Comments on the Utilities' proposals to the Board Of Public Utilities to change the clean energy program, May 6 and July 10, 2002.

COMMENTS ON THE UTILITIES’ PROPOSALS TO CHANGE THE CLEAN ENERGY PROGRAM

Prepared by Dr. David Nichols on Behalf of the
New Jersey Division of the Ratepayer Advocate
July 19, 2002

Overview and Summary

The Clean Energy Program is a renewable energy program that is being operated as part of the Comprehensive Resource Analysis programs approved by the Board of Public Utilities. The Clean Energy Program is administered by the New Jersey Clean Energy Collaborative (NJCEC). The program promotes the installation of qualifying renewable electricity generation technologies sited at the facilities of utility customers. Through a letter to the Board of Public Utilities dated May 6, 2002, the utilities proposed changes in the Clean Energy Program. In a second letter from the utilities to the Board, dated July 10, 2002, one of the proposed changes requested in the May 6 letter was further modified. These comments address each change proposed by the utilities. There are also certain changes that were not proposed by the utilities, but which I believe the Board should consider concurrently with those proposed by the utilities. These further changes are discussed here as well.

My comments are based on my continuing review of the operation of and reported results from the CRA programs. I carry out this review function on behalf of the Division of the Ratepayer Advocate. As background for these comments I attach a table provided by the NJCEC which presents the levels of projects accepted (“reserved”) in the various components of the Clean Energy Program. Though the table is dated May 31, Michael Ambrosio of the NJCEC informed me that it represents the current situation.

The utilities also issued two clarifications of how the Clean Energy Program operates. One clarification was included as the first point in the May 6 letter. The second clarification was contained in a separate letter to the Board dated June 26, 2002. The clarifications do not change the program design and do not require comment here.

Based on my review, I believe immediate changes to the Clean Energy Program are warranted. These changes would affect the operation of the program for the balance of the current program year only. They are intended to improve the effectiveness of the program in causing installation of on-site renewable energy systems in the State, particularly systems in the small to medium size range. They do not involve any modification to the current program year budget of the Clean Energy Program. I suggest four changes for Board consideration. In order of importance they are:

Cap the size of projects eligible for Clean Energy Program incentives at 1 MW, as proposed by the utilities.

Increase the Tier I incentives for Block 1, as well as the percent of project cost that can be subsidized, as proposed in my Comments on the New Jersey Clean Energy Collaborative’s Presentations to the Board of Public Utilities.

Increase the size of Block 1 for medium/large photovoltaic cell (PV) projects only. The total increase would be the 5.23 MW proposed by the utilities on July 10, less any natural gas fuel cell (NGFC) capacity that was reserved in Block 1 in excess of the current 1 MW cap.

Create a new Tier IV incentive level, with lowered incentives for projects in the 300 kW to 1 MW range, as proposed by the utilities.

1. Cap the Size of Individual Projects

The utilities’ May 6 letter proposed capping the amount of capacity from any one project that could receive Clean Energy Program incentives. The proposal to cap project size at 1 MW (1000 kW) is reasonable and in my view should be adopted. Large projects can promptly use up available funds. Even though CRA program funds for renewable energy are being committed at a slower rate than expected, it is still important to focus those funds on small and medium size projects that cannot expect to receive support elsewhere. The May 6 letter correctly points out that larger projects can apply for incentives under the Grid Supply Program, a CRA program administered by the Board. (The utilities’ June 26 letter clarified that only projects which receive no other CRA incentives are eligible for Clean Energy Program incentives.)

2. Increase the Incentive for Small Projects Now

Neither the May 6 letter nor that of July 10 proposes changes in the structure of incentives for “Tier I,” that is, projects of 10 kW in size or less. Small PV systems such as those which might be installed on a home or a small shop fall into this size range. At its meeting with the Board on June 13, the NJCEC explained at length how, despite intensive marketing, only modest progress had been made in interesting residential homeowners in acquiring PV systems. The attached table shows that only 151 kW of the 1000 kW for small projects in Block 1 have been reserved. While continued marketing and education can be expected to increase interest in small scale technologies, there is a case for a dramatic increase in financial incentives to jump-start the market for Tier I size projects. A specific proposal along these lines was included in my Comments on the New Jersey Clean Energy Collaborative’s Presentations to the Board Of Public Utilities (July 8, corrected July 11). I quote the core of that proposal:

“Currently, Tier I incentives for Blocks 1, 2, 3, and 4 are $5, $5, $4, and $3 per Watt, respectively. Moreover, the incentives are currently limited to 60, 50, 40, and 30% of the cost of the renewable energy system for Blocks 1, 2, 3, and 4 respectively. The need is to provide stronger incentives for the uptake of small renewable energy systems. I suggest that for Tier 1 the incentives should be increased to $7, $6, $5, and $4 per Watt for Blocks 1, 2, 3, and 4; and that for Tier 1 projects only, the incentives be capped at 80, 60, 50, and 40% of system cost, respectively.”

The incentives for small systems that I propose here deliberately aim higher than any proposals I am aware of from the solar energy industry or from within the NJCEC. I believe a larger number of projects need to be installed around the State in order to demonstrate the availability of renewable technology, particularly PV technology.

In the program for 2003 and each successive year, the incentives would decline. The NJCEC is considering many changes to the Clean Energy Program to propose for next year. But there is also a need for a mid-course correction relating to the Tier I program for the current year. Something bold is needed.

3. Increase in the Size of Block 1

One major change requested by the utilities is an increase in the size of Block 1 for medium/large projects. The overall Clean Energy Program is divided into four blocks. Blocks are defined in terms of (1) a total amount of capacity, (2) the financial incentive available to renewable energy projects, and (3) the size (in kW) of the individual projects. There are also some restrictions on the portion of each block which technologies of a particular type may utilize. In general, the financial incentives are highest in Block 1, then decline in each successive block. The original (and thus still current) size of Block 1 is 2 MW (2000 KW): 1 MW for small projects of 10 kW or less installed capacity, and 1 MW for projects above 10 kW. The attached table was provided on July 15 by Michael Ambrosio of the NJCEC, who stated that it represents the current state of approved (“reserved”) projects under the program.

The May 6 letter proposed increasing the size of Block 1 for medium/large systems (those over 10 kW) from 1 MW to 2.23 MW. This would be done to accommodate projects which were accepted by the utilities as qualifying for Block 1 incentives. The letter does not explain how the utilities managed to allow over-subscription of Block 1, but this could reflect the fact that to participate in the program, application must be made through an individual utility. Some of the over-subscription of Block 1 was due to natural gas fuel cell (NGFC) projects, whose inclusion in the Clean Energy Program was and is opposed by the Ratepayer Advocate and which I have opposed in my recent Comments on behalf of the Ratepayer Advocate. Some of the over-subscription to Block 1 incentives was due to a large PV project.

While the May 6 letter was still before the Board, the July 10 letter proposed to increase the size of Block 1 for medium/large systems (those over 10 kW) by a further 3 MW, in addition to the expansion to 2.23 that was requested on May 10. The additional 3 MW would only be for PV projects. The total size of Block 1 for systems over 10 kW would thus increase from 1 MW to 5.23 MW. The size of Block 1 for small systems would remain at 1 MW. This further proposed expansion of Block 1 for medium/large projects is partly based on the fact that projects were accepted for incentives under Blocks 2 and Block 3 after Block 1 was filled. According to Mr. Ambrosio, the developers of the projects that were accepted under Block 2 and 3 had submitted their proposals in the hope of getting Block 1 incentives. Indeed, their projects are only financially viable if they get those incentives. Moreover, the PV industry believes that additional projects may be proposed if they can receive Block 1 incentives. One conclusion that can be drawn from the two proposals to increase the size of Block 1 for systems over 10 kW -- first to 2.23 MW, then to 5.23 MW -- is that only the highest incentives, those of Block 1, are currently effective in causing investment in PV technologies.

There is merit in expanding Block 1 to provide a strong impulse to the PV market. Eventually the PV market in the State will have to become more competitive and less reliant on subsidy, if it can. But that outcome is several years down the road. The logic of the Clean Energy Program is to use substantial financial incentives to jump-start the on-site renewable energy market in the State. Given that logic, plus the fact that the overall level of renewable energy activity under the CRA is lagging behind budgeted levels, the expansion of Block 1 should proceed -- but only for PVs, the most innovative and most costly of the on-site technologies.

On the other hand, the portion of the over-commitment of Block 1 reservations that is from NGFCs should not be included in the expansion of the block. We do not know exactly what portion of the capacity reserved under Block 1 for medium/large systems is from NGFCs. But if it were -- for illustration -- 500 kW, then the recommendation would be to increase Block 1 from 1 MW to 4.73 MW for medium/large systems. If inadvertent commitments were made to NGFC projects after Block 1 was actually subscribed, the proposers are due apologies, but not a change in program parameters.

4. Reduce the Incentive for Medium/Large Projects

The May 6 letter proposes to create a new incentive Tier IV. Specifically, the incentives available for projects of 300 kW up to 1 MW in size would be reduced substantially. The objective, as the July 10 letter explains, is to reduce the amount of incentive funding that could be applied to large, non-PV projects, so as to make more funding available for medium-sized projects of 100kW up to 300kW. This change should be implemented as proposed.

IN THE MATTER OF THE FILING OF THE )	BPU Docket Nos.
COMPREHENSIVE RESOURCE ANALYSIS )	EX99050347, EO99050348,
OF ENERGY PROGRAMS PURSUANT TO )	EO99050349, EO99050350,
SECTION 12 OF THE ELECTRIC DISCOUNT )	EO99050351, GO99050352,
AND ENERGY COMPETITION ACT OF 1999 )	GO99050353, GO99050354

PREPARED BY DR. DAVID NICHOLS ON BEHALF OF THE NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE

PREPARED BY DR. DAVID NICHOLS ON BEHALF OF
THE NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE