California Solar Initiative: Can it Deliver?

California Solar Initiative: Can it Deliver?

Peter Cappers Director, Performance Pricing

March 21, 2006 - The California Solar Initiative (R.04-03-017), created by the California Public Utilities Commission (CPUC) in early 2006 to provide roughly $3.2 billion in incentives for customer-sited photovoltaic (PV) systems (along with other forms of customer-sited solar energy) over 11 years, is the most ambitious publicly-funded solar PV deployment program in the country. According to the press release, the program has the stated goal of increasing the amount of rooftop solar units by 3,000 MW by 2017. The two state energy agencies stewarding the program, the CPUC and the California Energy Commission (CEC), will target installations in commercial and existing residential construction, and new residential building construction, respectively.

With such a large amount of money set aside for this initiative, California will, within a few years, become one of the world's dominant markets for solar PV. California may still remain a distant third to Japan and Germany, however, which today jointly comprise roughly 75 percent of the global market for PV systems. As in these two countries, the rapid expansion of solar PV installations in the Golden State is and will be due in large part to public policy support. Since March of 1998, the CEC has administered its Emerging Renewables Program (ERP), paying out over $196 million of incentive funds to over 13,000 completed PV systems totaling well over 50 MW(AC) of capacity. In 2001, the CPUC established the Self-Generation Incentive Program (SGIP), a PV rebate program targeting larger commercial installations. Since that time the CPUC program has directly supported more than 40 MW(AC) of PV.

Grid-tied PV systems require public support to induce significant customer demand, given the high cost of installation. Without a strong installation infrastructure and supply chain, along with major technological improvements, the costs to install such systems will remain out of reach for the vast majority of cost-conscious consumers, absent policy support. Rebate programs help bring down the purchase and installation costs sufficiently to bring end-users to this burgeoning technology. As demand for these systems increases, the installation infrastructure and underlying technologies should improve, resulting in lower future prices for solar PV installations. Whether these cost improvements can or will make these systems truly economical from a societal perspective, and over what timeframe, is the subject of debate.

More specifically, some have questioned whether California's commitment to solar power will be sufficient to drive PV system costs down to competitive levels by 2017, as envisioned. Others have noted that the historical lack of continuity and stability in California's rebate programs have potentially reduced investor confidence in these markets, thereby somewhat limiting efficiency gains in manufacturing and distribution. Indeed, this concern was a major reason for the CPUC's commitment to an 11 year, $3.2 billion program. Finally, some have wondered whether the specific design of California's incentive programs may have jeopardized the willingness of installers to lower total installed prices, at least at times.

A new report sheds some light on these concerns—Lawrence Berkeley National Laboratory (LBNL) recently published an analysis of the installed costs of PV systems funded by the two California rebate programs ("Letting the Sun Shine on Solar Costs: An Empirical Investigation of Photovoltaic Cost Trends in California"). Over the analysis period, 1998 - 2005 for the CEC program and 2001 - 2005 for the CPUC program, the authors found that costs did indeed decline, significantly under the CEC's rebate program and somewhat less substantially under the CPUC's program (7.3 percent vs. 4.1 percent annual average cost reduction, in real terms, for the CEC and CPUC, respectively). Overall, price reductions in the worldwide market for PV modules had largely been passed through to purchasers on a one-for-one basis. The bulk of the cost reductions in California, however, were found to have come in the form of installation and balance of system costs. This bodes well for policymakers, because it is these costs that are most likely to be affected by state incentive programs. The study also confirms the potential attractiveness of targeting the residential new construction market, as systems installed in that market have come in at costs substantially below the residential retrofit market.

But the news was not all rosy. According to the study, for every $1/W(AC) change in the CEC's rebate level, the pre-rebate installed costs have historically changed between $0.55 - 0.80/ W(AC). This means that higher incentives have not always been passed through to customers fully, instead being absorbed by PV retailers. The report also shows that the structure and size of the incentive can have a measurable affect on the level of pre-rebate costs. The richer incentives in recent years under the CPUC's program, for example, appear not to have motivated system cost reductions to the same extent as under the CEC's program.

In developing the design of the California Solar Initiative incentive programs, policymakers at the CEC and CPUC may benefit from the results of this analysis. The goal of installing 3,000 MW of roof-top solar PV systems by 2017 is a noble one, but will require sustained and aggressive cost reductions. The Berkeley Lab study shows that significant cost reductions have already occurred, but also suggests that the state's focus should be primarily on reducing non-module costs, because module costs are largely set in a worldwide market. Targeting the market for new homes, and supporting more standardized "plug and play" PV systems, are two approaches that might have merit in this regard. The long-term nature of the CSI should also help facilitate this goal as experience in Japan illustrates that a sustained long-term program pays dividends in the form of lower priced systems (In 2004, the average cost of a residential PV system in Japan was reportedly $1.4/W(AC) lower than in California.). Additionally, the historical link between rebate levels and pre-rebate installed costs should be severed by establishing incentives based on customer economics, and by regularly reducing incentives as PV system costs decline. To preserve scarce funds, it may also be advantageous to differentiate incentive levels such that they incorporate the significant cost variations observed by system size, and application type. Incentive differentiation may be especially important given the new and expanded tax incentives for solar offered under EPAct 2005, and the fact that those tax incentives will provide much more benefit to commercial systems than to residential systems. If California can illustrate to the rest of the country that incentive programs for this technology, when properly designed and structured, can allow the market to rapidly develop at reasonable cost, then policy-makers in other states may soon follow with more aggressive policies of their own.

To subscribe or visit go to: http://www.electricenergyonline.com/