by David Niebauer

A recent decision by the California Public Utilities Commission (“CPUC”) has reinvigorated and expanded the Self-Generation Incentive Program (“SGIP”) by greatly expanding the technologies that are eligible for the program and creating up-front rebates plus performance-based incentives for developers and manufacturers working to install these technologies.

The impetus for the new expanded program was legislative action taken in October 2009 in Senate Bill 412.  That bill authorized the CPUC, in consultation with the California Air Resources Board, to expand eligible technologies based on greenhouse gas (“GHG”) emissions, and extended the expiration of the program to January 1, 2016.  In addition, on September 10, 2011, Assembly Bill 1150 allowed SGIP money to be raised by the state’s electric utilities for an additional three years through 2014. The program collects $83 million annually from ratepayers through their electricity bills.

The SGIP was established in 2001 as a peak-load reduction program seeking to encourage the development and commercialization of new distributed generation (DG) – generation installed on the customer’s side of the utility meter.  In 2007, the solar portion of the SGIP was replaced with the California Solar Initiative, a much larger program that has met with considerable success.  Originally funded with $2.167 billion to cover a 10-year period, the program is nearly out of cash, but has been instrumental in California leading the country in solar installations. A recent report by the Solar Electric Power Association (SEPA) shows all three of California’s investor owned utilities (IOUs) in the top ten utility solar rankings for 2010 – much of it DG.

From 2007 – 2010, the SGIP was only available for small wind turbines, fuel cells and advanced energy storage.  The expanded program now includes wind turbines, fuel cells, organic rankin cycle/waste heat capture, pressure reduction turbines, advanced energy storage, and combined heat and power gas turbines, micro-turbines, and internal combustion engines – provided they achieve reductions in GHG emissions.

The following chart shows each eligible technology with the incentive in dollars per watt:

Technology Type Incentive ($/W)

Renewable and Waste Heat Capture

Wind Turbine                                                                                                  $1.25                        Waste Heat to Power                                                                                     $1.25                   Pressure Reduction Turbine                                                                        $1.25

Conventional Fuel-Based CHP

Internal Combustion Engine – CHP                                                           $0.50         Microturbine – CHP                                                                                       $0.50                        Gas Turbine – CHP                                                                                         $0.50

Emerging Technologies

Advanced Energy Storage                                                                               $2.00                   Biogas                                                                                                                 $2.00                      Fuel Cell – CHP or Electric Only                                                                   $2.25

For projects under 30kW, the entire incentive will be paid up front.  For larger projects, the incentive will be paid 50% up front and the remainder over a five year period, based on capacity factors.

Size does matter, and the incentive will be tiered as follows:

0-1 MW = 100 %                                                                                                                                   1-2 MW = 50 %                                                                                                                                     2-3 MW = 25 %

Pointing to the CSI as its model, the CPUC has adopted a declining incentive structure to “gradually reduce the market’s reliance on a subsidy”.  The decline will apply a 10% annual reduction for emerging technologies and 5% annual reduction for all other technologies, with the first reduction starting on January 1, 2013.

The decision puts a 40% “concentration limit” on manufacturers (i.e., no one manufacturer can claim more than 40% of the incentive slated for any given year).  This concentration limit will not apply to project developers, however.

The funds collected each year will be allocated with 75% dedicated to the renewable and emerging technology bucket and 25% dedicated to the non-renewable bucket.

The new program will require a service warranty in addition to a parts warranty.  The CPUC has requested stakeholder input on the length of the warranty for the “reasonable expected useful life of a project”.

SB 412 also directed the CPUC to provide “an additional incentive of 20 percent from existing program funds for the installation of eligible distributed generation resources from a California supplier.” This additional incentive can be found in Section 3.5 of the 2009 SGIP Handbook.

At least one California manufacturer of natural gas fired microtrubines is touting the new CPUC decision as a boon to DG installations and energy efficiency.  Developers who deploy waste heat recovery systems should also be pleased by the decision.  More efficient use of on-site energy generation and storage will not only reduce GHG emissions, but also ease transmission and distribution infrastructure bottlenecks.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.  www.davidniebauer.com

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