The article below points out how the utilities are fighting the solar industry by increasing their demand charges to compensate for customers generating their own power from solar. As some states and utilities define the rules of the game other states will follow suit. It also mentions how the regulations being in a state of flux may impact future investments.
Rooftop solar finds out utilities can disrupt, too
By Michael Copley – SNL Energy
With the solar industry working to open new markets and speed up development, fights between the two sides are playing out in statehouses and public utility commissions across the country.There is a pervasive thought that U.S. utilities face disruptive risks as distributed solar moves into the mainstream. Utilities, the reasoning goes, could find themselves trapped in a “death spiral” in which declining demand puts pressure on revenues as costs hold or even increase. But as utilities move to shield themselves from that hazard, some say solar companies are the ones in the precarious position.
Faced with slumping sales and increasing amounts of customer-generated power, utilities are pushing regulations broadly aimed at protecting their balance sheets and non-solar ratepayers, changing the rules of the game that have so far benefited solar companies. Some say those efforts could hollow out policies that are vital to rooftop solar and shake investor confidence in the sector.
“We’re only one small code or rule change away from being dead in the water, all of us,” Morten Lund, a partner at Stoel Rives LLP and co-chairman of the firm’s Solar Energy Initiative, said at an October 2014 solar conference in Las Vegas.
That same month, Barclays Capital Inc. Managing Director Steven Berkenfeld told solar executives in Washington, D.C., that to continue attracting Wall Street money, the industry has to ensure favorable policies are not rolled back.
“People who want to be critical of the industry — from an analyst perspective, from an investor perspective — are worried about … additional costs that are going to be put onto distributed generation,” Berkenfeld said.
Utilities, pursuing what they say are fairer and more transparent policies, have opened new fronts in a battle that solar advocates say once was fought almost exclusively over net-energy metering — a policy in many states that requires utilities to compensate ratepayers for surplus electricity they send from their solar panels back to the grid. Utilities are proposing higher fixed charges, solar-specific fees and lower compensation for customer-generated power. In some cases, they are trying to get into the residential solar business themselves.
Roadblocks to new markets
Wisconsin is one state to expose such vulnerabilities, with policymakers moving to tamp down the advantages of distributed solar before the industry could really take root.
In a stinging set of decisions in 2014, the Public Service Commission of Wisconsin gave the go-ahead to hike fixed charges 82% for MGE Energy Inc. subsidiary Madison Gas and Electric Co.; 83% for Integrys Energy Group Inc.subsidiary Wisconsin Public Service Corp.; and roughly 78% for Wisconsin Electric Power Co., a Wisconsin Energy Corp. subsidiary that along with Wisconsin Gas LLC does business as We Energies.
The shift from variable to fixed charges is “the most evident and frankly the most troubling” approach utilities are taking to redesigning rates, Tom Starrs, vice president of market strategy and policy at Total SA subsidiarySunPower Corp., said at a December 2014 solar conference in San Diego. It “radically undermines the solar industry’s value proposition to its customers,” he said.
“If you make a fixed charge high enough, at some point … it tends to neutralize the benefits of net metering,” Swami Venkataraman, a vice president and senior credit officer at Moody’s, said an interview. Moody’s has said higher fixed charges are credit positive for utilities because they make revenues more predictable.
Before voting in the Wisconsin cases, state Public Service Commissioner Ellen Nowak said she was she was looking for “innovative rate design ideas that assess … the cost to the cost causer.” A commission spokesman, in an email, said Nowak for years has pushed for “a more fair and balanced fixed charge.”
In at least one of the Wisconsin cases — We Energies’ — regulators also approved a fixed demand charge on solar customers and lower utility payments for customer-generated power.
After the vote, Bryan Miller, vice president of public policy and power markets at Sunrun Inc.,echoed Rive. “Right now [Wisconsin] is not a solar market — there are less than 400 solar customers in the whole state. It has great potential to become a solar market. But … it’s certainly the case that until this is reversed, no companies will enter the state, and the very few that are struggling to sell anything will cease to be able to do that,” he said in an interview.
GTM Research Senior Vice President Shayle Kann said Wisconsin will not be the only state where “something like this” happens.
The Connecticut Public Utilities Regulatory Authority in December 2014 approved increased monthly fees on residential customers of Northeast Utilities subsidiaryConnecticut Light and Power Co. AES Corp. subsidiary Indianapolis Power & Light Co. is trying to increase rates with a shift toward higher fixed fees, a move that is becoming something of a trend in the Midwest, the Indianapolis Business Journal reported. And the utilities of Hawaiian Electric Industries Inc. proposed increasing fixed charges and imposing a monthly solar charge.
“This is why things like cost reductions matter; this is why financial innovation matters; this is why … regulatory battles that are happening matter; because any given thing that doesn’t go quite right can push a meaningful portion of the market out of the money,” Kann said.
Rooftop solar companies also warn that utilities could hijack the market by forming residential solar operations inside of their regulated monopolies.
In December 2014, the Arizona Corporation Commission approved limited rooftop solar programs proposed by Pinnacle West Capital Corp. subsidiary Arizona Public Service Co. and Fortis Inc. subsidiary Tucson Electric Power Co. While advocacy groups backed by big-name solar companies fought the proposals, saying they would kill competition and stifle innovation, some state regulators responded that the utilities could help create a more robust market by contracting with local installers that have felt boxed out by national competitors.
But it has not been all wins for utilities.
Solar advocates scored a victory when electric utilities in South Carolina signed onto a deal setting favorable net-metering terms in the state. The agreement shows the “strength and fairness” of such policies and is a sign of the difficulty utilities face in their “attempts to eliminate rooftop solar across the country,” said Miller, who also is co-chairman of an advocacy group called The Alliance for Solar Choice.
For utilities, the idea is simple: A new technology and market entrant needs new policies.
“Right now we have situations where our rates were designed based upon the way we built the service system 20 or 30 years ago. … They don’t reflect the costs of doing business today,” James Avery, senior vice president of power supply at Sempra Energy subsidiary San Diego Gas & Electric Co., said at the December 2014 solar conference in San Diego. “What we would like to do is for everything to be transparent and people to see our costs.”
There is little reason to think the regulatory fights will end any time soon.
“It is, literally, a national conversation about net metering and cost shifting and rate design, and we’re kind of past the point where the issue really respects state borders, and we’re at the point where each individual action on the state level … has something of a precedential quality,” Justin Barnes, a senior research analyst at Keyes Fox & Wiedman LLP, said at the October solar conference in Las Vegas. “Any given state is potentially in play, even if unlikely, and they’re all important.”
Expecting the Midwest to be a hotspot in 2015, Sunrun recently hired the former sustainability and solar program manager for the city of Milwaukee “to help lead the defense against monopolist utilities trying to eliminate the growing rooftop solar industry” in the region. Miller said the solar industry has already won the fight over net metering. But “I’m not suggesting utilities are going to stop trying to eliminate competition,” he added. “This is a battle. It’s just that they’re losing.”
David Raskin, a partner at Steptoe & Johnson LLP, said utilities have no choice but to continue looking for ways to recoup their investments. Net-metering policies that compensate customers at the retail rate for their surplus solar power can keep utilities from recovering some of their infrastructure spending, according to EnerKnol Inc., an energy research and data firm.
“What investors have historically provided to this industry, they can refuse to provide; and they will refuse to provide capital to an industry that … chooses to stop asking regulators for rates that fully recover costs,” Raskin wrote in the November 2014 issue of Energy Law Journal. “Policies that restrict access to this capital are and will remain harmful to the public interest.”
Agreeing to change, but not the change
Solar advocates and utilities generally agree that utility rates need reforming, but they differ on the specifics.
Higher fixed charges are “too simplistic,” James Tong, vice president of strategy at Clean Power Finance, wrote in an email.
“When they assess a blunt fixed fee, utilities lose the levers they could otherwise use to influence consumer behavior to make the entire grid more cost effective,” Tong wrote, adding that the grid should be treated as a marketplace where utilities make money through transaction or access fees.
Even in California, which IHS Technology expects will have the highest market share of annual solar power generation globally by the end of 2015, regulators are putting more thought into solar, asking, “Where are the places on the grid where there’s extra value and how do we get to price” technology such as distributed generation and battery storage, California Public Utilities Commissioner Michael Picker said at the December 2014 solar conference in San Diego.
Intrinsic in that question is the idea that little strategy is going into siting and using new distributed solar generation.
Miller said time-of-use rates are an “excellent way of sending the right transparent price signals” to ratepayers. But Owen Smith, principal at the Rocky Mountain Institute, said utilities are approaching the issue with rate filings that they think are practical.
“We’ve charged for electricity in the same way for a long, long time, and I think that many utilities and the regulators, frankly, think that these are too hard to change, and that customers will never understand them, and that it will create a backlash if we go from a flat-rate structure to demand charges or time-varying rates and things of that sort,” Smith said at the December 2014 solar conference in San Diego.
Moody’s Senior Vice President Mihoko Manabe said utilities and regulators are not looking for ways to “stanch rooftop solar but to accommodate it, encourage it, while at the same time making sure that the issue of cost shifting is dealt with” and utilities are able to respond to shifting market dynamics.
Regulators are not likely to get rid of net metering, she said in an interview. But “it’s going to be reformed, and it’s going to be amended.”
Room for accommodation?
In SEC filings, solar companies warn that regulatory and policy changes, including utility rate designs, could cause demand for their product to wane and markets to contract. Opinions vary over how much change those companies could withstand.
While Lund warned that the solar industry is “one small” change away from trouble, Venkataraman said companies have “some leeway.”
“A lot of residential customers who are installing rooftop solar right now are kind of like the low-hanging fruit. It’s quite profitable for [companies],” he said. “And in many cases, we know that it’s more profitable than what they would consider to be their threshold return requirements, if you will. There is some leeway there … to maybe accept a slightly lower level of profitability than in the past. So it’s not that it’s a question of [having] losses or being profitable; there is something in between there as well.”
SolarCity, which racked up $71.7 million in net losses attributable to stockholders during the first half of 2014, reported third-quarter 2014 net income of $19.2 million and a gross margin of 51%. “Our long-term value creation for shareholders has never been stronger,” Rive and CFO Brad Buss wrote in a third-quarter 2014shareholder letter.
In a Jan. 8 report, Deutsche Bank Securities Inc. said the rooftop solar sector will be a “key highlight” for the U.S. industry in 2015, with expanding margins going forward. However, the bank noted widespread uncertainty, with some utilities taking steps to compete with the likes of SolarCity and others lobbying against the sector. But if Arizona is any indication, policy fights should not slow solar deployment, analysts said. Arizona Public Service and the solar industry battled in 2013 over a utility proposal that ultimately led to a monthly 70-cents-per-kW surcharge — roughly $4.90 per month for customers with a 7-kW system — for APS ratepayers who install rooftop solar panels after Jan. 1, 2014.
“Arizona is generally considered one of the most contentious regions for debate in the U.S., yet solar leasing companies … have continued to ramp their installation rates despite this,” Deutsche Bank analysts wrote.
New York State Public Service Commission Chair Audrey Zibelman said markets and regulations are likely to remain in a state of flux. “If anyone … is sitting here and saying, ‘This is going to be it,’ it’s not going to be it; things will change,” she told a gathering of solar companies in Washington, D.C., in October 2014. “So everyone needs to be flexible in thinking about it.”