SB 1 Senate Bill - Bill Analysis

BILL ANALYSIS 1
1

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

SB 1 - Murray Hearing Date: August 8, 2006
S
As Amended: June 29, 2006 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). These programs, known collectively
as the California Solar Initiative (CSI), provide $3.2 billion
in subsidies through rebates for the installation of
photovoltaic projects.

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.

This bill establishes goals of installing 3000 MW of solar
generation capacity, establishing a self-sufficient solar
industry, and placing PV systems on 50% of new homes in 13
years.

This bill requires the CPUC, in implementing the CSI, to:
Adopt a subsidy that declines not less than an average
of 7% per year, and shall be zero as of December 31, 2016.
Adopt performance-based subsidies (e.g. subsidies that
pay based on the amount of electricity produced) by January
1, 2008 for all large PV systems and for half of all
medium-sized systems. Peformance-based subsidies are
encouraged, but not required, for smaller systems.
Performance-based incentives shall also decline at an
average of not less than 7% per year.

This bill authorizes the CPUC to award $101 million in subsidies
for solar thermal systems.

This bill authorizes the CPUC to award $50 million for solar
research and development.

This bill requires municipal utilities to establish solar energy
programs in support of the 3000 MW goal. Such programs shall be
established by January 1, 2008 and shall cost $784 million.

This bill establishes an aggregate cost cap for these solar
programs of $3.4 billion.

This bill prohibits the CPUC from imposing the cost of the CSI
on low income customers and bars the CPUC from imposing a
surcharge on natural gas to pay for the CSI.

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, 2011.

This bill raises the net metering cap from 0.5% to 2.5%.

This bill requires the CEC to establish eligibility criteria,
installation guidelines, and equipment rating standards for
solar energy systems receiving ratepayer subsidies. The CEC is
also required to perform random performance audits on PV
systems.

This bill requires the Contractors' State Licensing Board to
review and, if needed, revise its licensing classifications to
ensure that PV contractors have the proper qualifications.

BACKGROUND

As passed by the Senate in 2005, SB 1 established the Governor's
Million Solar Rooftops proposal. Because SB 1 did not pass the
Assembly in 2005, the CPUC instead created a solar program by
regulation, known as the California Solar Initiative (CSI).
That program is similar to the one envisioned in SB 1, though
there are important differences noted below. Rather than
create a solar program, the current version of SB 1 now creates
limits on the CPUC's solar program and includes municipal
utilities, over which the CPUC has no jurisdiction.

California Solar Initiative
After the 2005 session adjourned without passing SB 1, the CPUC
established the CSI by regulation. The CSI shares the goals and
basic mechanism of SB 1, which is to provide a long-term subsidy
for photovoltaic systems with incentives that are reduced
annually. But the CSI differs from SB 1 in important ways, some
of which are due to the jurisdictional limitations of the CPUC
and others which are differences in policy.

The major difference is that the cost of the program increased
substantially. The last 2005 version of SB 1 had a cost cap of
$2.5 billion. This amount reflects what the solar industry said
it would take to accomplish the goals of the program. But the
CPUC's CSI raised the cost cap to $3.2 billion. The CPUC has
never justified the cost-effectiveness of the higher price tag.
And the increased program cost will not lead to more installed
solar capacity. Part of the cost increase will cover $160

million in new R&D expenditures. Funding is also made available
for a solar water heating subsidy program. And the CPUC allows
$250 million to be spent on utility administration. The cost of
the CSI is recovered exclusively from CPUC-regulated utility
customers, both gas and electric.

Importantly, the CSI does not raise the net metering cap. Net
metering is a major benefit to PV customers because it allows
the customer to sell his excess electricity production back to
the utility at retail rates. Because net metering creates an
additional, substantial subsidy, the amount of PV capacity that
can be net metered has been limited by statute. PG&E and
Southern California Edison are nearing their limit.
Consequently, a bill raising the net metering cap is required
for any significant solar capacity to be added.

Current Subsidies
Even without the CSI, solar energy is already heavily
subsidized. For commercial customers federal tax credits and
accelerated depreciation cover about 50% of the cost of the
system. Accelerated depreciation for state tax purposes is
worth another 6%.

Since 1976 California has provided $1.1 billion in tax credits
and another $1 billion in rebates for solar energy systems,
resulting in over 160 MW of solar power. State and federal
policy has been generous to the solar industry. And, just as
high gasoline prices make alternative transportation fuels more
attractive, so too do high (and rising) electric prices make
solar more attractive.

California a Green Energy Leader
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 surcharge on
CPUC-regulated utility bills, pay at least 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
surcharge 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. Authorization of a 5-year spending
plan for some of these funds is pending again this year in SB
1250 (Perata). California's Renewable Portfolio Standard is a
further major commitment to renewable energy. It requires
electric utilities to increase their purchase of renewable
energy by 1% of total energy needs annually until 20% of their
energy is from renewable sources.

COMMENTS

1. Overview -- The Assembly amendments have changed character
of this bill. When first considered by this committee in
2005, the bill contained the Governor's Million Solar Roofs
Initiative, creating a long-term subsidy program for the
photovoltaic industry. After SB 1 stalled in the Assembly,
the CPUC created a solar program much like that contained in
SB 1. But the CPUC could not deal with the biggest hurdle to
a successful solar program, which is raising the cap on the
amount of PV systems that can benefit from net metering, a
crucial benefit in the eyes of the solar industry. And the
CPUC could not impose a PV program onto municipal utilities,
over which is has no jurisdiction. These CPUC shortcomings,
as well as concern over potentially lax CPUC administration,
led to a reinvigoration of SB 1. SB 1 no longer creates a
solar program. Instead it deals with the issues which the
CPUC could not and imposes some constraints on the program.

2. Issues which concerned the committee during the first
hearing on the bill -- When this bill was last heard in this
committee, members were interested in encouraging
performance-based incentives, capping the cost of the
program, and enabling affordable housing projects to
participate. These issues are discussed below:

Performance-based incentives -- Recent evaluations of PV
systems raise questions about their performance. These
studies indicate that PV systems may be underperforming,
highlighting 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 system manufacturer and 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 is very strongly supportive of performance-based
incentives. It requires that all incentives for large
solar installations and at least half the incentives for
medium-sized installations be performance-based by January
1, 2008. Performance-based incentives for smaller,
residential-sized systems are encouraged.

Capping the cost of the program -- The version of SB 1 that
was pending during the last legislative days of 2005
contained a cost cap of $2.5 billion. The CPUC's CSI
raised the cost cap to $3.2 billion. The current version
of SB 1 raises the cost cap to $3.35 billion. Included in
that higher number is $101 million in subsidies for solar
heating devices, which create no electricity, and $50
million in solar R&D administered by the CPUC (which is in
addition to the $62.5 million already funded for renewable
energy R&D administered by the CEC), both of which were
encouraged, if not insisted upon, by the Governor's office
and included in the latest set of amendments. This is a
much costlier program with no justification for the higher
cost nor the additional spending on solar heating and R&D.

California's recent heat wave set records for energy
consumption. While regulators can take comfort in having
weathered the heat storm, very soon customers will be hit
with their bills. There are reports that recently approved

rate increases, coupled with record consumption, will lead
to extraordinarily high bills. This may prompt renewed
interest in the causes of California's high electricity
rates. There may well be widespread support for
cost-effective solar energy even if it results in rate
increases. But given California's already high electric
rates, there can be little room for programs which are not
cost-effective.

Affordable housing -- The CSI requires that 10% of program
funding be made available to affordable housing projects.
If that funding isn't used in any given year then it
becomes available for other CSI purposes. SB 1 no longer
contains an affordable housing component. Legislation
requiring an affordable housing component is pending in the
Senate Appropriations Committee (AB 2723 - Pavley).

3. Municipal Utilities -- This bill requires municipal
utilities to establish their own PV programs at an aggregate
cost of $784 million, which is within the $3.35 billion cost
cap. It requires that subsidies start at not less than
$2.80/watt and decline by 7% annually thereafter.

4. Net Metering -- Last year's version of SB 1 raised the net
metering cap to 5%. The current version raises the net
metering cap to 2.5%, meaning that the Legislature will see
this issue again in a couple of years if SB1 achieves its
goals for installing PV capacity.

5. Labor Opposition Removed -- Concerns from organized labor
contributed to the demise of SB 1 last year. Those concerns
have been addressed and organized labor is no longer opposed
to the bill.

6. Committee Options -- The committee can take four actions in
a 29.10 hearing:
Return the bill to the floor recommending approval of
the amendments.
Return the bill to the floor recommending disapproval of
the amendments.
Return the bill to the floor without recommendation.
Hold the bill in committee.

POSITIONS

Sponsor:

Author

Support:

The Utility Reform Network

Randy Chinn
SB 1 Analysis
Hearing Date: August 8, 2006