1
1

SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
MARTHA M. ESCUTIA, CHAIRWOMAN

SB 1 - Murray/Campbell Hearing Date:
April 26, 2005 S
As Amended: April 25, 2005 FISCAL B

DESCRIPTION

Current law and regulations establish subsidy programs for the
installation of solar photovoltaic (PV) systems administered by
California Energy Commission (CEC) and the California Public
Utilities Commission (CPUC).

Current law establishes a "net metering" program primarily for
PV systems. This net metering program credits the customer for
any electricity produced by turning the electricity usage meter
backwards. Net metering is limited to 0.5% of the utilities' or
energy service providers' demand.

Current law 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. Municipal electric
utilities are not subject to these standards, but are required
to implement and enforce their own renewable resource
procurement programs.

Current law provides a 7.5% state tax credit for the
installation of residential- and commercial-sized PV and wind
energy systems.

Current law excludes residential- and commercial-sized PV and
wind energy systems from property taxes.

This bill requires the CEC to develop, implement, and fund a
program to install 1,000,000 PV systems, or the generation
capacity equivalent of 3,000 megawatts (MW) on residential and
commercial customer sites by 2018. This is to be accomplished
through subsidies which start at current subsidy levels of
$2.80/watt (or about $10,000 for a typical residential system)

and decline steadily to zero by the end of 2016. Higher subsidy
levels are authorized for homes with superior energy efficiency.

This bill authorizes the CEC to develop a PV subsidy program for
affordable housing projects.

This bill requires the CPUC to develop a solar energy program to
accomplish the goals of this bill. The cost of this program is
to be recovered from IOU ratepayers, including those residential
customers protected from cost increases under current law.

This bill requires municipal utilities to adopt a similar
program with proportionate expenditures.

This bill requires the CEC to commence a proceeding by July 1,
2006, and conclude that proceeding within 3 years, to consider
if and when solar energy systems should be required on new
buildings.

This bill requires sellers of production homes, as defined, to
offer PV systems on new homes for which tentative subdivision
maps are completed on or after January 1, 2010.

This bill raises the net metering cap from 0.5% to 2%. After
the CPUC has developed a special rate design for PV customers
which recognizes that the value of energy varies by time of day
and season, the net metering cap will increase to 5%.

This bill extends the existing 7.5% tax credit for the
installation of residential- and commercial-sized solar and wind
energy systems until 2017.

This bill extends the existing property tax exclusion for
residential- and commercial-sized solar and wind energy systems
until 2017.

BACKGROUND

This is the Governor's Million Solar Rooftops proposal. It
establishes ambitious goals for the installation of solar energy
systems for residential and commercial customers. The solar
energy systems embraced by this bill are PV systems which
directly convert sunlight to electricity and are located on the
customer premise. This bill does not include solar thermal
systems, which use sunlight to heat water, nor does it include
large wholesale solar electric generators.

What's a PV System?
A PV system has two main parts, the roof-mounted PV panels which
transform sunlight into electricity and the inverter which
transforms the direct current created by the PV panels into
alternating current which is usable in the home or on the
electric grid. The orientation of the PV panels is crucial to
the success of the system; they must be south- or west-facing.
The panels must not be shaded and should be angled to capture
the most sunlight. A typical residential PV system is 2kw -
4kw. The installed cost is about $9000/kw so a 3kw system would
cost $27,000. Rebates have been as high as $4500/kw and are now
at $2,800/kw, so the 3kw system would today cost $18,600 after
rebates. A state tax credit would further reduce the price by
7.5% to $17,205. For commercial customers the final after-tax
cost is much lower because of greatly accelerated depreciation
and a 10% federal tax credit.

Current Subsidies
California has several subsidy programs targeted specifically at
PV systems. The CEC administers a program for residential- and
small commercial-sized PV systems that provides a rebate for a
portion of the installed cost of a PV system. That rebate was
initially $4.50/watt, or about 50% of the system cost, and has
since been lowered to $2.80/watt. This program is funded
through the Public Goods Charge (PGC), which is a surcharge on
all IOU electric customers, and is budgeted at about $30 million
annually, though in 2004 the program spent $70 million on PV.
The CPUC administers a similar program for commercial-sized
customer-owned generation, including PV systems. This program,
known as the Self-Generation Incentive Program (SGIP), costs
$125 million annually and is paid for out of electric rates.
The SGIP PV subsidy is $3.50/watt and is oversubscribed.

In addition to these two subsidy programs there are numerous
other state and federal programs which substantially reduce the
after-tax cost of PV systems, particularly for commercial
customers. These include a 10% federal tax credit, accelerated
depreciation, a 7.5% state tax credit, accelerated depreciation
for state taxes, and favorable property tax treatment. By
themselves these tax benefits for commercial customers are worth
more than the state subsidy, according to CEC estimates. Other
state subsidies are net metering, which reverses the electric
meter as electricity is produced, and an exemption from exit
fees.

Since 1976 California has provided just over $1 billion in tax
credits for solar energy systems. In 2003 the credit was $8
million.

As of the end of 2004 there were 12,000 PV systems in California
with an aggregate rated capacity of 93 MW. (This includes the
PV capacity in municipal utility territory.) It will be heavy
lifting to reach the program goal of 1,000,000 PV systems or
3000 MW in 13 years.

By any measure, California has been a leader in the pursuit of
alternative energy sources and energy efficiency. Every year
customers of California's IOUs, through a PGC, pay an extra $228
million to fund energy efficiency and conservation, $135 million
for renewable energy, and $62.5 million for energy research,

development and demonstration. Legislation authorizing the PGC
was enacted in 1996 (AB 1890 - Brulte: Chapter 854 of 1996) and
again in 2000 (AB 995 - Wright: Chapter 1051 of 2000), both on a
bipartisan basis. California's Renewable Portfolio Standard is
an additional commitment to renewable energy. It requires
utilities to increase their purchase of renewable energy by 1%
annually until 20% of their energy is from renewable sources.

California Electricity Rates Among the Highest in the Nation
California's electricity rates are the highest in the
continental United States. Typical are the rates paid by
Southern California Edison residential, commercial, and
industrial customers, which are 55%, 94%, and 146% higher than
the national average, respectively.<1>

Prior Efforts
Last year the Governor introduced a Million Solar Homes proposal
late in the legislative session. That proposal, contained in SB
199 (Murray), differed from this bill in several important ways.

SB 199 SB 1
Homes only Homes and non-industrial
buildings
Authorizes an increase of up to No cap on the rate increase
0.05 cents/kwh
Homebuilders required to offer solar
Homebuilders required to offer solar
when subdivision map is complete by 1/1/07
when map is complete by 1/1/10

SB 199 was not successful. Instead AB 135 (Reyes: Chapter 867
of 2004) was enacted which authorized internal borrowing within
CEC programs so that existing PV programs could continue.

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<1> Comparison for 2003 based on data compiled by the California
Energy Commission and the Energy Information Administration's
2003 Annual Energy Review.

QUESTIONS FOR THE COMMITTEE

Given current state and federal PV programs, what
problem does this bill solve?
Should California establish a new multibillion dollar
subsidy program specifically for the PV industry?
Is this the best use of ratepayer and taxpayer resources
compared to other public purpose investments such as energy
efficiency and other renewable technologies?
How can the program established in this bill be improved
to increase the likelihood of success and reduce costs?

COMMENTS

1. Letting the Sun Shine . Supporters believe that PV is a
unique technology because it is clean, produces electricity
during peak times when it is needed most, and can be
installed on customer premises.

Supporters see this bill as the catalyst for a strong,
indigenous, self-supporting solar industry. By
establishing a long-term commitment to PV and long-term
purchase incentives, PV sales will predictably increase
leading to increased investment by solar manufacturers and
installers. This generates scale economies which in turn
reduce prices leading to even more sales. This virtuous,
self-reinforcing circle will lead to enough sustained
demand that subsidies will no longer be needed within 11
years, according to supporters.

The Japanese experience with PV incentives is often cited
as the model for this bill. In 1994 the Japanese
government established a goal of 70,000 homes with 3kw
systems by 2000 and half of new homes by 2010. Supporters
indicate that those targets are likely to be met and that
the federal subsidy has decreased from $12/watt to almost
nothing.

The goal of this bill is to create 3000MW of clean
electricity and to transform the PV industry so that it can
compete without government subsidies. (By way of
comparison, 3000MW is about the size of 6 large
powerplants.) The cost of doing this is unknown, but
supporters believe that $2 billion - $2.5 billion in

ratepayer subsidies is a reasonable guess. To accomplish
its goals the bill does three things: 1) establishes a PV
rebate program, 2) requires production home builders to
offer PV, and 3) extends current PV tax breaks.

2. Why Is This Bill Needed ? California's Electric Needs
Are Being Met -- Since 2001 California policymakers have
spent a great deal of time ensuring that electricity
shortages are not repeated. Legislation regarding
electricity procurement and planning has been enacted, and
the CPUC has established a competitively bid procurement
process. Earlier this year this committee was told by the
CPUC that energy supplies, while tight, are adequate.
Consequently, this bill is not necessary to meet
California's electricity needs.

PV Programs Continue Without this Bill -- Nor could this
bill be necessary to sustain the PV industry. If this bill
fails both the CEC and CPUC PV programs continue, though
the CEC's program will need to find additional revenue as
it will run through even the additional revenue provided by
AB 135 last year. The CPUC program will continue through
2007 and will not run out of funding as the CPUC has the
authority to increase rates to raise revenues. And, the
existing net metering statutes remain. Because San Diego
Gas & Electric is close to the net metering cap there is a
potential problem, but SB 816 (Kehoe), which passed this
committee without opposition, deals with that.

A Good Investment? -- If this bill isn't necessary to meet
California's electricity needs or to keep the PV industry
viable, then the only remaining reason for this bill is
that it is a good investment for ratepayers. This bill
requires ratepayers to invest about $2 billion for clean
energy that is produced during peak hours. But the actual
investment is far greater if the investment by taxpayers is
also considered. The value of state and federal tax breaks
to commercial PV purchasers is greater than the value of
the rebate proposed by this bill. Supporters have
presented an analysis which they believe demonstrates that
the rebates are cost effective over the 13 year period
covered by this bill based on the savings from substituting
the PV generated electricity for purchased electricity.
While the merits of that analysis can be debated, it is

clear that if the substantial cost of the state and federal
tax breaks are also considered the program envisioned by
this bill is not a sound ratepayer and taxpayer investment.
However, that analysis does not consider the value of a
growing California-based PV industry that does not rely on
government subsidies, to the extent that this is an outcome
of the bill. Another analysis offered by supporters
details the benefits of PV systems, assigning a range of
values to each benefit (e.g. avoided carbon dioxide
emission, avoided transmission and distribution costs).
That analysis shows that PV power is potentially highly
valuable, though at the low end of the range a large
subsidy as proposed by this bill is not justified.
Opponents dispute this analysis arguing that some of the PV
benefits are illusory.

Why 3000 MW? -- The primary goal of this bill is to obtain
3000 MW of PV capacity. This number is not rooted in any
particular assessment of electrical capacity shortage,
though it is the number you get when you take one million
homes and multiply that by an average PV system size of
3kw. There appears to be no magic to 3000 MW.

3. Cheaper Ways to Get it Done . Assuming that peak demand
reduction is desirable, there are many ways to achieve it
in addition to investments in PV. Energy efficiency and
other renewable energy sources may be less costly options,
for example. When the Legislature decided that less
reliance on fossil and nuclear fuels was in the public
interest, it passed a Renewable Portfolio Standard (RPS)
with overall goals and a budget. Rather than choose a
specific renewable technology the RPS legislation
identified a variety of technologies. Then, using a
competitive bidding process, renewable energy is procured
based on the lowest cost. If those costs are higher than
market prices for non-renewable energy the extra cost is
paid for out of the PGC as long as funds are available,
thereby limiting ratepayer risk. The RPS process took
advantage of competition to reduce costs, making our
renewable energy goals more attainable. This bill does
just the opposite. It picks a winning technology, thereby
eliminating much of the competitive pressure to reduce
price and innovate. And it provides a ratepayer and
taxpayer subsidy which could easily reach several billion

dollars.

4. Will the Bill Achieve Its Goals ? Things Change -- One
of the goals of this bill is to encourage investment in PV
installation infrastructure and to reduce PV costs so that
PV will no longer need a government subsidy. Those with a
long memory will recall that those same promises were made
in 1996 by renewable energy advocates when they urged
implementation of a 10-year PGC. It should be no surprise
that we've found that 10 years was not enough; the PGC has
been extended for an additional 5 years. Similar promises
were made when net metering legislation first came before
the Legislature in 1995.

Unfulfilled promises are nothing new in the Legislature,
not withstand the sincerity of the promisers. The real
question is whether any state legislation can be
comprehensive and far-reaching enough to guarantee the
growth of an entire industry. The problem is that state
legislation has a limited scope. It cannot control events
in other states, changes to federal law and taxes, global
competition for PV products, inflation, the cost of
competing technologies, cultural norms, and the many other
variables that will effect the growth of any industry.
Things change that are far outside the reach of state
government.

The most obvious example of the effect of unforeseen and
uncontrollable events on PV growth is California's 2001
electricity crisis. Blackouts and a 40% increase in
electric rates spurred unprecedented growth in PV demand,
something that the existing state and federal PV support
programs were unable to do. But if the CPUC ever succeeds
in reducing electricity prices and ensuring supply
reliability those factors will reverse and the
attractiveness of PV will diminish. Changes to federal tax
law could also vastly change the economics of PV,
particularly for commercial customers. If this bill is
enacted it is difficult to believe that ten years from now
the PV industry won't be back in Sacramento with a
perfectly valid reason why a new subsidy program is
necessary. In a term-limited world, those reasons may well
resonate.

Other factors out of the control of state legislation are
influencing PV prices today. Germany has initiated a large
and expensive PV program. It has attracted a lot of PV
supply, so much so that there are reports of PV panel
shortages and accompanying increases in PV system prices in
California. It is perhaps giving ourselves too much credit
to believe that any state, even one as big as California,
can do enough or spend enough to drive a global industry to
substantially reduce its prices.

5. Making the Program More Effective . Focus on New Homes
-- The second largest component of PV system cost is the
cost of installation. The vast majority of PV systems are
installed on a custom basis, mostly by retrofitting homes.
These costs could be reduced if the PV systems were
standardized and installed en-masse. New production homes
would be ideal for this. A number of additional benefits
arise as well. By designing the PV system with the home
architecture the efficiency of the PV system could be
maximized through roof design, orientation of the house,
and placement of landscaping. Design and engineering
costs could be minimized because the designs could be
reused for other homes in the subdivision. Marketing costs
would be minimized because the systems could be sold to
builders of hundreds of homes rather than owners of
individual homes. Financing costs would be minimized as
the cost of the PV system could be included in the home
mortgage. And most new homes are being built in the
hotter, sunnier areas of the state where PV is ideal. This
bill requires production homebuilders only to offer PV by
2010, a much less aggressive requirement than in the
Governor's solar bill from last year. It further requires
the CEC to consider whether PV should be required in new
homes by 2009. Given the substantial additional benefits
of PV on production home construction, the author and
committee may wish to consider phasing in a mandate to
include PV on a percentage of homes. Not only would this
guarantee the sales volume, but it would also eliminate the
ratepayer subsidy for this part of the program.

Performance-Based Incentives -- Recent evaluations of PV
systems raise questions about their performance. An
analysis of the large PV installations showed that at
California's 2004 peak electric demand, those systems was

producing only 39% of their rated capacity.<2> An earlier
report analyzing a much smaller sample of older systems
showed that the actual capacity of the PV systems was 30%
less than the rated capacity and that the capacity factor,
or the output of the PV systems as a percentage of the
theoretical maximum, was 13%.<3> These studies indicate
that PV systems may be underperforming, which highlights
the need for performance-based incentives. Current PV
rebates are awarded up front and are based on the rated
capacity of the PV system. If instead of up-front rebates
the incentives were based on electricity production the PV
customer would have a much greater incentive to install the
system in a way to maximize production and to maintain the
system to achieve optimum performance.

This bill authorizes the CEC to develop installation
guidelines to encourage maximum energy production. But
these guidelines will be effective only if they are
enforced, and it's unlikely the CEC will have sufficient
resources to inspect one million PV installations.
Because performance-based incentives will be self-enforcing
they will be more effective. The CEC has just commenced a
pilot program using performance based rebates. The author
and committee may wish to consider requiring the use of
performance-based incentives.

Progress Report -- Supporters are asking the Legislature to
authorize a ten year, multi-billion dollar program without
any guarantees of benefits. But rather than establish a
program and set it on auto-pilot for 10 years, perhaps it
would be better to give the industry a shorter time frame
to demonstrate progress. After a successful mid-term
evaluation the program could then continue. This is what
the Legislature required of the PGC, where it was reviewed
after five years and renewed based on performance. The
author and committee may wish to consider establishing a
review of this program after four years of experience, and
-------------------------
<2> CPUC Self-Generation Incentive Program Fourth-Year Impact
Report (Final Report ), submitted to Southern California Edison
and the Self-Generation Incentive Program Working Group,
prepared by Itron, April 15, 2005, p.8-5.
<3> Measured Performance of California Buydown Program,
Residential PV Systems by Kurt Scheuermann, Regional Economic
Research, Inc., for the California Energy Commission, undated.

to annually track the progress of the program in
publicly-available reports. If the program is judged to
have met the expectations of the Legislature as established
in this bill, the subsidies could then continue for its
final five years.

Only One Program -- Staff understands that it is the intent
of this bill is to encompass all the state PV programs into
a single program, though that is a little unclear in the
bill language. The author and committee may wish to
consider clarifying that this bill establishes a single
program. The author and committee may also wish to
consider barring any other PV incentive programs except for
those specifically created in this bill.

6. Another Way to Raise the Money . Supporters believe that
this bill will require $2 billion to $2.5 billion in
ratepayer subsidies. The bill authorizes the CPUC to add a
surcharge to electric bills to raise sufficient funds to
achieve its objectives. That surcharge would be about two
tenths of a cent per kwh ($0.002/kwh). The effect on
individual ratepayers would be relatively small, about
$15/year for residential ratepayers according to
supporters. But electric rates are made up of a lot of
relatively small components. It is easy to make the
mistake of looking at any one component of the bill as
relatively small but not seeing that the cumulative effect
is to make California's electricity rates the highest in
the country.

California currently has two PV programs. The CEC's
program is paid out of the PGC. In 2004 the CEC spent $70
million in rebates. About $30 million was ongoing funding
and the remainder from internal borrowing. The CPUC's SGIP
program is $125 million annually, the vast majority of
which is PV. Current PV subsidies are therefore anywhere
from $100 million to $150 million in ongoing funding. This
current funding level is not far from the $200 million
annually that would be required to provide $2 billion over
10 years. Simply extending the subsidy duration from 10 to
15 years would result in about $2 billion in subsidies
without requiring a rate increase. The author and
committee may wish to consider deleting the authority for a
new rate increase and instead earmark the existing PGC and

SGIP funding, as well as extend the life of the SGIP
funding, for the PV program for 15 years.

7. Who Benefits ? For those who can afford it and who have
a long-term perspective, the PV program envisioned by this
bill, in conjunction with the tax credits, makes installing
a PV system an attractive option. But the cost of the PV
system makes it impossible for low- and middle-income
customers to even consider. As those customers will never
be able to participate in the rebate program, the author
and committee may wish to consider whether they benefit
before making them pay for it? Under this bill the cost of
this program is exempted from the existing protections
against rate increases for residential customer usage up to
130% of the baseline quantities. Supporters argue that the
electricity generated by the PV systems will reduce the
amount of electricity needed to meet peak demand. As that
electricity is the most expensive, PV systems reduce the
overall cost of electricity which benefits all customers.

This argument is true, but only partly. Peak demand is
most severe and costly during summer weekdays, and for
those costly peak hours PV systems are most valuable. But
PV systems generate during hours that aren't peak, like
summer weekends, weekday mornings, and days that aren't
hot. Also, as summer shifts into fall and winter, peak
demand shifts into later hours of the day so that by winter
the peak demand occurs well after sunset.

While this program provides some benefits to all customers,
it is hard to see how those benefits overcome the cost of
the program for low- and middle-income customers. The
author and committee may wish to delete the override of the
rate increase protection for residential usage up to 130%
of baseline. (If the suggestion to simply use funding from
the existing CEC and CPUC programs is accepted this issue
will have to be handled differently as all customers and
all usage contributes to the cost of both programs.)

8. Other Issues . Labor Issues -- An insurmountable issue
in the Governor's solar bill last year was whether PV
projects which received state subsidies should be subject
to prevailing wage laws. This bill does not require
prevailing wage. The authors and interested parties are

discussing the issue.

Municipal Utilities -- Municipal utilities are required to
establish a comparable PV program and to spend comparable
amounts of money. This raises the same questions for
municipal utilities as it does for IOUs: Is there a
problem which this bill solves, and does it solve that
problem in a cost-effective way? With municipal utilities
the questions are more acute because these utilities are in
lesser need of resources than the IOUs and may have a
climate which is not conducive to PV installations. Rather
than establish consistency among utilities for its own
sake, the author and committee may wish to consider giving
the municipal utilities more flexibility to meet whatever
problem they are alleged to have.

Renewable Energy Credits -- There is an ongoing discussion
about requiring utilities to purchase renewable energy and
to establish a credit trading program to facilitate meeting
that requirement. The creation of renewable energy credit
(REC) trading creates wealth for those who have the REC
because they can sell it to those who have to buy it. PV
systems create renewable energy and hence RECs. These
could potentially be extremely valuable, as were the air
pollution credits during the 2001 electricity crisis. This
bill does not speak to who owns the REC from a subsidized
PV system. There are many competing claims on the REC,
including the PV system owner, the ratepayer, and the
taxpayer, all of whom have paid for part of the PV system.
If REC trading is permitted, revenues from selling PV
generated RECs may be useful in helping pay for the program
created in this bill.

Affordable Housing -- This bill authorizes the CEC to set
aside support for PV systems on affordable housing. The
author and committee may wish to require the CEC to set
aside support for affordable housing.

Rooftops Only -- While this bill is called the Million
Solar Rooftops initiative, there is no bar on putting PV
panels on the ground. This may be an unwise use of land,
and has become somewhat of a controversy for a very large
PV installation in Butte county.

Overdue reports -- The CPUC was required to provide the
Legislature and the Governor with an analysis of the costs
and benefits of net metering by January 1, 2005. A report
was submitted on March 29, 2005 but it fails to provide a
cost/benefit analysis. Instead it reports on the CPUC's
progress at developing such an analysis, which will not be
ready in time to assist the Legislature in evaluating this
bill. The Governor was required to create an independent
panel to review the PGC expenditures and submit a report to
the Legislature by January 1, 2005 on whether to change or
eliminate the PGC on or after January 1, 2007. This report
has not been provided, nor has the independent panel been
established.

POSITIONS

Sponsor:

Author

Support:

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Oppose:

California Manufacturers & Technology Association
Southern California Edison
The Utility Reform Network

Randy Chinn
SB 1 Analysis
Hearing Date: April 26, 2005