The buzz in solar right now is about the incredible growth in the residential and commercial sectors. These are the solar panels popping up on home rooftops and Wal-Marts across the country.
What you may not realize is that residential and commercial solar are based on one of the industry's most controversial policies -- net metering.
What is net energy metering? It's the ability of a solar owner to sell excess power produced by solar panels to the utility and net out usage that may occur later. In essence, net metering allows solar owners to use the grid as a battery, saving energy for another time. The residential and commercial solar boom that's driven SolarCity (NASDAQ:SCTY.DL) and SunPower (NASDAQ:SPWR), among others, is based on net energy metering. Now, one piece of the solar industry might be joining utilities in fighting back against these policies.
Utilities fight back against solar
The biggest utility wrangling with solar right now is Arizona Public Service, Arizona's largest utility. The company is putting on a full-court press against net metering in a debate with regulators and the industry, going so far as to make ads trying to convince customers that solar actually raises costs for the poor.
There's little evidence that in practice solar raises electricity prices on anyone long term, but this is something utilities, solar installers, and regulators are debating. On the surface, it's easy to argue that the cost of the transmission and distribution lines and power plants that generate consistent returns for utilities will need to be shifted to those without solar, since they would be paying most of the cost as solar grows. That's the argument utilities are making against net metering.
But this doesn't include tangible or intangible benefits of solar. The biggest factor in solar's favor is that energy production peaks largely at the same time energy consumption peaks (within a few hours), namely when air conditioning use is at its highest. Plus, if generation is done on-site it cuts down on infrastructure like power lines and peaking power plants. Of course, this lower level of infrastructure investment goes against the economic incentives of utilities.
First Solar changes the debate
First Solar (NASDAQ:FSLR) this week put its hat in the ring against solar (say what?), arguing to Arizona regulators that net metering shifts the cost burden to non-solar customers. To me, this is sour grapes and shows just how far First Solar has fallen from its industry lead. Any time these debates take place we need to consider where economic incentives lie and why APS and First Solar are arguing against net metering.
The fact of the matter is that First Solar has no exposure to either residential or commercial solar in the U.S., missing out on the boom that has profited SolarCity, SunPower, and others. The company's low-efficiency panels are simply not efficient enough to compete against other manufacturers on rooftops.
So there's an economic benefit to First Solar fighting against residential and commercial solar. If it does, states will need to meet renewable portfolio standards by building utility-scale projects, which is where First Solar makes its money.
Right now in the U.S., the huge utility scale solar projects that First Solar has made its money on just simply aren't getting contracts. Utilities are finding little need to add utility-scale projects to meet renewable standards, resulting in fewer projects. All of the growth is in small projects, to the detriment of First Solar.
The debate will rage on
Arizona and California will be the first battlegrounds over net metering and it's interesting that First Solar is arguing against solar in Arizona. An industry like solar that has gone through the ringer over the past few years normally bands together, building policy that helps the industry as a whole. But I guess when economic interests' collide the benefit of one overtakes the good of the industry.
As for SolarCity and SunPower, I wouldn't expect any major changes to net metering in Arizona or California in the short term. Changes may be necessary as the industry grows and more power comes from solar, but that will be years down the road when costs come down, energy storage is more feasible, and other innovations have been made by the industry. These are bumps in the road for these companies, not a reason to sell today.