Let the Sun Shine by Chris Trayhorn, Publisher of mThink Blue Book, May 15, 2006 The California Public Utilities Commission (CPUC) works to ensure Californias energy supply is safe, reliable and reasonably priced. In the aftermath of the energy crisis, the states energy agencies adopted aggressive energy efficiency programs and renewable procurement goals to reduce energy use and the harmful environmental impacts associated with conventional energy generation. In January 2006, the CPUC created the largest solar program of its kind in any state in the country the California Solar Initiative (CSI) a 10-year, $2.5 billion program designed to help California move toward a cleaner energy future and help bring the costs of solar electricity down for California consumers. The goal of the program is to increase the amount of installed solar capacity in the state by 3,000 megawatts (MW) before 2017. California has long been a leader on environmentally sound approaches to the provision of energy. The CPUC adopted formalized policies on renewable power and energy efficiency in our energy action plans (EAP). The CSI continues this tradition with an aggressive new program to promote solar development. We are taking an important step to lay out a framework for an orderly, 10-year approach to creating a sustainable solar industry. Our hope is that solar will become a major part of Californias energy portfolio, to provide clean and inexpensive distributed generation to millions of California consumers. Our plan is to offer a subsidy now to push the deployment of an important part of our sustainable energy future in the long run. This solar program simply offers one of the many emerging alternatives to consumers concerned about a clean energy future. This groundbreaking initiative represents the culmination of more than a years worth of work by the PUC and the California Energy Commission (CEC), as well as considerable work and many discussions in the California legislature and Governor Arnold Schwarzeneggers office. A collaboration of PUC and CEC staff drafted two joint reports in 2005. The first report, issued in June 2005, addressed key concepts related to implementing a statewide solar program, such as program design, funding levels and an implementation schedule. A December 2005 report proposed specific incentive levels, program elements and an oversight and administrative structure and contained recommendations for integrating energy efficiency and advanced metering activities with the CSI. Local Actions Impact Global Solar Cost and Supply California was an early adopter of solar technologies, supporting widespread solar installations through a combination of favorable rates, rules and financial incentives. California is the third-largest photovoltaic (PV) market in the world but is relatively small in comparison to Japan and Germany. In addition, other U.S. states and many countries are increasing their support for installation of solar generation. California installed about 36 MW in 2004 compared with more than 900 MW worldwide. Figure 1 shows the annual installed capacity for the three largest programs and the rest of the world in the last six years. The dashed line represents the annual manufacturing capacity of PV modules at the end of each year. While it would appear that manufacturing capacity is increasingly in surplus, in fact installations grew so rapidly during 2004 that capacity was strained during the year, leading to widespread reports of module shortages in California. Given the current size and future growth potential of the California solar market, solar incentive policy development must now consider a broad number of factors, including worldwide solar market conditions. Solar policy decisions made in Germany, Japan and the rest of the world have an impact on global solar costs, supply and availability and hence have impacts on Californias CSI program. For example, incentive policies in Germany created high demand for PV systems in a very short period, leading to the current supply and demand imbalance and to increased equipment prices worldwide. In contrast, Japan has successfully grown its PV market gradually over the past decade with minimal market disruptions. Spain recently adopted a program similar to the German model. Japans Solar Incentives Focus on the Residential Market In 1994, Japan initiated a federal-level solar rebate program, providing incentives of $9.00 per watt. Average system prices were about $20.00 per watt. The rebates declined annually over the next 10 years; the 2004 rebate was about $0.45 per watt. The program has grown to approve more than 70,000 applications in 2004, which added about 300 MW of solar capacity in that year. Figure 2 shows the average system price, rebate level and number of applications since 1994. Participation increased gradually, system prices in Japan declined substantially and the net cost to the customer remained about the same. Today, the average installed system price is $6.12/watt. In 2006, federal rebates in Japan are scheduled to sunset, although some local governments and entities will continue to support projects with local incentives. The significance of the local incentives is not clear at this time. Annual federal program funding peaked at about $250 million in 1999 and is currently declining with the level of incentives, even with increased applications and has exceeded $150 million in four out of 11 years. The 11-year program budget exceeds $1.5 billion. Germany Utilizes Performance-Based Incentives The electric utilities administer Germanys solar incentive program. Incentives are based on actual energy produced over a 20-year period, paid through a utility feed in tariff, similar to a long-term electricity sales agreement. The program initially provided low-interest loans, available at the applicants bank of choice and administered through the German Reconstruction Loan Corporation. Like California, Germany seeks to reduce CO2 emissions.[1] To that end, policy makers reinvigorated an existing incentive program in January 2004 by increasing feed-in tariffs and, removing restrictions on system size and participations. Per-kilowatt-hour (kWh) purchase prices vary by customer class, system size and physical configuration. Prices for roofmounted PV range from $0.70/kWh for residential customers to $0.55/kWh for large commercial installations.[2] Building-integrated systems receive an additional $0.06/kWh bonus. The purchase price for solar kWh is scheduled to decline by 5 percent per year. Germany has no current plans to alter the feed-in tariff, but terminated the lowcost loans in 2004. Average residential system prices are about $6.40 per watt. The program installed 570 MW between 1999 and 2004, at a cost to date for the purchased electricity of more than $1 billion. About 75 percent of the systems were installed in 2004, due to the increased feed-in tariff. PV incentives in Spain: Spains solar program is similar to the German model. It utilizes a feed-in tariff for PV, and a separate lowinterest loan program. Solar projects receive a guaranteed payment over 25 years of about $0.555/kWh for systems up to 100 kW and about $0.30 per kWh for capacity sizes over 100 kW.[3] There is no cap on the number of systems that may take service on tariff. Loans are limited, which has an impact on program participation. When loan funding ends, applicants tend to wait for the next round of funding even though the feed-in tariff alone makes a system purchase economical. California Solar Initiative The CSI includes the following provisions: $2.5 billion over a 10-year period in rebates that will decline steadily over that same time frame. Funds will come from electric and gas distribution customers of investor-owned utilities and will go toward the installation of solar photovoltaics initially, with solar hot water heating and solar heating and cooling systems being added after workshops are conducted later this year. The California Energy Commission will oversee one component of the program to focus on builders and developers of new housing to encourage solar installations in the residential new construction market. The PUC will oversee the remainder and majority of the CSI, which will cover existing residential housing, as well as existing and new commercial and industrial properties. The program sets aside 10 percent of program funding for lowincome customers and affordable housing installations. The PUC will also explore the option of offering low-cost financing options to those types of installations in workshops this year. The program includes an additional amount of up to 5 percent of the annual budget for potential research, development and demonstration activities, with emphasis on the demonstration of solar and solar-related technologies. The program includes a requirement that solar incentive payments be made not just for installed capacity, but also with emphasis on the performance and output of the solar systems installed, to ensure that these solar investments are delivering clean energy as promised. The program design requires all facilities that receive an incentive to undergo an energy efficiency audit (at a minimum) to identify more cost-effective energy efficiency investment options at the building. The PUC also intends to have further workshops to determine incentives for newly constructed buildings that participate in utility energy efficiency new construction programs and exceed the existing building standards by a certain threshold. CSI Funding Requirements and Allocation The CPUC adopted a budget for the CSI program of $2.5 billion over 10 years, beginning in 2007, though rebate funding of $300 million is available during 2006 through the CPUCs existing self-generation incentive program. The utilities may recover associated revenues in applicable rate-making proceedings. The CPUC set annual CSI budgets so that they are relatively high in the early years and decline in later years as rebate levels fall and, hopefully, as the markets need for financial support decreases. The CPUC also will provide for funding flexibility between program years in recognition of actual demand for funding. Figure 3 provides a schedule describing the utilities collection of revenue requirement, although expenditures may be higher or lower in any given year according to the number and nature of project proposals. The CPUC also allocated up to 10 percent of the total budget funding of $2.5 billion to administrative costs, which includes program evaluation and marketing and outreach efforts. Structure of Incentives The two existing solar incentive programs (prior to the existence of the CSI) managed by the CPUC and the CEC have provided payments on the basis of capacity, with the exception of a small performancebased pilot at the CEC. For capacity-based incentives, a project owner is paid the full incentive on the basis of the projects size as soon as it is installed. One potential problem with this incentive structure is that it does not recognize power production or motivate good project management or maintenance once the project is installed. Projects may even be removed without penalty at any time. Performance-based incentives (PBI), on the other hand, recognize good project performance by paying the project owner on the basis of energy production levels. Such a performance-based incentive structure will promote not only installation of solar projects but also their efficient operation. A good incentive program is one that promotes efficient operation of the solar project to the extent such a program is effective and readily administered. Energy Efficiency Requirements The CPUC and CECs Energy Action Plan loading order requires optimization of energy efficiency measures first, followed by demand response and renewable energy. Consistent with the EAP loading order, the CECs 2004 and 2005 Integrated Energy Policy Report recommends leveraging energy efficiency improvements in new and existing homes prior to installing a solar system. New residential and commercial buildings in California are required to meet standards that ensure a certain level of energy efficiency is attained. These standards are updated periodically to consider new energy-efficient technologies, practices and methods. Typically the investor-owned utilities offer financial incentives to encourage customers to install efficiency measures beyond what is required by the building standards. Requiring existing commercial and residential buildings to retrofit energy efficiency as a condition for solar rebates is more complex. Residential and commercial buildings vary as to achievable energy efficiency levels, making it more difficult to establish uniform requirements or standards. The CSI recommends requiring an existing building constructed more than three years prior to the reservation date to receive an energy audit and submit the results as part of the reservation process for the system. It is our hope that our solar initiative will become a model for the nation. You can track our progress and any new developments on the CPUCs website at http://www.cpuc.ca.gov/static/energy/051214_ solarincentive.htm. Endnotes California proposes to reduce greenhouse gas emissions to year 2000 levels by 2010; to 1990 levels by 2020; and to 80 percent below 1990 levels by 2050, according to Executive Order S-3-05 issued by Governor Schwarzenegger in June 2005. Germanys goal is to reduce emissions to 40 percent of their 1990 values by the year 2020. http://www.bsi-solar.de/english/information/EEG http://www.idae.es/index Totals do not include 2006 funding. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.