Arizona on Value of Solar

2016 was an important year for solar and distributed energy resource (DER) policy.

California concluded a multi-year evaluation of its successful net metering program with a decision to preserve full retail credit. In New York, an exhaustive assessment of DER policy is underway. Regulators there proposed preserving net metering for residential customers while more data is collected on the value of distributed resources.  

Nevada reversed course on its 2015 net metering decision by grandfathering existing customers. Regulators there declared that further expanding net metering is in the public interest. And Massachusetts regulators rejected punitive fees in a major rate case, concluding "the department is not persuaded that a cost-shift from DG (distributed generation) customers to non-DG customers exists."

All across the country, policymakers have been looking at net metering, the cornerstone policy for distributed energy resources. They have largely found that the policy is a fair and easily understood tool for compensating valuable ratepayer investment in solar and local energy infrastructure. It is especially notable that Arizona's policy, in the home of one of the most extensive solar resources in the country, stands in contrast to those other outcomes.

In late December, 2016, Arizona's utility regulators concluded a multi-year process to determine how to value distributed generation. They set in motion a new policy many believe is likely to undermine investment in solar and other distributed technologies in the state. We urge advocates and regulators looking for sustainable models of state DER policy to think carefully before following Arizona's example.

Arizona's new policy rightly recognizes that what happens behind the meter is the customer's business. It preserves the important principle of self-generation and self-determination. It also compensates customers with a credit rate for exported generation.  

Any customer has the right to reduce load, whether through better insulation, high-efficiency appliances, battery storage or the installation of rooftop solar. Whether Arizona utilities can treat customers differently based on what technology they adopt to reduce load will be decided in ongoing rate cases.

By separating self-generation from exported power, Arizona has built a foundation for both solar and broader DER compensation. In the U.S., we are progressing toward a more transactional distributed energy system. Credit rates should capture the value of energy fed into the grid by rooftop solar, energy storage, vehicle to grid chargers, and other customer-centric technologies.  

In the future, the export credit rate should be refined to price energy at certain times of the day and in specific geographic locations. That will incent economically beneficial DER deployment across the grid.

But when it comes to DER progress, the rates at which customers are compensated are just as important as what they're being compensated for. The methodology Arizona adopted for determining the credit rates themselves, in our opinion, is shortsighted.

In the near term, Arizona will base the credit rate for exported rooftop solar on the price utilities pay for large-scale solar projects. This method will be combined with or replaced by an evaluation of the avoided costs associated with exported rooftop solar. However, the avoided costs will only be calculated over the next five years. 

The short-term method, dubbed the Resource Comparison Proxy methodology (RCP), is a surprising outcome. The RCP is less a methodology for determining the value of rooftop solar and more of a short cut to arrive at a number for compensating exported power.

The RCP looks at a blended average of the cost of utility-scale solar projects that have been committed to over the past five years as a way to compensate rooftop solar in the future. While the RCP is expected to result in a value relatively close to the retail rate in the near term, this outcome would seem to be its only merit. The method is untested by any state-regulated utility.

There are two important reasons why we believe the RCP is bad policy. First, equating the value of exported power from rooftop solar with utility-scale solar costs is not a valid comparison. The price paid for utility-scale generation has no bearing on the value that rooftop solar exports provide to non-participating customers.

Additional rooftop solar is not an alternative to additional utility-scale solar. Rather, it provides valuable energy at the distribution level that displaces marginal fossil-fired generation and helps the utility avoid future grid investments in capacity, transmission and distribution. And, the technology-specific nature of the proxy method cannot be used to compensate future non-solar DERs.

Second, the RCP is set to rebalance annually based on a five-year rolling average. While it is expected to stay above ten cents per kilowatt-hour in the near term, it will likely drop as older contracts are replaced with newly signed lower cost contracts. While regulators have built in a safeguard against declines in the RCP between rate cases, it is not clear how this will be treated in the long term.

The long-term avoided-cost methodology is the method for valuing rooftop solar that has been employed in varying forms in value of solar proceedings across the country.

It is common practice to evaluate avoided costs attributable to rooftop solar over the twenty to thirty-year lifetime of the asset.  

However, Arizona has chosen to limit the analysis to five years. The five-year limitation was not based on fact or precedent. Rather, it was chosen based on the Commission's opinion that "a twenty-to-thirty-year forecast would incorporate inherently speculative data based on factors that could be easily manipulated."

Arizona rejected the utilities' requests to base the avoided cost methodology on one year of historical costs. However, the five-year approach still significantly undervalues rooftop solar.

Rooftop solar systems have a twenty- to thirty-year economic life, possibly longer. In that respect, they are similar to many other electric system investments, such as distribution lines and central station power plants. When Arizona households and small businesses install rooftop solar, those systems will impact the electric system for decades into the future.

However, Arizona decided to ignore the long-term benefits because they require forecasts of future conditions. While some uncertainty is inherent in long-term forecasts, long-term forecasts and analyses are crucial tools for utilities and other businesses.

Arizona's utility system is a network of long-lived capital assets, and utilities develop long-term Integrated Resource Plans that include numerous long-term forecasts. When utilities develop those long-term plans, they routinely produce sophisticated forecasts of uncertain future events such as natural gas prices, future carbon dioxide regulation, and customer load growth.  

By arbitrarily limiting the avoided cost analysis to a five-year period, Arizona will systematically undervalue solar and future DER technologies.

The Arizona Commission also determined that individual customers making the twenty-to-thirty-year investment in rooftop solar would be able to lock in their export rate for a period of only ten years. That is less than half the expected lifetime of their systems.

While rates are variable under retail rate net metering, customers can count on the fact that utility rates are not likely to go down over the term of their investment. Under Arizona's new policy, customers will only be able to calculate the value they will receive for the first ten years. After that, it's anyone's guess what their exported rooftop solar energy will be worth.

We find this aspect of Arizona's policy particularly troubling, when one considers that solar export credit rates will be based on contracts that the utilities have signed for large-scale solar installations. These contracts routinely include twenty-year fixed or escalating prices.  

Arizona is essentially requiring individual families and small businesses to take on more risk than sophisticated utility-scale developers will accept. In doing so, Arizona's regulators would seem to be creating barriers for rooftop solar to flourish in the state.

This is not the end of the road for solar regulation in Arizona. As the Nevada experience proved, consumers are likely to press regulators for benefits from the solar power they want to invest in. The recent decision marks a turning point for Arizona, as regulators strive to address this contentious issue.

Lead image © Can Stock Photo / Hasenonkel