Arizona gears up for full cost-benefit solar value proceeding

Can a combination of cost-of-service and value-of-solar studies end the state's metering wars?

Arizona regulators just announced a giant step toward the end of their state’s more than two year war over net energy metering (NEM).

Since 2012, solar advocates and the state’s dominant electricity providers, Arizona Public Service (APS) and Tucson Electric Power (TEP), have argued over how best to reimburse rooftop solar customers for the energy they send back into the system.

At issue is whether to keep retail net metering, which pays solar owners the retail rate of electricity for the power they export to the grid, or whether to replace it and impose extra charges on solar owners. 

The stakes for both utilities and the solar industry are high. APS and TEP say retail rate NEM is cutting into their revenues and imposing unfair costs for grid maintenance on customers without solar power. The solar industry says eliminating net metering could stall the growth of rooftop solar in the state, limiting customer choice and slowing the transition away from fossil fuels. 

At the core of the argument is one question: How much is rooftop solar worth? 

Previous efforts aimed at that conundrum had gone at it in parts. But last month, the Arizona Corporation Commission (ACC), the state's utility regulatory body, moved to address that question in one fell swoop. 

On Oct. 20, the commission voted 4 to 1 “to proceed with one generic docket, a conversation of the cost of service [COS] and the value of solar [VOS],” according to a transcript of the session in which the decision was reached.

The proceeding will take place in the pre-existing docket E-00000J-14-0023, entitled “In the matter of the Commission's Investigation of Value and Cost of Distributed Generation."

If regulators conclude that distributed solar provides a net benefit to the grid, it could justify providing solar owners retail rate remuneration, or a similar scheme for the energy they send to the grid. But if they find that solar imposes a cost on customers without their own generation, it could justify higher utility fixed charges or demand charges for system owners.

Identifying the actual costs and benefits of rooftop solar for Arizona utility customers could end the debate, both sides seem to agree. But as other utilities across the nation have found, identifying that value is easier said than done.

Opening the value of solar hearing

APS created in late September for the value of solar proceeding when it offered to withdraw a bid for higher charges for solar owners and proceed with a fuller examination of both the costs and benefits of distributed solar.

In examining the proposal, regulators shared a general agreement the proceeding must be “expeditious,” as the state's solar battles have already raged for more than two years. But, as Commissioner Doug Little said in voting for the new proceeding, “this thing may develop a life of its own and go spiraling off into some long, involved proceeding.”

Nevertheless, he said, “we want to err on the side of more information as opposed to less because one of the things that we want to do is make the decision based on the most complete information that we can…”

“This will be,” Commissioner Bob Stump said as he voted to open the examination, “the worst sort of proceeding except for all of the others [proposed to resolve the issues].”

Commission Chair Susan Bitter Smith was the dissenting vote, arguing that solar costs and benefits could be better determined in the context of a rate case.

Sector observers outside of Arizona largely welcomed the decision to address both costs and benefits in a single proceeding.

“As a matter of regulatory efficiency and of fairness, consider all the issues in one proceeding,” Karl Rabago, a former Texas utility commissioner and director of Pace Energy and Climate Center recently told Utility Dive in calling for “a comprehensive examination of the benefits and costs.” 

The ACC’s decision was provoked by an APS request for a separate proceeding to evaluate the findings in its recent cost of service study. In that study, the utility concluded that customers with distributed solar, on average, shift $67 a month in costs to non-solar customers because they pay less for grid upkeep:

APS says the grid benefits from distributed solar are far outweighed by the costs solar owners shift to the rest of the ratepayer pool. 
APS cost of service study summary (used with permission)


Solar backers balked at that request, objecting to a proceeding that only looked at the costs of distributed solar, and not its benefits. APS, however, maintains that the proceeding was only part of the process. 

“We suggested they take the real data in that [COS] study and proceed in the docket established to consider the grid access charge,” said APS Senior Public Policy Vice President Jeff Guldner. “We recognized it only looks at cost. It is important to also have the value of solar discussion. But that should be in an integrated resource planning (IRP) proceeding because it is about potential future or hypothetical benefits.”

The intention from APS was to have conclusive evidence on both the cost of service and value of solar available to commissioners for a rate case scheduled for June 2016. The utility still hopes the new proceeding can reach its conclusions by then, Guldner said.

But he added that APS is not entirely comfortable with the new plan for a comprehensive proceeding because determining a single, simple value for solar is problematic.

“Talking about cost and then throwing in a bunch of benefit-type analysis can get confusing," Guldner said.

Arizona solar advocates are similarly apprehensive toward the new plan, but agree that its better than what APS previously proposed. 

Though the cost-benefit question is already being worked through in the ongoing TEP rate case, the new proceeding is preferable to the APS proposal, said Attorney Court Rich on behalf of The Alliance for Solar Choice, a national rooftop solar advocacy group founded by major national solar installers such as SolarCity and Sunrun.

“It is time for the state of Arizona to have a new independent third-party study of the costs and benefits of solar,” he said. “We are asking for a fair and objective analysis. The third-party researcher should not be picked by the utilities or by the solar industry.”

The APS concerns

Guldner said APS is concerned solar advocates will propose using studies similar to one done by Clean Power Research for Maine’s regulators that derived a solar value of $0.33/kWh.

“The problem with VOS studies is they are all hypothetical,” he said. “The solar advocates say the studies are done independently, but we don’t think they are.”

“The other challenge is determining the difference between the values for distributed solar and the values for utility-scale solar,” he added.

Utility-scale solar “is much cheaper for customers and has many of the same benefits,” he said, referencing a recent Brattle Group study commissioned by world-leading utility-scale solar developer First Solar.

APS wants a proceeding that will “understand the cost and have a constructive and reasonable conversation on the values,” Guldner said. “Customers want solar and should be able to put it on their roofs, but it needs to be compared to the cost and values of utility-scale solar.”

Utility backers say distributed solar is significantly more expensive than larger-scale arrays. 

Both types of solar avoid the fuel cost of using natural gas to generate electricity. But utility-scale solar generation costs the utility no more than $0.05 per kWh to $0.06 per kWh in Arizona and the retail rate NEM credit cost to the utility for rooftop solar can be as much as two or three times that. In utility planning, Guldner said, "assets that are built or bought for the lower cost are chosen."

The Brattle study shows the other benefits advocates attribute to rooftop solar can be obtained from utility-scale solar as well, he added. When the utility agrees with a developer on the siting of a 5 MW to 10 MW array, it can offer similar locational benefits and reduce system congestion, he said. And it is equally emissions-free.

“Right now, rooftop solar is being located on the distribution system by credit scores,” Guldner said. “Until it there is congestion pricing or another pricing model that values the location, it isn’t adding value.”

A utility-scale array with single-axis tracking has a higher capacity factor than a rooftop, fixed-tilt array because it produces more energy for a longer period in each day and therefore displaces more natural gas, Guldner said, referencing “the simple differences” shown by the Brattle study.

“The simple fact that grid-scale solar is almost twice as efficient obviates a lot of the hypothetical values of rooftop solar, he said. “Why would you pay $0.12/kWh for a resource you can get for $0.05/kWh?”

TEP will also participate in the new proceeding, according to Energy Supply Senior Director Carmine Tilghman. He made the same point about the two types of solar to Utility Dive recently.

“I can buy solar energy from a larger scale project on my distribution system, paid for by my ratepayers, at $0.058/kWh," he said. "That is half the price I am forced to credit people who push energy back on the grid from net metered systems.”

Finally, Guldner said, deferred system infrastructure expenditures are not as significant a value in Arizona, where land is available and new construction does not have to take place in crowded urban settings.

“In Arizona, grid-scale tracking solar systems can be placed relatively flexibly on the grid,” he said. “What is the differential between locationally valuable grid-scale solar and locationally valuable rooftop solar? And is that value differential enough to offset the simple fact that the grid-scale is twice as efficient as rooftop solar because it tracks the sun?”

The solar sector responds

“The choice between customer-sited solar and utility-scale solar is a false choice,” TASC's Rich responded.

An independent and objective cost-benefit analysis will show, as others across the country and around the world have, that “a customer’s investment in rooftop solar results in a net benefit to all ratepayers," he said. "There is no shift of costs to other ratepayers.”

The utility claims that when a homeowner installs solar, it creates a cost that has to be made up for by other consumers. But the benefits of solar exceed the costs, Rich said, citing a 2013 Crossborder Energy study showing every $1.00 invested in Arizona rooftop solar produced a $1.54 benefit to ratepayers.

Solar advocates say that when everything is considered, rooftop solar systems provide more benefits than costs to the grid.

“No other analysis matters,” Rich said. "If there is only a net benefit, there is no policy justification for modifying existing policies in a way that disadvantages rooftop solar.”

Utilities don’t like rooftop solar because it decreases their spending on new infrastructure and when they spend money on something like a solar power plant, regulators allow them a guaranteed return on the investment through ratepayer bills, Rich argued. “It is good for the utility but bad for ratepayers.”

Rooftop solar decreases utilities’ revenues because solar owners purchase less electricity and get paid for the electricity they deliver to the grid, he explained. Utilities argue they have to shift that loss of revenue to other ratepayers, Rich said. But if there is $1.54 benefit for every $1.00 expenditure, there is no cost shift.

Whether utility-scale solar is a net benefit to ratepayers is a different question, Rich said. But it may not offer all the additional and unique benefits of rooftop solar.

“First, a random cloud cover can take out an entire utility-scale solar plant but it is not going to take out all the distributed rooftop solar supply at once,” he noted. “One of the big benefits of geographically diverse distributed solar is that cannot happen to 10 MW all at once.”

Risk is a second difference. APS has been historically disinclined to contract for utility-scale solar, he said. “But with utility-owned utility-scale solar, ratepayers bear the risk of the investment. With rooftop solar, only the homeowner bears that risk.”

Third, rooftop solar installation does not face the permitting, interconnection, and environmental impact issues that a utility-scale array typically encounters, he said.

Finally, Rich said, information is emerging that will show the APS cost of service (COS) study filed in anticipation of the discussion about value to have been based on false assumptions.

“They seem to be arguing it costs the utility a different amount to serve solar customers than to serve non-solar-owning customers,” he explained. “The recent Nevada COS study shows the cost to serve solar customers does not vary in any meaningful way from the cost to serve other customers.”

Waiting for the commission

Details on the coming proceeding have yet to be released, but stakeholders say procedural guidance — including the number of hearings, when they will be, and the rules for participants — are expected this week.

Filed Under: Solar & Renewables Distributed Energy Regulation & Policy
Top image credit: Wikimedia; DGustafson