The California Public Utilities Commission (CPUC) works to ensure California’s
energy supply is safe, reliable and reasonably priced. In the aftermath of the
energy crisis, the state’s 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 California’s 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 year’s
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 Schwarzenegger’s 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 California’s 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.

Japan’s 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 Germany’s 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 applicant’s 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: Spain’s 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 CPUC’s 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 market’s
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 project’s
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 CEC’s 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 CEC’s 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 CPUC’s website at
http://www.cpuc.ca.gov/static/energy/051214_ solarincentive.htm.

Endnotes

  1. 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. Germany’s goal is to reduce emissions to 40 percent of their 1990 values
    by the year 2020.
  2. http://www.bsi-solar.de/english/information/EEG
  3. http://www.idae.es/index
  4. Totals do not include 2006 funding.