BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN ------------------------------------------------------------ |SB 655 - Peace |Hearing Date:April 13, | S| | |1999 | | |------------------------------+--------------------------+--| |As Amended:April 5, 1999 | | B| |------------------------------+--------------------------+--| | | | | |------------------------------+--------------------------+--| | | | 6| |------------------------------+--------------------------+--| | | | 5| |------------------------------+--------------------------+--| | | | 5| |------------------------------+--------------------------+--| | | | | |------------------------------+--------------------------+--| | | | | ------------------------------------------------------------ DESCRIPTION This bill requires the California Energy Commission (CEC) to develop a seven-year program to provide grants to offset a portion of the costs of qualified solar and distributed generation (DG) installations, contingent on funding of the program in the annual Budget Act. Solar systems would be eligible for up to $750 and DG systems would be eligible for 10% of their cost, up to $2,000. The bill further requires the CEC to establish operational and safety standards for DG systems. The bill also expands the purpose of a "solar energy system" to include "electricity generation" for the Civil Code's definition of a "solar easement." KEY QUESTIONS 1) To what extent will the grant program established by this bill induce new investment in systems that provide additional environmental and system reliability benefits? 2) Will the CEC be able to accurately determine whether individual DG systems provide greater environmental and system reliability benefits than those achievable from other power sources? 3) What exactly is a DG system and who should develop operational and safety standards for their use? BACKGROUND Existing law provides a variety of mechanisms to support solar energy. These include property tax exemptions for installation of solar systems and grants for development and operation of some solar generation technologies. Since 1976, California tax law has provided a credit for the cost of solar energy systems installed in California. Existing federal law provides a credit equal to 10% of the cost of energy property placed in service during the year. In 1980, the California Constitution was amended by initiative (Proposition 7) to provide that active solar energy systems would not be assessed as "new construction" under Proposition 13's property tax requirements. AB 1890 (Brulte), Chapter 854, Statutes of 1996, provided $540 million, collected over four years, to operate and develop new, emerging and existing renewable resources technologies. The CEC was charged with developing a spending plan for these funds, as well as others dedicated in AB 1890 for various public purpose programs. The CEC spending plan was codified by SB 90 (Sher), Chapter 905, Statutes of 1997. Under SB 90, the grid-connected photovoltaic segment of the solar industry (which is potentially eligible for grants under this bill) is eligible to compete for 10% of the $540 million, which is the portion designated for new and emerging technologies. That money is awarded according to the number of kilowatt hours produced, not on a per-system basis. As a result, the solar water heating segment of the solar industry is not eligible to compete for this funding because no kilowatt hours are produced. And, by definition, the non-grid-connected photovoltaic segment is also not eligible. DG is small scale production of electricity at or near the point of use, as opposed to central generation, where electricity is produced in large quantities at a remote site and transmitted to multiple users. DG systems range from photovoltaics and fuel cells to gas turbines and diesel engines in residential, commercial and industrial applications. They can operate in conjunction with, or independent of, the electricity grid. Under this bill, solar and DG systems are required to be interconnected with the electricity grid to be eligible for grants. DG systems are further required to be used only to meet onsite electric load, and not sell power. This bill is similar to SB 116 (Peace) of 1998, which established a grant program for solar systems, but not DG systems. In addition, SB 116 reinstated a property tax exemption for the installation of solar systems. SB 116 was vetoed by Governor Wilson, who objected to the grant program, stating a preference for "fair and open market competition without government subsidization of one particular industry." Governor Wilson had already reinstated the solar property tax exemption by signing AB 1755 (Keeley), Chapter 855, Statutes of 1998. COMMENTS 1) Will the grants attract new investment? The goal of this bill is to increase consumer investment in solar and low-pollution DG systems in California by providing grants that make them more cost-competitive. With that increased investment, the theory is that these systems won't need state support to be cost-competitive in the future. The rationale for supporting these systems now is (1) the current environmental and system reliability benefits that individual system installations provide and (2) the anticipated future environmental and system reliability benefits that a thriving solar and DG industry will provide. This bill caps the grant that an individual system can receive at $750 for solar and $2,000 for DG. The type of low-pollution DG systems contemplated in this bill might cost from $7,500 for a household fuel cell to $25,000 for a small commercial turbine. The grant's contribution to the cost of installation of most systems would be relatively small, so the extent that these grants will attract investment in solar or DG system from customers who wouldn't otherwise buy one is uncertain. In some cases, the availability of a grant may have the perverse effect of allowing manufacturers to increase their prices and profits on the state's dime. As a result, it is uncertain how much of the state subsidy will go toward increasing the number of solar and DG systems in use and how much of it will go toward boosting manufacturers' return on investments. 2) On what basis should DG systems be considered to be worthy of public support? While the environmental benefits of solar generation are well established, the benefits of DG systems are highly dependent on the efficiency of the particular system. An onsite solar or combined cycle gas turbine-powered DG system could be a marked environmental improvement over central generation, but a conventional diesel generator would not. This bill requires, as a condition of eligibility, that the CEC certify whether a DG system provides environmental and system reliability benefits equal to or greater than specified fuel efficiency, NOx emissions and reliability standards. These standards are designed to be more stringent than existing powerplant standards. Even with these standards, it may be difficult for the CEC to accurately compare overall benefits to those attributable to existing or competing power sources. The CEC could calculate the total emissions per kilowatt produced by a DG system and compare that to an average for natural gas power plants to determine whether a system produces more or less relative pollution. However, while the per-unit pollution of a DG system could be less, there's no guarantee that the pollution produced by the DG system would displace the pollution produced by existing central power plants. If reliance on distributed generation grows significantly, it may actually displace demand for generation from newer, cleaner central power plants. Assuming that the CEC can make an accurate comparison of the simple pollution impact of a DG system, there is also an important question of where the environmental and system reliability benefits accrue. To address this, the Committee may wish to consider amending the bill to require pollution impacts to be calculated within discreet geographical areas and/or that the CEC coordinate with the Air Resources Board. One option would be to require that environmental benefits are realized within the same air district, although there may be more localized impacts within an air district that should be considered. The Committee may also wish to consider a technical amendment to clarify the NOx standard that would apply to DG systems, on page 9, line 40, by replacing "percent" with "parts per million". 3) Will this bill outlive its purpose? One of the stated goals of the solar energy grant program is to "reduce the cost of solar energy systems so that after four years these systems will not need state support to be cost competitive." However, the program that this bill would establish would continue at least until January 1, 2007. If the program is expected to achieve this goal, the Committee may wish to consider whether it should be established for four years rather than seven. 4) Operational and safety standards for DG. This bill is intended to establish operational and safety standards that apply to DG, which is defined as any onsite, grid-connected generation system used to meet onsite load only (no sales of excess power). However, including this provision in the same section that establishes the DG grant program implies that the standards only apply to grant-eligible systems. To clarify that they apply to all DG systems, the Committee may wish to consider drafting the standards described between page 8, line 23 and page 9, line 7 in their own section. The definition for DG found on page 9, line 24-27 should also be duplicated in the new section. The standards are to be established, and presumably enforced, by the CEC. Ordinarily, the California Public Utilities Commission (CPUC) has jurisdiction over these type of transmission and distribution issues. The Committee may wish to consider whether the CEC should coordinate with the CPUC, or whether the CPUC should instead be the responsible agency. 5) Exactly what is DG? How DG should be defined is the subject of some disagreement. According to this bill, DG means systems that provide onsite power only. Others have suggested that co-generation facilities, which often sell excess power, should be considered DG. The type of facilities that might sell excess power are not likely to otherwise qualify for the grant program, but the operational and safety standards might be relevant to them. 6) Exemption from OAL review. This bill exempts the guidelines adopted to implement these programs from the ordinary requirements that govern the adoption of regulations, including review by the Office of Administrative Law (OAL). Ostensibly, this provision is intended to simplify and/or expedite the adoption of these guidelines. However, OAL was established to provide consistent, centralized review of state agency regulations with the goal of reducing complexity and duplication in regulations. The Committee may wish to consider whether this exemption is justified. POSITIONS Support: Alten, Palo Alto Ameco, Long Beach Astro Power, Walnut Creek Aztec Solar, Sacramento BP Solar California Solar Energy Industries Association, Rio Vista California Manufacturers Association California State Council of Laborers Diablo Solar Services, Martinez Environmental Defense Fund, Oakland Environmental Solar, North Hollywood - 15 letters Goldline Electronic Controls, La Mesa Helioco, Napa Heliotrope General, Spring Valley Horizon Industries, Escondido Leveleg, Precision Solar Mounting Systems, San Diego Morley Manufacturing, Cedar Ridge New Energy Ventures, Inc. (NEV) Off-Line Independent Energy Systems, North Fork Photocomm, Inc. the Wireless Power Company, San Diego PVI Photovoltaic & International, Sunnyvale Real Goods, Ukiah Schofield Solar Energy Company, San Buena Ventura - 2 letters Science Applications International Corporation, San Diego Six Rivers, Eureka Solar Connection, Morro Bay SolarCraft Services, Inc. Novato Solar Depot, Sacramento Solar Unlimited, Burbank Solec, Carson South Bay Solar, San Jose SunEarth, Ontario Sunray Energy, Inc., Daggett, California Sun Utility Network, Los Angeles Western Renewables Group, Mission Viejo Oppose: None reported to Committee. Lawrence Lingbloom SB 655 Analysis Hearing Date: April 13, 1999