The California solar initiative: how mandatory time-of-use rates chilled the solar energy market.

• Author: Carver, Ben

INTRODUCTION

Governor Arnold Schwarzenegger signed the Million Solar Roofs Bill (S.B. 1) into law on August 21, 2006. (1) The statute, authored by Senator Kevin Murray, authorized an innovative $3 billion performance-based incentive program designed to reduce California's dependence on fossil fuels, decrease greenhouse gas emissions, stimulate the solar industry, and provide leadership in developing alternative energy. One seemingly minor provision, however, undermined these laudable goals. The time-of-use (TOU) mandate--a small component of S.B. l's complex set of incentives--created a billing structure that often penalized solar power users, devastating the program's early performance.

Recognizing the problem, in June 2007 the legislature temporarily suspended the TOU mandate through A.B. 1714, a band-aid bill passed solely to address S.B. 1 's problematic billing structure. But A.B. 1714 simply postponed the issue for later reconsideration; the TOU mandate is scheduled to be reinstated in January 2009. Unless major changes are made to the TOU structure, S.B. 1 will be weakened yet again.

This Note explores the TOU mandate in the context of S.B. 1 's two major goals: 1) encouraging solar energy; and 2) incentivizing the generation of solar energy during periods of peak energy demand. Specifically, we conclude that the TOU debacle reflects the legislature's failure to thoroughly consider the interaction between the methods used to pursue the two goals.

We start with a broad narrative of S.B. 1, describing in general terms how the TOU mandate operated within the program. We then investigate the legislative history and intent of the TOU provision and examine in some detail why the TOU rate failed.

We conclude by arguing that S.B. l's two goals are not inherently incompatible, and that a more carefully crafted piece of legislation can effectively address both goals. We propose that any new legislation do two things: 1) introduce a flat-rate ceiling that will ensure solar power users are rewarded rather than penalized for using solar energy; and 2) expand the incentives for efficient temporal energy use to all energy customers, not just solar power users. These improvements will successfully address the legislature's goals in passing S.B. 1.

1. BACKGROUND

   Unwilling to wait for energy reform on a national scale, California passed S.B. 1 in response to the ever-increasing costs of energy production and concerns about pollution and global warming. (2) However, S.B. 1 was not created from scratch. Rather, it is the current and most expansive policy in a string of efforts to expand solar energy in California by providing subsidies for installations of solar electricity. Collectively, these efforts constitute the California Solar Initiative. (3)

   The first and primary goal of S.B. 1 was to accelerate the adoption of technology converting solar energy into electricity, thus having an immediate impact on greenhouse gases while concomitantly addressing California's ever increasing demand for electricity. (4) Legislators addressed this goal by establishing a series of more specific, interrelated targets: installing 3000 megawatts of solar energy systems throughout the state; establishing a self-sufficient solar industry in California that provides solar energy systems as a viable mainstream option for homes and businesses by 2017; and placing solar energy systems onto fifty percent of new homes by 2020. (5)

   In the spirit of reform, however, the California legislature also used S.B. 1 to address a second, related goal: matching solar energy production to peaks in electricity demand. In the summer, peak-demand usually occurs in the late afternoon, when air-conditioners operate at maximum capacity. So, for example, if energy demand peaks at 3 pro, then ideally electricity created from solar energy would also peak at 3 pm.

   As a means to this end, S.B. 1 provided a simple incentive to prospective solar-energy customers: receiving a rebate for solar-electricity installation was conditioned upon the customer switching to a time-of-use billing structure. (6)

   The bill expressly considers this in economic terms, stating that "a solar initiative should be a cost-effective investment by ratepayers in peak electricity generation capacity where ratepayers recoup the cost of their investment through lower rates as a result of avoiding purchases of electricity at peak rates." As passed, S.B. 1 was widely praised as one of the most aggressive solar programs in the United States. (7)

   However, the practical implementation of the program has been a far more difficult task than imagined, impaired in part by the unintended consequences of mandatory TOU rates. (8) Despite the best of legislative intentions, S.B. 1 stumbled out of the gates, performing especially poorly in hot, desert areas like southern California. While designed to address S.B. l's second goal, the mandatory TOU provision inadvertently created perverse disincentives that undermined S.B. l's first, more important goal. By requiring TOU rates, S.B. 1 had made the apparently untenable assumption that solar power would cover each customer's demand, thereby eliminating that customer's need to purchase electricity from the grid during times of peak demand. Where this assumption was unfounded, solar-energy customers would actually foot higher energy bills. Thus, the very provision meant to incentivize efficient energy usage actually functioned as a devastating financial disincentive. (9) In fact, some customers found that the TOU rates rendered solar-energy more expensive than flat rates with conventional energy.

   Consequently, in the first three months of 2007, the Public Utilities Commission reported a seventy-eight percent decline in requests for solar power equipment rebates; in the Southern California Edison territory, not a single new solar panel was installed between January and May of 2007. (10) By May, the solar installation industry was "threatened with collapse across much of California." (11)

   Aghast at a policy gone awry, the legislature passed A.B. 1714, temporarily suspending the TOU requirement until January 2009. (12) A.B. 1714 was...