Dueling studies draw battle lines for next Arizona utility-solar showdown
Studies commissioned by APS and TASC have hugely different approaches to solar valuation, but share an important piece of common ground
Arizona Public Service (APS), the state’s dominant electricity provider, and The Alliance for Solar Choice (TASC), representing the nation’s dominant solar installers, are headed for another showdown.
Nearly every state in the nation has seen some version of net energy metering (NEM) and solar rate design issues over the past few years, but few places saw proceedings as contentious as the 2012-2013 face-off between the utility and solar advocacy group in Arizona.
That debate over remuneration rates for rooftop solar systems quieted temporarily when the Arizona Corporation Commission ruled that retail rate NEM would be left in place but allowed APS to add a modest fixed charge to solar customers’ bills. Now it appears the issue is emerging again, in a regulatory proceeding for an entirely different utility.
As a part of its ongoing general rate case, UES Energy Services (UES), a smaller Arizona electric utility, is proposing a shift to residential demand charges, and solar advocates are opposing the move. Like many other disputes between the parties, this one involves dueling research. But unlike many times in the past, that very research could reveal a point of common ground between the parties that could provide a path forward.
Intervention in the UES rate case
UES provides electricity to about 93,000 customers in rural Arizona and is owned UNS Energy Corp. — the same parent company as Tucson Electric Power, another utility with a history of solar industry disputes in the state. Its current proceeding is focused on residential demand rates, but state utility insiders say that NEM and solar valuation will once again be at the heart of the issue.
“The utility cannot add a demand charge without also reducing the energy volumetric charge because otherwise bills go up,” said APS Sr. VP Jeff Guldner. “Solar advocates say reducing the volumetric rate will hammer solar because there is no room in the solar value proposition.”
As intervenor, APS commissioned and filed a report prepared by Navigant Consulting called “Solar Project Return Analysis for Third Party Owned Solar Systems."
The analysis “focuses on quantifying solar [third party ownership (TPO)] providers’ project returns in utility service territories,” and concludes “solar TPO providers have headroom to adjust to some changes in rate structures while maintaining project returns.”
In other words, Navigant concluded that "because returns are fairly rich, changes to rates or to NEM do not mean the end of a viable solar market," Guldner said.
That study stands in opposition to another filed in the same rate case.
Also as an intervenor, TASC commissioned and filed “The Benefits and Costs of Solar Distributed Generation for Arizona Public Service (2016 Update)” by Crossborder Energy’s R. Thomas Beach and Patrick G. McGuire.
“The appropriate framework for assessing the relative benefits and costs of net metering is to focus on the value that customers receive for the electricity that is exported from their premises,” Beach testified to the ACC. If all benefits of residential solar to APS are considered, the report concludes, rooftop solar is worth between $0.248/kWh and $0.311/kWh to the utility. That is above the retail rate credit it currently earns.
Both reports are based on assumptions and calculations that the other side views as questionable or invalid. But despite being on opposite sides of the debate, the studies reveal an important area of common ground that regulators could use as a starting point for more constructive negotiations.
Demand charges and the solar value proposition
Based on the Navigant analysis, it is “unfounded” to claim adjustments to NEM or other rate designs cannot be tolerated by the TPO solar business, said APS Director of State Regulation and Compliance Greg Bernosky.
APS is increasingly seeing value in the prospect of implementing demand rates for residential customers, Bernosky said. A $50/month demand charge was recently imposed on solar owners by nearby Salt River Project (SRP), a public utility not regulated by the ACC, and something very similar is now being proposed by UES.
Demand charges "allow customers opportunities to save on their bills,” Bernosky said. “Especially for solar customers, there are emerging technologies that allow keeping an eye on peak demand to get to those savings. We have seen a lot of customers save when they move to a demand rate.”
Bernosky said there is anecdotal evidence the SRP solar market, which fell 90% in the wake of the demand charge’s imposition, is coming back. He rejects criticisms that dealing with peak demand rates is too complicated for residential customers or penalizes lower income customers.
Rooftop solar users can address demand charges by exporting to the grid during peak demand for the higher value credit or by adding battery storage, according to GTM Research senior solar analyst Cory Honeyman, lead author of a just-released study on rate design and solar economics. Compared to raising fixed charges, a common utility tactic to respond to rooftop solar growth, demand charges can allow consumers new opportunities to cut power rates if they can respond to the price signals.
“We have proof that residential demand rates work for customers and can particularly work for customers that adopt new technologies,” Bernosky said.
The solar industry, however, rejects the Navigant calculations about solar's viability under residential demand charges.
The Navigant study’s conclusions “are simply not grounded in reality, and we can only assume that they are based on ridiculous assumptions,” SolarCity Communications Director Will Craven said in an email.
“APS believes the Arizona Corporation Commission’s job is to determine how much pain the private sector can take for the benefit of APS,” Craven said. “Meanwhile, APS parent company Pinnacle West had a net income of $3.92 billion last year, but cannot tolerate the fact that some Arizonans want other options for generating electricity.”
Navigant's findings: Solar providers have headroom
Navigant collated extensive data from GoSolarArizona, the SolarCity website, and other publicly available sources. It calculated solar lease rates for December 2015 and January 2016 and the annual lease escalator for TPO customers of UES, APS, Tucson Electric Power, Sulphur Springs Valley Electric Cooperative (SSVEC), Pacific Gas and Electric, and Sacramento Municipal Utility District.
It then determined the utility offset rate — the utility rate the TPO provider has to beat to make taking a solar lease a good deal for the customer. Navigant concluded “solar TPO providers choose to operate in jurisdictions where they can maximize their return by undercutting utility offset rates.”
TPO companies “appear to be tracking utility rates and pricing accordingly” because the lease prices are higher where utility rates are higher, it reports.
“These higher lease prices cannot be fully accounted for by variations in system cost, solar production, and tax rate (locational factors).” Navigant added. Similarly, “project returns are higher in service territories with higher utility offset rates.”
With NEM at the retail rate, Guldner said, solar providers have “no reason to price lower than just below the utility rate, even if the costs of the solar are coming down.”
If the leasing company charges are not capturing the costs associated with the equipment, “when costs go down, prices don’t,” he said. “The solar owner ends up overpaying.”
The Navigant insight of most interest to APS is that despite solar’s falling installed costs and the long term extensions of the ITC and bonus depreciation, lease rates are not declining and are, in some places, increasing.
In 2015, Navigant concluded, TPO providers in the UES territory “experienced an estimated 40% project return, which is expected to increase to around 80% in 2016, due to the lease rate increase from $0.087/kWh to $0.095/kWh between 2015 and 2016 and the reintroduction of the 50% bonus depreciation allowance.”
It is through this analysis that Navigant concluded “solar TPO providers have headroom to adjust to some changes in rate structures while maintaining project returns.”
SolarCity declined to address questions raised by Navigant about system value versus system cost, about SolarCity's returns, and about whether rate changes proposed by UES will make solar non-viable. But NC WARN Consultant and former ACC Policy Advisor Nancy LaPlaca told Utility Dive that the Navigant conclusions can be taken a different way than APS's perspective.
“TPO solar companies market where they can make money based on the utility’s rates," she said. "As Navigant makes clear, there is ample competition in the TPO marketplace. If there was a market failure, it would be revealed."
Crossborder's findings: Solar more valuable than retail rate credits
While the Navigant report concludes that solar providers are already making healthy returns, Crossborder Energy's study argues that solar's benefit to the grid should be valued even higher than the current retail rate of electricity it now receives.
The study explains that distributed generation differs from other resources because “DG customers are not just consumers of power, but also at times produce power for export to the utility system.” It also shows that NEM is about “valuing the power which DG customers will export to the grid."
Finally, it attacks “myths” about NEM, including “the misplaced ideas” that NEM customers use the grid more than regular utility customers, that NEM customers with low or zero bills do not pay for their grid use, and that the grid serves to "store" DG output.
The benefits of solar DG equal or exceed the costs in both the “Total Resource Cost Test” and in the “Societal Test” — tow measurements of the cost-effectiveness of utility energy programs — Crossborder concluded.
In addition, Crossborder concluded the Participant and Ratepayer Impact Measure Tests show there is a balance between the costs and benefits of residential DG for both solar owners and non-solar owners.
APS can, it added, maximize the benefits available to its system from distributed solar by finding ways to drive growth in the commercial segment of the market, where the benefits significantly exceed the costs, the study concluded.
West-facing solar DG, which delivers more solar-generated electricity later in the day and farther into the APS peak demand period, will also provide more benefits to the APS grid, it also concluded. The utility should therefore consider incentives that motivate residential customers who want solar to transition from the traditional south-facing orientation.
The Crossborder study builds on a growing body of work dedicated to finding the full value of residential solar in Arizona and elsewhere. Last fall, in hopes of finding more accurate solar valuation schemes than net energy metering, the ACC issued a decision to open a docket dedicated to assessing the full cost and benefit of distributed solar to the grid.
Guldner said at the time APS is concerned solar advocates will want to use studies that include societal values like one done by Clean Power Research for Maine’s regulators that derived a solar value of $0.33/kWh. Crossborder's study is one such analysis.
“The problem with VOS studies is they are all hypothetical,” Guldner told Utility Dive. “The solar advocates say the studies are done independently, but we don’t think they are.”
A separate challenge, Guldner said, is determining the difference between the value of distributed solar and the value of utility-scale solar because the latter “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.
That is not an “apples-to-apples” comparison, Beach told the commission, because rooftop solar delivers a retail energy product and utility-scale solar is a wholesale product.
“The retail, rooftop product has been delivered to load so, at a minimum, the value of wholesale solar must include the costs for delivering it to customers that could also be served by solar DG located on their own roofs, Beach said.
A path to common ground?
While the Navigant and Crossborder studies present dramatically different perspectives on solar growth — likely due to the parties that commissioned each report — they share an important area of common ground.
Crossborder's final finding in its report confirmed that costs to non-solar owners decreased in the APS service territory when the utility instituted its existing residential time-of-use (TOU) rate structure.
“Encouraging greater use of TOU rates also will improve the cost-effectiveness of solar DG,” Beach told the ACC.
In a state where it seems that utilities and solar advocates can rarely agree on the methods for assessing solar's value, let alone come together on its conclusions, the fact that both contesting reports conclude there is room for rate design reform is noteworthy.
“When APS gets criticized for proposing changes in rate design because they would crush the returns for these companies and their opportunity to make money, we believe that is overstated,” Bernosky said. “There should be a willingness and ability to adjust to what utilities need to do to adjust their rate designs.”