California’s Solar Hot Water Initiative

Michael Giberson

Yesterday the California Public Utilities Commission approved a program to subsidize installation of solar hot water heaters.  Green Inc. at nytimes.com provides a description of the solar hot water program.  The description emphasizes the goals of the program (reduce use of natural gas and electricity to heat water, primarily in order to reduce greenhouse gas emissions) and highlights the incentives offered to homeowners and owners of multifamily commercial buildings.  The description omits completely any description of who will fund the subsidy.  Fortunately, the story provided a link to the CPUC decision which provided the rest of the story.

Under the program, a Public Goods Charge will be added to the bills of natural gas consumers to collect $250 million fund for replacing gas water heaters with solar thermal water heaters.  An additional $100.8 million fund for replacing electric water heaters will come from California Solar Initiative money already being collected through a charge on electric consumers.

Analysis conducted for the CPUC determined the program was “cost effective for ratepayers and in the public interest,” as the state law requires, though that conclusion was disputed in regulatory proceeding. (Summarized here in the CPUC decision.)  In high gas cost scenarios the program was readily found cost effective, but the CPUC focused on the stable-gas-price “Business as Usual” scenario (as the worst-case or most conservative scenario from the point of view of cost-effectiveness).  Using a “society as a whole” perspective and the Business as Usual scenario, the program was determined to be cost effective if cost reductions of 16 percent relative to current costs can be achieved over the eight-year program duration.

Which kind of sounds like a conclusion that the program would not be cost effective.  However, the decision assures us, commission staff have examined the tools, materials and methods use to build and install solar hot water systems, and staff concludes “a 16% cost reduction is a reasonable expectation.”

I wonder if they considered the possibility of a low-priced natural gas scenario?


3 thoughts on “California’s Solar Hot Water Initiative

  1. “I wonder if they considered the possibility of a low-priced natural gas scenario?”

    You mean, kind of like the price environment in place now? Shirley you can’t be serious?

  2. A 16% cost reduction in solar thermal is quite reasonable. The industry is currently fragmented and dominated by custom installations. Adding some professionalism and mass production to the mix could do a lot to reduce prices.

    Regarding the nat gas price outlook, my money (literally, in the form of options on UNG) is on fairly large price rises. The shale gas plays that have done so much to increase nat gas reserves are not profitable at current prices… a price doubling would be about right. And without shale gas, we wouldn’t have the low prices we currently do.

  3. I won’t be surprised by a few months with gas price spikes here and there over the next several years (so options a few years out seem likely to provide an opportunity to the patient), but I was of the impression that many of the shale plays were profitable at today’s prices.

    (Admittedly, I am more the policy guy, and you are more the investment guy and you are actually putting your money behind your position and I’m not in any significant way. My normal biases would incline me to believe the investment person risking his own money over a policy guy perspective, but in this case I don’t).

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