A Historic Day and the Morning After

I joined a joyous group yesterday at San Francisco city hall to celebrate the 3-1 vote in favor of the CPUC’s California Solar Initiative (CSI). Allocating $3.1 billion in solar incentives over the next 10 years, CSI is historic in proportion and puts California back into contention for global leadership in solar power. The commission’s vote brings some closure to a two-year roller coaster ride of ups and downs in the development of a comprehensive solar policy for the state. However, in the light of the morning after, there are some serious issues facing California’s solar future that will pose big challenges for the next 2 to 3 years.

It’s impossible not to be excited about the scope of CSI. Indeed last night as Gavin Newsom, Michael Peevey, Dian Grueneich, and others joined the solar crowd to celebrate, the mood seemed positively giddy. There was a lot of backslapping and, yes, I personally witnessed a number of “high-fives.” From my perspective there are three aspects of CSI that make it compelling:

·         2006 stopgap funding of $300MM – California’s commercial solar market has been mired in incentive funding shortfalls for two years now. By adding $300MM to the existing programs, the commission has enabled the market to progress while the details of CSI implementation are sorted out. That’s great news for all the solar projects that have been in a holding pattern.

·         10-year program creates market certainty – In some ways the best part of the CSI is the long-term vision it projects. Previous programs had been renewed in 3-year increments. The long term commitment provides the necessary market certainty to encourage greater investment in solar startups and project financing.

·         Shift to performance-based incentives – The CSI puts a big emphasis on transition to performance-based incentives. This is a necessary and important step to ensure that ratepayers get the clean energy they’re paying for. Performance based incentives will also encourage new forms of private solar project financing and put more emphasis on reliability of solar power systems and technologies.

For those who have been involved in the policy-making process with the CPUC and the legislature, the passage of CSI is something of a surprise outcome from what has been a difficult two-year process to map California’s solar future. Two-years ago, the Self Generation Incentive Program (SGIP), the primary incentive program for commercial-scale grid-tied solar applications, which had in previous years operated with an annual surplus of funds, exhausted its solar funding in just two months. The Emerging Renewables Program (ERP) that serves residential customers experienced similar fund shortfalls. Both programs were victims of their own success—they stimulated demand for solar power that grew faster than policymakers anticipated.

2004 started out on a promising note with the update to the joint Energy Action Plan and amazing progress on the Renewable Portfolio Standard (RPS). However, attempts in the legislature and in the CPUC to fix the solar incentive program funding problems were largely failures. As 2004 turned to 2005, everything seemed in disarray—the solar community couldn’t seem to agree on what was needed and solar advocates had a hard time finding common ground with other players in the distributed generation lobby. The distributed generation proceeding (DG OIR) at the CPUC began to get bogged down in technical administrative issues and the positions of various parties to the proceeding seemed impossibly divergent.

The lowest point in the process came in the Fall of 2005 with the failure of SB1 in the legislature (the original California Solar Initiative) and the publication of the draft cost-benefit methodology proposal from Itron in the DG OIR proceeding. The first hint I saw that things were turning around was in a meeting our policy team had with commissioner Peevey in September. While carefully avoiding any ex parte issues, we communicated our general frustration with the direction of the CPUC’s proceeding was taking. Peevey indicated that he was working with the governor’s office directly on a solution and that he was confident of a positive outcome. In the end, it was the determined efforts of Peevey and Governor Schwarzenegger that provided the political momentum to create the CSI (plus the hard work of many in the solar industry!). Working together they effectively pulled a rabbit out of a hat—using the commission to deliver what the legislature could not, a comprehensive and long-term platform on which to build California’s clean energy future.

In the light of the morning after yesterday’s celebration, there are serious supply and policy issues on the horizon that are cause for concern. These include:

·         Silicon supply issues – The PV industry is going to be seriously challenged by the global shortage of silicon. A recent report from Piper Jaffray underscores the seriousness of this issue. Their report indicates that in 2006 and 2007 solar industry growth will be constrained by supply to just 5% growth. For an industry that has been growing by leaps and bounds that is going to be like hitting a brick wall. The silver lining to this is that the combination of increased incentives and constrained supply should drive even more investor interest in silicon alternatives, efficient silicon technologies, and solar concentrators (full disclosure: I work for a Energy Innovations, a company developing a solar concentrator).

·         CSI program development – The details of how the CSI is implemented will be the focus of the DG OIR proceedings for much of 2006. The administrative details will be as important as the program itself. I expect that there will be numerous attempts to undermine CSI’s effectiveness through proposed rule changes and administrative details that will make it difficult or risky for program participants. It will be critically important to maintain the momentum and intent of the CSI throughout to avoid a “death of a thousand cuts” via the commission process.

·         Attacks on net metering – PG&E served notice to the commission recently that they were approaching their net metering cap under the original net metering law. I expect there will be a minor battle in the legislature and CPUC to extend the cap and maintain continuity for net metering applicants. Simultaneously, the utilities are making noises about shifting net-metering rules to credit customers at wholesale electric rates rather than retail rates. Net-metering is a major driver of the economic return of a solar power system and factors heavily in the decision to invest in solar projects. By altering net-metering rules, the utilities could undermine the CSI via backdoor means.

·         Return of SB1 – It’s looking like there may be an attempt to revive a solar power bill in the state legislature. This reflects the political tension between the legislature and the CPUC and the perspective by some in Sacramento that the CPUC has usurped legislative authority by passing the CSI. If a bill passes that is not well harmonized with the CSI, the process of working out the differences could slow CSI implementation down for months or even years. I expect the proponents of a solar bill to engage in some political doublespeak, attempting to torpedo key aspects of CSI under the banner of a pro solar agenda.

I certainly don’t mean to dampen the excitement of yesterday’s celebration. But it’s important that the industry go into the next year with eyes wide open. The solar industry has shown itself to be a smart and resilient group. Through a combination of smart investment, entrepreneurship, and political savvy, I anticipate huge advancement of solar power in the next few years. That’s great news for California, the U.S. and the world.