Last month, Arizona regulators concluded a closely-watched proceeding on the value of solar by ending retail rate net metering and, to the frustration of solar advocates, siding with utility companies on most key issues.

The 4 to 1 Arizona Corporation Commission (ACC) vote at the end of December begins a transition away from retail net metering and introduces a replacement rate design.

Some solar advocates say the changes undermine the residential solar value proposition. Other advocates and stakeholders say the changes will make Arizona solar better. Few have noticed a surprise hidden in the plan.

The ACC ruling postponed decisions on the exact value of solar incentives for future utility rate cases. But the commission did act to make rooftop solar customers a separate rate class — a change some in the industry say bodes ill for the solar sector when new utility rate proposals are considered.

“The biggest outcome of this decision is uncertainty, but we are concerned because its proposed methodologies seem to systematically undervalue distributed solar,” Briana Kobor, distributed generation policy director at Vote Solar, an industry advocacy group, told Utility Dive.

The VOS ruling and new compensation schemes

With increasing solar penetration on their systems, Arizona utilities have rebelled against what they perceive as an unsustainable shift of costs to non-solar owning customers caused by net metering.

The December hearing sought to address that, reviewing an October recommended order by an administrative law judge (ALJ) on proposals made during the ACC’s year-long value of solar (VOS) proceeding. The ALJ opinion affirmed solar customers’ right to export power, but called for a shorter-term value calculation for the export rate.

The ACC’s December order clarified how two different valuation methodologies prescribed by commission staff will be applied. They synthesize stakeholder-proposed methodologies made during the VOS proceeding.

The Resource Comparison Proxy (RCP) methodology will be used in near-term utility rate cases to set compensation for exported solar energy. In subsequent rate cases, when details of the more specific Avoided Cost methodology are settled, it will be applied instead of RCP.

The RCP rate will be determined by the averaged wholesale prices of generation from each utility’s central station resources brought online during the five years preceding its rate case.

Based on information provided by APS, its average compensation rate would be about $0.114/kWh. It would replace the current average residential retail rate of $0.122/kWh.

For TEP, the ACC staff derived a compensation rate of from $0.106/kWh to $0.133/kWh.

As the utilities sign new contracts, the anticipated decline in the installed cost of solar is expected to drive the five-year rolling average RCP rate down.

The RCP methodology is intended to “promote a gradual change in export rate” but cannot drop more than 10% per year, according to the ACC decision. The rate a solar adopter gets at interconnection is fixed for 10 years and purchasers of homes with DG systems “inherit the remaining years of that locked in rate.”   

Further down the line, solar valuation will switch from the RCP to a more specific Avoided Cost (AC) approach. The AC valuation “is related to what has been done in value of solar analyses in other states,” Vote Solar’s Kobor said.

The calculation will be based on commission-determined benefits and costs of distributed generation for each utility over the five years preceding its rate case.

Based on staff recommendations during the proceeding, the AC calculation will begin with the value of the delivered electricity. Second, it will include generation capacity and transmission and distribution capacity costs and benefits. Finally, staff will calculate in benefits and costs from ancillary grid services and deferred financial and security risks.

Reactions to the new valuation schemes

Both utilities and solar advocates found things to dislike in the ACC’s new solar schemes.

Utilities complained that the RCP methodology, while it decreased rooftop payments, did not go far enough. PPAs for central station arrays are now in the range of $0.03/kWh, both APS and TEP argued. If built adjacent to utility distribution systems, they can provide most of same benefits as rooftop solar, making it difficult to justify paying the much higher RCP rates for rooftop generation.

The decision to provide the RCP rates and to gradually reduce them reflected commissioners’ expressed concern throughout the hearing that the solar industry and its customers need and deserve a transition period away from retail net metering.

The shift to the new compensation rates will be a big change from NEM in a different way, Lon Huber, a consultant for the Residential Utility Consumer Office (RUCO), told Utility Dive.

“There is no banking and no netting,” Huber, a director at Strategen Consulting, noted. “The solar owner just gets paid for every kWh exported.”

That means solar owners will no longer be able to apply banked credits for exported electricity from times of the day or the month when they need little self-consumption to times when they use more electricity.

Solar advocates expressed support for the gradualism of the RCP approach, but were more critical of the AC methodology.

A key dissatisfaction for solar advocates is that environmental, societal, and economic development benefits and costs will be excluded. Richard Schmalensee​, professor emeritus of economics at the Massachusetts Institute of Technology called such benefits “speculative and non-quantifiable," in testimony on behalf of APS, 

The solar industry disagrees. The problem with the AC methodology, former ACC Chair Kris Mayes recently noted to Utility Dive, is that “a value of solar determination needs to include the values of solar.” Excluding distributed solar values such as water savings, emissions reductions, and societal benefits is “a fundamental problem,” she said.

Commissioner Bob Burns, the only opposing vote in December’s ruling, argued in his dissent that more of solar’s costs and benefits should be considered for the AC methodology.

“If the benefit became quantifiable in the future, its value would be included,” he wrote. “I think having more information about the value of solar, not less, is preferable.”

Solar advocates were even more dissatisfied that the AC calculation will be based on only a five-year period. An AC approach "is not really a cost-benefit analysis or a true value of solar if it is artificially limited to five years,” Anne Hoskins, director of policy at Sunrun, told Utility Dive.

Vote Solar’s Kobor argued that an AC calculation for solar, like a typical utility-scale power purchase agreement (PPA), should be for 20 years.

“Nearly every other cost-benefit analysis completed by a public entity has looked at the long term value over 20 years to 30 years,” Kobor recently told Utility Dive.

Using benefits and costs over a longer term is fundamental to utility planning, she added. “The integrated resource plans [IRPs] for all three major Arizona IOUs include the level of distributed generation they expect to contribute to system peak over their 15-year planning processes.”

Mayes agreed. “The norm for IRPs, PPAs, and contracts for power plants is always 20 years to 25 years. The benefits of solar don’t drop off a cliff at five years.”

Solar’s real benefit, Hoskins added, comes from including it into long-term planning. “That allows the utility to defer the cost next transmission project or another peaker plant,” she said. “When the rate case using this methodology begins, it is going to come out with a lower number because the shorter time period cuts off those benefits.”

A lurking surprise for solar?

In his dissent, Commissioner Burns stressed that solar customers should not be assigned to a separate rate class in the VOS decision, but rather in the future rate cases that will determine the exact solar incentives.

That future will arrive when commissioners hear the APS rate case, beginning in March. If the commission accepts the APS proposal, solar advocates may be in for a rude awakening.

The final decision did not determine what the RCP rate will be because it is to be determined in each utility’s rate case,” RUCO’s Huber pointed out. “And the ruling did not set a new rate for self-consumption.”

But the question of whether solar customers can be a special rate class is settled. The commission can now debate the proposed APS three-part rate plan, which contains a higher fixed charge, a controversial demand charge, and – to make those charges more palatable – a reduced volumetric rate.

That reduced volumetric rate is lowest for the special R3 class of customers designated in the APS proposal as “partial requirements customers with on-site generation" — rooftop solar customers, in layman's terms.

While the expected solar tariff rate under the RCP approach is nearly at the retail rate, the absence of netting or banking solar credits in the new compensation schemes could cut actual compensation to solar owners nearly in half.

About 56% of Arizona rooftop solar generation is exported, according to data provided to Utility Dive by APS. But that is only half solar's value proposition. There is also a threat to the self-consumption rate. It is the remaining 46% of a rooftop array’s generation that is used by the solar owner. Under retail net metering, every self-consumed kWh reduces the solar owner’s bill by the retail rate.

If the commission approves the proposed APS rate changes, solar customers’ retail volumetric rate would drop from $0.122/kWh to an APS-estimated average rate of $0.06/kWh.

That means that while any exported solar energy would still receive the RCP-designated rate, the savings from self-consumed solar would be at the new, lower APS voumetric rate, or about $0.06/kWh.

On average, that would constitute about a 50% overall reduction in the compensation for rooftop solar.

The fact that the ACC moved to make solar owners into a new rate class indicates the commissioners may be inclined to approve the APS proposal, said Nancy LaPlaca, an energy consultant who was an ACC policy advisor from 2009 to 2013.

Sean Gallagher, vice president at the Solar Energy Industries Association, would not speculate on how the commission will rule on the APS proposal.

“Our position is that the ACC got the solar valuation wrong in the VOS [proceeding] and we are going to continue to fight for solar customers in the upcoming rate cases,” he emailed to Utility Dive.

“Well-designed time varying rates do at least as good a job at recovering utility costs and aligning customer behavior with system needs as do demand charges,” he added.

A missed collaboration opportunity?

There was a second point Commissioner Burns stressed in his dissent. New solar customers “should have their solar export rate grandfathered for 20 years, not 10 years, just like what was approved for existing customers,” he said.

The amendment proposing a 20-year guarantee for the export rate was one of the last voted on during a hearing that grew contentious as decision after decision went against solar.

Coming into it, “our intention was to make a serious effort to collaborate,” Kobor said. Vote Solar was willing to move beyond retail rate net metering in return for a pre-published, annual step-down rate, a 20 year AC calculation, and other concessions from the utilities. A similar deal was recently struck between utilities and solar companies in New York.

“We came to the table today hoping to reach a reasonable compromise but we do not feel that happened,” Kobor said.

Sunrun’s Hoskins echoed the Vote Solar official, saying she did not come into the hearing with other solar advocates’ long standing “net metering or bust” attitude.

“We recognized there was going to be change and the issue was how quickly the change would come and what kinds of security there would be for customers,” she said.

The change in Sunrun’s attitude is notable. As a leading member of The Alliance for Solar Choice, the company has utilized aggressive lobbying tactics for solar in recent years, opposing attempts to replace retail net metering with successor tariffs.

Hoskins attributed the absence of a grand bargain on net metering to utility stakeholders and their allies.

“They could have reached out to us and offered a solution that would be a national model,” Hoskins said. “But they seemed to see that, given where it was going, they did not need to collaborate.”

Despite extensive efforts, Utility Dive was unable to get on-the-record explanations from other stakeholders on why a fuller solar incentive agreement could not be reached. But an interchange near the end of the hearing, during the debate on whether to put compensation in place for 10 years or 20 years, was revealing.

It was started by Court Rich, an SEIA board member and long-time attorney to The Alliance for Solar Choice (TASC). Rich, who has challenged the Arizona utilities in commission proceedings for many years, raised concerns about the Arizona Solar Deployment Alliance, a smaller state solar trade group. ASDA supports the ACC decision, with its president Sean Seitz telling Utility Dive the rate cuts are “not an undue burden.”

“It is worth noting every one of the ASDA members sells rooftop solar to APS and their biggest customer may well be APS,” Rich said. “My client [TASC] is a membership organization and it represents the overwhelming installs in the state.”

He was reprimanded by Commissioner Tobin. “The suggestion is that we are not moving in good faith and I am nervous about that.”

“I by no means meant to imply the commission is working in bad faith and I appreciate you bringing that up so I can correct it,” Rich replied. “I have been working for the solar industry and these clients for a long time and this is the first time I have ever been able to tell you they want to work collaboratively with the commission.”

Later, Commissioner Tom Forese cast the deciding vote on how many years the compensation rate should be kept in place.

“It was Mr. Rich’s comments that got me from 20 [years] down to 10,” Forese said.

Commissioner Forese, who was just elected Commission Chair, did not reply to Utility Dive’s request for an explanation of his remark.

Commissioner Forese "cannot answer," according to outgoing ACC Chair Doug Little. “We are still bound by ex-parte rules until the reconsideration period ends.”

Rich also declined a request for further explanation. “As an attorney, I cannot comment about my representation without my client authorizing me to do so,” he emailed.

There is speculation in the Arizona that longstanding antipathy between the involved stakeholders was at the core of this interchange. None would comment on the record. But the bitter words were a clear indication that this much-anticipated VOS proceeding did not resolve the differences between Arizona solar stakeholders, and that more battles are on the horizon.