BILL ANALYSIS                                                                                                                                                                                                    1
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   SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                  DEBRA BOWEN, CHAIRWOMAN


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|SB 655 - Peace                |Hearing Date:April 13,    | S|
|                              |1999                      |  |
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|As Amended:April 5, 1999      |                          | B|
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                            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