Bright Consumers: Cost Inequity in Solar Power Generation

Bright Consumers: Cost Inequity in Solar Power Generation November 2013 By: Mark Anderson, Esq. Senior Vice President and Sarah E. Hunt, Esq. Manager, State Issues Stateside Associates 2300 Clarendon Boulevard, Floor 4 Arlington, Virginia 22201 (703) 525-7466 www.stateside.com

The utility and solar industries are debating the state regulations that govern the way electricity is sold to, and bought from, homes and businesses with solar panels. With the increase in the number of solar panels, the incentives provided by many existing net metering policies could grow exponentially and unfairly burden businesses and consumers that do not have roof-top solar panels. Changes in state net metering regulations are being considered by various states, most prominently Arizona. Changes recently approved in Arizona, for example, will allow utilities to charge grid-connect fees to customers with solar-voltaic panels on their homes or offices. 1 Arizona and other states continue to consider additional changes to their net-metering polices. Depending on whether the proposals pushed by the solar industry or by the utilities prevail, future adjustments in net-metering policies will either exacerbate cost-shifting inequity or they will continue the current regulatory trend toward increased fairness for all electricity buyers. How net metering works Net metering, or net energy metering (NEM), bills electric utility customers for the electricity they use, minus the power they generate from their own energy sources, such as solar panels or small wind turbines. This paper focuses on rooftop solar panels, the most commonly net-metered small, or distributed energy resources (DER). 2,3 Rapid growth in rooftop solar over the past decade has fueled the controversy over net metering. 4 Solar panels sometimes generate more electricity than a home or business needs; at other times, they produce no electricity due to absence of sunlight. With net metering, building owners are billed for the electricity they use from the utility and can sell any surplus electricity back to the utility. 5,6 Customer meters track the amount of power they get from the utility and the amount of surplus power they sell back to it. 7 Net-metered customers electric bills reflect the amount of their energy use minus the price of the energy they sell. 8,9 The question being debated in some states is how much utilities should have to credit solar panel-owning customers for generation that offsets the customer s usage as well as for any excess power sold back to the grid, and how to ensure that the billing structure is fair to all utility customers. Net metering was designed as an incentive for home and business owners to install solar panels and other types of DERs. 10 The federal Energy Policy Act of 2005 mandated that states consider adopting a federal standard under which utilities would offer net metering to customers who request it. 11 Many states already had adopted regulations, often created when the solar panel market was small, 12 that support net metering. Net metering is currently available in 43 states, the District of Columbia, and four U.S. territories. Between 2003 and 2012, as solar prices dropped and a leasing model for installation became common, the number of net-metered customers increased from virtually zero to over 300,000. 13,14 November 2013 Cost Inequity in Solar Power Generation 1

Concerns and controversy As solar installations have multiplied, utilities have voiced concerns about the structure of regulatory incentives for net metering. The industry points to the rapid growth of the solar market and to technological and market trends encouraging further expansion. Utilities have begun pushing for regulatory and rate structure changes in response to these developments. The solar industry has likewise pushed for rule changes favorable to continued subsidization of their industry. 15 Utilities believe that current regulations create unfairly high electric bills for some customers, 16,17 and that updated regulations would allow for more equitable billing and give the utility more flexibility to meet its obligations. 18 The utility industry has recommended changes in net metering to ensure that net-metered customers pay their fair share of the cost of maintaining the grid, while compensating them fairly for the surplus energy they produce. Suggested changes include: 1. Separate billing of customers with solar panels from paying them for the power they produce. 19 2. Impose standby charges on net-metered customers one or more extra charges per kilowatt-hour (KWH) of total consumption for transmission and distribution. 20 3. Credit net-metered customers at the wholesale, rather than retail, price for selfgeneration. 21 4. Substitute up-front incentives like grants or tax credits for ongoing incentives involving monthly electric bills. 22 Solar industry campaigns to protect its interests The solar industry is aggressively seeking the expansion of net-metering programs as states consider changes to net-metering rules. The utility industry is countering with policy proposals to reduce the subsidization of solar power by non-solar customers. Arizona s recent rulemaking decision is widely expected to become a model for solar policy. The solar industry, led by the D.C.-based Solar Energy Industries Association, engaged in all-out political war in an effort to shape the outcome in that state. 23 Former congressman Barry Goldwater, Jr., is the chairman of Tell Utilities Solar won t be Killed (TUSK), a solar backed group that organized a campaign against changes to Arizona s netmetering law. 24 TUSK and the solar industry spent hundreds of thousands of dollars on television and radio ads. Their negative attack ads accused the utility industry of crony capitalism. The solar industry characterizes possible changes to the net-metering rules as a tax hike. Solar has bi-partisan support in its campaign against net-metering law changes in Arizona. The progressive Organizing for Action sponsored a pro-solar industry letter-writing campaign in Arizona during late summer 2013. 25 November 2013 Cost Inequity in Solar Power Generation 2

Utilities have also launched advocacy efforts to promote net-metering reform. In Arizona, utilities also spent thousands on television and radio ads. They brought in their own political heavy-hitters, including Grover Norquist of Americans for Tax Reform, who filed comments in a rulemaking stating his opinion that net-metering reform was not a tax increase. 26 Political activity by solar and utilities is expected to continue in Arizona over the next two years as the Arizona Corporation Commission holds workshops and conducts additional research into net-metering. 27 Utilities Make the Case for Change Net-metered customers still depend on a reliable power grid The utility industry highlights the difficulty and expense of installing, maintaining, and fueling backup generators and of transmitting electricity produced by homes or businesses solar arrays for sunless periods. Since sunlight availability can change from moment to moment, net-metered customers must remain connected to the electric power grid at all times to ensure reliable power and stable voltage and frequency. 28 Electric grid maintenance entails fixed labor and equipment costs to generate, transmit, and distribute electricity. 29,30 These costs, which include everything from construction to high-tension wires to worker salaries, 31,32 account for about half of each customer s electric bill. 33 Dollars not paid by net-metered customers are spread over the remaining customer base Utilities are heavily regulated by state public utility boards, which dictate the rates at which they are allowed to bill per KWH. State boards calculate the rates based on a utility s fixed costs and an acceptable revenue target. 34,35,36 The cost of maintaining and improving the grid is reflected in the retail rate all customers pay for each KWH they use. 37,38 When net-metered customers receive a credit on a portion of their bill, the utility s revenue is reduced, and the allowable rate per KWH it can charge is recalculated as a percentage of a smaller revenue base. Most states net metering regulations require utilities to buy surplus power, and provide usage offset credit, from net-metered customers at the retail rate, which is above what it would cost a utility to produce the electricity itself or buy it wholesale. 39 The retail rate includes fixed costs that go toward maintaining the grid. When self-generating customers are compensated at the retail rate, the result is that they no longer contribute toward those fixed costs. Customers unable to install solar panels will wind up shouldering a disproportionate share of the costs required to maintain the grid. 40,41 November 2013 Cost Inequity in Solar Power Generation 3

Net metering requires more complex and costly distribution systems The increasing use of solar and other distributed energy resources sometimes imposes new demands on the grid. Infrastructure built to handle a one-way energy flow (utility to customer) must be updated to deal with fluctuating amounts of energy that net-metered customers send back to the grid. Utilities must adapt their grids for two-way power flow to avoid power supply and safety issues. 42,43 Customers least able to afford an extra burden subsidize the more affluent Another concern is economic fairness. Utility customers who can afford to install solar panels on their roof are more affluent, on average, than those who cannot. A California Public Utilities Commission study found that net-metered customers have a median household income of $92,210, versus $54,283 for all California households. 44 An Arizona Republic investigative report found a similar disparity. 45 These findings suggest that people making too little money to afford solar installations and sell power back to the utility bear a greater share of the cost of maintaining a functioning grid. 46 Utilities do not oppose renewable energy or DERs, but seek to cover fixed costs and bill all customers fairly Solar industry representatives have claimed that utilities oppose the spread of solar energy and net metering as a threat to their business model. 47 The utility industry, however, says that it supports DERs if their integration into the power grid is well planned. According to Ted Craver, Vice Chairman of the Edison Electric Institute and CEO of Edison International, well-situated DERs can benefit utilities because they can defer, and sometimes substitute for, installation of new utility infrastructure such as power plants [and] transmission lines. 48 He adds that Edison International subsidiary Southern California Edison is working on a demonstration project that will place DERs in parts of Irvine, California. 49 The Arizona Public Service Company, the state s largest electric utility, is conducting a pilot project that has installed solar panels on homes in East Flagstaff. 50 Craver says that his industry wants to see DERs integrated into the power grid, but that to achieve this goal, it must objectively identify and resolve several important issues affecting electric system safety, reliability, and affordability. 51 As discussed above, these issues include modernizing the grid to accommodate DERs and developing a rate structure that is fair to all electric utility customers. Where things stand in the states Most of the 43 states with net-metering rules have rules that provide generous incentives for solar. A handful of states, including Arizona, California, Idaho, Louisiana, and New Mexico, are revising their net-metering rules. All eyes are currently on Arizona, where a new decision on net-metering is expected to become a national model for net metering policy. 52 The Arizona Corporation Commission (ACC) has a docket, or rule-making, on net- November 2013 Cost Inequity in Solar Power Generation 4

metering that is being followed closely by utilities and the solar industry. 53 In a recent ruling under this docket, the ACC acknowledged net-metering causes a cost shifting that burdens non-solar customers. 54 The ruling permits utilities to charge a 70 cents per kilowatt grid-use fee to future solar customers. The average fee per new solar customer is expected to be $4.90 per month. 55 The ruling is modest and has been called a victory by both sides. The solar industry was pleased that the ACC did not go so far as to allow utilities to purchase excess generation from solar users at wholesale prices or enact other significant policy changes. The ACC had initially considered whether to permit utilities to offer homeowners two options for solar on their roofs: a bill credit or a net-metering option. Both options would likely have reduced the incentives for solar and increase costs for consumers with solar-powered homes. 56 These changes may be considered in the future as the ACC also voted to establish a workshop process to continue to deliberate net-metering policy in Arizona. The ACC will revisit substantive changes to net-metering policy in the future, no later than a currently mandated 2015 rate case. Conclusion Net metering regulations are being debated in a number of states. Electric utilities state that they support small-scale renewable energy sources but would like to see the current system of incentives adjusted so that they can bill customers fairly regardless of income level, better cover their fixed costs, and earn reasonable revenue. Changes in the billing structure, including the ability to pay net-metered customers the wholesale rate for the electricity their solar panels produce and to offer up-front rather than ongoing incentives, would help accomplish these goals. The availability of net metering as an incentive has helped the solar industry grow exponentially over the past decade. The solar industry is predictably resistant to any regulatory change that would encroach on its turf. In Arizona, industry and advocacy groups spent heavily on negative ad campaigns in an attempt to influence the ACC s rulemaking. The new and future regulatory changes in Arizona will likely serve as a model for other states, and should be closely watched by every household and business that pays electric bills. Stateside Associates is the proven leader in state and local government relations. Since 1988, Stateside Associates has offered clients state, federal and local Issue Management, Legislative Monitoring, Regulatory Forecasting SM, RegulationALERT SM, TellTale SM, Groups Program Management and Lobbyist Management and Referrals, all of which are grounded in first-hand knowledge and based on serving clients unique needs. For a complete list of services, please review our informational brochure or visit www.stateside.com. November 2013 Cost Inequity in Solar Power Generation 5

1 Martin, Christopher, Bloomberg Business Week, Arizona Approves Grid-Connect Fee for Rooftop Solar Panels. 2 Craver, Jr., Raising Our Game: Distributed Energy Resources Present Opportunities and Challenges for the Electric Utility Industry, 19 20. 3 Solar Energy Industry Associations, Solar Net Metering by State. 4 Irfan, Renewable Energy: Solar, Utility Companies Clash over Changes to Net Metering. 5 Ibid. 6 California Pubic Utilities Commission, Energy Division, California Net Energy Metering (NEM) Draft Cost Effectiveness Evaluation: NEM Study Introduction, 13. 7 Hull, Solar Industry, Utilities Clash over Proposal to Change the Way "Net Metering Is Calculated. 8 Irfan, Renewable Energy: Solar, Utility Companies Clash over Changes to Net Metering. 9 Solar Energy Industry Associations, Solar Net Metering by State. 10 Irfan, Renewable Energy: Solar, Utility Companies Clash over Changes to Net Metering. 11 U.S. Department of Energy. Office of energy efficiency and renewable energy., State Energy Alternatives. 12 Irfan, Renewable Energy: Solar, Utility Companies Clash over Changes to Net Metering. 13 Ibid. 14 Solar Energy Industry Associations, Solar Net Metering by State. 15 Irfan, Renewable Energy: Solar, Utility Companies Clash over Changes to Net Metering. 16 Ibid. 17 Edison Electric Institute, Straight Talk About Net Metering, 3. 18 Irfan, Renewable Energy: Solar, Utility Companies Clash over Changes to Net Metering. 19 Wood and Borlick, Value of the Grid to DG Customers, 5 6. 20 Ibid. 21 Ibid., 3. 22 Irfan, Renewable Energy: Solar, Utility Companies Clash over Changes to Net Metering. 23 Randazzo, Ariz. Utility, Solar Industry Fight over Solar Credits. 24 TUSK: Tell Utilities Solar Won t Be Killed. 25 Obama Comes to TUSK s Rescue in Arizona Solar Fight. 26 Arizona Corporation Commission, Docket E-01345A-13-0248. 27 Cardwell, Diane, New York Times, Compromise in Arizona Defers a Solar Power Fight. 28 Wood and Borlick, Value of the Grid to DG Customers, 2,4. 29 Ibid., 1. 30 Murphy, How Are Electric Rate Determined And What Incentives Do Power Companies Have To Invest In Smart Grid. 31 Ibid. 32 Jun, Esq., The Electric Utilities Pricing of Electricity and the Role of the Public. 33 Wood and Borlick, Value of the Grid to DG Customers, 3 4. 34 Murphy, How Are Electric Rate Determined And What Incentives Do Power Companies Have To Invest In Smart Grid. 35 California Pubic Utilities Commission, Energy Division, California Net Energy Metering (NEM) Draft Cost Effectiveness Evaluation: NEM Study Introduction, 42. 36 Jun, Esq., The Electric Utilities Pricing of Electricity and the Role of the Public. 37 Wood and Borlick, Value of the Grid to DG Customers, 3 4. 38 Craver, Jr., Raising Our Game: Distributed Energy Resources Present Opportunities and Challenges for the Electric Utility Industry, 22 23. November 2013 Cost Inequity in Solar Power Generation 6

39 Edison Electric Institute, Straight Talk About Net Metering, 3. 40 Wood and Borlick, Value of the Grid to DG Customers, 3 4. 41 Craver, Jr., Raising Our Game: Distributed Energy Resources Present Opportunities and Challenges for the Electric Utility Industry, 23. 42 Edison Electric Institute, Straight Talk About Net Metering, 3. 43 Craver, Jr., Raising Our Game: Distributed Energy Resources Present Opportunities and Challenges for the Electric Utility Industry, 22 23. 44 California Pubic Utilities Commission, Energy Division, California Net Energy Metering (NEM) Draft Cost Effectiveness Evaluation: NEM Study Introduction, 11. 45 Randazzo, Costs of Rooftop Solar Out of Reach for Many in Arizona. 46 Craver, Jr., Raising Our Game: Distributed Energy Resources Present Opportunities and Challenges for the Electric Utility Industry, 23. 47 Irfan, Renewable Energy: Solar, Utility Companies Clash over Changes to Net Metering. 48 Craver, Jr., Raising Our Game: Distributed Energy Resources Present Opportunities and Challenges for the Electric Utility Industry, 20. 49 Ibid., 24. 50 Randazzo, Costs of Rooftop Solar Out of Reach for Many in Arizona. 51 Craver, Jr., Raising Our Game: Distributed Energy Resources Present Opportunities and Challenges for the Electric Utility Industry, 22. 52 Randazzo, Ariz. Utility, Solar Industry Fight over Solar Credits. 53 Arizona Corporation Commission, Docket E-01345A-13-0248. 54 Cardwell, Diane, New York Times, Compromise in Arizona Defers a Solar Power Fight. 55 Ibid. 56 Randazzo, Will Arizona s Solar Showdown Set Precedent for the Nation? November 2013 Cost Inequity in Solar Power Generation 7