Why SRP's controversial demand charge unlocks a huge opportunity for solar-plus-storage

The utility wants customers to help with peak demand but they may buy batteries instead of more grid power.

The biggest solar installer in the U.S. is suing a small Arizona public utility for giving it what could be a big boost toward a new business model.

SolarCity believes there is legal and ethical justification for its lawsuit. The just-approved Salt River Project (SRP) demand charge, required only of new solar customers, could be anti-competitive, according to the installer. And it is likely to induce significant pain on the region’s solar industry.

SRP has a point, too. “There is nothing wrong with rooftop solar technology. It was our price structure that needed to change,” SRP Treasurer and Financial Services Director Steve Hulet told Utility Dive.  

The utility’s internal analysis showed 73% of its costs are fixed, he said. Analysis also showed solar owners’ reduced variable, per-kilowatt-hour charges significantly lower their contribution to maintenance of system infrastructure but do not proportionately reduce their consumption of peak demand electricity.

The typical SRP customer who installed solar had an average bill of about $170 per month before installation and, under the old price structure, their average bill dropped to about $70 per month with solar. But the utility’s avoided costs, largely for fuel, fell only about $50 per month, leaving it with a monthly net revenue loss of $50 per average solar customer.

“The bulk of the solar value comes from avoided fuel costs but there are other capital costs we calculate into that figure,” Hulet said. “Perhaps not as much as SolarCity would include but we think it is done fairly.”

Solar advocates insist that utility calculations fail to include solar’s value to the overall system and lead to unfair conclusions about what to charge for solar.

SRP calculated an annual under-collection of about $9 million that has to be passed on to non-solar owners, Hulet said.

“To serve peak, we have to add transmission and distribution lines and generation infrastructure,” Hulet said. “We felt it was best for customers with that kind of consumption pattern to break revenues into the two pieces, the fixed demand charge and the energy charge.”

 
 

The new rate structure

In the new rate structure, Hulet said, the energy charge is lower because SRP will get its cost recovery from a demand charge that rises with peak period usage.

“Existing solar rooftop customers will not be put on the demand charge price plan for 20 years,” Hulet said. It will apply only to customers that install solar after December 8, 2014. “We will have to carry that $9 million to $10 million per year for the next 20 years but the new plan allows us to stop that figure from growing.”

Seeing solar’s rapid expansion, utility leaders decided to confront the annual loss before SRP’s current estimated 15,000 solar owners grew and transformed the loss “into hundreds of millions of dollars” and became a serious burden to non-solar-owners, Hulet said.

“But SRP has not simply adopted an increased fixed cost,” he explained. “The demand charge is a tool and a price signal, not only for the customer but for the industry.

If new solar owners match the profile of existing solar owners and continue to use peak period electricity the same way, their bills will only drop from $170 per month to $120 per month, Hulet said. But if they respond to the price signal efficiently, they might save even more than $100 per month.

“The rooftop solar industry could put their solar units up west-facing to help more with peak demand,” Hulet explained. “And the customer can adopt new technology, whether it’s load controllers or smart thermostats or battery technology, and change their behavior to respond to those price signals.”

Battery-plus-solar vs. just solar

“Solar plus storage responds to the demand charge technically, whether or not it works economically,” agreed Solar Grid Storage CEO Tom Leyden, whose company was just acquired by SunEdison.

“I agree with SRP’s point,” said GTM Research energy storage analyst Ravi Manghani. "The Salt River Project ruling could open new opportunities."

Currently, the most economic use of battery storage is in commercial-industrial applications because one-third to one-half of their power costs often are peak period demand charges, Manghani explained. Residential demand charges and other net energy metering reforms may work similarly to boost home battery storage.

“SRP is only one utility out of the 3,000 in the U.S. but it will not be the last utility to enforce a residential rate structure that benefits solar-plus-storage,” Manghani said. “Any kind of net energy metering reform that reduces the value of solar works in favor of storage.”

A GTM research analysis, he said, found a hypothetical SRP demand charge of around $32 for residential customers with a 4 kW solar system resulted in solar-plus-storage economics being superior to solar-only economics. But, Manghani stressed, “it is important to understand that it does not improve the overall economics of solar, only the economics of solar-plus-storage versus solar-only for a particular customer.”

The analysis would apply to purchased or leased solar, he added, “as long as the cost side of the equation doesn’t dramatically change based on ownership.”

SolarCity, in partnership with Tesla, already has a solar-plus-battery-storage offering. Just the announcement of Tesla’s “giga-factory” drove storage prices down, Leyden said. The economies of scale that will come when battery production at that scale begins could very well change the rooftop solar business.

 
 

The SolarCity lawsuit

SolarCity’s federal anti-trust lawsuit is based on SRP’s alleged attempt to prevent customers from choosing to buy less power from the utility and produce more themselves with rooftop solar, explained SolarCity Associate General Counsel Fred Norton.

“Knowing the customers would have to still be connected to their grid, SRP decided to charge customers so much extra that no rational person would go solar," he said. "That is the new pricing plan.”

In addition, he said, “SRP customers who do not generate power do not have those charges. That makes them discriminatory against solar owners.”

“SRP firmly rejects SolarCity’s claims,” a utility statement said. The new rate structure is “not improper or contrary to law.” The SolarCity lawsuit, it added, “is without merit and will be aggressively defended.  SolarCity’s efforts to mischaracterize what the SRP Board approved are unfortunate.”

Leyden, who worked with SunPower and SolarCity before founding Solar Grid Storage, called SRP’s logic “perverse.” There is logic in establishing system-wide price signals, he explained, “but SolarCity is right, it is discriminatory to apply a demand charge just because someone is installing a solar system and not apply the same charge to other ratepayers.”

“We know from our experience with time of day pricing plans that our customers respond significantly to price signals and reduce peak period usage,” Hulet countered. “We’re confident the solar industry will find a business model that works and people will continue to adopt that technology. It would be unwise for solar companies to base their business practices on changing another industry’s price structure.”

"What SRP doesn't see is that by pushing back against solar, they are driving companies like SolarCity to lead a migration away from the grid that will cost SRP more revenues," explained former ACC policy advisor Nancy LaPlaca, now an NC WARN energy consultant. "They could instead be working with the solar industry and helping solar customers be better citizens of the grid."

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