Can rooftop solar and utilities get along?

Talk of a “utility death spiral” in Germany, Australia and the US as rooftop solar grows has put a blockade between the two factions. We look at collaboration options that could keep residential solar and utilities united.

Ex-FERC Chair Jon Wellinghoff has suggested allowing utilities to own...

Distributed solar advocates have been cheering the ‘utility death spiral’ hastened by the increasing adoption of behind-the-meter solar.

“In Australia there was a reduction in demand from households because of the number of photovoltaic systems,” says Stephen King, Professor of Economics at Monash University. “It created a non-trivial drop in demand for electricity.”

The much-touted theory is that utilities are about to be put out of business as increasing numbers of people generate their own electricity.

But in each successive booming solar market, policy incentives do get phased out. In the US, short of a miracle in congress, expiration of the 30 per cent Investment Tax Credit (ITC) is just two years away.

“The renewable energy industry hasn’t been quite as good a lobbyist as the coal, oil and gas industries,” says Kevin Smith, CEO of SolarReserve. “A lot of those benefits that are provided for investment in oil, natural gas and coal are forever, unless you change the tax code, as opposed to renewable energy where you have to proactively renew things.”

In the meantime, the ITC has boosted sales for the residential solar industry in America. But planning should be in place for when the good times end.

Working together?

One solution might be working with the utilities rather than against them.

Ex-FERC Chair Jon Wellinghoff has suggested allowing utilities to own residential solar behind the meter, in a paper co-authored with James Tong, VP for strategy and government affairs at Clean Power Finance (CPF).

"Thinking Outside the Box: A Case for Utilities Owning Solar within Regulated Service Areas” suggests that consumers and the solar industry would benefit from utility involvement because utilities could greatly increase solar adoption.

If utilities could own distributed residential solar, there would actually be some big advantages for the solar industry. Having more flow would introduce economies of scale, by increasing the size of the pie, reducing costs for installers.

Utilities could reduce the two biggest obstacles to additional rooftop solar on the sales side: consumer inertia and creditworthiness.

How consumers slow solar

Even when faced with lower bills to go solar, most consumers balk.

People hesitate to take the plunge because they are concerned that they must be able to accurately assess ROI in an unfamiliar business.

Just staying with the utility is the default position and busy people settle for the easy path. So customer acquisition cost can average as much as a quarter of the cost of a system.

“It could be anywhere from three to five thousand dollars per system, just for the acquisition costs,” Wellinghoff said in a recent interview. “Those costs can be driven down substantially by having utilities stepping in, finding the customer, doing the financing, basically just handing them over to the installers to put in the system.”

If utilities were permitted to contract with the solar industry to rent space and own solar on their customers’ roofs, the reach of solar could be much wider than it is now, no longer limited to the initiative and creditworthiness of consumers who understand the benefits.

How utilities ‘slow down’ solar

On the utility side, the biggest obstacle is that utilities get no credit for behind the meter solar.

If utilities had to meet a requirement for distributed solar as they do for utility-scale renewables, the potential benefit to the solar industry could be as great as it would be for consumers.

“The biggest growth sector in the solar industry is on the services side. Installation, permitting, sales, the project developers, the financial folks; the majority of jobs in the industry are not in manufacturing,” says SEIA VP of Trade & Competitiveness John Smirnow.

State utility commissions do control the rates utilities can charge, and they could guarantee a lower rate for consumers who accept utilities’ using their roof to install solar.

The solar rate could simply stay with the roof, so if the house changed hands, the new occupant would continue to get the lower rate.

Even when the house was unoccupied for a period between sales, the solar would still be generating power to the grid for the utility, and would have a value. There is a benefit to that distributed generation, even if the customers are not there.

Advantages for utilities

Utilities could choose where the need is greatest, to avoid building new distribution lines and power plants. Utilities like the Sacramento Municipal Utility District (SMUD) have been studying feeder system impacts and thinking about guiding locational development of solar. South Carolina has recently passed legislation that would allow utilities to invest in behind-the-meter solar.

Utilities are in a strong position to leverage their economies of scale and access to low-cost capital to secure a distributed solar asset base.

When Arizona Public Service (APS) proposed that it own 20 MW worth of solar arrays on 3,000 homes, the idea was shot down by Arizona’s Republican-held regulatory body, Arizona Corporation Commission (ACC) claiming the plan was too costly, and exceeded the renewable mandate. Arizona has one of the lowest requirements in the nation, despite its world-class solar resource.

SolarCity, the market leader in solar leases objected, saying the $30 “rent” APS would pay was higher than the $10 to $20 savings they could offer customers given low electricity rates in Arizona’s predominantly coal-fired market.

But APS said being able to site arrays to meet their needs would allow them to increase the number of west-facing roofs in order to supply the increasingly steep late afternoon peak as Arizona increases solar adoption. APS said it would partner with local installers rather than get into the solar business itself.

Serving all consumers, the biggest obstacle is overcome

Countering the charge of unfair competition from a utility with guaranteed profits, APS Renewables Manager Marc Romito points out that theirs would not compete with SolarCity and other solar leasing firms because their focus would be on low income customers who do not meet financial eligibility for a lease.

“This is for an entirely new class and category of customers that have no way to access a lease or cash purchase,” he tells the commission.

This is the key benefit of utility-owned solar. Anyone can sign up for power with an electric utility. Even the poorest person in America has no legal or financial obstacles preventing them from arranging what amounts to an open-ended PPA with a local electric utility. Currently, utilities can cut off the electricity if customers do not pay, so credit ratings are not a requirement.

By contrast, going solar requires a credit rating of at least 650, whether leasing or borrowing to pay upfront, despite being the cheaper option. Of course, those who choose to own or lease their own solar would still have that choice.

If utilities rented some ratepayers roofs, these customers would still be billed by the utility, but with a credit from the utility for the solar ‘rent’ of their roof.

But by removing the biggest obstacles: consumers’ inertia and financial weakness paired with the utilities’ opposition to net metering, solar adoption could be greatly increased by allowing utilities to rent rooftops for solar.

Activity in this space is already taking shape. In late December of last year, the Arizona Corporation Commission voted to allow the state's largest utilities, Arizona Public Service Company (APS) and Tucson Electric Power Company (TEP) to begin doing business in the residential solar market, albeit to a limited degree and with further restrictions on which customers they could serve.

According to news reports, The Arizona Corporation Commission (ACC) voted “no objection” to Arizona Public Service’s $28.5 proposal to own 10 megawatts of residential solar systems. Customers that rent their roofs to the utility will receive a $30 credit on their bill each month for up to twenty years.

The decision could be the start of a trend for rate-based rooftop solar, as regulated utilities around the country look to build their own solar portfolios.