How the Changing Ownership of Distributed Photovoltaics ... 0612 Paper - PV... · REPORT # 04-12...

PV OWNERSHIP REPORT | JUNE 2012

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How the Changing Ownership of Distributed

Photovoltaics Impacts Customers, the Solar Industry

and Utilities

Mike Taylor

Research Director

Solar Electric Power Association

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Changing Ownership of Distributed Photovoltaics

Alice Clamp

Principal

Alice Clamp Associates

June 2012


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Copyright

© Solar Electric Power Association, 2012. All rights reserved. This material may not be published, reproduced, broadcast, rewritten, or redistributed without permission.

Acknowledgements

Additional research provided by:

Meister Consultant Group

www.mc-group.com

- Wilson Rickerson

- Chad Laurent

The Solar Electric Power Association would like to thank the

following individuals for their feedback and review: Steve

Bradley, Cox Enterprises; Adam Browning, Vote Solar; Susan

Buller, Pacific Gas & Electric; Karlynn Cory, National

Renewable Energy Laboratory; Nadav Enbar, EPRI; Stephen

Frantz, Sacramento Municipal Utility District; Rusty Haynes,

North Carolina State University; Chuck Hornbrook, Itron; Jason

Keyes, Keyes and Fox; Liz Philpot, Alabama Power; J.P. Ross,

Sungevity; Drew Torbin, Prologis; Brad Wood, Progress

Energy.

Feedback

The Solar Electric Power Association would appreciate feedback on this and past reports, as well as new areas of research we should consider in the future. Please take a moment to provide comments and suggestions through an online survey:

http://tinyurl.com/SepaReportFeedback

Cover Photo: Courtesy of Gainesville Regional Utilities

Cover Photo

Solar water heating installation at American University

(Courtesy: Skyline Innovations)

http://www.mc-group.com/

http://tinyurl.com/SepaReportFeedback


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Table of Contents

List of Tables 3

List of Figures 3

Executive Summary 4

I. Introduction 8 Ownership Progression 8

Stakeholder Impacts 8

II. Customer Ownership 10 Customer Perspectives 11

Solar Industry Perspectives 11

Utility Perspectives 12

III. Solar Industry Ownership 15 Customer Perspectives 15



IV. Utility Ownership 19 Customer Perspectives 19



V. Critical Issues 23 Customer Challenges 23

Solar Industry Ownership Challenges 25

Utility Ownership Challenges 27

V. Conclusion 29

List of Tables

Table 1: Stakeholder Perspectives on Customer Ownership ....................................................................14 Table 2: Stakeholder Perspectives on Solar Industry Ownership .............................................................18 Table 3: Stakeholder Perspectives on Solar Industry Ownership .............................................................22

List of Figures Figure 1: Southern California Edison’s Utility Owned PV Project Under Construction ................................. 6 Figure 2: Rooftop Installation ...................................................................................................................... 12 Figure 3: San Francisco Sunset Reservoir Solar Project ........................................................................... 16 Figure 4: Tucson Electric Power’s Bright Tucson PV facility ...................................................................... 20 Figure 5: Consumer Solar Options - Economic Value versus Market Conditions............................................ 24 Figure 6: Third-party power purchase agreement restrictions. ....................................................................... 26 Figure 7: Long-term utility ownership versus industry ownership economics. ................................................. 28


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Executive Summary

Over the past decade, the U.S. photovoltaic (PV) market has grown at an average annual rate of approximately 70%, with distributed, rooftop systems accounting for much of the expansion. Indeed, at the end of 2011 there were more than 200,000 distributed PV systems totaling nearly 2,500 MWAC installed in the United States.1 This growth has been spurred by a combination of federal and state incentives, declining installation costs and, particular to this paper, evolving and innovative solar ownership models used within the distributed PV market.

Within this distributed market, three ownership models have emerged over time: customer-owned, solar industry-owned and utility-owned. The layering of new ownership models has been essential to the growth and development of the PV market, especially in light of high upfront costs and fluctuating incentive levels. Solar industry ownership has given consumers lower cost solar options for example.

In assessing each PV ownership model the paper examines the advantages and the challenges of each ownership model to the respective stakeholders, and the critical issues at play as the cost of PV continues to fall.

CUSTOMER OWNERSHIP

Customer-owned systems have benefited from a wide range of federal and state incentives and policies, including:

A 30% federal investment tax credit applied to the total cost of the installation

Net metering in 43 states and the District of Columbia (some states limit eligibility to customers of certain utility types)

Direct cash incentives offered by some states and utilities, including rebates or performance payments

Customer Perspectives. The key advantage for customers owning their own PV systems is that they directly capture 100% of the electricity benefits, but it comes at the cost of bearing all of the financial and operational risks over time. In those states where net metering is available, it allows customers to offset their retail electricity use by generating some of the power they need. Where net metering is not an option, PV installations are interconnected on the utility side of the meter, with all of the electricity generated by these systems going into the distribution grid but at a less economic price.

Solar Industry Perspectives. For a solar industry company, customer-owned systems offer the lowest long-term business risk after the installation is complete. It is the business model available in every state—the legal, regulatory, financial, and economic limitations for business development are the lowest of the three ownership models. There are downsides, however. The customer base is often limited to those who have higher incomes, savings or capital availability. And where state or utility incentives are available, the market can be subject to boom-and-bust cycles, making long-term business investments more difficult.

Utility Perspectives. At a minimum, utilities benefit from avoided cost savings. Utilities may also gain grid support or peak capacity benefits, though these are not unanimously accepted. The corollary is that the utility may incur additional grid integration needs and costs in staff.

Metering plays a key role in defining utility costs and benefits. For the utility, net metering reduces electricity sales and revenues. On the utility side of the meter, the issues shift somewhat with a feed-in tariff. FITs are often higher than avoided costs. In addition to higher pricing, there are other downsides

1 Greentech Research, U.S. Solar Market Insight Report (Q3 2011),

www.greentechmedia.com/research/solarinsight

http://www.greentechmedia.com/research/solarinsight


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to FITs for utilities. The more FIT contracts a utility signs, the greater its debt obligation, a factor taken into account by debt rating agencies. SOLAR INDUSTRY OWNERSHIP

Nearly all of these solar industry-owned systems are net metered. Under third-party ownership using net metering, customers sign either a long-term performance contract (cents/kWh) or monthly lease ($/month) with the solar company, in exchange for a PV system on their property.

Customer perspectives. The key customer advantage of third-party ownership is no or low upfront costs, regardless of metering configuration. Under third-party ownership, the solar company assumes all of the risks previously borne by the customer-owner. But the model is only economic in select states where a combination of solar resource, incentives and state policies align economically and legally and is often only available to consumers with superior credit. Commercial customers may alternatively gain value through leasing their roof to a solar company, much like a landowners leases wind or mineral rights. For customers, this model is currently limited to larger buildings in specific utility service territories where the distributed wholesale market is active. Solar Industry Perspectives. Third-party ownership entails more complexities, transaction costs, and assumed risks than the customer-ownership model, but the potential payoff is greater. Under net metering, the benefits include a much broader customer base, a higher sales volume and a portfolio of low-risk PV projects. In place where wholesale markets are active, the benefits include similarly higher sales volume, but only for the winning bidders. This market area is much more controlled and targeted because it is entirely dependent on the utility’s demand and procurement processes for solar. Utility Perspectives. Nearly all of the utility benefits and challenges are the same or similar for net metered third-party ownership as for customer ownership. But third-party ownership does two things differently. First, it accelerates the market as more customers become interested in no- or low-cost solar. Second, it raises questions about competition within a monopoly utility service territory, one of the basic regulatory tenets. There are relatively few situations where the utility benefits under net metering. One potential scenario is a utility-owned community solar program, which is fairly limited nationally. Utility ownership on the utility side of the meter is more typical, as the utility leases rooftop or ground space (or utilizes utility property) and feeds the electricity directly into the distribution grid. UTILITY OWNERSHIP

Utility-owned PV systems represent a small but growing share of the distributed PV market. Customer Perspectives. Utility ownership can offer customers benefits, but in different ways depending on the design structure. In a community solar program, the barriers to customer solar participation are lowered to the greatest degree possible with the goal of recreating the benefits of net metered solar. The model can be more flexible than third-party ownership and is available to a broader spectrum of customers, but the program are not yet widely available. Customers could also lease their roofs to utilities, similar to third-party ownership on the utility side of the meter. Solar Industry Perspectives. Overall, utility ownership can represent opportunities for turnkey solar industry construction projects. But the market size is limited by utility planning and needs, making the scale less predictable and timing intermittent. Moreover, some in the solar industry have fundamental questions about utility ownership, including concerns include utilities’ significant financial resources and potential market influence.


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Utility Perspectives. Utility ownership in the context of a community solar program provides several benefits. The program expands the range of solar customers, generally at a lower subsidy than a typical incentive program. The utility may also recover closer to the full cost of service in rates for a community program, which addresses some of the impacts of lost revenue and non-participant costs. Utility ownership also provide investor-owned utilities with a regulated rate of return on the asset, a benefit to shareholders.

CRITICAL ISSUES

Customer Ownership Challenges. The two major challenges for consumers are the availability of different options and understanding their costs, benefits and risks. The first challenge for consumers is the availability of different ownership options and the value proposition they each offer. Self-ownership is an option in every state, followed by third-party ownership in many states, but community solar has much more limited availability and roof leasing the least. Additional research on the willingness of consumers to trade upfront costs and ownership risks for their solar benefits is needed. Solar Industry Ownership Challenges. Generalizing the ownership challenges for solar companies is difficult, but one theme stands out—market accessibility. The main solar industry ownership challenge is the legality of power purchase agreements (PPAs) and leases stemming from contracts between third-party companies and consumers for the sale of solar electricity. The rapid growth of the market for solar industry-owned systems will exacerbate the revenue issue for utilities, a natural part of solar market growth. If PV costs, technological advancements, regulatory structures and grid integration solutions are aligned, more utility customers will offset more consumption with solar, accelerating the need for revenue loss resolution over the long-term. Utility Ownership Challenges. The critical challenges for utility ownership fall under a single subject area, competition, which consists of two issues. The first is whether regulated utility ownership can fairly compete in the market and the second is whether it can be price competitive for ratepayers in a fast changing pricing environment. There are countervailing issues that may make utility ownership more expensive, such as normalization of the federal investment tax credit and imputed debt. Individual regulatory proceedings will need to delve into this assumption on a case-by-case basis to parse each utility’s economics.

CONCLUSION

For the three stakeholders, the major issues vary significantly. For consumers, the availability of different ownership options can be a net economic benefit relative to self-ownership alone. The solar industry has similarly grown rapidly with the advent of new ownership options. Utilities are just beginning to pair utility ownership with customer opportunities in ways that may begin to address some of the revenue concerns previously discussion. However, with more choice comes more responsibility for both the consumer and the solar industry. Consumers need to educate themselves and recognize that lowering their costs and risks by shifting ownership may also lower their solar benefits. Discerning

Figure 1: Southern California Edison’s utility owned PV project under construction (Courtesy of Southern California Edison)


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the various options and offers for their solar business will become critical. The solar and utility industries have a part to play in educating consumers about these issues. For the solar and utility industries, ownership options and perceptions are interestingly similar. They each have concerns about ownership by the other as a fundamental threat to their long-term business success. For utilities, solar industry ownership represents the acceleration of the liberalization of their regulated business model. For the solar industry, utility ownership represents the entrenched incumbent wielding market power on a nascent and fast moving industry. Resolving these concerns and issues will be critical to the long-term health and relationship between both industries.


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I. Introduction

Over the past decade, the U.S. photovoltaic (PV) market has grown at an average annual rate of approximately 70%, with distributed, rooftop systems accounting for much of the expansion. Indeed, in 2011 over 62,000 distributed PV systems were installed, bringing the cumulative number to almost 203,000 systems nationwide, or totaling almost 2700 MW.2 This growth has been spurred by a combination of federal and state incentives, declining installation costs and, particular to this paper, evolving and innovative solar ownership models used within the distributed PV market. OWNERSHIP PROGRESSION Within this distributed market, three ownership models have emerged over time: customer-owned, solar industry-owned, and utility-owned. The changing ownership models have been essential to the growth and development of the PV market, especially in light of high upfront costs and fluctuating incentive levels. Through 2006, nearly all distributed PV projects were customer-owned. Although the market grew, its appetite was largely limited to early adopters who were willing to manage the upfront costs and long-term operational risks. Beginning around 2006, solar industry-owned PV systems emerged as a significant driver of the PV market, particularly non-residential systems. In this ownership model, a solar company (and/or associated investors) assumes many of the financial and performance risks that have historically served as a disincentive to customer-owners. Project developers enjoyed significant success in siting PV systems on commercial and institutional rooftops in key state markets, entering into long-term contracts to provide solar electricity through power purchase agreements or leasing arrangements directly to building owners. More recently, residential rooftops have emerged as a viable solar industry-owned business model in certain state solar markets. In the last three years, several utilities have announced plans for over 700 MWAC of utility-owned distributed PV systems, spurred by federal tax credit eligibility, declining PV costs and a desire to diversify RPS compliance risk. Utilities are employing similar efforts to lease customer sites, but also siting projects on third-party or utility property, most often outsourcing the project installation to the solar industry, but managing the system long-term as a utility-owned asset. STAKEHOLDER IMPACTS PV ownership strongly determines the allocation of costs and benefits among the customer, the solar industry and the utility, which shift as the ownership model changes. These project development factors include:

Who assumes short-term construction risk and capital outlays?

Who assumes long-term technology, operations and maintenance risk?

Where does the long-term allocation of revenue streams and financial risks occur?

Who has the ability to maximize economies of scale and minimize transaction costs in procurement, use of incentives, and financing terms?

For utilities, these impacts also vary significantly by the metering configuration, depending on whether the PV system is located on the customer- or utility-side of the meter. The metering configuration is a dividing line for differing regulatory and revenue drivers. Systems on the customer side of the meter (i.e. net metering) reduce utility electricity sales, which affect utility fixed cost recovery, revenues and

2 Solar Electric Power Association, annual utility solar rankings survey, 2012.


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profits. “Full cost recovery from PV customers is a big concern for us,” said one utility representative. Net metering makes up about 99% of the number of distributed systems nationwide.3 The assessment of advantages and challenges under each ownership model may help answer two key questions: What are the primary challenges, and why? Are there solutions to these challenges? Distributed solar is a unique generation resource for utilities, and the metering configuration and historically higher solar costs factor significantly into their assessment. Utilities are concerned about the impacts on their core mission of safe, reliable, low-cost solar and the disruptive reality (and perceptions) of distributed solar. Utilities are primarily concerned with solar’s economic pressure on customers and the operational issues and changes that may be necessary for the technical integration of the distributed generation. If solar were cheaper than wholesale power sources, utilities would largely adopt solar en masse, proactively finding solutions to the operational challenges as a matter of good business practice. In the interim, the solar industry and utilities find themselves in an evolving combination of policy requirements, regulatory compromises and business adaptation in a rapidly changing market environment. This paper qualitatively examines the three ownership structures—customer, solar industry, and utility—and the economic and strategic impacts on each group as ownership has evolved over time. As ownership shifts from model to model, so too do each stakeholder’s perceived advantages and disadvantages.4 For some issues, what is good for customers can also be good for the solar industry and utilities. In other issues, there are fundamental conflicts of interest that require compromise or resolution. Some of these challenges flow from the ownership structure itself, while others depend on the metering configuration underlying the ownership. There are three main sections corresponding to the three ownership types (customer, solar industry, utility). Each section discusses the advantages and challenges to each stakeholder, with a summary table of these issues. Each section also contains two current examples of the ownership type, one on each side of the meter, as this attribute often determines where the fundamental economic impact on the utility lies.

3 Solar Electric Power Association, annual utility solar rankings survey, 2012.

4 Because regulatory issues and policies can differ from state to state, the market for distributed PV systems tends

to be balkanized. As a result, costs and benefits often depend to some extent on state jurisdiction and circumstances, which should be kept in mind as the paper progresses.


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II. Customer Ownership

Customer-owned PV systems have formed the basis of the U.S. distributed PV market over the past decade. In 2009, customer ownership accounted for 87% of the residential and 49% of the commercial markets, decreasing to 59% of residential and increasing to 58% of commercial in 2011.5 There is no reason to think that customer ownership won’t continue to be an important market segment, though its fraction and drivers will shift over time.6 Most customer-owned systems are net metered on the customer side of the meter, with only a small portion being metered on the utility side in niche locations. Customer-owned systems have benefited from a wide range of federal and state incentives and policies, including:

A 30% federal investment tax credit applied to the total cost of the installation

Net metering in 43 states and the District of Columbia (some states limit eligibility to customers of certain utility types)

Direct cash incentives offered by some states and utilities, including rebates or performance payments

In those states where net metering is available, it allows customers to offset their retail electricity use by generating some of the power they need. Areas with higher consumer electricity prices provide more economic motivation for solar. On its own, however, net metering does not make PV installations economically viable. PV markets have grown most rapidly where net metering, financial incentives and/or good solar resources are available. Depending on the interplay of levels of each, markets will develop more or less quickly. Where net metering is not an option, PV installations are interconnected on the utility side of the meter. All of the electricity generated by these systems goes into the distribution grid, even if the system is located on a customer’s property. Under the 1978 PURPA law, customers are paid for the solar electricity by the utility at the ‘avoided cost’ of wholesale power. In a few U.S. jurisdictions, utilities offer feed-in tariffs (FITs), which provide premium wholesale electricity rates for renewable areas, i.e. a direct contract for all of the solar electricity. However, many utilities have been reluctant to offer FITs because of the high cost and regulatory uncertainty.


www.greentechmedia.com/research/solarinsight.

6 Residential ownership declined due to the expanded availability and popularity of third-party ownership in major

market states; commercial increased due to the availability of the federal Treasury’s 1603 cash grant in lieu of tax credits program - companies don’t need the tax liability that third-party ownership provides. The program expired in 2011 and may push more commercial third-party ownership as a result.

Discussion Examples: Customer Ownership Example 1 - Customer Side-of-Meter: Typical customer-owned, net metered residential or commercial rooftop PV system installed by a solar company Example 2 - Utility Side-of-Meter: Similar customer-owned residential or commercial rooftop system, but with a feed-in tariff contract to sell solar electricity directly to the utility.

See Summary Table 1



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CUSTOMER PERSPECTIVES

The key advantage for customers owning their own PV systems is that they directly capture 100% of the electricity benefits, but it comes at the cost of bearing all of the financial and operational risks over time. A customer-owned system provides the direct benefit of such incentives as tax credits, rebates and potentially the renewable energy credits (RECs), but the customer needs to be able to use the tax credits and monetize the RECs. If customers don’t owe enough taxes, they can’t monetize tax credit effectively. There is also a delay between when the solar installer is paid for project completion and when the tax credits are recovered in the following year’s tax filing. There is often a similar, though shorter, delay for rebate program payment, unless the rebate can be assigned to the solar installer. REC markets are either non-existent or difficult to use in most states, with a few exceptions. In the end, the customer often needs to pay for the entire system cost and then receive the incentives over the next few weeks and months. Waitlists or lotteries for incentive programs are also not uncommon. These issues apply to systems that are net metered as well as those paid through a feed-in tariff. A net metered system reduces the customer’s electricity bill and serves as a hedge against rising electricity prices. But calculating exact economic benefits over the long term can be tricky. There are often multiple rate options that change seasonally and perhaps by the time of day. Rate increases are actually economically beneficial to solar customers, as long as their solar system covers more than 50% of their annual usage (since the solar portion is effectively ‘insured’). However, most customers don’t often know how much electricity they use. Similarly, many solar owners track the return on their solar investment with a quick look at the monthly electricity bill and an approximation that it went down ‘enough’ based on a hunch. Under a feed-in tariff arrangement, changes in the price of grid electricity do not impact the contract price for the solar electricity – everything produced is sold directly to the utility. Calculating performance and predicted revenue is based on solar performance alone. But a FIT is direct income, which is taxable, and at the extreme can be interpreted as a commercial enterprise, which might involve additional tax and legal reporting needs. FITs are also unavailable in most locations. In short, the customer-owned PV system provides the greatest direct rewards, but also at the greatest cost and risk. SOLAR INDUSTRY PERSPECTIVES

For a solar industry company, customer-owned systems offer the lowest long-term business risk after the installation is complete. Some installers may offer long-term financing, performance monitoring, maintenance contracts and/or warranty periods (often at additional costs). However, managing equipment inventory, long-term operational and maintenance needs, and the financial requirements of maintaining a long-term project portfolio are significantly lower for customer-owned systems. In its simplest form, the system is installed by the solar company and paid by the customer, with few further obligations. It is the business model available in every state—the legal, regulatory, financial, and economic limitations for business development are the lowest of the three ownership models. However, the low barrier to entry can result in increased competition from less experienced firms. Companies can differentiate themselves with added services, such as financing, management of utility and incentive paperwork, and long-term experience. “This model provides continuous access to market opportunities, as long as incentives are available or the economics are right,” said one solar company representative. “We’re not waiting for an RFP solicitation.” There are downsides, however. The customer base is often limited to those who have higher incomes, savings or capital availability, along with tax liability to use the tax incentives. Where state or utility incentives are available, the market can be subject to boom-and-bust cycles, which make long-term


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business planning difficult. Whether there are incentives or not, in many states no- or low-growth market volumes can make it difficult to sustain a business. For customer-owned systems, there are no significant differences between metering options. Net metering is easy to explain to customers (“meter spins backward”). However, calculating specific project economics in various rate structures can be more difficult than under a FIT. If both options are sufficiently economic for the customer, larger markets result. But a FIT is dependent on utility and/or regulatory willingness to buy wholesale solar power at higher prices. The overall cost may be the same to the utility (versus net metering and a rebate), but the regulatory implications are much different. UTILITY PERSPECTIVES

At a minimum, utilities benefit from avoided cost savings, the value of which can range from not buying wholesale electricity or using fuel in existing power plants to the equivalent cost from the next planned power plant to the cost of alternative renewable sources. There is little national consensus on this value and it is largely state and utility specific. However, at the distributed level, solar is largely more expensive than the higher end of avoided cost estimates, though the gap is closing faster than some utilities might realize. Utilities may also gain grid support or peak capacity benefits, although they are not universally accepted or easily calculated or monetized. However, “…just because utilities don’t count accrued savings doesn’t mean those savings don’t exist,” said a solar company representative. “It’s real money.”The corollary is that the utility may also incur additional grid integration needs and costs in staff resources to directly manage interconnection and customer programs (as well as indirect supporting services) and physical upgrades or grid management needed to interconnect or manage the variation in solar generation. A customer-owned system can help fulfill a policy requirement, usually through the associated renewable energy credit (REC) and application under an RPS. Under net metering arrangements, REC ownership for customer-owned systems is highly variable, ranging from customer or utility default to prorated sharing based on incentives to no legal discernment in ambiguous legacy contracts. Under FITs, REC ownership is normally contractually defined and clear. Tracking and accounting for distributed PV RECs can come with higher transaction costs given their smaller size, which may make it prohibitive. At present, there is limited use of real-time performance tracking and management of a solar ‘fleet’ as a generation resource. “We can’t treat systems on the customer side as reliable sources,” said one utility representative. Another utility representative added: “Our planners don’t view solar as a peak resource.” But advances in the smart grid, meters, and inverters, as well as communications and data management capabilities, may improve this situation going forward. At its core, a utility is in the business of electricity sales, and customer service and satisfaction are important to utilities and regulators. Providing a solar customer with a seamless, and even helpful, experience provides a direct benefit to that customer, but also confers a larger public relations benefit to the utility, overall, as this experience is repeated and expanded. For the utility, net metering reduces electricity sales and revenues. It is fundamentally hard to get around this issue because solar customers purchase less electricity, but

Figure 2: A rooftop installation (Courtesy of Solectria)


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continue to depend on utility services that entail fixed costs when solar is not available. “Cost recovery” is, for all but a few utilities, either theoretical or of minimal impact today, especially relative to other sales variables (e.g., weather, energy efficiency). Although revenue loss is limited because of the small solar market, its acceptance today could represent a precedent that may impact utilities over the next five to 10 years. A related issue is “customer cross-subsidization,” which occurs when non-solar customers pay additional costs, either for the higher cost of solar, solar incentives, and/or non-covered fixed costs. A fundamental principle of setting electricity rates is that, to the extent possible, each customer pays for his or her own cost of service. “Renewable power has to be firmed and shaped,” said one utility representative “So other customers have to pick up the solar integration costs.” Both of these economic impacts are largely ‘managed’ by limits on aggregate net metering capacity, usually as a percentage of capacity or a defined number of megawatts, in regulatory or policy arenas. The limits are indirectly implied as a management tool for these economic concerns and where the limits have been met, they have been expanded without significant attention to the long-term underlying issues. Once those limits reach meaningful amounts (5-10% or more), the issue will have to be resolved in a more meaningful way.7 California recently doubled its net metering limit and included a process to assess the costs and benefits of net metering at a deeper level as a first step over the next few years. A final utility cost under net metering, seemingly mundane in some respects, is the difficulty of integrating billing and/or metering into existing utility processes and legacy billing software. Some utilities report having to manually process net metering customer bills, while at the same time the small number of solar customers doesn’t justify upgrading the capital-intensive software. “Our customer billing database is at least 20 years old,” said one utility representative. “Our billing department can accommodate solar customers, but it takes creativity and hard work.” An outside expert adds: “Depending on the state, billing can be a nightmare for utilities.” On the utility side of the meter, the issues shift somewhat with a feed-in tariff. FITs are often higher than avoided costs, so cross-subsidization is still present. But because FITs don’t impact a customer’s consumption, they eliminate the issue of revenue loss. Still, the question of how to cover extra costs must be addressed. A FIT essentially represents the amortization of different costs under net metering into one cost, i.e. FIT = net metering + rebate + REC value. One key difference is that there is a clear contract purchase of the metered electricity and RECs based on actual performance, a clear business transaction benefit. Performance monitoring, program management and payments are much easier since distributed solar is essentially just a smaller generator that can fit into existing (though perhaps adapted) utility processes. In addition to higher pricing, there are other downsides to FITs for utilities. Managing FIT pricing in a rapidly changing, dynamic market is difficult. And over the long term, as portfolios grow, utilities may face debt equivalency issues. The more FIT contracts a utility signs, the greater its debt obligation, a factor taken into account by debt rating agencies.

7 A system-wide net metering limit is a poor proxy for managing high penetration limits, which will occur on a

feeder by feeder basis, leaving the economic concern as the primary driver. However regulatory discussions are rarely explicit or quantitative about the specific causation of limits.


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Table 1: Stakeholder Perspectives on Customer Ownership

Investor Concern Customer Solar Industry Utility

Advantages Challenges Advantages Challenges Advantages Challenges

General Issues

Direct benefit of available incentives (e.g., taxes, rebates, RECs)

Fulfills personal environmental or independence ethos

Bear all financial, technology, maintenance, and performance risk

Pay/finance costs

Need tax liability to monetize tax incentives

RECs may be difficult to monetize

Where economic, waitlists are common

Can be difficult process for non-technical consumers

Low business risk once project completed

Low long-term customer obligation risk

Doesn’t require complicated tax or investment structures

Market option in all states for all installers

Customer base often limited to those who have higher incomes or savings, tax liability

Where incentives available, market can be subject to boom-and-bust cycles

Low barrier to entry can result in unqualified competitors and poor installations

Avoided cost savings

Potential grid support or peak capacity benefits

Public relations benefit for positive customer interactions

Often fulfills policy requirements

May incur grid integration needs and costs

Grid support or peak capacity benefits aren’t universally accepted or easily monetized

Customer Side-of-Meter Example 1: Residential or commercial customer-owned, net metered rooftop installation.

Direct electricity bill savings

Hedge against electricity rate increases over time

Rate structures are fluid, making long-term benefits difficult to calculate

Only available option in many states

Reduced electricity sales revenue results in: 1. Under recovery of cost of service from solar customer in rates (“cost recovery”) 2. Non-solar utility customers paying for added solar costs (“cross -subsidization”)

Performance is not easily tracked or enforced

Integrating billing and/or metering into existing processes can be difficult • May hit aggregate net metering capacity limits, requiring regulatory changes

REC accounting and ownership can be more complicated

Utility Side-of-Meter Example 2: Residential or commercial customer-owned rooftop installation with a feed-in tariff contract to sell solar electricity directly to the utility.

FIT offers long-term price certainty and revenue calculations

Economics not dependent on electricity usage

Multiple incentives (net metering + rebates + RECs) are combined into one FIT contract

Limited availability, nationally

Can be interpreted as a commercial endeavor with associated tax, insurance, and other issues

Potentially larger market if FIT is economic and available beyond niche locations

Relatively small market volumes in specific locations

Dependent on utility and/or regulatory willingness to buy wholesale solar power at higher prices

Amortize rebate incentive over time for actual performance

Clear contract for electricity and RECs

Performance, program management and payments easier

No impact on sales revenue

FIT is higher than wholesale rate, which results in: 1. Non-solar utility customers pay for added solar costs (“cross- subsidization”) 2. Regulatory approval could be difficult

Managing FIT pricing difficult w/ rapidly changing market prices

Utilities may face debt equivalency issues as solar portfolio grows


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III. Solar Industry Ownership

Solar industry-ownership8, also known as third-party ownership, emerged as a significant driver in the commercial PV market about six years ago in key solar states, expanding over time to new areas. In the last two years, it has moved into the residential segment in many of these original states. Among the factors leading to the growth of both commercial and residential third-party ownership have been declining installed costs, federal and state incentives (and tax equity to use the associated tax credits), and state policies to develop solar market demand. In 2009, third-party ownership accounted for 13% of the residential and 51% of the commercial markets, increasing to 41% of residential and decreasing to 42% of commercial in 2011.9 The model’s no- or low-cost entry point for residential consumers is highly appealing, in the states where it is available. Commercial markets are subject to variations in capital costs, tax liability, tax equity availability, and the federal cash-grant program, all of which are assessed differently by different companies. The expiration of the cash grant program at the end of 2011 may shift interest back to third-party ownership again. Nearly all of these solar industry-owned systems are net metered. Under third-party ownership using net metering, customers sign either a long-term performance contract (cents/kWh) or monthly lease ($/month) with the solar company in exchange for a PV system on their property. Customers may realize up to 20% savings on their electric bill, and more as retail rates (presumably) rise. If a hypothetical PV system covers half a customer’s annual usage, the customer still pays 50% of the normal utility bill, while the other 50%, minus any discount relative to utility rates, is paid to the solar company. Instead of the FIT model, an emerging variation on the utility-side of the meter is third-party ownership that is bid into a utility distributed PV RFP or auction. Customers may benefit economically by leasing their rooftops to a solar company. This distributed PV auction model has been used most actively in California, where rooftop and ground-mounted installations are expected to represent hundreds of megawatts over the next few years. CUSTOMER PERSPECTIVES

The key customer advantage of third-party ownership is no or low upfront costs, regardless of metering configuration. Of course, customer benefits are correlated to

8 Solar industry ownership can include a variety of companies (installers, developers, investors, etc) and/or

business arrangements, but is essentially any arrangement other than customer- or utility-ownership.


www.greentechmedia.com/research/solarinsight.

Discussion Examples: Solar Industry Ownership1 Example 3 - Customer Side-of-Meter: Net metered residential or commercial rooftop installation under a long-term energy purchasing or equipment lease contract with the solar company, which owns and maintains the system. Example 4 - Utility Side-of-Meter: Commercial rooftop installation, owned by the solar company, which leases the roof space from the customer and sells all of the electricity to the utility in response to a distributed PV auction.

See Summary Table 2



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risk; customers who don’t own their systems will make economic and technology compromises. The compromise under net metering is that customers only capture a small portion of the electricity savings since they now pay the solar company the majority of it. If electricity rates increase, the customer’s discount over the utility rates increases (for the portion that is annually offset by solar). The third-party owner takes care of a lot of the customer challenges by owning the system—monetizing benefits like incentives and RECs, making solar affordable to a wider pool of potential customers, handling more of the installation process details and assuming a greater amount of performance and operations risk. In return, customers now have a long-term monthly payment obligation to the solar company (as they similarly would to their utility). For smaller residential and commercial systems, the amount of this payment can vary, depending on the customer’s initial upfront payment. Under third-party ownership, the solar company assumes all of the risks previously borne by the customer-owner. The customer may bear some of the performance and maintenance risk, depending on the compensation method (though the lease payment is not tied to performance as strongly as with a PPA). In either case, performance and maintenance issues are likely more closely monitored than under a customer-owned solar system, so the risks are lower overall. The model is only economic in select states where a combination of solar resource, incentives, and state policies align economically and legally. The model is specifically disallowed in some states and not legally determined in others, making the business proposition either illegal or more risky.10 Under a utility PV auction model, the solar company pays customers for leasing their roof, much like farmers might lease their fields to a wind energy developer. However, the payments to the customer are smaller than the equivalent value of what the electricity savings would have been. The owner of a large building, a warehouse, for example, would not be a good candidate for a net metered system because of low electricity use relative to roof space that could host a large PV system. However, the building owner would be a good candidate for a roof lease (or FIT). For customers, this model is currently limited to larger buildings in specific utility service territories where the distributed wholesale market is active. As with FITs, the solar system does not impact the customer’s electric bill and rate increases are fully absorbed by the customer. A final, perhaps esoteric issue is RECs, which are often contractually assigned to the solar company (unless negotiated in the contract). For everyday purposes, this doesn’t matter, since the solar company

10

There hasn’t been a significant test case for a solar company with a portfolio of third-party owned PV projects that went bankrupt. Presumably, its contracts could be sold to another company if they could be profitably managed; if not, the most likely outcome is a distressed asset sale in which the customer has a distinct opportunity to become the new owner, or would have to renegotiate with the new owner over its removal in the worst case.

Figure 3: San Francisco Sunset Reservoir Solar Project (Courtesy of Recurrent Energy)


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is probably in a better position to monetize the RECs more effectively, something that is presumably reflected in the contract price. SOLAR INDUSTRY PERSPECTIVES

A solar company must understand long-term operational and maintenance costs and needs to a finer degree, and must be able to secure large pools of capital and tax equity financing to maximize economies of scale and manage an ongoing capital-intensive distributed PV portfolio. The solar company is assuming many of the risks previously held by the customer-owner. Given these start-up costs, state and utility locations with good economics and stable policies are important. Under net metering, the benefits include a much broader customer base, a higher sales volume and a portfolio of low-risk PV projects that offer required rates of return for the company or investors. Under the auction model, the benefits include similarly higher sales volume, but only for the winning bidders, which are forging a long-term relationship with a specific utility, not with the customer, for a fixed amount of solar at the lowest bid prices, where profit margins are squeezed the most. The market is much more controlled and targeted because it is entirely dependent on the utility’s demand for solar. These are high-risk, high-reward projects, with multi-megawatt contracts for the winner that are the equivalent of dozens of customer contracts. This is a challenging and competitive arena in which a small number of players will benefit. UTILITY PERSPECTIVES

Nearly all of the utility benefits and challenges are the same or similar for net metered third-party ownership as for customer ownership. But third-party ownership does two things differently. First, it accelerates the market as more customers become interested in no- or low-cost solar. Second, it raises questions about competition within a monopoly utility service territory, one of the basic regulatory tenets. Some states have rules that allow third-party ownership; others have rules against it. Most states haven’t formally determined them. In the long run, both factors raise the question of whether this model is indicative of the future of electricity production—less centralized, more democratized, and offering differentiated value, similar to the impact that cell phones have had on the telecommunications industry. Distributed PV auctions tend to represent a fundamentally opposite process, one that is more traditionally associated with utility procurement practices and one that offers competitive, real-time market pricing and more control over process design and results. This model helps contain costs to the greatest degree possible while still acquiring new solar development. Competition is good for ratepayers, but obviously has impacts on solar industry partners. With so many new market entrants, it can be difficult for utilities to assess the long-term quality of bidders and bids. The lowest price may not be economically feasible once the project enters a later stage development or must be completed within a required timeframe. Utilities are struggling to balance open competition with reasonable requirements to ensure quality bids.


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Table 2: Stakeholder Perspectives on Solar Industry Ownership



General Issues

No/low upfront costs

Third party monetizes benefits ( incentives & RECs) into contract price

Lower income and capital requirements

Fulfills personal environmental or independence ethos

Third-party takes care of more process details

If RECs are contractually assigned to solar company, customer isn’t legally using solar

Broader customer interest and higher sales volume with lower customer financial barriers (“no or low cost solar”)

Tax advantages include depreciation

Ability to obtain lower- risk financing with contract

Set-up long-term business model in stable state markets

REC market benefits are highly variable in some markets

Where incentives available, market can be subject to waitlists

Avoided cost savings

Potential grid support or peak capacity benefits

Public relations benefit for positive customer interactions

Often fulfills policy directives

May incur grid integration needs and costs

Grid support or peak capacity benefits aren’t universally accepted or easily monetized

Customer Side-of-Meter Example 3: Residential or commercial rooftop net metered installation owned by a solar company under a long-term lease ($/month) or solar electricity purchase (cents/kWh) contract.

A portion of electricity bill savings (if applicable)

Hedge against electricity rate increases over time

Solar PPA transfers operations, performance risk to third party; solar lease less so

Performance monitored more closely

PPA rate varies with upfront payment

Lease retains some performance risk

Long-term contractual payments

Only available in select states

Rate structures can be highly variable/complex in some states, making exact benefit difficult to calculate

Not legal in/within every state (or, in some cases, unclear)

Reduced electricity sales revenue results in: 1. Under recovery of cost of service from solar customer in rates (“cost recovery”) 2. Non-solar utility customers paying for added solar costs (“cross -subsidization”)

Integrating billing and/or metering into existing systems can be difficult

Performance is not easily tracked or enforced • May more quickly hit aggregate net metering limits

REC accounting and ownership can be more complicated

Utility Side-of-Meter Example 4: Commercial rooftop installation, owned by the solar company, who leases the roof space from the customer and sells all of the electricity to the utility in response to a distributed PV auction.

Potential for roof or land lease payments from industry (if applicable)

Payment lower than electricity bill savings

Generally limited to non-residential market

Roof lease option limited to small parts of country

Customer still exposed to increasing utility rates

Potential for higher sales volume for bid winners

Opportunity for long-term relationship with utility

Auctions/RFPs are competitive, market is uncertain

Industry assumes most of policy, performance, O&M, and liability risks

Only available for specific utilities and during RFP periods

Dependent on utility willingness to buy wholesale solar power at higher prices and more unique regulatory approval

RFPs/auctions offer competitive, real-time pricing and control over procurement process

Amortize payments over time for actual performance

Clear legal transaction for electricity/RECs

Performance monitoring & payments easier

No impact on sales revenue

Price is uncertain

Difficult to assess bidder quality

PPA is higher than wholesale rate, which results in: 1. Non-solar utility customers paying for added solar costs (“cross subsidization”) 2. Regulatory approval can be difficult

Utilities may face debt equivalency issues related to purchasing customer generation as a solar portfolio grows


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IV. Utility Ownership

Utility-owned PV systems represent a small but growing share of the distributed PV market. In 2010, these systems accounted for just over 8% of the national PV market; however, they now represent hundreds of megawatts of future growth, both currently planned and likely, over the next few years. Interest in utility ownership grew after federal legislation in 2008 allowed regulated, investor-owned utilities to utilize the solar investment tax credit. Due to tax structure issues, municipal and cooperative utilities are significantly less likely to own solar.11 There are relatively few situations where the utility benefits under net metering. One scenario could be a community solar program, which is fairly limited nationally. Utility ownership can allow the utility to manage revenue loss more effectively; though not eliminate it, through the program design and procurement. Regardless of ownership, a community solar program involves building a larger distributed PV project and allocating participating customers a small portion of it so that they can virtually net meter their electric bill as if the solar panels were on their property.12 CUSTOMER PERSPECTIVES

Similar to solar industry ownership, utility ownership offers customers solar benefits at no or lower costs than if they owned it themselves. And again, while the benefit is less, so too is the risk. In a community solar program, the barriers to customer solar participation are lowered to the greatest degree possible—no siting or shading needs, no credit or financial requirements, an expanded pool of participants (e.g., renters, low-income residents), no long-term commitment, and portability within the utility’s service territory. In many ways, the model is more advantageous than third-party ownership and is available to more people (where it is available). Under virtual net metering or a fixed-rate solar tariff, the customer is also hedged against future increases in electricity prices, for the portion that solar covers. However, the program details are

11

Municipal and cooperative utilities can own solar, but generally speaking, they are less likely to since they can’t directly utilize the tax benefits as tax-exempt entities. Instead they rely on solar developers to utilize the tax incentives, which are (presumably) passed along in the contract price. Many of these contracts contain buy-out options in the future once the tax incentives are utilized, which could be exercised at a later date.

12 Numerous variations on community solar program design are not discussed here. Rate options can include solar

tariffs instead of direct virtual net metering. For more information, see SEPA’s Utility Solar Business Models Quarterly Bulletin (August 2011) & Design Guide (February 2012).

Utility Ownership Discussion Examples Example 5 - Customer Side-of-Meter: Utility-owned, ground-mounted installation used in a community solar program with virtual net metering for participating customers. Example 6 - Utility Side-of-Meter: Commercial rooftop leased from the customer by the utility, which owns the project and feeds solar electricity directly into the distribution system.

See Summary Table 3

http://www.solarelectricpower.org/resources/publications.aspx#USBM q3

http://www.solarelectricpower.org/resources/publications.aspx#USBM q3


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determined by the utility and in effect, there is no alternative if the program is only available to certain customer segments, limited to certain sizes per customer, or other program details. In a roof-lease scenario, the customer benefits are very similar to third-party ownership on the utility side of the meter. The one difference might be that the utility could be perceived as a more stable counterparty, resulting in actual project development, and in turn, actual leasing revenue. In some scenarios, roof ‘prospecting’ projects could result in a contractual requirement without certainty of development. These assets can be stranded from other opportunities, depending on the contract details. SOLAR INDUSTRY PERSPECTIVES

Overall, utility ownership can represent opportunities for turnkey solar industry construction projects, but this is limited to the winning bidder, if it is bid out. Similarly, there can be maintenance contract opportunities. Participating in these kinds of projects can lead to a better understanding of the utilities’ needs and processes, which may be valuable for future project opportunities. However, the market size is limited by utility planning and needs, making the scale less predictable and timing intermittent, and the benefits conferred to the fewer number of bid-winning companies. As much as some utilities are concerned about the long-term impacts of third-party ownership, parts of the solar industry also have fundamental questions about utility ownership. Relative to solar companies, many utilities have significant financial resources and potential market influence. There is certainly some fear about the utility becoming the dominant player in certain market segments, in effect seizing opportunities for broader participation from the industry. Whether utility ownership detracts from or supplements the market depends on the details in a utility’s proposal. Community solar projects could potentially lessen demand for traditional customer-owned or third-party owned projects at customer sites by consolidating customer sales into the community solar PV program. One solar company may build the relatively larger project, rather than many companies building many smaller projects at many customer sites. One could argue that it softens the demand for customer-sited PV, but it doesn’t eliminate it. Some customers will still want a project at their property, while the new community solar program will also be of interest to consumers who would never consider self-ownership. Given the limited availability of community solar programs at this point in time, these concerns currently arise where such programs exist. Many of the issues for utility ownership on the utility side of the meter are similar to those for community solar from the industry perspective. In addition, the utility and the solar industry could be competing for customers’ roof space, with some questioning whether the utility is utilizing special information or relationships from its existing electricity sales accounts. Separating the regulated and the entrepreneurial side of the utility has been discussed in several regulatory proceedings on utility ownership.13 13

For more information see SEPA’s Utility Solar Business Models Reports from May 2008 and October 2010.

Figure 4: Tucson Electric Power’s Bright Tucson PV facility (Courtesy of Tucson Electric Power)

http://www.solarelectricpower.org/resources/publications.aspx


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UTILITY PERSPECTIVES

As with solar companies, utilities are not all alike. Investor-owned utilities have more economic motivation to own solar since they can directly utilize the federal solar tax credit and earn a rate of return on the capital investment, benefits not obtained under PPA contracts. Municipal and cooperative utilities that are not able to access these benefits, with a few exceptions, don’t have significant utility ownership initiatives. However, IOUs need to show regulators that utility ownership is in the best interest of ratepayers, not just the utility, a requirement that represents a certain amount of regulatory risk when proposing new utility-owned projects or programs. Demonstrating that utility ownership, using an often higher cost solar asset than traditional generation resources, is beneficial is a fundamental litmus test. Utilities can do this by achieving lower installed costs relative to historical cost data or through lower long-term project management. Some utilities argue that they can compete effectively (relative to a traditional PPA contract) by managing the project at the marginal O&M costs after the debt service is paid, and financing a lower cost over the long term. Utilities may also show that a balanced portfolio that includes some utility ownership presents a lower risk of RPS policy non-compliance. Although there are still risks with utility-owned projects, they differ from those of the solar industry. The program expands the range of solar customers, generally at a lower subsidy than a typical incentive program. The utility also recovers closer to the full cost of service in rates for a community program, which addresses some of the impacts of lost revenue and non-participant costs. These programs can be seen as a means of retaining revenue from customers who might otherwise install a solar system of their own. That said, at today’s solar costs, such programs don’t fully resolve the issue of lost revenue. Rather, they decrease the gap. At least some of these issues are applicable to the community solar program design, not to utility ownership itself. A PPA for the generation project could achieve some these goals as well.


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Table 3: Stakeholder Perspectives on Solar Industry Ownership



General Issues

No/low upfront costs

Build PV systems for project (for winning bidder, if project is bid out)

May offer O&M opportunities

May develop new relationship with and understanding of utility business needs

Market size determined by utility planning and/or legislative, regulatory policy

Fear of utility becoming dominant market player in certain market segments

Lower customer relationship or opportunity for business model other than utility model

Issue of sole or preferential utility access in distributed solar environment

Earn rate of return on capital investment (IOUs)

Asset retained for life of project at marginal O&M after debt service

Ability to spread risk of RPS non-compliance

Potential to capture value from tax benefits (IOUs)

Reduced capital requirements for large generation projects

Strategic placement of assets to control peak demand

Larger systems or programs generally produce lower-cost electricity

Lack of tax appetite by publicly owned utilities to use tax credits decreases value of PV assets

Utility or regulator assessments that discourage utility ownership because of real or perceived regulatory risks

Can the utility manage this rapidly changing, niche market?

Customer Side-of-Meter Example 5: Utility-owned, ground-mounted installation used in a community solar program with virtual net metering for participating customers.

Extremely low barriers to participation

Not tied to customer’s site location

Serves as hedge against rising energy prices

Expands range of participants, e.g., renters, low-income, shaded sites

Project details, and, in turn, customer benefits decided by utility

Consolidates some customer sales into fewer, larger systems for winning bidder

Utility recovers closer to full cost of service in rates

Expands range of interested customers

Generally lower subsidy than typical incentive program

Utility benefit depends on value of contract vs. what would have been lost or gained in net-metering arrangement

Some subsidies likely still needed

Billing and/or metering challenges

Utility Side-of-Meter Example 6: Commercial rooftop leased from the customer by the utility that owns the project and feeds solar electricity directly into the distribution system.

Potential for lease payments from utility

No performance or O&M risk

Credible counterparty, certainty of development

No direct bill savings

Low competition or choice as to lease payment, production, or other benefits

Lease payment may not be worth as much as power sale or net metered electricity

Higher cost than other generation resources


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V. Critical Issues

This paper illustrates that varying solar asset ownership models and metering configurations can significantly change the associated costs, benefits, and risks to the three main stakeholders involved in solar transactions. But following this detailed comparison and discussion, two key questions remain:

What are the biggest ownership and metering challenges for each stakeholder today?

How will these challenges change as PV costs decline and markets accelerate in the future? CUSTOMER CHALLENGES

Utility solar customers want low costs and good economic value in a PV installation. However, every state, and even each utility within a state, presents unique solar market conditions based on the solar resource, electricity prices and the state or utility policies. The market conditions in turn influence the ownership options available, which could range from self-ownership to third-party ownership to a utility-program like community solar. The two major challenges for consumers are the availability of different options and understanding the costs, benefits and risks of these options. Self-ownership is an option in every state, followed by third-party ownership in many states, while community solar has much more limited availability and roof leasing the least. Figure 1 is a qualitative depiction of the economic value a customer gets from these four solar options versus the availability of the options depending on the solar market conditions. Generally speaking, the economic value that customers receive is correlated with how active a local solar market is. Similarly, ceding self-ownership tends to reduce economic value in exchange for lower costs or risks. Only in the most advanced markets, such as Hawaii, California, New Jersey and Arizona, are all four options available to some consumers in some form. Self-ownership is available across the United States, but the value proposition varies significantly depending on retail rates (if net metering is available), solar resource, and available incentives. Third-party ownership becomes available, in the more solar-active states, to consumers with good credit and siting options. Where it is available, third-party ownership is extremely popular, ranging from 30% to 70% of the market. Additional research on the willingness of consumers to trade upfront costs and ownership risks for their solar benefits is needed, i.e. at what rate of return does the balance shift from self-ownership to third-party ownership, or back again? Utility-led community solar is only currently available through about 15 utilities nationally, with perhaps a dozen more planning programs over the next year. Utilities of all types in both active and less active solar states are now operating programs, but program design and economic value can vary significantly. These programs are all in their early stages of rollout and there is no favored design as of yet.


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Figure 5: Consumer Solar Options - Economic Value versus Market Conditions

Roof leasing is available in niche markets where feed-in tariffs and/or distributed utility procurement drive the option. However, much like land prospecting for natural gas or wind energy, roof prospecting has a much less transparent or formal process for linking roof owners with roof leasers and determining the economic value of the lease. There are a number of complex factors that go into the local need for roofs, but generally a single real-estate management company with a large building portfolio of large roofs would be more valuable to solar developers than a single, smaller commercial or residential roof (the latter probably has no value in today’s market). Absent a roof space ‘shortage’ based on local market conditions, this is the most limited no-ownership option for consumers. The second challenge for consumers is understanding the nuanced costs, benefits and risks of self-ownership versus utilizing external ownership. In exchange for lowering costs and ownership risks, solar companies and utilities also require some of the solar benefits. Consumers leasing a PV system on their roof divide their electrical bill between the utility and solar company, although there may be a discount on the solar portion. The solar system doesn’t reduce consumers’ overall bill significantly. However, the solar portion can be a fixed price and if electricity rates rise over time, consumers are hedged against these increases. Nonetheless, consumers need to look closely at the contract terms and, as they might with a vehicle lease, understand the details and commitments of a 10-20 year solar contract. Just as they would for self-ownership from an installer, consumers should get multiple bids to compare third-party ownership


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and the down-payments (if applicable), monthly leases or energy rates, performance assumptions and utility rate escalation assumptions. If a solar down payment lowers the monthly lease, this may justify paying some upfront costs. If a solar contract has a 5% annual escalation rate, this likely exceed the historical utility rate increases, and consumers would be paying more for solar in the future. These are not commonly understood issues and consumer protection resources are not readily available. This is an issue that both the solar and utility industries can get behind in order to find common solutions and opportunities to educate consumers. Utility-led community solar programs can have very low barriers to entry—no upfront costs and low long-term risks—but to make the economics work, benefits are lower in many locations. While the solar rate tends to be higher than the standard retail rate, it may decline over a 5-10 year period. And the utility program’s benefits may be lower over 10+ years than a comparable solar company offer for self-ownership or a solar lease. Lower program risks equate to lower program benefits in most cases. In the future, as solar costs presumably decline and solar markets expand, all four consumer options will become more available in more places. Understanding the economic value trade-offs of ownership and risk between self-ownership, third-party ownership, utility programs, and roof leasing will be important. Undoubtedly, there will be problem areas. These can range from underperforming installations to contract disputes, from failed companies to limited participation in highly solar saturated parts of the electric grid. They are an inevitable part of rapid market expansion and increased solar value for more consumers. Overall, the solar industry will expand successfully, but consumers need to understand their particular local market ownership options and how they can benefit. SOLAR INDUSTRY OWNERSHIP CHALLENGES

The solar industry wants additional sales at good profit margins on costs, long-term market certainty, and fair competition. However, even within distributed PV markets, the solar industry is highly diverse, ranging from 1-2 person installers to vertically integrated, multinational companies to associated companies providing financing, insurance and construction. Generalizing the ownership challenges for everyone are difficult, but one theme stands out—market accessibility. Market accessibility can relate to many issues, ranging from net metering availability to interconnection costs and processes on the electric grid to fair compensation for solar benefits. The main solar industry ownership challenge is the legality of power purchase agreements (PPAs) and leases stemming from contracts between third-party companies and consumers for the sale of solar electricity. Figure 2 details the current status of the PPA business model, nationally. The status ranges from expressly disallowed (red) to limited use for certain utilities (orange) to allowed (orange) to undetermined (white).


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The theory behind utility concern for third-party PPAs is that these contractual arrangements look like a competitive electricity supplier within the regulated utilities’ service territory. There is uncertainty about whether solar leases ($/month rather than cents/kWh) fall under these restrictions and whether the regulatory risk may prevent some companies from establishing the business model in certain states. Leases also put more performance risk on the consumer, making these arrangements less appealing and saleable. A large number of states, generally those with smaller and less active solar markets, have not established a clear direction on this issue. Revenue loss also is a concern, and how utilities, regulators and stakeholders resolve the economic implications of the ownership issue over the long term is important. There are two concerns related to revenue loss: fixed costs and cross-subsidization. Net metered customer ownership raises the same concerns, while, on the other hand, third-party ownership tends to accelerate market activity. Utilities recover their costs through rates, some of which are fixed regardless of how much electricity they sell. If customers are purchasing less electricity (because of solar, energy efficiency, storage and weather variation), utilities still need to recover their fixed costs. If utilities raise rates to fund solar incentives and higher cost solar purchases or to recover fixed costs, non-solar customers disproportionately bear these costs through cross-customer subsidization. Many advocates argue that solar provides more benefits than are compensated for in rates. At the margins, solar’s impact is within the noise of natural electricity sales variation; however, the amounts are becoming measurable for certain utilities. Policies and proposals for managing this revenue impact have included net metering caps, decoupling, standby charges, rates restructuring, higher fixed rates and lower volumetric rates, and dissociation of sales from grid services (i.e. deregulation).

Figure 6: Third-party power purchase agreement restrictions.


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More significantly, the rapid growth of the market for solar industry-owned systems will exacerbate this revenue issue. If PV costs, technological advancements, regulatory structures and grid integration solutions are aligned, more utility customers could theoretically offset 100% of their consumption with solar, using some combination of storage, the smart grid, energy efficiency, and the electric grid. At one end of the extreme, utilities would move from volumetric sales companies to wires companies serving as delivery agents, much as they are in deregulated states today. Today’s rapidly growing market points to some version of this scenario. In the short term, a smart balance between recovering these costs, valuing solar benefits, and not limiting distributed solar growth will need to be met as utilities, regulators, and stakeholders begin to grapple with this issue in meaningful ways as solar and efficiency penetration grows. UTILITY OWNERSHIP CHALLENGES

For utilities, ownership interests are more nuanced. In general, investor-owned utilities are more likely to own since they can use the federal tax credits and earn profits for shareholders. But each utility however, will assess internal capital availability, solar costs, regulatory approvals and stakeholder reaction differently. Utilities also are more likely to own larger systems in the 1+ MW range, with cost preferences for the ground-mounted market on utility property as rooftop markets have higher installed costs and higher maintenance risks. The critical challenge for utility ownership fall under a single subject area, competition, which consists of two issues. The first is whether regulated utility ownership can fairly compete in the market and the second is whether it can be price competitive for ratepayers in a fast changing pricing environment. SEPA’s Utility Solar Business Models Phase 2 report discusses some of the solar industry concerns with utility ownership:

“[F]rom a market perspective, distributed solar systems don’t exhibit the “natural monopoly” characteristics that have historically justified monopoly ownership and its associated advantages…[M]arkets have proven to be highly competitive…Industry perceptions depend on their own business model and the specifics of the utility’s proposal…Some of these developers oppose utility ownership in principle. Others recognize it as a legitimate avenue to engage utilities in solar development – so long as regulators adopt safeguards to prevent monopoly abuses, such as discriminatory access to utility wires systems; use of confidential customer information or ratepayer-funded assets or personnel for competitive purposes; or other forms of entry barriers or cross-subsidization from monopoly operations.”

The regulatory process often seeks to address these concerns with stakeholder input, including the second challenge, i.e. whether a regulated utility can be price competitive in a dynamic, changing market. Module prices have dropped nearly 70% in the last 18 months, with installed costs seeing commensurate reductions as well. It is not unusual for regulatory approval of a utility’s ownership proposal to take anywhere from three to twelve months, and sometimes even longer to receive A utility’s assumptions of the component and labor costs can change drastically during this brief time period. Whether a utility’s proposal can be price competitive depends in part on its structure. Many utilities bid out the project installation, which would see reflective price reductions as well, and some bid out the ongoing maintenance. Utilities are also seeing hyper-competitive PPA bidding for 1-20 MW distributed PV projects, where industry margins are cut increasingly thin. With regard to short-term construction and operating costs, utilities need to think strategically about how to justify ratepayer benefits relative to solar industry ownership.

http://www.solarelectricpower.org/media/156968/usbm%20executive%20summary.pdf


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However some utilities, most notably Arizona Public Service, argue that utilities’ long-term ownership capabilities can swing the economics in their favor—most notably the PPA renewal at the end of the contract life. The theory is that at the end of the 25 year contract the industry owner will negotiate the contract at the prevailing market rates for wholesale energy, which will presumably be higher at that point. To manage the long-term operating risk, in the case of a PPA, financing arrangements often limit the contract to 80% of the useful asset life in order. However, the utility owner can operate the project for the full 30+ years of the asset at the marginal O&M costs, saving ratepayers money over the final years of the project (Figure 3). This option is not available to all utilities, however; some report similar limits on assuming financial calculations beyond a comparable PPA contract length. Finally, there are countervailing issues that may make utility ownership more expensive, such as normalization of the federal investment tax credit and imputed debt. Individual regulatory proceedings will need to delve into this assumption on a case-by-case basis to parse each utility’s economics. Additional discussion on these issues is available in two SEPA publications, Buy versus Build: A Qualitative Comparison of Financial, Tax and Regulatory Issues Influencing Utility Solar Procurement and Normalization of Solar Investment Tax Credits.

Figure 7: Long-term utility ownership versus industry ownership economics. Source: Arizona Public Service.

http://www.solarelectricpower.org/resources/publications.aspx#Buy_vs_Build_December2011

http://www.solarelectricpower.org/resources/publications.aspx#Buy_vs_Build_December2011

http://www.solarelectricpower.org/resources/publications.aspx#Normalization_of_Solar_Investment_Tax_Credits_June2011


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V. Conclusion

Distributed photovoltaic ownership has evolved significantly in the last 10 years in certain state markets, and is now layered with varying opportunities for customer, solar industry and utility ownership. These new business models are indicative of a maturing and more profitable solar market as these business models evolve and companies see new opportunities. However, as these ownership opportunities emerge, these stakeholders will find that the costs, benefits and risks of photovoltaics are shifting, presenting new challenges in managing anecdotal perceptions, calculating costs and benefits and assessing legal and regulatory issues. In addition to ownership, metering plays a pivotal role in the costs and benefits, especially for utilities. Net metering represents a fundamental concern for the utility industry over the long-term, and its availability and design have long been part of federal and state political and policy decision-making. Absent a fundamental shift in utility cost recovery methods, utilities and the solar industry will find themselves at increasing loggerheads over these issues. A sustainable resolution would represent a significant step forward for both industries. For consumers, the availability of different ownership options represents a net benefit for their solar economic value, and likewise this is true for the solar industry. Utilities are just beginning to pair utility ownership with customer opportunities in ways that may begin to address some of the revenue concerns previously discussed; however, with more choice comes more responsibility for both the consumer and the solar industry. Consumers need to educate themselves and recognize that lowering their costs and risks by shifting ownership also lowers their solar benefits. Discerning the various options and offers for their solar business will become critical. The solar and utility industries have a part to play in educating consumers about these issues. For the solar and utility industries, ownership options and perceptions are interestingly similar. They each have concerns about ownership by the other as a fundamental threat to their long-term business success. For utilities, solar industry ownership represents an accelerated erosion of their regulated business model. For the solar industry, utility ownership represents the entrenched incumbent wielding market power in a nascent and fast-moving industry. Resolving these concerns and issues will be critical to the long-term health and relationship between both industries.


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Utility Solar Tax Manual (2012) This manual provides detailed explanations of solar related federal tax provisions, as well as exploring other tax issues such as Clean Renewable Energy Bonds, and unique business tax structures and issues. This is the third update of the Utility Solar Tax Manual Major updates to the report include setions on the investment tax credit, treasury cash grants, depreciation, manufacturer credit, special tax issues, and other tax nuances. Community Solar Program Design (2012) 'Community Solar' programs are one type of utility solar business model that exemplifies the need for cross-functional coordination within the utility for both their design and operation. This Technical Brief considers the point of view of the community solar design person or team within a utility and qualitatively explores the inter-departmental strategic needs that should be addressed as a community solar program is developed. Centralized Solar Projects Quarterly Bulletin (2012) SEPA's quarterly solar projects bulletin provides a summary and commentary on the centralized PV and CSP projects activity in the United States through Q4 2011, including a year in review section. Thirty-one large projects (>5 MW) were

completed totaling 420 MW of capacity, a 72% megawatt growth over 2010. Over 4,000 MW of new projects started construction in 2011 and will be completed between 2012-2015. The Impact of Third-Party Business Models on the U.S. Market for Solar Water and Space Heating (2012) The report begins with a review of solar thermal market research for both residential and commercial sectors, including loan-centered models, solar thermal ESCOS, third-party leasing, third party shared revenue projects, and third-party energy services agreements. The last section looks at one critical, remaining question: How can SWH businesses attract the upstream financing they need to scale up turnkey solutions? Buy versus Build (2011) This report explores a utility’s two solar procurement options – ownership or contracting. The analysis considers financial, tax and regulatory implications that impact a utility’s decision whether to buy (PPA) or build (own) solar generation. Electric Utilities' Solar Employment Needs Brief (2011) The rapid growth of solar electric markets has in-turn required electric utilities to adjust and increase their staffing capabilities to manage everything from distributed customer systems

to centralized purchasing contracts to utility owned projects. SEPA's new brief, Electric Utilities' Solar Employment Needs, builds upon the recent analysis in the utility chapter in the U.S. Solar Jobs Census report to create a more complete and unique picture of the utility solar workforce. Normalization of Solar Investment Tax Credits (2011) To date, utilities have announced or are implementing over 900 MW of utility-owned projects, which is a growing and important fraction of the overall solar market over the next five years. However, the IRS code contains certain provisions, called "normalization rules," which can have adverse effects in utilities' use of the ITC and the resulting project costs. This brief describes the issue of normalization in more depth and offers case studies of utilities as they relate to normalization of solar ITCs. Italy Fact Finding Mission (2011) In May 2011, SEPA traveled to Italy to study the country's successes, current challenges, and future approaches surrounding the development and grid integration of distributed solar photovoltaic (PV) resources. The key takeaways from the SEPA fact finding mission are explored in this report.

SEPA Research Report Summaries

1220 19th Street NW, Suite 800, Washington, DC 20036, U.S.A. Tel: 202.857.0898

www.solarelectricpower.org

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