Here comes the sun. In 2016, U.S. solar generation almost doubled, from 7,493 megawatts in 2015 to a new annual record of 14,626 MW. For the first time in 2016, solar ranked as the No. 1 source of new generation capacity additions on an annual basis.

The forecast calls for more of the same. The U.S. could install another 13 GW in 2017, doubling of U.S. solar capacity in just two years. 

Dig deeper into GTM/SEIA data and surprises await. Community solar, ready for its great leap forward, has started contributing to solar growth. Rooftop solar grew 19 percent amid data showing concerns about a slowdown in California. It has become more difficult to scale residential solar at pre-2016 levels as the number of early-adopters begins to deplete. Ongoing Federal Trade Commission and state investigations of solar scams may also hinder growth. 

Without a doubt, utility-scale solar deserves most of the credit for the solar records, growing 145 percent in 2016. As the GTM/SEIA report concluded, utility solar generated almost 80 percent of solar capacity installed in the third quarter 2016.

“While U.S. solar grew across all segments, what stands out is the double-digit-gigawatt boom in utility-scale solar, primarily due to solar’s cost competitiveness with natural-gas alternatives,” according to GTM Research’s associate director for solar, Cory Honeyman.

The unregulated power-producing arms of major utilities such as Duke, Dominion, Mid-American, NextEra and Southern Company could account for 50 percent of solar power coming online by the end of 2017. In December, Xcel Energy, doubled the total amount of sun-powered generation in Minnesota when a single solar plant went online.

Myriad reasons explain the utility solar boom, such as filling the generation gap left by the retirements of coal-fired units in Texas and the Southeast. Utilities in southern states have incorporated utility-scale solar into their resource planning efforts as a hedge against the price volatility of natural gas. Most important, the cost of PV solar has plummeted, with prices in purchased power agreements between $35/MWh and $60/MW competitive with any generation source for utility peak power over a 20-year contract.  

But tumbling prices alone won’t guarantee solar’s future. For solar to succeed, utility commissions must ensure fair and equitable rates through principled rate design that benefits all consumers and safeguards grid reliability. The key (and challenge) to the regulators’ art is to allocate the economic rents properly so all stakeholders – utilities, solar developers, customers – receive the proper price signals for solar. Rates that implicitly subsidize one form of solar over another – or, for that matter, favor one technology over others – must be abjured.  Monopoly and monopsony rate-setting duties will continue to fall to state regulators, with high stakes for the solar industry, utilities and customers.

Net metering – the price paid for residential solar—drives much of the regulatory debate. Net metering, an economic life raft for solar installers and leasing companies, allows owners of rooftop solar arrays to sell the electricity they generate to their utility (often) at a retail, not a wholesale rate, and purchase power when the sun doesn’t shine. Critics describe net metering as a subsidy to  home owners with rooftop solar, and contend net metering beneficiaries do not pay their fair share for grid services used 24/7.  An equity argument then follows because net metering shifts costs to non-solar ratepayers.  

The caricature of rooftop solar as an energy vanity good of the wealthy is ungenerous but contains some truth. Of the 645,000 homes with solar, just five percent are owned by Americans making under $40,000, according to a George Washington University Solar Center study. To the extent rooftop solar owners get paid at or near retail rates for net metering, these homeowners are inevitably being cross-subsidized by poorer folks who do not have expansive roofs upon which to array and display their energy virtue.  Yet, these customers end up paying more for the nuts and bolts of the electric grid, the inverters, transformers and wires, no longer included in the bills of those with solar net metering.

As market penetration of residential solar increases, up go the electricity bills for ratepayers without solar. A recent study conducted for the Electric Markets Research Foundation concluded that if net metering surged to 40 percent of electricity produced in a market, ratepayers without solar could face a rate hike of as much as 45 percent.

The “critical difference” between the EMRF report and others is that earlier studies of the value of solar examined only “current penetration levels, not future levels,” the pro-solar PV magazine stated.

A Lawrence Berkeley National Laboratory study in January also found that the greater the amount of rooftop solar and net metering, the more electricity rates increase.    

This is not to gainsay all solar as a part of the nation’s energy mix. Rather, it is to make the somewhat boring and didactic point of regulatory economics that regulators must get the pricing right so solar benefits all customers, and the least-cost resources win out. The National Association of Regulatory Utility Commissioners recently released a rate design manual that will help states navigate solar issues. 

Data suggest utility solar has solid price advantage over other purveyors of solar. The Department of Energy reported the levelized cost of energy from a new utility-scale solar plant reached $0.07/kWh in 2016, considerably cheaper than the $0.18/kWh cost for residential solar. A Massachusetts Institute of Technology study found that residential solar systems are significantly more costly per unit of capacity than utility-scale systems – approximately 70 percent more expensive on a levelized-cost basis. In other words, as with many parts of the utility industry, scale matters because it drives costs lower.

Regulators therefore face the familiar task of properly assigning costs and designing rates. To be sure, this is no easy task, and the “right” answers do not fall out of an uncontroverted cost or pricing model. States are making the effort. Virtually every state addressed distributed solar in 2016, including 73 actions on net metering in 28 states, according to the North Carolina Clean Energy Technology Center. Arizona and Michigan regulators recently sought a more equitable approach by reforming and reducing solar net metering rates. Legislators in around the country might join the fray.   

Of course, interconnection pricing and joint and common cost problems have bedeviled regulators since the advent of utility-style regulation in the railroad era. Regulators have a thankless and highly contentious job because they are, in effect, deciding who receives economic rents between rooftop solar and the broader electric system.  Under-assign costs and fixed system costs to rooftop solar, then you get over-investment in rooftop solar paid for by non-solar customers; over-assign those same costs, and you get suboptimal investment in rooftop solar. The debate becomes esoteric, contentious and very high stakes.

I see no easy answers, though certain institutional experiments such as unbundling rates, abandoning volumetric block rates and considering time-of-use pricing are also rate design experiments worth trying.  A more transactive grid, without so many monopoly and monopsony problems, is the goal sought by many energy futurists.  In the present and past, though, regulators have struggled with these interconnection pricing problems for a long time.  The lessons of this history are clear: Get it right and all customers benefit. New technologies succeed according to its consumer acceptance and economic efficiency. Get it wrong, and you get a regulatory morass and durable market distortions that benefit the few at the expense of the many, and endless political economy struggles for pricing dominance. For everyone cheering for the success of solar energy, that result would be unacceptable.   

Ray Gifford is the former Chairman of the Colorado Public Utilities Commission from 1999-2003, and is the Managing Partner in Wilkinson Barker Knauer LLP’s Denver office.