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Solar flameout: Demand charges cause applications to plummet and could reflect Arizona’s energy future

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One year after Salt River Project added an unprecedented rooftop solar charge, solar applications in the utility’s territory are on life support.

Applications were down 96 percent in 2015 when compared to 2014, according to numbers provided by SRP. The utility received 7,634 applications for solar in 2014, and just 318 applications last year.

SRP instituted a demand charge in February 2015 on solar customers, a complicated rate design that diverges from how energy bills are normally assessed. Under a demand charge, customers pay for power based on the peak level of energy they use throughout the month. Typically, customers pay for energy based on the total volume of power they use monthly.

Now, the state’s largest utilities, including Arizona Public Service, have signaled an interest in demand charges for all residential customers, not just solar customers. That would drastically change the way customers use and pay for energy and would require most people to alter the way they live their lives.

But utilities say the strategy can better manage new technologies, including solar energy, and better match up costs of serving customers with the way bills are assessed.

In what’s seen by many as a test case, the Arizona Corporation Commission staff suggested moving all customers of UNS Electric in southern Arizona to mandatory demand charges in the small utility’s ongoing rate case. The state’s largest regulated utility, APS, intervened in the case and has provided testimony to support the idea of mandatory demand charges, signaling its interests in proposing similar ideas for its customers.

Solar groups say demand charges are a nightmare for solar customers, and ratepayer advocates say the charges are difficult for customers to understand. It’s tough for people to know when power usage is hitting its peak, so customers would have a hard time adjusting their lifestyles to avoid big utility bills, opponents say.

Demand charges would likely require residential customers to stop running appliances like washers, dryers and air-conditioning units at the same time to avoid a high charge.

When SRP first announced its solar plan, the solar industry decried the charge and said it would kill solar. It appears, at least for now, that they were correct.

“Clearly, demand charges are bad for solar. There’s no question about it,” said Mark Holohan, president of the Arizona Solar Energy Industries Association.

Meanwhile, solar companies have shifted their focus to sales in APS territory before the utility makes any major changes to its solar scheme. Solar applications increased by 72 percent from 2014 to 2015. Last year, the utility received 14,111 solar applications. In January 2016, APS got 1,404 applications.

Utilities say solar customers don’t pay their fair share for infrastructure costs, which shifts those costs to non-solar customers. In order to make up for that, most utilities have suggested various methods and combinations of rate changes, from altering net metering, adding monthly fees and instituting demand charges.

But utilities have now moved beyond finding solutions for the alleged solar cost-shift, instead setting their sights on major changes to rate design, like mandatory demand charges for all customers.

Residential Utility Consumer Office Director David Tenney said proposals to move all residential customers to demand charges aren’t wise. Only about 2-3 percent of customers in most utilities have rooftop solar, and utilities are suggesting the solution is to change rates for 100 percent of customers, he said.

“We’re convinced that there are winners and losers when it comes to that. There will be people who understand the demand charge and use it, but there will also be people who don’t understand it or people who can’t use it because they have medical or physical needs,” Tenney said.

A mandatory demand charge would negatively impact a lot of customers, and it wouldn’t fix the solar issue, so it’s hard to understand why utilities want to go that route, Tenney said.

Tenney said to truly understand how to make demand charges work, customers would need to understand the ins and outs of all aspects and components of demand rates, which is incredibly difficult.

“We deal with this stuff every day, and even with us, we’re saying, this is just so complicated. Because it’s so complicated for us, we know what it’s going to be like for the average ratepayer,” he said.

Dan Pozefsky, RUCO’s lawyer, said even in the best-case scenario, if demand charges are successful for customers, the utility would lose revenues because customers would spend less on power.

“Would utilities just accept this notion – that we reduced demand, we lost revenue and we‘re just going to accept it? Of course they’re not,” Pozefsky said.

The Corporation Commission, which regulates utilities, will eventually need to approve any rate changes for APS and most other utilities. The commission doesn’t regulate SRP, so its demand charge didn’t require commission approval.

Behind SRP’s numbers

While the implications for non-solar customers are huge in upcoming cases, the demand charge’s impact on solar in SRP territory has already been drastic.

SRP spokesman Scott Harelson said an “extremely high number” of people submitted applications just before the new demand charge plan was announced in December 2014, which boosted the utility’s 2014 numbers.

He said the solar industry still “needs some time” to figure out how to work with the new demand charge.

Many of the largest solar companies, including SolarCity, have closed up shop in SRP territory, which has had a big impact on solar application numbers, Harelson said.

Local companies are still working in SRP territory and trying to use other technologies, like battery storage and load controllers, he said.

“SRP is confident that as more of the rooftop solar industry takes a similar approach, customers will respond and their numbers will continue to grow,” Harelson said.

Before the demand charge, a typical month brought in between about 300 to 500 solar applications. The 2015 numbers did show a slight uptick over the course of the year, from 11 applications in May to 45 applications in December. Harelson said the nine months of data on solar demand charge customers showed that the median peak demand reduced from 8.2 kilowatts before August 2014 to 7.5 kilowatts in August 2015, which means customers are at least starting to understand how to manage demand.

“We are confident that as our customers continue to learn how to manage their demand, that they will continue to save more on their future energy bills,” he said.

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Defending demand

A handful of rate cases that include proposals for solar charges are moving through the Arizona Corporation Commission right now, but UNS Electric’s case is up first and will likely set the tone for the other utilities as they seek changes to rate design, including demand charges.

UNS Electric, a utility that serves about 100,000 customers in Mohave and Santa Cruz counties, first proposed moving solar customers to a demand charge, reducing net metering rates and adding a monthly fee, plus an optional demand charge for non-solar residential customers. But Corporation Commission staff members proposed the idea of moving all customers to a mandatory demand charge, instead of just providing the option.

Hearings are set for the UNS case starting March 1.

Last year, several utilities, including UNS and APS, proposed solar fees or changes to net metering outside of rate cases. All of the utilities moved their proposals into rate cases, which allows them to look at rate design as a whole for customers instead of singling out solar.

APS sought an increase of its solar fee to $21 early last year, but after an outcry from the solar industry, the utility abandoned the idea. APS said it supports the idea of demand charges for all residential customers and has provided testimony to that effect in UNS’s rate case proceedings. When the utility announced its proposal to increase its solar fee, it said moving people onto demand charges eventually was one of its goals.

And in a recent interview, APS officials said the utility “supports the concept of mandatory demand rates for all residential customers.” APS is expected to file a rate case this summer.

APS defends demand charges as another way that customers can save money. If customers can manage their peak energy usage, they can lessen the charge, said Greg Bernosky, APS’s director of state regulation. And if customers use less energy, the utility can manage the costs it pays to deploy power as well, Bernosky said.

“If customers can manage their demand, we can manage our costs. They lower their demand, we lower our costs,” he said.

Public service corporations receive returns on investments for infrastructure they build out to serve customers. But Bernosky said it’s not as simple as building more infrastructure just to get paid back; it’s important for the utility to use resources wisely, and the demand charge can help with that.

“We have to manage our costs. We’re in the business of keeping customer costs as low and reasonable as possible,” he said.

The demand charge also sends price signals to customers, telling them that if they reduce power at peak times, they can reduce their overall bills, Bernosky said. The price signals will help people understand the demand charge because they’ll want to save money on electric bills, he said.

APS studied 1,000 customers it moved from existing rates to a demand rate, and 90 percent of those customers saved money, according to the utility.

Demand charges can also unleash new technologies, like battery storage and smart thermostats, to help customers best manage their peak usage, Bernosky said. So, instead of trying to change rates just for solar customers, the utility sees the value in looking at rates as a whole and how different technologies may interact with them, he said.

“We think the customers can save across the board, with or without solar, if you go to demand rates. There are opportunities for everybody. Instead of singling out one technology, we think it makes more sense to say, ‘Let’s do this across-the-board,’ and then, depending on what type of (technologies) you adopt now or in the future, you can slide right into it,” Bernosky said.

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Bad for solar

Demand charges like Salt River Project’s are “clearly bad for solar” and a “very punitive rate feature,” said Holohan of Arizona Solar Energy Industries Association. Holohan said demand charges are hard for customers to understand, since they likely haven’t been billed that way before and might not have the education or technology needed to manage their electrical bills.

“It’s like driving a car without a speedometer. … (Utilities) know customers don’t manage it well, and it’s a way they can ensure they recover more fixed costs. (Customers) can’t cut their bills as much,” he said.

Holohan said it’s still possible to save money going solar under demand charges, but it becomes more complicated and involves other technologies to make the numbers pencil out.

“It’ll be up to the regulators to decide if we want to put customers on complex rates that punish them,” he said.

But, Holohan added, regulators and utilities need to adequately answer what problem exactly would be solved by these charges.

“If you’re a ratepayer, you should not be voting for this proposal. If you’re a shareholder, then you like it,” he said.

Court Rich, an attorney for The Alliance for Solar Choice, said the demand charge means SRP’s customers can no longer access rooftop solar. Most companies have shifted focus to other markets, like APS’s.

“What happened was exactly what the solar industry said was going to happen. They destroyed the solar industry in their service territory,” Rich said.

But demand charges aren’t just tough for solar customers to swallow – they’re hard for everyone, Rich said. Trying to manage energy to avoid getting slammed for a high peak is basically a “full-time job,” he said.

“The only goal it achieves is to help utilities make more money, to make it more complicated for their customers to save money,” Rich said.

Difficult for senior citizens

Rich pointed to a comment made by SRP General Manager Mark Bonsall during a public meeting on its demand charge last year. Bonsall said a “large number” of non-solar customers wouldn’t want to be on a demand charge and wouldn’t understand it. Bonsall said it would be “very difficult” to “put my grandma on a demand charge.”

Other utilities are now considering putting everyone’s grandmas on demand charges, Rich said.

“(Demand charges) are complicated and difficult to manage. Even if you could understand, you still can’t react to it. It’s two layers of difficulty. It’s hard to figure out how it works. And once you even figure out how it works, you can’t do anything about it,” he said.

The Arizona branch of AARP is already lined up against the demand charges proposed by UNS, saying they would be especially difficult for senior citizens to manage.

In an op-ed in the Nogales International, the group said the demand charge would make it hard for customers to save money simply by using less power.

“If approved by the Corporation Commission, demand charges would be difficult for most consumers to understand. Consumers often don’t know when their household is experiencing its maximum electricity usage. This makes it nearly impossible for ratepayers to keep their electric bill as low as possible,” AARP Arizona Director Dana Marie Kennedy wrote.

Demand charges aren’t a tested method of rate design, she wrote.

“Why should an untested ‘demand charge’ proposal be tested here in the heat of the Arizona summer? Even more so, no other state utility commission has ever imposed mandatory demand charges on residential customers,” Kennedy wrote.

One comment

  1. For all the ink used on this article, couldn’t you spare a few drops to explain what demand charges are all about?

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