Utilities Fight Back Against Residential Solar Advantages

Arizona is the stage for a very important debate at the heart of the solar industry right now, and it could have a big effect on some of the industry's largest players. Arizona Public Service (APS), the regulated monopoly utility for Arizona, is proposing major changes to the way solar customers are paid for the energy they provide, essentially hoping to upend the net metering that's led to a residential solar boom.  

Net metering is the process of selling extra electricity that solar panels create back to the utility and getting "paid" the same rate you pay for electricity. A customer only pays for the net energy used so, if a customer uses 1,000 kW-hours per month and generates 700 kW-hours of solar power her net bill will be for 300 kW-hours of electricity, no matter when the power is produced or generated.

Utilities, particularly in the southwestern U.S., have started to fight this system, arguing that it doesn't properly compensate them for grid services supplied to customers and will eventually push grid costs onto those customers without solar. But is that true, and how will this impact investors? Let's take a look at what we know right now.

Monopoly vs. non-monopolies
Solar power is coming to the grid, no matter what utilities want, and that creates a conflict for monopoly utilities. The cushy business of supplying power at a set return on equity doesn't require much innovation or adaptation and it's highly profitable, especially if you can constantly grow your assets. That's why solar power is so scary. Instead of relying on utility investment in grid and power generation assets, solar allows a customer to own the power-generating assets at home, taking away a potential revenue source.

That's part of the prism people need to understand when looking at net metering and how utilities around the world view solar. It's different in regulated markets, where utilities have more incentive to innovate.

But not everyone in the utility business is fighting solar. NRG Energy (NYSE: NRG  ) owns utility-scale solar projects and is investing in residential projects as well. Edison International (NYSE: EIX  ) , which owns Southern California Electric, not only owns commercial and utility-scale assets, it recently invested equity into Clean Power Finance,a residential solar financier, and bought its own project developer SoCore Energy. Some utilities will embrace solar and some will fight it, which makes the debate so intriguing. 

Does solar really cost everyone else?
In the abstract, the concept of pushing costs from solar owners to non-solar owners makes sense. Think of an example of a grid with two customers, both using 1,000 kW-hours of electricity per month and regulated rates requiring $200 in revenue for the utility ($0.10 per kW-hr). Without solar the bill for both customers would be $100. 

If one of these customers installed solar power that generates 700 kW-hours per month, then the $200 in revenue would be split among the additional 1,300 kW-hours, resulting in a 15.4 cent per kW-hour rate and a $153.85 bill for the non-solar owner. This is the argument APS and other utilities are making against net metering. 

Reality, however, is far more complex than this simple example. The biggest reason is that solar panels generate the most power when wholesale power rates are the highest, so solar actually lowers the average cost per kW-hour the utility pays for power by reducing peak demand, at least until solar adoption is too high.

Some will also point to evidence that solar can have an adverse impact on grid prices based on Germany, where solar adoption is the highest in the world and at times can generate 40% of the country's electricity. Germany's electricity costs have risen about 4% annually since 2000 and 4.8% over the past two years, largely because of the adoption of solar. This compares to about a 2% increase in electricity costs annually in the U.S.  

That figure will scare some but it also needs some context. What we need to keep in mind with that comparison is that Germany had a feed-in tariff that paid solar installers a solar premium for over a decade. This was nothing close to net metering. As recently as 2010 the feed-in tariff rate was 39.14 euro cents per kW-hour versus 24.4 euro cents for power from the grid. That's not exactly net metering and still the cost increase hasn't been wildly faster than the U.S. Plus, even Arizona is years away from the level of solar adoption Germany has, and Germany's installed base gets a rate far more attractive than net metering.

Should solar owners have to pay something for use of the grid? Maybe, because the grid does offer a service, but there are auxiliary benefits that serve the public's best interest, such as lower fuel consumption, reduced stress on existing transmission and distribution lines, new jobs, and more. Some would argue that these factors should be weighed heavily, especially in an area where a company like APS is given a government approved monopoly. It also doesn't help that APS is currently asking for the world instead of reasonable fees for solar owners. 

What APS wants
Instead of net metering, which effectively pays solar owners $0.15-$0.16 per kW-hour for their power, APS has made two alternative proposals. The first is to pay customers $0.06-$0.10 per kW-hour for the power they generate, about in line with wholesale rates. The second proposal is to charge a fee that would reduce the average solar owner's savings from 70% of their bill to 30%-40%. That's no small impact for solar owners and could bring returns to such a low level that it kills residential and commercial solar immediately. 

As APS's proposal has made the rounds it has turned into a political battle. There have been commercials in Arizona about both sides of the battle. What's changing for the solar industry is that it looks like the political winds are in solar's favor. Consumers favor solar, and both sides of the political aisle are seeing the value of this growing industry.  

What it means for investors
For investors, this is a valuable debate to watch. SolarCity (NASDAQ: SCTY  ) and SunPower (NASDAQ: SPWR  ) rely on net metering to fund their residential and commercial solar installations, and a lower rate changes the returns dramatically. On the private business side, Sunrun and Clean Power Finance could be devastated by a change in net metering rules, especially if it spreads around the country. Sunrun, in particular, relies on net metering for all of its projects. 

For now, net metering is under attack, but it's still in place in most key states for solar companies. But the debate will rage on, particularly where adoption rates are the highest. 

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Read/Post Comments (14) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 07, 2013, at 9:36 AM, MRCamp wrote:

    I understand utilities have an investment in grid infrastructure but no where in this article do I notice the investment by those who install alternative electric generation systems is addressed. Their contribution can reduce the utility's need to build more generation facilities or buy power from another grid. The initial costs and maintenance of these systems is not something an individual can recover in just a few months and should not be minimized.

  • Report this Comment On August 07, 2013, at 9:49 AM, FrankMcKinney wrote:

    Throttling solar to save a dying business model is a short-sighted plan. What if the utilities used a model where they de-emphasized maintaining their own plants (Edison/San Onofre for instance) and became more of a power agency. Take on all suppliers to drive the price down and then negotiate rates with retail and industrial customers. They could shed a lot of overhead that way while still maintaining their monopoly in the market.

  • Report this Comment On August 07, 2013, at 10:22 AM, SanDiegoDoug wrote:

    If a company can't adapt to new technology or a new use of technology then let them die. Don't punish others because of their ignorance. There are plenty of companies that didn't adapt quickly enough or not at all (RIM, Borders, ..) and are dead or soon will be.

  • Report this Comment On August 07, 2013, at 10:23 AM, mikeflynn57 wrote:

    Sorry, it still reads like the big guys do not want the little guy to earn the same p\kwhr as they do. Also want to extend little guy's capital recovery costs, making a solar decision, even in AZ, harder to make. In other words, deregulation is fine, as long as there is no real competition.

  • Report this Comment On August 07, 2013, at 10:38 AM, nomadd22 wrote:

    The simple fact is, when you pump power back into the grid you probably save the utility 5 cents per kwh. Requiring them to pay you more than power costs them to buy or produce doesn't add up in real math. They can't be required to spend $10 billion building a power system and then give you use of that system for free to balance your power usage in the long run.

  • Report this Comment On August 07, 2013, at 10:45 AM, scasti1 wrote:

    How do the solar persons, of whom I am an support, actually "generate" power, and how does it get transmitted back to the grid.

    Please email me and tell me at scasti1@yahoo.com

    Otherwise, it seems that the power company is paying a "subsidy" for power that the customer generates for "different" purposes.

    Sorry for the lack of knowledge.

  • Report this Comment On August 07, 2013, at 10:54 AM, mikeflynn57 wrote:

    how much of APS power comes from colorado river projects; public and semi-public developments? Its model would seem to be close to pure profit, except for maintaining the lines.

  • Report this Comment On August 07, 2013, at 11:05 AM, solarbill wrote:

    I put in a solar system 6 years ago. For four years Edison in California did not have to pay me for the extra electricity that I supplied to them. The 10 billion spent on new power plants is going to be used by new customers, not me. Make them pay for it. I supply high cost electricity in the middle of the day and I don't even have air conditioning. 95 -97% of the infrastructure is already in place for these mega companies. The only thing that they need the revenue for is, higher executive salaries in bigger dividends for stock holders.

  • Report this Comment On August 07, 2013, at 11:52 AM, bellard wrote:

    Energy enthusiast's;

    Most people do not understand net-metering, including the author of this article. Most net meter's are simple cheap devices - with 2 registers. one measures electricity flow into your electric panel, the other register measures electric flow from your electric panel back to the grid(into your neighbors house that pay retail).

    In the Southwestern US, I have recently installed a few residential solar arrays. After looking at my solar production data, and my new utility bills, looks like 75% of my solar energy is consumed behind the meter. Only 25% get pushed back to the grid - this is important since this is the fight - over the 25%, not the 100% of an array's kwh production.

    Second, if my utility did not just give me a credit for that 25%, then I could add in a simple small battery backup to my system to reduce that 25% down close to zero. This would not be off-grid, just reduced net metering so I can still get retail credit for my energy.

    As others have posted - this is a losing game plan for utilities - any kind of new technology, and innovations simple reduces their profits - they will fight to the end, but the end is nearing. We will see distributed energy like solar eat into utility profits - they will have to increase rates for the non-solar premises - further pushing those customers into solar or DG...This cycle will really pick up over the next 5 years..

  • Report this Comment On August 07, 2013, at 11:55 AM, SLTom992 wrote:

    It is rather silly that the power companies are somehow supposed to pay retail rates for power. If you want to run solar then make the additional inventment in the battery storage and the DC to AC conversion. Putting this all on the utilities and pretending that you are a special case is ridiculous.

    If you make the full investment then all it looks like to the utility is that you are using less power. That's the way it should be.

    Giving special dispensation and tax advantages to people installing solar power helps no one and hurts the taxpayer.

  • Report this Comment On August 07, 2013, at 12:03 PM, DonH6 wrote:

    The main reason that some utilities are resisting residential solar energy is due to the cost to maintain and balance that power on their utility grid. If one only has a limited amount of Residential Solar than that amount can be handled. However, like Wind Power, when too much Solar Power is loaded onto the local grid it can cause great problems. Also residential utility accounts cost more to administrate than commercial utility accounts.

    In my humble opinion all grid power needs to be better planned and integrated properly and Residential Solar creates another challenge for local utilities. Grid integration costs whether Wind or Solar need to be accounted for by the producers of power. Other power producers have that same requirement as well.

    The US has been subsidizing Wind and Solar Power for many years but layering the costs on all users of Power through utilities power prices. Both Wind and Solar are intermittent power and should be treated as auxiliary power. Both need to be used immediately for loads or stored in batteries. There are transmission and grid integration costs for all sources of power.

  • Report this Comment On August 07, 2013, at 12:22 PM, solarbill wrote:

    The truth is, the power companies have been feasting off the profits from their customers with very little investment into infrastructure upgrades for the last 20-30 years. When was the the last time a new dam, new transmission lines or nuclear power plant built. Most of their costs are for repairing above ground transmission lines, destroyed by weather problems because they refuse to modernize by running under ground lines as they have done through out most of Europe. They are also in the process of installing costly "Smart Meters" so they can track and then charge residential users higher rates for using power in the middle of the day. You will see time of day rates charges in the near future. Monopolies will always fight to protect their dinner.

  • Report this Comment On August 07, 2013, at 4:56 PM, Oilvet wrote:

    Solar bill obviously you have never tried to do any of the things you write about or you would know none of those things can be done with out spending millions or billions on regulations, EIP studies and lawyers battling the enviro whacko industry weasels.

  • Report this Comment On August 07, 2013, at 5:56 PM, philthomps wrote:

    Integration issues aside--and those will gain in importance as customer-owned renewables grow--the right price for energy generated by customers and bought by the utility is the utility's avoided cost, which is how much it saves by not generating that energy itself. It's pretty hard to argue that transmission and distribution costs are avoided by the utility when excess solar energy flows from customers. Avoided cost varies over time, and as the article points out, that tends to be higher when solar generation reaches its peak, in the afternoon. But it's unlikely that the higher avoided cost would rise to the level of the standard retail full rate.

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