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Policy Report on
AB 1890 Renewables Funding
Report to the Legislature

California Energy Commission
March 1997
Publication Number P500-97-002

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This report was prepared by the California Energy Commission's Renewables Program Committee and is consistent with the objectives of AB 1890. The Commission adopted the views and policy recommendations contained in this report by a unanimous vote on March 20, 1997.

This report represents the conceptual policy framework rather than the details necessary to implement policies. Future procedures are expected to include changes that are necessary to effectively carry out these policies and any further Legislative guidance.

Acknowledgements

Renewables Program Committee
Michal C. Moore, Presiding Member
Jananne Sharpless, Second Member

Renewables Program Committee Advisers
Manuel Alvarez
Rosella Shapiro

Project Manager
Marwan Masri

Principal Authors
Cheri Davis
Bob Huffaker
Tim Tutt

Contributing Authors
Suzanne Korosec
Pramod Kulkarni
Sandy Miller

Project Secretaries
Madeleine Meade
Carrie Hilton

Renewables Program Committee Counsel
Jonathan Blees



Executive Summary


Background

Assembly Bill 1890 (AB 1890), enacted on September 23, 1996, deregulated the electricity industry and established broad funding and allocation guidelines for support of renewable electricity generation technologies over the period 1998 through 2001. The legislation directs the California Energy Commission (Energy Commission) to report to the Legislature by March 31, 1997, with recommendations for allocating funds for the support of renewable energy technologies. This report responds to the requirements of AB 1890.

AB 1890 directs the collection of $540 million from existing investor-owned utility (IOU) ratepayers from 1998 to 2002 to support existing, new, and emerging renewable electricity generation technologies. The legislation directs the California Public Utilities Commission (CPUC) to transfer these funds to the California Energy Commission pending further administrative and expenditure criteria guidelines from the Legislature. Funds are to be used to {1}:

  1. Support the operation of existing and the development of new and emerging in-state renewable resources

  2. Support the operations of existing renewable technologies that provide fire suppression benefits, reduce landfill materials, and mitigate open-field agricultural burning

  3. Support the operations of existing innovative solar thermal technologies that provide peak generation and reliability benefits


AB 1890 directs the Energy Commission to report to the Legislature by March 31, 1997, with recommendations regarding market-based mechanisms to allocate the funds. The programs recommended should include options and implementation mechanisms that {2}:

  1. Reward the most cost-effective renewable generation

  2. Implement a process for certifying renewable resource providers

  3. Allow customers to receive a rebate from the renewables fund

  4. Allocate at least 40 percent of total funds to existing and at least 40 percent to new and emerging renewables

  5. Use financing and other mechanisms to maximize the effectiveness of the available funds


The legislation also requires that the report include consideration of {3}:

  1. The need for mechanisms to ensure that cogeneration using energy from environmental pollution in its process and microcogeneration with a total generating capacity of less than one megawatt (MW) remain competitive

  2. Whether fuel cells should be treated as fuel switching under the legislation, and therefore be eligible to avoid the CTC


Finally, AB 1890 directs three policies that are related to but not fully addressed in this report:

  1. IOUs are required to allow customers to make voluntary contributions to support renewables.{4}

  2. Municipal utilities are directed to collect funds for public-purpose programs, including new investment in renewable resources. {5}

  3. The California Environmental Protection Agency (CalEPA) is required to submit a report to the Legislature by March 31, 1997, that evaluates benefits of the solid-fuel biomass industry and recommends cost-shifting strategies. The legislation also requires coordination between the CalEPA and the Energy Commission's renewable policy efforts.{6}


The Energy Commission began collecting input from stakeholders with an En Banc Hearing on October 16, 1996. This hearing was followed by a series of five Renewables Program Committee (Committee) and staff workshops during November and December. Stakeholders presented proposals on the allocation of funds to the broad technology status categories and to specific technologies, mechanisms for distributing the funds, and certification issues. A Staff Report based in part on information presented by participants during these earlier workshops was distributed to participants for public comments on January 4, 1997, and public input on the Staff Report was received at a Committee Hearing on January 16, 1997. The Committee then developed a Committee Draft Report based upon the review of comments from the January 16 hearing and subsequent written comments. The Committee held a hearing February 27 to receive input on the Committee Draft, and comments from that hearing were incorporated into this Final Report, which was adopted by the Energy Commission on March 20, 1997.


Allocation of Funds

Participants in the Energy Commission's proceedings presented proposals with widely varying implications for the renewables industry. A coalition comprised of most of the established renewable industries proposed allocating 60 percent to existing facilities, with support tied to market clearing prices and funds rolled over to other categories if not needed. Other proposals gave a substantial portion of the funds to emerging technologies or for the marketing of renewables directly to customers.

The Energy Commission evaluated these proposals in relation to the objectives of AB 1890 and developed the allocation strategy summarized in Figure ES-1. The Energy Commission recommends that AB 1890 renewables funding flow through four accounts, designed to provide balanced support for the renewables industry and satisfy the objectives of AB 1890. Each technology status category (existing, new, and emerging) is assigned an account. A fourth account, the consumer-side account, is designed to help develop a consumer-driven market for renewable generation. While the Energy Commission seeks to encourage the development of a consumer-driven market for renewables, the fate of the existing renewables industry should not rest wholly with the consumer market until that market has proven viable. A balance of support to existing and new suppliers is needed to ensure that suppliers will be around to provide renewable power to those consumers who desire it when the consumer market develops.

The existing technologies account is initially allocated 45 percent of the $540 million for the support of existing renewables (with the provision that these funds may rollover to other uses if not needed). The proposal aims to maintain the benefits of the renewables industry by providing support that reflects industry needs, while encouraging movement towards a competitive market by the end of the AB 1890 funding period. Movement towards market-based competition is encouraged by phasing down funding over the four years and by allocating support to three broad tiers, rather than specific technology allocations. The first tier is allocated 25 percent of the funds, the second tier 13 percent, and the third tier 7 percent (totaling 45 percent for the entire account).

Of the 40 percent minimum AB 1890 allocates to new and emerging technologies, the new technologies account is allocated 30 percent of the funds and the emerging technologies account receives 10 percent (additional funds may become available from the existing account rollover). The Energy Commission recognizes that new renewable generation developed with AB 1890 support must eventually be competitive in the power exchange or the direct access market. {7} The proposal provides neither specific technology allocations nor tiers for new renewables; rather, it sets up competitive bidding mechanisms to reward the most competitive and cost-effective new renewable generation without administratively specifying technologies to be supported.

The remaining 15 percent of the funds is allocated for use in the development of a consumer-driven renewables market. The customer credit subaccount is allocated 14 percent of the consumer funds, which will be returned as a bill credit to consumers who purchase renewable energy from either existing, new, or emerging technologies. One percent of the funds is allocated to the consumer information and market building subaccount.

Allocations between accounts are varied over time (see Table ES-1 and Figure ES-2), while maintaining the overall allocations given previously. Funding to the existing technologies account ramps down, while funding to the new technologies account and the consumer-side account ramp up. The existing account ramps down because existing technologies must become increasingly cost-effective over the transition period and the market clearing price may increase over time, reducing the need for funding. The allocations for the new technologies and customer credit accounts increase over time because there are expected to be fewer projects and providers eligible for these funds in the early years than in the later years.


Figure ES - 1
Proposed Allocation of AB 1890 Renewables Funds


Table ES - 1
AB 1890 Accounts - Allocations by Year

Account 1998 1999 2000 2001 Overall
Existing Technologies 57% 49% 41% 33% 45%
New Technologies 24% 28% 32% 36% 30%
Emerging Technologies 10% 10% 10% 10% 10%
Customer-Side 9% 13% 17% 21% 15%


Funds roll over within the same account when not needed, potentially increasing available funds in later years. The Energy Commission is assuming that funds will be collected from utilities and allocated to accounts in four equal allotments over a four-year period.


Figure ES - 2
AB 1890 Accounts - Allocations by Year



The Energy Commission proposes that funds in undersubscribed accounts for any period roll over to the same account in subsequent periods (this rollover applies also within the tiers in the existing technologies account). By the end of 2001 it will become apparent whether rollover funds are not needed in their own accounts and can be reallocated elsewhere. The first three percent ($16.2 million) of the total AB 1890 funding for renewables, if available as rolled over funds at the end of 2001, will be allocated to emerging technologies. Any remaining rollover funds will be reallocated based on an assessment of market conditions at that time.

The Energy Commission assumes at this time that the AB 1890 funds will equal $540 million collected evenly over a four-year period, providing $135 million per year. The legislation is ambiguous, however, about the timing of $75 million. If the cash flows in the first three years are lower than the assumed level of $135 million, then we expect that it will be possible to use undistributed funds from the new technologies account to support the existing, emerging and customer accounts at or near the levels that will occur if the funds are collected evenly over four years.

In the event that the level of undistributed funds in the new account is insufficient to fill any shortfall, then the available funds will be proportionally allocated to the various accounts based on the percentages shown in Table ES-1. Any such adjustment will not affect the overall allocation of AB 1890 funds. If the timing of cash flows makes it necessary to allocate funds to existing technologies in 2002, then those funds will be distributed using target technology prices and payment caps in effect during 2001. The Energy Commission will continue to coordinate with the CPUC to resolve the cash flow issue in a timely manner.


Distribution Mechanisms

Since the market characteristics of the renewables industry vary substantially between existing, new, and emerging technologies and between suppliers and consumers, a "one size fits all" approach for the distribution of the renewables funds will not provide the best means to develop a self-sustaining renewable industry in California. The Energy Commission proposal contains four separate distribution mechanisms for the four accounts. The mechanisms for the existing technologies, the new technologies, and the customer-side accounts are all per kWh incentives, differentiated by characteristics particular to the circumstances of those accounts. The distribution method for the emerging technologies account will consist of project specific distribution mechanisms to be determined prior to, or as part of, multiple competitive Requests For Proposals (RFPs). The proposed distribution mechanisms are summarized in Table ES-2 and described in detail in Chapters 3 through 6.

The Energy Commission's proposed distribution mechanisms are market-based, simple, and flexible. They allow market players to decide whether to expand or contract operations, to determine which new technologies will be built, and to choose whether to purchase electricity from renewable suppliers or from traditional sources. The mechanisms proposed include simple caps and react to market clearing prices to automatically avoid most overpayment or underpayment issues. They reflect, but do not duplicate, the proposals from stakeholders who participated in the Energy Commission's extensive information gathering proceedings.


Table ES - 2
Summary of Distribution Mechanisms

Distribution Mechanism Features
1. Per kWh Production Incentive
(Existing Technologies Account)		 Amount determined by lesser of:

  1. target prices minus market clearing prices
  2. available funds divided by generation; or
  3. specified production incentive caps

Payments made on a monthly basis

Rain check provision for scheduled plant improvements

Three subaccount "tiers," with different target prices and caps
2. Per kWh Production Incentive
(New Technologies Account)		 Allocation to specific suppliers determined by a simple auction

Funds distributed over a five-year period

Payments made on a monthly basis
3. Project-Specific Support
(Emerging Technologies Account)		 Distribution mechanism determined on a project-by-project basis

Could include interest rate or capital cost buy-downs, customer rebates, and other forms of assistance
4. Per kWh Consumer Incentives
(Consumer Credit Subaccount)		 Amount determined by lesser of:

  1. available funds divided by eligible renewable generation; or
  2. a 1.5 cent/kWh incentive cap

Payments made monthly


Existing Technologies Account

The existing technologies account distribution mechanism is a simple cents per kWh payment tied to the relationship between target prices and the market clearing price for electricity, along with the number of kWh generated. Target prices are fixed cents per kWh levels established for the three tiers in the existing technologies account, set to reflect a competitive energy price for the technologies in the tiers, accounting for their approximate average costs and other revenue streams (e.g., tax credits and capacity payments). Payments are made only when the "market clearing price" falls below the target price for a tier, minimizing any unneeded support from the fund.{8} The highest target price, for Tier 1, ramps down to equal the target price for Tier 2 by 2001. Suggested target prices and production incentive caps for the existing technologies account are summarized in Table ES-3.

Table ES - 3
Target Prices and Payment Caps for Existing Technologies
(Cents per kWh)


1998 1999 2000 2001
Tier 1
(Biomass,* Solar Thermal)		 Target Price 5.0 4.5 4.0 3.5
Cap 1.5 1.5 1.0 1.0
Tier 2
(Wind)		 Target Price 3.5 3.5 3.5 3.5
Cap 1.0 1.0 1.0 1.0
Tier 3
(Geothermal, Small Hydro, Digester Gas, Landfill Gas [LFG], and Municipal Solid Waste [MSW])		 Target Price 3.0 3.0 3.0 3.0
Cap 1.0 1.0 1.0 1.0
*For the purposes of this report, the Energy Commission has classified whole waste tire combustion as biomass.


New Technologies Account

Prospective new projects will bid for the amount of support they require. Bids will consist of a cents per kWh amount and an expected amount of generation. Projects that bid the lowest support request will receive support, subject to a 1.5 cents per kWh cap, with higher bids considered until funds are fully allocated. Winning projects will receive support for five years from their on-line date, but must be on-line prior to December 31, 2001.


Emerging Technologies Account

The Energy Commission proposes that funds from the emerging technologies account be distributed to technologies or projects based on the outcome of multiple competitive Requests For Proposals (RFPs). The specific form of support for winning projects will be determined on a case by case basis. The RFPs will be administered by the Energy Commission using criteria to be developed during the implementation period following the completion of this report and its consideration by the Legislature.


Consumer-Side Account

The consumer-side account includes funding for both customer credits, and for consumer information and market building activities. Of these two subaccounts, only the customer credits require a fund distribution mechanism; the Energy Commission proposes that these funds be distributed through a simple per kWh consumption credit. The credit will be paid out through certified providers (marketers, aggregators or suppliers who sell directly to end-use consumers) with the value determined by dividing available funds by the total kWhs of qualifying renewable power sales in each period, subject to a cap of 1.5 cents per kWh. Credits received must be reflected in consumer bills.


Proposed Certification Process

The Energy Commission proposes to certify renewable resource suppliers and providers both for eligibility for AB 1890 funds and for direct access priority (where the term "direct access" refers to both physical direct access and contracts for differences). These suppliers and providers will self-certify through a simple process described below, subject to verification by the Energy Commission. Certification as a renewable supplier or provider for the purposes of direct access priority will be based on the definitions of renewable resource technologies given in AB 1890 and further clarified in Chapter 9 of this report. Certification as a renewable resource supplier or provider for purposes of funding eligibility will be based on those definitions, but will also include the additional eligibility requirements for the particular funding accounts specified in Chapters 2 through 6.


Supplier Certification

Renewable resource suppliers (generating facilities) wishing to be certified for the purposes of either participation in direct access priority or support from AB 1890 renewable funds will file a simple, standardized self-certification form with the Energy Commission. This self-certification form will include, at a minimum, the following information:

  1. Name and location of generating facility

  2. Name, business address, telephone and telefax numbers of contact person

  3. Description of renewable resource technology used for power generation

  4. Size of facility (nameplate) and capacity of interconnection to grid

  5. Operational date of generating facility (including dates of additions such as repowering)

  6. Type of contract with utility (if applicable) and whether and for how long the contract includes fixed energy prices

  7. Percentage of fossil fuel, if any, used in generation (must be 25 percent or less)

  8. Whether the certification is for accelerated direct access, payment of renewables funds, or for both accelerated direct access and payment of renewables funds


The Energy Commission recommends that each certified renewable supplier be assigned a unique supplier identification number to help maintain project confidentiality. All certified renewable suppliers will be required to report performance and other relevant information on a monthly basis. This information will be used to verify continued eligibility for accelerated direct access (based on average annual generation) and/or to determine the level of payment to be made from the renewables funds.


Provider Certification

The Energy Commission proposes that renewable resource providers (marketers, aggregators, or generators selling directly to end-use customers) seeking to participate in either accelerated direct access or support from AB 1890 renewables funds also file a simple, standardized self-certification form with the Energy Commission. The self-certification for providers will include, at a minimum, the following information:

  1. Name, business address, telephone and telefax numbers of company

  2. CPUC provider registration number (if available)

  3. Contact person responsible for retail sales

  4. Description of the proposed supply portfolio (or portfolios, if provider offers more than one generation product to customers) {9}

  5. Estimated generation to be obtained from certified renewable sources

  6. List of supplier identification numbers for certified renewable sources

  7. Estimated generation to be obtained from other sources

  8. Whether the certification is for accelerated direct access, payment of renewables funds, or for both accelerated direct access and payment of renewables funds


The Energy Commission endorses the use of a unique identification number for each certified renewable provider, similar to that used for suppliers. This identification number could be used for both registration with the CPUC for direct access and for certification, reporting and verification through the Energy Commission.

All certified renewable providers will be required to report performance and other relevant information on a monthly basis. This information will be used to verify continued eligibility for accelerated direct access (based on average annual generation in each supply portfolio) and/or to determine the level of payment to be made from the renewables funds.


Monitoring and Enforcement

The Energy Commission proposes that an independent non-government entity under contract to the Energy Commission, or the Energy Commission itself, be responsible for certifying and monitoring renewable resource suppliers and providers. The information from monthly reports will be examined to ensure that output from a particular supplier has not been claimed more than once. Verification that providers selling to customers receiving direct access have provided 50 percent or more of the customers' load from renewable sources will be done on an annual basis.

For transactions going through the Independent System Operator, complete verification can be accomplished by cross-checking numbers filed by providers and suppliers with ISO transactions. Penalties for falsely self-certifying or reporting could vary depending on the nature of the violation and may include exclusion from payment of funds, probation for continued eligibility for accelerated direct access, cancellation of certification, repayment of and loss of any future renewables funds, or prosecution for fraud under existing state and federal laws.


Microcogeneration, Cogeneration
Fueled By Pollution and Fuel Cells

AB 1890 directs the Energy Commission to include consideration of the need for mechanisms to ensure the competitiveness of microcogeneration and cogeneration fueled by pollution. The legislation also requires consideration of whether fuel cells should be treated as fuel switching for purposes of exemption from the competitive transition charge (CTC).

An economic analysis by Energy Commission staff (discussed in Appendix C) provides strong evidence of the need for mechanisms to ensure that microcogeneration and cogeneration fueled by pollution remain competitive. One such mechanism would be a CTC exemption. There may be other mechanisms that could be used; however, the Energy Commission makes no recommendation for any particular mechanism at this time without further analysis and discussion of alternative mechanisms.

The Energy Commission proposes that fuel cells be found to meet the definition of renewable technology when they use non-fossil fuels and that they be found to fall within the category of fuel switching for purposes of CTC exemptions, regardless of fuel.


Definitions

AB 1890 defines "renewable resource technologies" as "electricity produced from other than a conventional power source within the meaning of Section 2805, provided that a power source utilizing more than 25 percent fossil fuel may not be included."{10} Renewable resource technologies include, but are not limited to, facilities that use the following energy sources to generate electricity:

  1. Solar

  2. Wind

  3. Geothermal

  4. Solid fuel biomass

  5. Whole waste tire combustion

  6. Municipal solid waste that does not consist primarily of products originally manufactured from fossil fuels

  7. Gas from anaerobic digestion of biological wastes

  8. Hydropower with a generating capacity of 30 megawatts or less


The term "in-state generation" is defined as production of electricity by generation facilities physically located in the state of California. By this definition generating facilities located outside California that use renewable fuels from the state are not eligible for support, even if they own transmission lines in California.

The term "existing renewable resource facility" is defined as a facility, using a renewable resource technology, that is located in California and became operational (generating electricity for sale) prior to September 23, 1996.

The term "new renewable resource facility" is defined as a facility, using a renewable resource technology, that is located in California and became operational (generating electricity for sale) on or after September 23, 1996.

Existing facilities that are substantially refurbished on or after September 23, 1996, may compete for funding support from the new technologies account, but if successful they cannot continue to hold a utility contract that pays long-term fixed energy or capacity prices. A refurbished facility is considered to be a "new renewable resource facility" for the purposes of AB 1890 fund distribution if the fair market value of the non-refurbished portion of the facility does not exceed 20 percent of the refurbished facility's total value. Improvements to or enhancements of existing technologies will be eligible to compete for funding support from the new technologies account if the incremental generation is not subject to sale through a utility contract that provides long-term fixed energy or capacity payments.

The term "emerging renewable (resource) technology" is defined as a renewable resource technology located in California that uses photovoltaic technology, or is determined by the Energy Commission to be emerging from research and development and to have significant commercial potential.



FOOTNOTES********************************

  1. Article 7, 383.a.

  2. Article 7, 383.b.

  3. Article 7, 383.c.

  4. Article 7, 381.d.

  5. Article 8, 385.a.

  6. Article 9, 389.

  7. The term "direct access market" is used in this report to refer to both physical direct access transactions and contracts for differences.

  8. The Energy Commission proposes that market clearing prices be estimated based on monthly average utility short run avoided costs (SRAC), until such time as the CPUC determines that the power exchange price adequately represents market clearing prices. At that time the monthly average power exchange price will be utilized.

  9. By supply portfolio, we mean a proposed mixture of generation options that is offered as a package to customers. Portfolios could be all renewable, all one technology, all local, all conventional, or mixtures of the above, and would have different prices reflecting the characteristics of the portfolio. Customers will then choose among the offered portfolios depending upon their preferences about generation options and prices.

  10. Article 7, 381.b.3.



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