Arizona's utility-owned solar programs: The new business models utilities are looking for?

APS and TEP will try different ways of owning solar and customers will be key

Two innovative utility-owned solar programs were finalized by Arizona regulators at the close of 2014, programs that could change the net energy metering controversy. More importantly, they could change the utility business model and the solar business.

Arizona Public Service (APS) and Tucson Electric Power (TEP) will each implement a pilot rooftop solar ownership plan funded by their customer bases. APS will provide systems averaging 7 kilowatts in size at no upfront cost to some 1,500 of its customers in the Phoenix area. TEP will provide some 600 systems averaging 6 kilowatts each to customers who pay a $250 application fee.

The APS customers will get a $30 per month bill credit for 20 years. TEP customers will have a 25 year fixed solar payment expected to cover 100% of their on-site electricity use, essentially zeroing out their traditional monthly utility bills.

“Compensation for the TEP plan is in savings through rates. Compensation through the APS plan is through what is basically a roof rental payment,” Residential Utility Consumer Officer (RUCO) Policy Specialist Lon Huber explained in an interview. “The question is: Which will produce more benefits to non-solar ratepayers and the system in general?”

Huber was a central participant in the negotiations between RUCO, the Arizona Solar Energy Industries Association (AriSEIA), and APS that produced the foundational policy on which both utilities’ programs were constructed. “My preliminary analysis suggests TEP’s program design can deliver solar under the cost of net metering,” he said. “But it is hard to know exactly how much until the numbers come in.”

Beating the cost of net metered solar and providing benefits to non-solar owning ratepayers is crucial because it reduces the shifting of electricity bill infrastructure and system charges. That shift of charges has become a major concern for utilities in the last 2 to 3 years as no-upfront-cost, third party ownership (TPO) financing, along with net energy metering, have driven a boom in rooftop solar.

Because solar owners’ reduced electricity bills have proportionately lower infrastructure and system charges, the burden for such charges are shifted to non-solar owning utility customers. The shift helps make TPO-financed, net metered solar cost competitive.

In response, some utilities want to terminate net metering. However, advocates argue solar provides quantifiable benefits to the system greater than the shifted bill charges. 

 
Rocky Mountain Institute (used with permission)
 

Foundational policy

Through the foundational policy and the right regulatory guidelines, “a balanced, level playing field is established between third-party owned business models and the utility,” RUCO’s filing with the Arizona Corporation Commission (ACC) explained. “Third party developers bring unique business models and techniques honed by competition while the utility can offer a suite of different services that confer system benefits and consumer protection while minimizing rate impacts.”

Utilities should face market forces and third party developers should not be free of infrastructure and system responsibilities, the policy asserts.

The policy’s key principles include:

  1. A lowest cost program design for utility owned [distributed generation] DG that does not cost more to ratepayers than the third party ‘revenue loss/cost shift.’
  2. Shared responsibilities around grid safety and vitality as issues arise with higher levels of penetration.
  3. Appropriate rate design for customers of third party systems that avoids gross over or under compensation.

The policy also specifies fair interconnection polices for TPO systems, open and shared data, and service by utilities to under-served markets.

In Arizona’s emerging “non-incentive, noncompliance driven market,” RUCO’s filing explains, these principles can bring ratepayers and Arizona’s economy “more benefits — not less — due to utility involvement in rooftop DG.”

 
Arizona Public Service (used with permission)
 

APS vs. TEP vs. TPO financed, net metered solar

TEP will invest up to $10 million for a total estimated solar capacity of 3.6 megawatts. The systems will be installed at a per watt cost of between $2.85 and $3.50. The 10 megawatt APS program will have a capital cost of $28.5 million.

While the APS program provides each solar customer with a guaranteed $30 per month bill credit from the start, TEP’s program initially allows the customer only to break even, Huber said. Savings could eventually be significantly more, he added, but the precise amount is hard to quantify.

“Things start to happen in the future,” he explained. “If rates go up, the solar owner is shielded from those rate increases because the home theoretically gets 100% of its electricity from solar and the homeowner continues to pay the same rental fee for the system. It is essentially the same thing that SolarCity does with zero-down leases.”

Farther out, the discount rate on future money could mean that even if the TEP system provides more than $30 of monthly savings in year 15, it could be worth less than APS’s rental payment in today’s dollars.

Finally, Huber said, the ultimate cost of the TEP and APS programs for the ratepayer will be reduced if fuel prices rise.

Benefits to the APS and TEP systems will come in multiple and similar forms, Huber said. Both will deploy advanced inverters, have geo-targeting goals, and obtain grid data for research purposes. The key difference between the two, Huber believes, is that a participating TEP customer’s behavior could impact the program’s value and its success.

“If a TEP customer’s usage drops 10% and the solar system performs 5% better than expected, the excess generation goes to the TEP system,” Huber said. “If the utility gets a really good deal on the installed cost and keeps its O&M low, the system wide savings could significantly reduce TEP’s fixed cost losses associated with the solar.”

That would “minimize the cost shift in a way that would be comparable to a SolarCity customer having to pay a monthly infrastructure charge,” Huber said.

The best plan?

Huber believes the sum of advantages from excess generation, bill charges, and impacts of fuel price increases may put TEP’s plan ahead of either APS’s plan or a TPO financed, net metered business model. “But there are many unknown value streams, especially in the TEP program,” Huber said.

These two different utility ownership models take wildly different approaches, he added. “A big question is whether APS or TEP will have the higher capital cost. This coming year will bring some answers about how much each costs ratepayers and how much of a savings over net metering each will provide.”

The way the policy was structured, the programs cannot cost more than the total cost of net metered solar, Huber explained. “The question is: Can it be less? And if so, which model will deliver the lower price?”