California and Germany have recently adopted programs to support the supply of tenants with solar energy by their landlord. These tenant supply programs are promising tools to turn tenants into more active players („prosumers“) and unleash their enormous, but so far neglected, potential for energy transition and climate change mitigation. Both, the Californian “Solar on Multifamily Affordable Housing Program” (SOMAH) and the German “Landlord-to-Tenant Electricity Supply Act” (Tenant Supply Act, TSA) serve the same purpose: promoting the installation of solar energy on multifamily buildings to reduce their tenants´ energy bills. And both count on the same instrument to kick-off: incentives for landlords. But that´s it with similarities: crucial program features differ significantly – making the comparison even more interesting as a large number of relevant aspects are covered. Being among the first of its kind, these two tenant supply programs are precious “learning objects” for law makers around the world who will (have to) follow their example.
- Unleashing the tenants´ potential for energy efficiency and renewables is key to successful energy transition and climate change mitigation
- “SOMAH” and “TSA” follow same purpose and general approach, but key program features differ significantly
- Status: Pending (CA) versus “live” (GER)
- Legal roles: Utility + landlord (CA) vs landlord = utility (GER)
- Incentives for landlords: 2.2 – 3.8 Eurocent for kWh supplied to tenants (GER) vs $3.20 per Watt tenant load (CA)
- Benefits for tenants: Virtual net energy metering (VNEM) tariff + allocation of credits (CA) vs supply contract with landlord (GER)
- Scope: All landlords and tenants (GER) vs affordable housing (CA)
- Target/Cap: 500 MW max per year (GER) vs 300 MW (minimum) by 2030 (CA)
- Funding: Share of GHG allowance auction proceeds (CA) vs levy for all customers (GER)
- Eligibility: Complex qualification and documentation process (CA) vs simple requirements (GER)
- Administration: By law, regulator and grid operators (GER) vs single “Program Administrator” (CA)
Status: live (GER) vs pending (CA)
The German TSA – adopted in July 2017 – is “live” with already more than 50 implemented projects and a total installed capacity of approximately 1 Megawatt. SOMAH is still pending: only basic program elements and policies have been set so far. A yet to be chosen “Program Administrator” (PA) shall elaborate proposals for implementing the policies by “no later than August 2018”. And a “Future Commission” will also have to address additional program parameters. With key players and parameters missing, the start of SOMAH is uncertain.
Scope: all landlords/tenants (GER) vs only affordable housing (CA)
The most important difference results from the scope (eligibility) of the programs impacting their potential: whereas in Germany all landlords and tenants in multifamily buildings theoretically benefit from the support scheme, according to a study commissioned by the German Ministry of Economic Affairs: 3.8 million households, SOMAH is limited to affordable housing/low-income households – reaching probably an exceedingly small number of tenants.
Legal roles: utility + landlord + tenant (CA) vs landlord = utility + tenant (GER)
The role of landlords is different. Under SOMAH, the utility provides electricity to the tenants. Landlords remain landlords even though they supply solar generated electricity to their tenants. Under TSA, landlords become utility: they must provide the entire electricity. Consequently, landlords must procure residual electricity via the grid as solar installations hardly cover the whole demand – even when using storage.
Benefits for landlords: premium for supplied kWh (GER) vs subsidy per Watt capacity (CA)
Both programs count on incentives for landlords as kick-off but with a different point of reference. SOMAH provides fixed, up front, capacity-based incentives for qualifying solar energy systems. The program aims at covering the full installation cost of tenant load. It sets a base rate of $3.20 per watt for the portion of PV systems serving tenants and $1.10 per watt for the portion serving common areas. The base rate will be discounted for projects that also claim federal tax credits. These incentives will decline either 5% annually or by the annual decline in residential solar costs. SOMAH allows 49% of VNEM tariffs (see below) to flow to common areas to provide the maximum flexibility to property owners to tailor their projects to their particular circumstances.
Landlords under TSA have several benefits. The TAS specific benefit is only one of them. Firstly, landlords have revenue from the electricity supply to their tenants as they are their tenants´ supplier. Regarding the contract between landlord (operator) and tenant, especially the price per kWh, it is important to know that the part of electricity supply covered by the solar installation is exempted from several price components, such as network charge, network related levies, tax on electricity and concession fee. This exemption does not apply to the residual electricity the landlord has to procure via the grid. Secondly, in cases where tenants cannot use all the electricity generated, the surplus electricity can be fed into the public grid and landlords will be paid the feed-in-tariff. Thirdly – the TSA-specific benefit -, landlords (operators) receive a premium for every kilowatt-hour of solar generated electricity they supply to their tenants – on top of the revenue from the electricity supply. Depending on the size of the solar installation and the national photovoltaics expansion rate the premium will be between 2.2 – 3.8 Eurocent/kWh.
Benefits for tenants: VNEM tariffs + credits (CA) vs contract with landlord (GER)
To begin with: tenants are not direct beneficiaries of the two programs, it is the landlords. Law makers hope that the incentives and benefits for landlords also turn into benefits (bill reductions) for tenants. The means of transportation to distribute the landlords´ benefits to the tenants is crucial. Again, California and Germany have chosen different approaches. Under SOMAH, the bill reductions shall be achieved through tariffs that allow for the allocation of credits. Tenants will be awarded the credits through a virtual net metering (VNEM) system, a subprogram of California´s “Net Metering 2.0” program. The utilities have been directed to set such VNEM tariffs. At least 51% of the solar energy must be dedicated to tenants. TSA does not introduce a special means of transportation, landlords (operators) and tenants sign normal supply contracts. The electricity price should be (very) competitive due to the landlord´s above listed benefits. TSA sets a minimum benefit: the price per kWh must be at least 10 % lower than the basic supply tariff.
These different approaches reflect different “cultures”. Whereas VNEM tariffs are “normal” in the US, only one EU-Member State (Greece) has introduced a VNEM system so far. Even net energy metering (NEM) is only introduced in 5 EU-Member States. VNEM has been discussed along the new EU-renewable energy directive – but was finally kicked out by the European Parliament. EU-Member States – among them Germany – explicitly want to limit tenant-supply schemes to PV on the same building.
As described under „Scope”, the eligibility requirements of the two programs are very different. Funding under TSA is eligible for all landlords. There are only few requirements: at least 40 % of the building must be used for living; the solar energy must be consumed by tenants – private households and business – in the same building or in residential buildings or “ancillary facilities located within close proximity of this building that are connected directly to the installation and not via the public grid”; the tenant-supply projects must be registered and notified (towards regulator and grid operator). And funding is limited to PV-installations below 100 kW.
SOMAH requirements seem to be more complex. The properties “must have at least five rental housing units that qualify as low-income residential housing: either the property must be located in a disadvantaged community (DAC) or at least 80% of households have income at or below 60 % of area median income”. The application procedures and eligibility documentation and requirements remain unclear need further clarification. The yet to be chosen Program Administrator (see below) shall elaborate them. Under both programs storage does not receive explicit funding but is explicitly in the game.
Funding: share of GHG allowance auction proceeds (CA) vs levy for all customers (GER)
The funding of the two programs is also interestingly different. SOMAH will be funded through California’s cap-and-trade greenhouse gas program, that is, the proceeds from the sale of greenhouse gas allowances allocated to California’s investor-owned electric utilities (IOU) for the benefit of their ratepayers. $1 billion shall be available for up to 10 years. The premium for landlords under TSA will be financed through the renewables levy (“EEG-Umlage”) every end-consumer pays through the electricity bill – whether they are participating in tenant supply programs or not.
Caps: 500 MW/year (GER) vs $100 million/year (CA)
Both programs set annual caps – with different points of reference. “TSA” sets an annual capacity cap at 500 MW, SOMAH sets an annual funding cap at $ 100 million or 10% of the IOUs’ annual greenhouse gas allowance proceeds, whichever is less. The administrative budget is capped at a maximum of $10 million of program funds per year.
Program Administration: by law, regulator & grid operator (GER) vs PA (CA)
TSA sets all relevant rules and procedures. The German regulator and grid operators execute the program. Under SOMAH, a single “Program Administrator” (PA) oversee the program state-wide, selected through a competitive bidding process. The PA shall be responsible for the development and management of the program, including the establishment and then implementation of a process for documenting the eligibility of all program applicants.
Law makers in California and Germany explicitly acknowledge that tenants must be protected. As the contract under TSA is a normal electricity supply contract all corresponding consumer protection provisions apply. TSA also introduces further provisions: tenants can sign a contract with the landlord but they do not have to; they continue to be free to choose their electricity provider; the duration of the contract governing the supply of electricity from the landlord to tenant is limited to one year; and TSA bans landlords from making the contract part of the rental agreement.
SOMAH intents low-income households to receive the full economic benefit of the generation allocated to them through the VNEM tariff for the life of the SOMAH system. In order to protect tenants from bearing any additional costs through increased rents, adjustments to utility allowances, or other mechanisms, the PA is to establish appropriate documentation requirements for applicants to demonstrate that 100% of the economic benefits of the generation system will be reserved for tenants through the life of the system. When a system subsidized through SOMAH is owned by a third party, further requirements shall ensure that no additional costs of system maintenance or operation be passed on to low-income tenants. The PA shall develop a form for the property owner to guarantee that costs for a third-party system will not be passed on to tenants. The PA shall also develop a method for a performance guarantee (including kWh production) to be provided by the third-party owner to the property owner.
Apart from the general purpose of promoting green energy and reducing tenant´ bills, there are no further explicit societal purposes under TSA. Under SOMAH, there are: it requires that properties served under the SOMAH program are provided with energy efficiency services, energy efficiency audits and notifications of tenants about availability of programs. Service providers must produce economic benefits by providing job opportunities to residents of disadvantaged communities.
Main issues (to come)
Like every support scheme in the energy sector, SOMAH and TSA have not been free from controversial subjects. There is too much money in the game – and high stakes. TSA´s adoption had permanently and until the end been at stake, postponed several times and heavily opposed by the big utility associations. There seems to have been more consensus on SOMAH. Its limited scope might have made it easier for all stakeholders to consent. But as crucial requirements and rules are yet to come, it is likely that the controversies have only been postponed.
- Taxation privileges for housing companies: So far, housing companies benefit from trade and corporate taxation privileges. Revenues from tenant-supply-models put these privileges at stake and, hence, might make housing companies and landlords step back from tenant supply models. A threshold of revenue for landlords without losing taxation privileges did not make it into the legislation – due to heavy protests by the two associations representing utilities.
- Equality between self-consumption and tenant supply: House owners/renters who consume solar energy they generate on their roof are exempted from paying the renewable energy levy (2018: 6,8 Eurocent/kWh). Tenants under TSA only profit from the premium paid to the landlord between 2 – 4 Eurocents/kWh. Especially consumer associations demand to equate tenant supply with self-consumption.
- „De-bureaucratization“ of the vendor´s role: Under TSA landlords become utilities facing the same obligations as big utilities. Small prosumers, such as landlords of single-, two- or multi-family houses, can hardly fulfill these obligations. Consequently, only big players like housing companies, utilities or service providers will implement tenant supply projects under the current regulatory framework.
- Metering scheme: The technical implementation of tenant supply programs is challenging, especially the metering scheme. Current schemes do not display the physical distribution of supply accurately, and smart meter-based metering schemes are still too expensive. Nevertheless, tenant-supply models have to be aligned with the current smart meter rollout. Blockchain-based metering and billing schemes might be a solution but are not feasible under the current regulatory framework. A regulatory sandbox for innovative technologies such as blockchain might help.
- Program Administrator: The stakeholders were split between those who advocate for a single, state-wide PA, and those who support separate PAs in the service territory of each participating utility.
- Time of Use (TOU) rates: Another controversial subject was whether to exempt customers from the mandatory transition to time of use (TOU) rates. It is unclear whether or how the switch to TOU rates would affect the bills of tenants participating in SOMAH. When default TOU rates are implemented for residential customers, participating tenants can choose to opt out of TOU rates.
Make tenants first class beneficiaries of the energy transition!
California and Germany are – once again – pioneering the energy transition. Their tenant supply programs are far from being perfect, but they are still remarkable efforts to unleash the huge potential of tenants for energy transition and climate change mitigation. No country committed to the Paris Agreement can do without their tenants. And tenant empowerment is also overdue as a matter of fairness: let tenants benefit from positive achievements, such as cheap solar energy and storage, instead of only paying the bill.
The Californian and German programs should be closely monitored and assessed – and followed! The EU should integrate a tenant-supply scheme into the plans for an “Energy Union” and create an enabling and supportive regulatory framework. That would send an important signal to the world! But the bar is set high: tenants must be first class beneficiaries of the energy transition. It is to be seen whether the German and Californian program jump over the bar – or knock it down.