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Arizona's solar industry at odds with utility companies: redux

At a hearing Thursday, February 6, the Arizona Corporation Commission (ACC) addressed Arizona Public Service’s (APS) latest challenge to the regulatory regime governing solar energy in Arizona. This time, APS sought – and was granted – a waiver from requirements under Arizona’s Renewable Energy Standard and Tariff (REST) that it produce a certain annual percentage of its electricity from renewable sources. Specifically at issue was a provision of the REST that 30% of the renewable energy required come from distributed generation* (DG) projects – such as residential and commercial rooftop solar panels.

(*Recall from previous entries that “distributed generation” refers to electricity produced on-site, at the consumers’ residence or business. This is in contrast to the bulk of electricity produced centrally at large power plants and delivered through the grid to customers.)

In addition to granting APS a waiver from the DG portion of the REST, the ACC voted to reconsider the provisions of the REST relating to how utilities may demonstrate compliance with the renewable standards.

Originally approved in 2006, Arizona’s renewable energy standard requires all utilities to generate at least 15 percent of their total energy from renewable technologies by 2025 – with 30 percent of the total renewable pie carved out for DG sources. Thus, 4.5 percent of a utility’s total energy production must ultimately be met by DG. On the way to the 15 percent standard, utilities have annually escalating targets: for 2014, they must get 4.5 percent of electricity from renewables, 1.4 percent of which must be DG.

Under the original regulations, utilities such as APS were required to demonstrate compliance with the REST by purchasing renewable-energy credits (RECs). In the beginning, these RECs took the form of rebates provided to APS customers that installed rooftop solar panels. However, faced with dropping solar panel prices, APS discontinued its customer incentives for solar last year. Consequently – and despite continued growth in solar installations – APS has been left with no recognized method to show that it has complied with the REST.

At last week's hearing, the Commissioners and interested parties discussed various solutions to accommodate APS while leaving the REST unaffected. The ACC, in directing its Staff to draft a modified rule, signaled that it was chiefly concerned with making it easier for APS to demonstrate compliance with the REST. Steven Olea, director of the Utilities Division for Staff, indicated that any change to the rules Staff came up with would either devalue the RECs or reduce the REST percentage requirement by the amount of the DG carve out. Essentially, Staff asserted that they could not protect both components of the regulation while allowing APS to count new kilowatt hours (kWh) coming online from customer solar installations towards the mandated standard.

It should be acknowledged that APS is currently exceeding its annual requirements for both the overall renewable standard and the DG carve-out portion thereof. In fact, based solely on current customer installations, APS will be able to meet its DG obligations through at least 2016. The sole issue is how APS can certify this compliance to meet the regulatory standard – i.e., can APS use a methodology other than the direct purchase of its customers’ REC credits.

The crux of the conundrum lies in a double-counting problem. If APS were to count kWh of production from distributed renewable energy towards compliance – without acquiring the RECs associated with this production – it would nonetheless have an implicit claim on its customers RECs. As a result, the owner of the new DG solar installation would not be able to claim the same RECs – even though they never officially relinquished title to the RECs to the utility. Thus, the RECs would be de-valued – no third-party aggregator would certify a REC that, materially, had been multiply-claimed.

Note here: all parties at the hearing seemed to agree that the RECs currently have a low market value.* As a public commenter pointed out, APS could purchase RECs from its solar customers without having to pass through large additional costs to all its customers – based on 2013 prices, it would cost APS customers about 9 cents per month if APS bought solar RECs.

(*But, pointedly, RECs are not completely valueless – interested parties such as WalMart and the U.S. Department of Defense are quite interested in being able to purchase RECs to fulfill their own corporate/regulatory renewable energy requirements.)

Note also: the Commissioners, on the whole, looked upon the hearing’s solar industry participants with an attitude ranging from skepticism to hostility. In response to solar industry counsel Court Rich’s comment that any modification to the REST would result in confusion in the marketplace, Commissioner Brenda Burns responded by blaming the advocacy of the solar industry for any and all uncertainty. Similarly, Commissioner Gary Pierce criticized the solar business model; in light of suggestions that amending the REST - on the heels of imposing a new charge on net-metered DG customers last November - would effectively kill solar in Arizona.

Continuing in this vein, Commission Chairman Bob Stump issued a press release following the hearing – which press release oscillated between declaring solar power in Arizona “an American success story”; while simultaneously imploring all parties to “refrain from demagoguing an issue of great importance to Arizonans.” Considered in the context of the Commissioners’ statements during the hearing, this second part of the message seems like an explicit warning to the solar industry.

The avowed purpose of Arizona’s REST was to expand the use of renewable energy in Arizona. Reserving 30 percent of this requirement for residential and commercial DG sources seems patently geared to stimulate growth in rooftop-solar energy within the overall renewable portfolio.* At last week's hearing, ACC assiduously stressed that they had no intention to diminish the requirements set forth in the REST.

(*Net metering rules clearly have similar import.)

All the same, the Commissioners’ treatment of the solar industry was troubling. If Arizona is to develop its full solar energy potential, the nascent industry requires some measure of incentives allowing it to compete on an even playing field with the monopoly utility leviathan. By gearing its analysis towards making compliance with the DG portion of the REST easier for utility companies, the ACC has perhaps lost sight of the REST’s primary function: speeding the development and incorporation of renewable energy onto the grid.

Solar rays are readily available in Arizona – it is foolish not to use this plentiful, sustainable resource. The long term benefit of a thriving, mature solar industry in Arizona more than offsets any short term pain APS might feel if required to purchase RECs at present market rates to comply with the current REST.

Although APS will be compliant with the REST’s DG requirement until 2016 – and although sufficient DG has come on line recently without incentives – the ACC should nonetheless favor requiring APS to certify compliance by purchasing additional RECs over any extensive modification of the regulatory status quo. Such preservation of the status quo would be particularly justified in light of declining new solar adoption in early 2014, following the ACC's authorization of net metering surcharges last November.

Solar energy uptake has thus far outpaced the expectations of Arizona’s renewable standards. However, this tremendous success may be jeopardized if the ACC continues to alter the economic landscape at the behest of the utlities.

Special thanks to Sandy Bahr of the Sierra Club, Grand Canyon Chapter and David Berry of Western Resource Advocates for providing extensive insight and background knowledge on the issues discussed in this post.

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