Arizona energy titans war over solar subsidies

This month, Arizonan voters will be presented with the choice to legalize marijuana legalization and to raise the minimum wage. Missing from the ballot is the Arizona Solar Energy Freedom Act, an initiative that would lock solar subsidies into place until 2022.

Most voters won’t notice the initiative’s absence. Fewer still will recognize that, with the right to vote on these subsidies, they were very nearly asked to choose winners in a duel between solar providers and utilities. While the ugliness of the Arizonan solar duel is fascinating in itself, it underlies a larger, more complex problem. Solar systems are fundamentally challenging the economics of electricity provision. In this changing landscape, stalwart energy players will need to adapt or they will be forced out. That, after all, is the painful nature of disruption in an industry that has historically seen little change.

Utilities vs. solar on the ballot

The feud came to a head this summer, when SolarCity’s super PAC, Yes on AZ Solar, filed an initiative to lock in existing credits for customers who install panels on their homes and sell energy back to the grid. Public utility Arizona Public Co., which has actively sought rate increases, quickly brought its own complaints to state lawmakers, prompting the introduction of two opposing initiatives that would lower the solar credit.

Approaching the summer, the three solar rate structuring initiatives were in the running to be included in this year’s ballot. These were only dropped after State Governor Ducey managed to bring the initiatives’ sponsors to the negotiating table in April. Professional mediators have since failed to bring accord, and the debate still simmers.

Same costs, fewer users

While promoting panels on private homes could seem like a no-brainer, solar carries hidden costs. Under net metering, utilities shoulder the costs of two sets of solar subsidies. The first is more obvious: solar consumers may sell their excess generation back to their electric utility at retail rates that are well above generation prices, giving the value of the margin to the consumer as opposed to the utility.

An additional hidden subsidy, however, arises from the fact that solar customers are no longer paying for the utility’s whole package and therefore contribute less to the cost of building and maintaining the electricity grid. As customers shrug off these costs, the fixed costs of maintaining the grid are distributed amongst fewer consumers. Those that are forced to stay on the grid, often the customers who cannot afford a photovoltaic array of their own, end up shouldering the cost of progress. This is the case that APS has made as it seeks to raise existing rates in Arizona

Source: U.S. Energy Information Administration, Form EIA-861, “Annual Electric Power Industry Report.”

These costs will only be magnified as more residents opt in to solar. Net metering has increased every year as the price of solar arrays drops for consumers. This tracks a dramatic rise in solar applications. In 2010, just over 1,000 applications were submitted for solar systems. In 2015, Arizona saw well over 6,000 applications. New leasing facilities have driven a lot of the growth, as new customers may reap the benefits of solar without paying for the whole system upfront.

Finding a way forward

In certain Arizona neighborhoods, small-scale solar has already been frozen by utilities. In 2015, The Salt River Project, a municipal energy provider for central Arizona, instituted a “demand charge” for new solar customers that would raise their monthly bill by about $50 to help meet costs, 73% of which come from fixed grid maintenance. Salt River Project argued that this rate structure is justified because, while solar owners reduce their contribution to maintenance costs, they still contribute to the strain of peak demand, forcing the utility to continue spending a premium on peaking power generation.

The Salt River Project’s fee segmentation (prices are determined by equipment and services, the demand charge, and the energy charge) presents an interesting rate structure and one that APS may like to adopt itself. This structure, however, could remove the bulk of the financial incentive to install solar panels, slowing renewable growth.

As SolarCity pours millions of dollars into promoting amenable Corporate Commissioners, APS continues to face a dear battle for the rate structure of its choice. With California, Hawaii, and other states struggling with their own net metering battles, many Western eyes are trained on the sunniest state’s upcoming decision.