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Energy Law Exchange

July 6, 2017

Debating the Value of Distributed Rooftop Solar

How much is solar power really worth?  Although a seemingly simple question, it has a myriad of complex and sometimes conflicting responses that many regulators across the U.S. are trying to resolve.

As the cost of solar technology has decreased in recent years, more homeowners and businesses have invested in distributed solar power.  This increased reliance on solar energy has caused a decrease in revenue for utility companies, fueling intense policy debates and regulatory proceedings in many states about how to calculate the proper “value” of solar.  Even with President Trump’s recent indication that the United States will withdraw from the Paris Climate Agreement – due to the increasingly competitive cost of renewable energy – projections for solar energy development in the U.S. remain robust.

There are arguments that solar is worth “more” than the next increment of power from traditional sources—and arguments that solar is worth “less.”  Solar advocates argue that solar energy benefits customers, society, and even utility companies.  Because solar panels generate electricity on sunny days during peak demand, solar users may reduce the need for utilities, and ultimately ratepayers, to purchase additional power at high rates during peak usage.  Sufficiently-scaled solar capacity may also reduce the need for utilities to make expensive capital investments in additional power plants and transmission lines—costs that would ultimately have to be borne by all rate payers, solar and non-solar customers alike.

Utility companies, on the other hand, respond that solar ratepayers are still “grid-tied” and need the grid to supplement their use of intermittent (or “non-firm”) solar power at night, during storms, or on cloudy days.  Even though solar panel users rely on the grid, the variable portion of their bills—and consequently, the amount of fixed operating costs they pay—are significantly less than the costs paid by non-solar users.  In other words, utility companies collect less revenue from solar users, even though the utility’s underlying infrastructure costs remain the same.  Utility companies argue that this unfairly shifts the cost to other utility customers who do not have solar, and such cost shifting will unsustainably increase as more customers invest in distributed solar for their own homes or businesses.

These divergent interests have led to rate disputes in many states.  In 2016, 47 states and Washington D.C. took some type of action involving solar policy or rate design.1 “The Fight to Put a Value on Rooftop Solar Power,”, (last updated Apr. 20, 2017). Generally, utility companies have sought to increase fixed charges and to reduce or limit the net energy metering credit given to solar customers that compensates them for energy they place on the grid.  Through net metering, solar customers received a credit for their excess solar energy production, which historically was at the same retail rates that utility companies charged grid customers.  In numerous rate cases, utilities have sought approval from state public utility commissions to reimburse solar customers at rates lower than the retail rate charged to customers by the utility.  Utilities have waged war on the entire concept of net metering for distributed solar production, and to date, have had some success in getting pure net metering policies abolished or reduced.  One of the longer and more contentious disputes recently took place in Arizona, and a similar dispute is now underway in Texas.

Arizona Value of Solar Proceedings

In June 2016, Arizona Public Service Company (APS) filed a rate case that sought permission from the Arizona Corporation Commission (ACC) to increase fixed charges for solar customers, substantially reduce the retail rate net energy metering credit, and impose additional demand-based charges on solar customers.  In its filing, APS argued that the cost shift from its solar customers to its other non-solar customers amounted to $42.7 million, and was on pace to rapidly increase.  Allegations of “subsidies” (a near-profane word in contested rate proceedings) were made, suggesting all non-solar customers were improperly subsidizing solar customers who were still using the grid—but not paying their “fair share” for grid infrastructure and fixed costs.

Later that year, Arizona regulators voted to eliminate retail rate net metering in favor of a reduced compensation system for new solar customers.  The regulators adopted the administrative law judge’s recommended order, with some modifications, so neither solar advocates nor the utilities were able to declare victory on all issues,  Ultimately, the regulators decided that the new lower compensation rate for solar customers would be set individually in each utility’s rate case, but also provided guidance indicating that new Arizona solar ratepayers would likely receive a much lower rate for their solar production than the full retail rate for electricity.  Initially, the rates would be based on the cost of energy from large solar farms while regulators worked to devise an alternative methodology.  Importantly, existing Arizona solar customers would be grandfathered in—allowing them to keep their original net metering rates for 20 years while new solar customers would be entitled to a fixed rate for 10 years after installing a solar system.  Solar advocates pushed for the need to grandfather in the rate for existing solar ratepayers who had already made significant capital investments in their respective solar systems in reliance on a certain expected level of return from those investments.

Following this decision, it seemed that the individual rate cases would likely take years to resolve.  But in March 2017, the state’s largest utility, APS, along with 30 other intervenors, reached an agreement with solar advocates regarding rate design and compensation. 2Settlement Agreement, Ariz. Pub. Serv. Co., Docket Nos. E-01345A-16-0036 and E-01345A-16-0123 (Ariz. Corp. Comm’n filed Mar. 27, 2017),  The ACC will decide whether to approve the settlement this summer.  If the agreement is approved, rooftop solar customers may select from four rate design options, which include a time-of-use rate plan with a grid access charge or a demand-based plan without a grid access charge.

Under the proposed settlement, new rooftop solar customers will be compensated $0.129 per kilowatt hour for excess energy they export to the grid in 2017, which is less than customers were previously compensated.  This export rate may decline at a rate of 10% annually for new solar customers, but new customers can lock in their rates for 10 years when they sign up.  Solar customers will also be compensated approximately $0.105 per kilowatt hour for self-generated solar power they consume (known as the offset rate), although the exact rates will vary based on customer usage patterns and rate design.  The offset rate will be lower for new solar ratepayers who select demand-based plans.  Although both the export rate and the offset rate will be lower than current retail rate net metering compensation, existing solar customers will be permitted to retain their original retail rate compensation for 20 years.

This settlement is significant for at least four reasons.  First, it will end five years of contentious debate in Arizona and provide state-wide precedent for other Arizona utility companies.  Second, if approved, it would have lasting effects because the parties agreed to refrain from revisiting the framework until at least 2019.  Third, the settlement prohibits APS from building new power plants until 2022 and from building combined-cycle gas generation units though 2027, with certain exceptions (namely, microgrids, renewables, distributed generation, power purchases, and upgrades to existing facilities).  Finally, while utility companies and solar advocates in other states have similarly reached agreements about alternative compensation mechanisms to replace net metering, Arizona is unique in that APS and solar advocates reached this agreement after state regulators had already decided to end Arizona’s net metering policy.

The Texas Dispute

Another solar debate is gearing up in Texas.  In March 2017, the state’s largest regulated utility, Oncor Electric Delivery Company (Oncor), filed a request for a rate increase with the Texas Public Utility Commission (Texas PUC).  Oncor seeks to impose a minimum monthly charge for homeowners who have solar panels, wind turbines, or storage batteries of 3 kilowatts or greater.  If approved, solar customers would pay a minimum bill based on the customer’s demand profile, which has been projected to be an approximate $40 per month minimum surcharge per residential customer.  Oncor’s proposal is limited to residential ratepayers, and would not affect larger commercial or industrial companies that also offset their own load via distributed solar behind the meter.

Oncor asserts that residential solar customers are forcing approximately $1.6 million per year in costs onto non-solar customers.  Oncor further argues that because home solar panels do not reduce peak demand, it must nevertheless provide these solar customers with full access to the grid that must meet the solar customer’s peak demand.  Conversely, solar advocates argue that the fee will discourage investment, and that residential solar provides system-wide benefits for which Oncor’s proposal does not account.  Critics have also argued Oncor’s proposed minimum charge does not account for the fact that a customer’s historical peak demand may not have aligned with the system’s peak demand.  Oncor’s proposed change would apply to existing customers who invested in solar systems under more favorable rate designs.

If the Texas PUC approves the proposed monthly charge, it would apply to approximately 10,000 residential Oncor customers in North Texas.  Unlike the recent Arizona proceeding, Oncor’s current proposal would not grandfather in residential solar customers who elected to install solar based on their anticipated rate of return from the current Oncor rate structure.  While this is currently a small percentage of Oncor’s 3.4 million metered customers, more households are projected to invest in distributed solar energy across Texas and the U.S.  If approved without any adjustments or settlement with solar stakeholders, the minimum surcharge could go into effect by the end of 2017.

The Unknown Future and Looming Storage Debate

The value of solar debate is evolving as utility companies, solar advocates, and other stakeholders engage in these disputes across the county.  Proposed replacements for net metering will likely include complicated and nuanced rate designs.  Even more uncertain is how the commercially viable storage options for intermittent renewable resources such as solar and wind could impact rate design and utilities’ cost recovery mechanisms.  If, and many in the industry would say “when,” reliable storage can be combined with renewable energy sources such that an historically intermittent resource can instead demonstrate dispatchable generation characteristics, the entire landscape could disruptively change very quickly.

As the value of renewable energy and storage rises and falls with regulations and technology, it is critical to consult with experienced counsel when evaluating renewable energy investments or disputes over the rate of return those investments should yield.