AB 327 Threatens Existing Solar and Renewable Projects in California

by Best Best & Krieger LLP
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BB&K's Sophie Akins and Joshua Nelson Write about the New Law's Implications

PublicCEO.com - February 10, 2014

In October 2013, Gov. Jerry Brown signed into law Assembly Bill 327 that may significantly change the economics of roof-top solar and similar renewable energy projects for public agencies, businesses and homeowners. In part, AB 327 alters the state’s net energy metering (NEM) law by permitting the California Public Utilities Commission (CPUC) to modify these standard contracts and tariffs for existing customers of California’s investor-owned utilities (IOUs) –San Diego Gas & Electric, Pacific Gas & Electric and Southern California Edison, after the end of a CPUC-determined transition period. Once this transition period is over, existing NEM projects will likely be subject to less solar-friendly, higher-cost NEM contracts. The CPUC is currently considering how to structure the transition period, and parties have proposed widely different transition periods (five years versus 30 years). Anyone with an affected renewable project can and should provide their input to the CPUC.

Smaller renewable energy projects like roof-top solar have become an important way in which California hopes to meet its goal of 33 percent of renewable energy by 2020. NEM is an important tool for solar projects, in particular to ensure such projects are economically viable. Current NEM contracts permit customers to use the grid like a battery, feeding energy into the grid and rolling their meters backwards during the day and then utilizing these credits during the night.

The current NEM structure has been criticized by California’s three IOUs, arguing that NEM customers are not paying for enough of the transmission and distribution costs. These concerns have especially focused on residential customers as studies have found that nonresidential customers under NEM contracts, such as public entities, actually pay significantly more than their share of such costs.

AB 327 responds to the utilities concerns by permitting the CPUC to develop a new NEM tariff for future NEM projects taking service beginning July 1, 2017 or when the IOU reaches an existing statutory cap on eligible renewable projects. A tariff is a CPUC-approved rule or regulation that applies to an IOUs’ customer. In this context, it is helpful to consider the tariff as the standard NEM contract for all customers, and tariff and contract can be used interchangeably. This new tariff will presumably reduce NEM customers’ energy cost savings by providing less of a credit for energy generated and fed into the grid.AB 327 does not limit this change to new projects. It also directs the CPUC to determine a “transition period” for current customers to continue under the existing NEM tariff before being subject to the new NEM tariff. The CPUC is required to consider a “reasonable expected payback period based on the year the customer initially took service” when establishing the transition period.

This provision will have a very large impact on all existing NEM customers, including public agencies. When customers invested in renewable projects, they did so with the understanding that they would benefit from the current NEM structure and receive the expected energy savings for the life of the system. Reducing these savings may affect the economic viability of existing projects.

Renewable stakeholders opposed AB 327 when it was being debated and requested that existing NEM customers’ investments be protected. Unfortunately, amendments to AB 327 did not directly address these concerns. However, in signing AB 327, Brown stated, “I expect the Commission to ensure that customers who took service under net metering prior to reaching the statutory net metering cap on or before July 1, 2017, are protected under those rules for the expected life of their systems.”

The CPUC has already opened the NEM transition period proceeding and invited comments from interested parties on how the transition period should be structured. This proceeding is under significant time pressure as AB 327 requires the CPUC to establish the NEM transition period by March 31. This short timeline has impeded participation. On Nov. 27, (the day before Thanksgiving), the CPUC issued a ruling requiring parties to submit comments on the transition period by Dec. 6 with reply comments due Dec. 16. While the CPUC ultimately granted a short extension, comments and reply comments were submitted in December with limited supplemental comments due on Jan. 6.

Numerous parties are participating in the proceeding. These parties have advocated for widely divergent lengths in the transition period. PG&E and SDG&E have argued for a standard 10-year period through 2023 that would apply to existing projects. Projects installed before 2016 would be subject to a six-year period, and projects installed in and after 2016 would transition to the new NEM tariff in 2017 or when that IOU reached its statutory cap. SCE proposed a standard 10-year period through 2023. Other stakeholders have argued for as much as a 30-year transition period.

The IOUs maintain that the transition period should be limited to the average residential or commercial customers’ break-even point, the point at which the average customer recoups the cost of its solar investment. The IOUs have been very dismissive of the governor’s statement. In fact, SDG&E has brazenly suggested it should be ignored and provides “no basis” for the CPUC’s consideration of the transition period. Other parties believe that early adopters of renewable energy should not be penalized for doing so and should receive the expected energy savings for the life of their projects.

This issue is especially important for affected public agencies. The IOUs calculated their average break-even points by excluding all public projects and by including assumptions like expected tax benefits that do not apply to public projects. This may result in a transition period that does not fairly treat public agencies. In addition, many agencies’ renewable energy investments were authorized under statutes that require the agency to determine that the investment would save energy costs. Simply focusing on break-even undermines these findings.

While the initial comment period has finished, there are still opportunities for interested agencies and parties to participate. In addition to potential future hearings and briefings, the CPUC will be issuing a proposed decision within the next few months, and parties will be able to comment on that decision.

Through participation by the public sector, a strong cohesive message can be sent to the CPUC that changes that may result in losses to those who have committed to renewable energy generation are not an acceptable option. By participating in the CPUC proceeding, public agencies can help affect the outcome.

* This article first appeared in PublicCEO.com on Feb. 5, 2014. Republished with permission.

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