Fight over solar panel incentives heads to regulators

For months, Arizona’s largest utility provider and the solar industry have waged a public relations war over the future of the state’s solar energy incentives.

That fight now moves to the Arizona Corporation Commission, as the energy regulator formally begins consideration of opposing proposals from each side.

At the center of the debate is the compensation utility customers get for the solar energy their rooftop panels produce. The practice in place now, called net metering, means Arizona residents who produce solar energy from rooftop panels can offset their electric bill with what they produce. If they don’t use everything they produce – and most don’t – they are compensated for the excess energy, which flows back into the energy grid and reduces the amount of energy the utility must generate.

Arizona Public Service, the state’s largest electric utility, claims the current system is not sustainable and needs to be changed because solar rooftop users are currently being compensated in a way that allows them to avoid certain infrastructure costs, which end up being pushed onto non-solar customers’ bills.

APS will formally propose two possible solutions to the Corporation Commission on July 12.

Under one of the options, the net metering program would be altered for new solar energy customers so that excess energy fed back into the energy grid is no longer valued at about 15.5 cents per kilowatt-hour. Instead, APS would purchase that energy for between 6 cents and 10 cents per kilowatt-hour, with the consumption offset remaining intact. The exact price would be determined by the user’s peak energy consumption each month.

Currently, net metering customers, on average, receive a 70 percent discount on their monthly electric bill. Under the first proposal, APS says that would drop to a discount of between 30 percent and 40 percent.

In the second APS proposal, the net metering system would be scrapped altogether in favor of a “bill credit” option. Under that scenario, an individual rooftop solar system would be utilized by APS as a mini power plant of sorts where the customer’s energy use is not offset by their solar panels at all, but all the energy their panels produce would be bought by APS at a flat rate of 4 cents per kilowatt-hour.

Under this system, the average rooftop solar customer would save around 20 percent on their overall bill. The 4 cents per kilowatt-hour price would also be recalculated each year.

The net metering price arrangement for 18,000 current customers would remain the same under both proposals.

The table below shows how the average rooftop solar user would be affected under the current system and APS’ proposed systems. The figures use a 2,500 square-foot home that uses 1,600 kilowatt hours in summer months, and 900 kilowatt hours during winter months, according to APS.
 

Each option also includes an increase in the existing upfront incentive that is paid to a new rooftop solar customer as a way of compensating for the reduced monthly savings. APS said it does not plan to offer an exact number for the increased upfront incentive so it can be negotiated with residential solar companies.

APS says the increased upfront incentive should shore up the monthly loss a customer would sustain under the terms of a typical solar panel installation and service plan. So, while a current net metering customer may save $150 each month because of their net metering plan, they also pay roughly $100 to the solar panel company for the lease of the equipment and the service associated with it. But if the savings are reduced to only $75 per month under the proposed plans, the increased upfront incentive will work to ameliorate the hypothetical $25 deficit incurred by the customer.

APS’ Residential Rooftop Solar Net Metering Proposals

But solar industry representatives take issue with the entire approach APS has used to look at the system. They say APS is seeking ways to keep their profits high, at any cost to customers and the solar industry.

According to a study solar advocates say is the most complete look at the situation, APS benefits from the current net metering program in the long term. The study, done by Crossborder Energy, concludes APS sees a benefit of $34 million each year over a 20-year period.

In a proposal put forth this week by the solar industry organization, The Alliance for Solar Choice, the value of the energy produced by net metering customers should be increased by about 50 percent in order to account for the $34 million annual benefit their study shows APS receives each year.

The Alliance for Solar Choice (TASC) proposal and Crossborder Energy study:

That study uses cost projections that include possible savings in new power plant production, as well as cost savings associated with greater compliance with renewable energy standards and environmental standards, which net metering can help offset for APS.

APS counters these claims by saying that rates cannot be calculated using such 20-year projections, mostly because energy prices fluctuate unpredictably and energy regulations can evolve unpredictably, leading to entirely different energy economics. APS says new power plant production needs don’t get determined 20 years in advance.

Arizona isn’t the only state where this same kind of struggle has emerged.

Idaho and Louisiana energy regulators were recently asked to take up the net metering arrangement in their states. Both states sided with the solar industry, and against the local utility companies that wanted net metering compensation reduced.

Much like APS, utility companies in those states said the current net metering system will ultimately lead to instability in the overall business operation of the utility, and may make them less attractive to investors that allow them to spend money on infrastructure.

APS says the net metering program jeopardizes the $1 billion it spends annually on infrastructure.

But the solar industry interest groups also point to assertions like the one made by Edison Electric, the main trade organization for large utility companies, in a recent study. The trade group said in the study that small-scale solar systems are the “largest near-term threat” to the utilities, and that efforts must be made to change net metering policies like Arizona’s.

Edison Electric Institute’s Disruptive Challenges study:

APS is part of Pinnacle West Capital Corporation, a publicly held capital equity firm, and it is allowed by the Arizona Corporation Commission to make up to a 10 percent profit each year. Most years, it performs near that cap.

The solar industry interest groups say that this kind of profit margin should not necessarily be accepted as an unchangeable factor in the equation. They say the state regulators could choose to reduce that cap, which would alter the costs APS says it needs to recoup as a result of increased solar panel use.

But the 10 percent cap, APS executives say, is tied to long-term projections that investors rely on, and that the pre-ordained profit margin is a trade-off given to the utility by the Corporation Commission, because they are required to provide their service to anyone within their jurisdiction.

So while they have been given the Corporation Commission’s blessing to assess additional fees to customers in order to recoup costs, as they have done, and which they say the new proposal would help level, they also must provide electricity to a person who might build a home 20 miles from the nearest existing substation. They don’t have a choice, even though providing such service will be a loss for the utility.

Being able to provide a stable, predictable profit margin, APS executives say, is what makes them attractive to the enormous investments that are used to pay for the costly infrastructure investments made by the utility.

Utilities in Idaho and Louisiana made the same claims during their net metering debates, but the state regulators there did not make the changes their utilities asked for.

Once APS’ formal proposal is given to the corporation commission, the issue will be heard and debated in public. Those hearings are expected to begin in coming weeks.