California Assembly Bill 327 (AB327), signed into law October 7th, 2013, drew fire from solar and energy efficiency proponents, The Sierra Club, and other environmental groups over the rate-setting powers it would give the California Public Utilities Commission (CPUC). These opponents worry that the bill allows changes in rate and regulatory structure that could discourage renewable energy investment in California. However, local governments, industry groups, utilities and some consumer groups argue these same powers could, used wisely, make electricity rates more equitable, protect consumers and help utilities adapt to an increasingly renewable and distributed grid. Climate Policy Initiative’s analysis suggests they could also create a very fertile and cost-effective environment for renewable energy for years to come.
AB327 allows the extension of the Renewable Portfolio Standard (RPS) and requires the extension of the Net Energy Metering program, both of which Climate Policy Initiative analysis has shown to be significant drivers of renewable energy growth in California. Many of the details of their implementation are left to the CPUC, though, and these details will decide the ultimate impact of AB327 on renewable energy in California.
Renewable Portfolio Standard
Although the majority of the bill’s controversy centered on Net Energy Metering and electricity rate structures, the bill’s largest impact on renewables markets could come from language allowing the CPUC to “require the procurement of eligible renewable energy resources in excess” of the current Renewable Portfolio Standard requirements. Right now, the RPS requires utilities to meet 33% of their retail energy sales with renewable energy by 2020 and in every year thereafter, but was formerly prohibited from requiring a higher percentage. With the passage of AB327, the CPUC can raise that requirement by, for example, setting a requirement higher than 33% after 2020, or by accelerating the current trajectory to 33% renewable energy as dictated by the RPS.
The RPS has been a key driver of the expansion of renewable energy in California by providing consistent demand signals for new renewable energy projects as well as a favorable environment for financing them at low cost. Lowering the cost of financing for renewable energy projects reduces their overall cost to ratepayers and society. Climate Policy Initiative’s modeling of renewable energy financing has shown that there are three major levers for encouraging low-cost financing for renewable energy projects: supplying revenue certainty, supplying a long duration of policy support, and lowering project risk. The RPS does all three.
However, utilities already have most of the contracts they will need to meet their 2020 RPS goals, meaning that the consistent demand signal provided by the RPS will be on the wane unless the CPUC uses its powers to extend the RPS. Such a move could also be crucial for helping the state meet its greenhouse gas emission reduction goal of 80 percent by 2050.
The Tiered Rate Structure and Net Energy Metering
CPI’s analysis has shown that Net Energy Metering combined with the tiered rate structure has been critical in making solar cost-competitive in California and in driving the installation of large numbers of distributed solar systems. The current system makes rooftop solar PV systems attractive investments for residential customers who find themselves in the highest tiers of the rate structure, while offering the long term revenue certainty important to creating a fertile environment for investors and developers.
AB327 extends the Net Energy Metering program, ensuring that consumers who install small (less than 1 MW) renewable generation capacity, like rooftop solar, after 2014will be eligible for some kind of monetary credit on their electrical bill for power they generate and feed back into the grid. However, it also gives the CPUC the authority to flatten the tiered rate structure, including the option to lower rates for the highest users while raising them for the lowest. This leeway could substantially reduce the incentives for customers in the highest tiers to install renewable generation or energy efficiency measures by affecting the Net Energy Metering benefit and the payback period for such projects. And, while there are many good reasons for amending the rate structure – indeed, it will likely be necessary in order for utilities to adapt to higher solar penetration, as explained here, and it could amount to a more equitable distribution of the costs of electricity – the CPUC should try to maintain the benefits of the current system within any reforms. These include long term certainty, revenue support, and simplicity. Options include considering how to incentivize customers to install their own electricity storage and flexibility resources, and encourage the development of solar in places that do not pay the highest electricity rates.
In summary, while AB327 provides some signal for investors in and developers of distributed generation, its ultimate impact on renewable energy depends entirely on how the CPUC chooses to adapt these policies to the needs of an increasingly renewable-energy-based grid.While the CPUC now has the power to extend popular policies that incentivize renewable energy and reduce financing costs, the devil is in the details. Hopefully, the CPUC will recognize in its upcoming regulations the tremendous value of policies like the RPS and Net Metering that provide long term revenue support and certainty, and chose to extend them in ways that reinforce California’s leadership position in renewable energies.