Within the solar installer community, it had come to be known as “the cliff.”
“It was very, very scary for the industry,” says Adam Gerza, the director of government affairs at San Diego-based Sullivan Solar Power.
Legislation enacted in 2006 — and then updated in 2010 — placed a cap on the number of California utility customers with solar installations eligible for taking advantage of the state’s net metering program. And that program had become a very powerful tool for firms that specialized in installing solar systems: Any excess energy created by a photovoltaic (PV) array — whether on a house or a school or a commercial business — could be, in essence, sold back to the utility at the same rate at which that customer purchased electricity. In sun-soaked California, that meant the average customer could not only end up making money off of the utility over the course of a year, but it could also pay down the cost of such a system at a greater rate.
Under current law, just 5% of a utility’s peak demand is eligible for net metering. Based on the portfolios of the state’s three biggest utilities — Pacific Gas & Electric Co., San Francisco; Southern California Edison, Rosemead, Calif.; and San Diego Gas & Electric, San Diego — that cap was (and still is) about 5,200MW. And customers desperate to get off the grid (so to speak) and take control over their energy generation were gobbling up available watts.
Confusing matters was the fact that for several years the language that codified that cap was vague and open to interpretation. In other words, by some estimates, there was enough space to last until sometime in 2017. By others, though, the cap would be reached much, much sooner. By the utilities’ estimates, though, it would run out much, much sooner. Either way, companies like Sullivan were in a virtual panic over what would happen once they’d hit that 5% ceiling.
“We had zero runway after that cap,” says Gerza. “Net energy metering as we know it today, with the rules and legal protections and terms and conditions, would go away.”
By summer 2013, little had happened to give the industry any reason to believe help would arrive — until, that is, Assembly Bill 327 started making the rounds in Sacramento.
Flat(ter) rates
Introduced by Democratic Assembly member Henry Perea in early 2013, what has now come to be known as AB 327 began as an effort to reform the state’s utility rates. In the early 2000s, when prices for power were skyrocketing, the California legislature capped the annual degree to which utilities could raise rates for residential customers who used the least electricity.
“It was basic protection for customers without a lot of money,” says Susannah Churchill, the West Coast regional director for Vote Solar, an industry advocacy group based in San Francisco. “But that also meant that, over the years, the higher tiers have been rising much faster than the lower tiers.”
Though each of the big three utilities sets its own rates (within the bounds of state law), customers fell into one of four tiers based on their energy usage. High-use customers can pay upward of 32 cents per kilowatt-hour, while those who use the least amount of electricity pay roughly 13 cents per kilowatt-hour. As originally worded, AB 327 would “flatten out” that rate structure, reducing the number of tiers to just two. The remaining low tier would pay more than it had, while the high tier would pay less.
The effect of such a plan presented a double-edged sword for solar installers. Ironically, because rates would go down for high energy users, their average return through net metering could actually go down, making solar less attractive to install — or more difficult to pay off if the system is already installed. On the other hand, for those whose rates would go up, a PV array could become more attractive. Edward Randolph, director of the California Public Utilities Commission (CPUC), has another take on the situation altogether. “If under rate reform what the high-use customers are paying goes down, what the low-use customers are paying goes up, and they meet somewhere in the middle — that means there will be more people for whom it will make economic sense,” he says.
Yet, as far as solar installers like Gerza were concerned, AB 327 was doing the industry a major disservice by failing to address the looming peak demand cap for solar installations and what to do once the industry hit it. “It was a natural fit for net energy metering and the upcoming cap to be addressed in that piece of legislation,” he says. “If there’s Maslow’s Hierarchy of Needs for solar to make sense for the customer financially, rate design and net metering are fundamental building blocks. They go hand in hand.”
So behind the scenes in Sacramento, a concerted push on behalf of the solar industry got underway to address the cliff.
Casting a wide net
The controversy over net metering and its future isn’t confined to just California. Nearly every state in the country offers some form of compensation for excess electricity generated by solar arrays, and most provide customers with a one-to-one return, more commonly known as full retail net metering. The incentive program, like tax credits and rebates before it, was meant to incentivize utility customers who were interested in distributed generation but intimidated by the high capital investment cost. (For comparison’s sake, the average installation could cost nearly $10 per watt in the late ’80s. Today, that number reportedly has dropped to less than a dollar.)
And net metering had its intended effect. According to Washington, D.C.-based Solar Energy Industries Association (SEIA), 4,751MW of PV capacity was installed nationwide in 2013, bringing the country’s total capacity up to 13,000MW. The same association estimates that another 6,000MW will be switched on in 2014.
To be fair, a little more than two-thirds of that capacity came from utility-scale installations. But based on pushback against net metering policies in several states, the utilities are beginning to feel the pinch. Which states? Just pick one. In 2013, Arizona’s largest utility, Arizona Public Service (APS), asked the state for permission to not only pay less than market rate for surplus electricity fed back onto the grid by solar customers, but also charge those customers for maintenance costs. (It got its wish on the second, but not the first.) More recently, APS announced it will begin installing rooftop solar on customer homes, a move that has many solar companies crying foul. “After attacking rooftop solar companies in Arizona relentlessly for more than a year, this latest tactic by APS has a ‘Trojan Horse’ smell to it,” said Ken Johnson, vice president of communications for the SEIA, in a press release. “Our member companies welcome fair and equal competition, but this move would stack the deck in favor of a company which can rate-base solar with a guaranteed rate of return. How is that fair? The Arizona Corporation Commission (ACC) needs to think this through very carefully.”
This June, Nevada’s Bureau of Consumer Protection directed the state public utilities commission to review its net metering program; the review is ongoing. In Colorado, the state public utilities commission is considering a request from the state’s largest utility to cut the rate at which it compensates solar customers for surplus electricity in half. That’s to say nothing of the fights taking place in Texas, Louisiana, and Vermont.
In almost every case, local utilities argue that non-solar customers are bearing the brunt of maintenance and other fixed costs on the transmission and distribution systems that those with PV arrays typically end up not paying for. In other words, this so-called cost shift is penalizing those who can’t afford to go green. They may have a point — depending on which way you tilt your head. As the debate over AB 327 heated up in summer 2013, the CPUC hired a consulting firm to analyze the cost-shift effects on local grid users. It found that non-solar customers are paying almost an extra $1 billion a year to subsidize the net metering credit for the state’s more than 240,000 solar installations.
However, that same report also looked at the “true cost” of delivered energy. Its finding? High-tier users pay nearly twice what it costs to provide them power. “Meaning that without solar on their house, they are paying way more to the utility than what it costs the utility to provide them with power,” says Randolph of the utilities commission. “When they put solar on their house and they get out of the upper tiers, they get down to paying about 103% or 110%.” All of which is to say…it’s complicated.
A new dawn
Before AB 327 passed the California state legislature and was signed into law by Governor Jerry Brown on Oct. 7, 2013, it underwent more than 10 revisions — including one that was of particular interest to installers like Gerza of Sullivan Solar Power and that was pushed through by Governor Brown’s office.
“Notwithstanding any other law, the commission shall develop a standard contract or tariff, which may include net energy metering, for eligible customer-generators with a renewable electrical generation facility that is a customer of a large electrical corporation... . A large electrical corporation shall offer the standard contract or tariff to an eligible customer-generator beginning July 1, 2017, or prior to that date if ordered to do so by the commission because it has reached the net energy metering program limit.”
In other words, the new law addresses “the cliff” by entrusting the utilities commission with determining how to continue compensating solar customers beyond the date by which the 5% cap is met or July 2017, whichever comes first. (Not only that, it will extend that new form of compensation to all future solar customers, even those who install systems after the 5% cap is met.) It’s possible, Randolph says, that the commission could choose to leave the current full retail net metering policy in place, or it could allow utilities to reimburse solar customers for excess generation at the wholesale rate. “There are a handful of options on the table,” he says. The commission is currently listening to presentations from all stakeholders and is required to make a decision by the end of December 2015.
But what of current solar customers, the early adopters who purchased systems under the assumption that they could rely on net metering to help them pay off their investment? The bill also instructed the commission to settle upon a grandfathering clause that would ensure that those customers — and any new customers who install systems sometime before July 2017 — could take advantage of full retail net metering beyond the point when the general net metering program changes (or doesn’t change). The utilities argued for as little as six years, while the solar industry pushed for as many as 30. In the end, the utilities commission settled on 20. “We looked at it in terms of the life of the system, but then of course you had debates over what the life of a system is,” says Randolph. “So it was a matter of a little bit of policy and a little bit of compromise.”
You can look at that in one of two ways. The partly cloudy perspective says net metering as we now know it could be a thing of the past in just two decades. The partly sunny perspective says that’s an opportunity to sell as many systems as you can in the next 18 months or so. Naturally, opinions are mixed. AB 327 may do very little for Verengo Solar, an installer with branches in California, Connecticut, New Jersey, and New York. Company spokesperson David Thoreau says the changes to net metering and the grandfather clause won’t factor into Verengo’s sales and marketing approach.
If the changes to net metering in California have goosed demand, those antsy customers haven’t run to Sprig Electric. “We have had no one come to us and say, ‘I’ve heard that there’s going to be an adverse situation in a year, so we want to move,’” says Michael Clifton, engineering and operation manager for the San Jose, Calif.-based contractor. “I don’t think there’s enough publicity about what AB 327 is and means.”
That said, the firm — for which solar constitutes about 10% of projects annually — has used the development as an opportunity to educate potential clients on the issue.
What of Gerza with Sullivan Solar Power? He’s firmly in the sunny-side-up camp. “This has — and it will — lead to a surge in demand,” he says. “So we’re going to do the same thing we’ve done for 10 years, which is honestly educating and being transparent about the realities on the ground.”
He knows the rest of the country will be watching. “The precedent we set here on the policy side is going to go a long way in determining what happens in the other 49 states,” he says.
To paraphrase the old maxim about presidential elections, as California goes, so goes the nation.
Halverson is a contributing writer based in Seattle. He can be reached at [email protected].
