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The Battle for a Solar Arizona

Arizona is being sucked into a war over residential solar energy

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A war on solar energy incentives and the ability of homeowners with rooftop solar to sell power back to utility companies is raging in parts of the U.S. as utilities attempt to derail the decentralized, "distributed generation" energy movement. And Arizona is in the crosshairs.

At the forefront of this war is a scuffle between Arizona Public Service, the state's largest utility, and solar installers over "net metering," which has drawn national attention from the media and solar industry organizations.

Net metering allows homeowners to receive credit on their electric bills for excess electricity generated by their solar panels, an arrangement that has resulted in a huge upswing in people going solar.

Today, 43 states and the District of Columbia allow net metering and 99 percent of the rooftop solar installations last year were net metered, according to the Solar Electric Power Association. Net metering is also the foundation for solar leasing—where companies like SunRun and SolarCity pay the upfront cost of solar with "no money down" while customers pay a fixed rate for power over 20 years. In Arizona, leasing accounted for 86 percent of all residential solar installed in the first quarter of 2013. Without net metering, solar companies would hobble along on sales of expensive rooftop systems few can afford.

"Net metering issues have arisen, as far as we can tell, over 150 times in those 43 states, and in 100 percent of those cases net metering has been maintained or expanded," says Edward Fenster, co-CEO of SunRun. "Certainly Arizona would be making a decision that clearly no other state has decided to make if it were to make a change to the net metering policy."

While the net metering issue is being fought over outside of Tucson, there is a fear that those clashes may spill into the Old Pueblo, affecting solar growth and electric bills.

Arizona ranks second nationally for rooftop solar and first for utility-scale solar power plants, according to an August report from Ernst & Young. And a July report from Environment America's Research & Policy Center has Arizona topping the 12 states ranked by per capita solar.

It may be because of the state's solar success that Arizona is being sucked into the energy skirmishes playing out in other states. And this battle for Arizona's solar soul comes at a time when home solar costs have fallen nearly 40 percent over the past two years, while residential installations grew 53 percent in the first quarter of 2013 and 48 percent in the second quarter, according to a September report from GTM Research and the Solar Energy Industries Association, or SEIA. In fact, a residential rooftop solar system has been installed once every four minutes in 2013.

But utilities like things big: big coal power plants, big nuclear power plants and big solar power plants. Because of this, critics say, ossified utilities like APS are trying to stymie rooftop solar to maintain their monopoly on power generation as they build larger, centralized solar power plants to meet state renewable energy mandates.

"The weakness of our system is that all those renewable energy plans depend on the utilities—utilities are the implementers," says Nancy LaPlaca, an energy consultant who served as staff policy adviser to former Arizona Corporation Commissioner Paul Newman from 2009 to 2012.

War of the Watts

The first shots were fired in January when investor-owned utilities nationwide received a rude awakening from an Edison Electric Institute report on the threats from home solar, labeling such distributed generation as "disruptive challenges." Utilities fear a sort of "energy Darwinism" where, as customers install solar, utilities sell less energy and are forced to raise electric rates to cover fixed costs. As rates go up, more customers add solar to reduce their electric bills, which forces utilities to push electricity rates up, which drives more customers to add solar.

"What they were saying is this is not going to be good for our stock prices," says SunRun's Fenster. "Because the industry is fragile from a stock price perspective, because it's got high stock prices and low growth prospects. But from a creditworthy prospective, from a service reliability perspective, they're are going to be fine no matter what."

But according to a September report from the Energy Foundation, unless federal and state policy changes to the electricity system are made to accommodate increased renewable energy use, "we will spend too much time, money and pollution on obsolete power plants, leave our country increasingly exposed to system failure, and let our energy technology businesses slip to the back of the pack."

"The train has left the station," said Andy Karsner, former assistant secretary for energy efficiency and renewable energy under President George W. Bush, in a statement with the release of that report. Karsner notes that consumers are leading a "bottom up market transformation" that has had a "greater impact than anyone in government or industry planned or anticipated."

Though the January EEI report encourages utilities to revise their economic incentives for solar to beat back distributed solar generation, many states seem reluctant to amend their net metering laws. Idaho and Louisiana recently turned down proposals to raise rates on solar customers, and solar advocates and businesses are pushing back in Colorado against a similar proposal.

But it's the battle here in Arizona that is the most contentious due to the plenary power of the Arizona Corporation Commission, the state's energy regulator.

In July, APS filed a proposal with the ACC to reduce the value of net-metered solar.

Net metering was enacted in Arizona in 2008. Customers with rooftop solar can save not only on electric bills, but also receive credit for excess power sent back to the grid. But even though only 18,000 of the 1.1 million APS customers use solar, the utility says current rules allow solar customers to benefit from a reliable grid without paying for its use.

"The only way we price the service that we sell is based on how much you consume even though a lot of the service we're providing doesn't change depending on how much you consume," says Jeff Guldner, senior vice president of customers and regulations at APS, who notes that when a customer consumes less power, "you end up shifting costs around to the customers who don't stop consuming it."

"Typically, once regulators look at both the costs and benefits of net metering, they see that there is a either a net benefit or a zero sum gain," Rhone Resch, president and CEO of the Solar Energy Industry Association, or SEIA, said in an email response. "As a result, there's been no need to change the rules."

The solar industry cites recent studies from Crossborder Energy and the Solar Energy Power Association that show net metering provides more benefits than costs to ratepayers, while utilities don't account for savings solar provides to utilities, such as avoiding investments in new power plants and transmission lines.

"I do disagree with that," says APS' Guldner, who describes rooftop solar as "a really interesting, really advancing technology." He says that to make a rooftop panel work, you've got to have the grid backing the service up in order to get the same quality of supply.

ACC is considering two options proposed by the APS.

The first adds a monthly grid user fee of an estimated $50 to $100 on new solar customers' bills based on the amount of electricity they consume regardless of what their solar panels generate.

The second choice lets APS buy all electricity produced by new solar residential systems at wholesale prices and then sell it back at retail rates—paying 4 cents per kilowatt hour and selling it for 12 cents or more, according to the group Tell Utilities Solar Won't Be Killed, or TUSK.

"In that case, that is a business transaction and the payments from APS would be subject to sales tax. There is also concern that the income tax credit itself would be jeopardized," says SunRun's Fenster.

SEIA submitted a motion to intervene in the APS case, as did the Alliance for Solar Choice, Western Resource Advocates, SolarCity, Arizona Competitive Power Alliance and Arizona Solar Deployment Alliance.

And these critics are not just liberal greenies.

TUSK's chairman is Barry Goldwater Jr., the former Republican congressman from California whose father, the former presidential candidate and senator from Arizona, founded the right-leaning Goldwater Institute. Even the conservative editorial board of The Arizona Republic has said that net metering changes "could decimate solar in the state."

TEP also requested to intervene, saying it was "directly and substantially affected by the issues addressed in this proceeding."

"I'm not surprised at all that TEP has filed an intervention in that case" says APS' Guldner, "because they probably recognize some of the decisions the commission might make with us, although it would be specific to us, may be very impactful in shaping what they do at TEP." Officials at TEP chose not to respond to requests for comment for this article.

Is Tucson Next?

The ACC points to Arizona's solar rankings as an indication that the solar industry is ready to stand on its own. In fact, as soon as the newly elected ACC commissioners took office in January, the all-Republican five-member commission unanimously ruled to slash utility rooftop solar incentives.

For TEP customers, incentives went from 75 cents per watt in 2012 to 10 cents per watt today.

The ACC also ended tax credits for solar on businesses, a decision that flies in the face of the city of Tucson's designation as one of the Department of Energy's 25 "Solar America Cities" and the Tucson Solar Development Plan, which requires all new city buildings meet 5 percent of their energy needs using solar.

The city spends about $17 million on electricity annually and currently gets about 4 percent of its power from renewable sources—a total of 4.5 megawatts installed on the Tucson Convention Center, the Public Safety Training Academy, the Price Service Center and the Pennington Street parking garage, among others.

But solar is not possible on all city buildings. To allow the city to continue to expand its renewable energy goals without the expense of buying solar panels, the ACC voted in July to allow TEP to sell more energy to the city from a solar power plant in Avra Valley. While the city is paying an additional 1 cent per kilowatt hour for that solar power, it's exempt from several fixed surcharges.

"We have calculated that over the 20-year term, the city will show a net savings and it's really our best hedge or mitigation against future rate increases," says Doug Crockett, energy manager for the city of Tucson. "We could not have done this 4.5 mW of installation without TEPs support."

TEP's solar efforts have received high marks, winning the 2012 Solar Electric Power Association "Solar Utility of the Year" and the 2012 Governor's "Green Innovator of the Year" award. On Sept. 14, TEP was one of 16 first-place winners in Arizona Forward's 33rd annual Environmental Excellence Awards for its solar investment at the University of Arizona Science and Technology Park's "Solar Zone," a 170-acre, $100 million research facility that is the largest multi-technology solar evaluation site in the country.

In 1996, TEP's parent company, UniSource, co-founded Tucson-based Global Solar Energy. Though UniSource sold it in 2006, Global Solar has gone on to become a major worldwide supplier of flexible, lightweight thin-film PV materials used for roofing and military applications.

Currently, TEP offers a one-time up-front incentive for grid-tied systems of 10 cents per DC watt for homes up to 30 kW and small businesses up to 70 kW—covering no more than 85 percent of the system cost when combined with federal and state solar tax credits.

But if net metering is OK'd for APS, there is a sense of inevitability that those changes will come to the Tucson area as well.

"This is what happens at the Commission: TEP just usually shows up and says 'Hey, me too.' So TEP lets APS do the heavy lifting most of the time," says former ACC staffer LaPlaca. "The other thing is consistency. I mean, why would you have one net metering policy for APS and a totally different net metering policy for TEP? It doesn't make sense."

"There is certainly something to that notion," says APS' Guldner. "For (the commission) to change from one utility to the other, typically they would want to see a difference in the policy. And if there's not a difference in the policy they're more likely to go with the same or similar decisions."

"I think if this APS proposal is adopted (in Tucson), it's going to be another chink killing a lot of the solar progress we've made in the state," says Crockett, the city's energy manager. "If would basically kill any opportunities we have for doing more solar where we invest ourselves, as we have in the past."

Bleeding Solar Jobs?

Arizona Gov. Jan Brewer, the self-proclaimed "solar queen," supports large, utility-scale solar plants. At the May 1 dedication of the huge Arlington Valley Solar Project, Brewer told the crowd that "These are the jobs that get Arizonans back to work."

Actually, it's rooftop solar installation that accounts for more than half of the 120,000 U.S. solar jobs—not solar manufacturing or operating big solar power farms, according to the Solar Foundation. Nationally, solar job growth has doubled in the past three years and Arizona is currently second in the country, employing some 10,000 people, with rooftop installation responsible for nearly 70 percent of those solar jobs.

"What's great about the rooftop solar business as opposed to utility scale is that, because they have to get on your roof, these are jobs that will not get outsourced," says Will Craven, a SolarCity spokesperson.

But before the ACC has even voted on the changes, the net metering debate has caused one of the largest residential solar installers—Utah-based Vivint Solar—to cancel plans to lease operating facilities in the state. Brendon Merkley, chief operating officer at Vivint Solar, wrote the Governor's Office that the rhetoric from the Corporation Commission was the reason the company chose not to invest in Arizona at this time.

"We are in discussions coming in November and will be talking and seeing what the climate is like in coming months. But at this point, it's not changed," says Kady Cooper, director of public relations at Vivint Solar.

In the first quarter of 2013, Vivint Solar was the second-largest U.S. residential solar installer, according to GTM Research. If the net metering proposals are shot down, Vivint says it would come to Arizona—including Tucson- with "a large number" of jobs for salespeople, installers and technicians.

"We would recruit locally. They're all 100-percent Vivint employees. We don't subcontract; we hire full-time employees," Cooper says. "It could be 30 in Phoenix and it could be 20 in Tucson, it could be 10 in Scottsdale. It just depends on the scope of the market."

But San Francisco-based SunRun—the first company to introduce a residential solar leasing service, in 2007—says that, depending on which way the net metering decision goes, it could end its installation business in Arizona.

"If net metering was dissolved in the APS territory but not the TEP service territory, we might just leave the service territory of APS," says SunRun's Fenster. "But any ACC decision in theory would likely spill over to TEP."

SunRun has financed more than 35,000 solar projects in 11 states.

"We've never had to leave a state due to a net metering change because there's never been one. Arizona would be stepping far aside from the 42 other states that have (solar policies) if you were to make a change like this," says Fenster.

San Mateo, Calif.-based SolarCity has no plans for leaving Arizona. Unlike SunRun and Vivint, SolarCity gets a big chunk of business for commercial operations like Walmart as well as school districts and municipal governments. In fact, with more than 55,000 customers and 3,000 employees in 14 states, SolarCity expects to put up 1 million rooftop projects over the next five years and "signs a new customer every five minutes," according to its website.

Rooftop solar is also becoming a standard feature for new homes, with six of the 10 largest U.S. home builders offering a solar panel option on new construction. KB Home leads the way, offering solar on homes in Nevada, Texas and Colorado, with plans to offer it in Arizona beginning this October.

Backroom Politics

In the November 2012 election, solar aficionados were supporting the "solar team" for ACC commissioners. It consisted of Democrat Marcia Busching and the two Democratic incumbents, Sandra Kennedy and Paul Newman. But voters choose ACC incumbent Bob Stump, former Scottsdale City Councilwoman Susan Bitter Smith, and former lawmaker Bob Burns.

"I'm very familiar with them from their legislative days," says Sandy Bahr, Grand Canyon Chapter president of the Sierra Club. "They've brought the terrible policies of years on the Legislature to the Arizona Corporation Commission."

It takes only three votes from the five-member ACC to pass the proposed net metering changes, and what makes some people nervous is that the commissioners may ignore public opinion—and any pertinent facts—and vote by ideology. That fear is prompted by the fact that four of the five commissioners are alumni of the American Legislative Exchange Council, or ALEC, a lobbying group that drafts conservative legislation for state legislatures and is funded by fossil-fuel corporations like Koch Industries, ExxonMobil and Duke Energy.

"I think you can make that argument about any elected official and whether or not it's valid or not. I would dispute that any elected official is predisposed to a certain vote because of past affiliations," says Jodi Jerich, who was hired in January as the ACC's executive director.

An April report from the Center for Media and Democracy found that 17 bills introduced in the Arizona Legislature in 2013 were tied to ALEC, and every member of the Republican leadership, as well as 27 other Arizona lawmakers, are current or recent ALEC members. The report also documents how the Goldwater Institute and David Koch's Americans for Prosperity-Arizona, are actively supporting ALEC agendas against renewable energy.

That agenda played out with 26 state legislative efforts earlier this year to push the ALEC template "Electricity Freedom Act," which would have prevented those states passing it from requiring utilities to increase production from renewable energy, as well as kill state solar incentives. But not only did all those efforts fail, some states actually increased renewable energy requirements for utilities. Even heavily GOP-dominated states had put solar jobs above political pressure: In Georgia, the ALEC defeat came with the help of a "Green Tea Coalition," uniting state Tea Party members with pro-solar groups. And Wisconsin's Libertarian Party has joined an effort to clarify that state's law to allow leasing and third-party ownership for solar panels—moves that may signal a sea change in political collaborations.

"Frankly, these partnerships make a lot of sense," notes SEIA's Resch. "As a popular, homegrown source of clean energy, solar is helping the United States to become less dependent on foreign exports—especially from dangerous, unstable areas of the world. These goals are shared by a large cross-section of Americans, including many conservatives."

"What we've interestingly seen in the last couple years is in certain instances, there's even stronger support for solar from the right than from the left," says SunRun's Fenster, noting that solar is in line with "conservative and Tea Party ethos that competition creates a benefit for consumers."

Just weeks into their term, the ACC commissioners made some noise about trimming Arizona's Renewable Energy Standard, or RES, the requirement that 15 percent of Arizona's electricity come from renewable sources by 2025. That rule requires that a third of that renewable energy come from distributed generation sources, with half of that coming from residential rooftop systems and half from nonutility commercial sources.

The proposal, floated and then withdrawn by Commissioner Gary Pierce (known for threatening to cut off Los Angeles' power in retaliation for a boycott over SB 1070), would have reduced the state RES to an "effective" 13.5 percent for just the APS service area. Pierce's withdrawal came after the ACC eliminated commercial solar incentives. Some ACC critics think the proposal may be reintroduced.

With the resounding defeat of their "Electricity Freedom Act" nationally, ALEC introduced a new "model" state bill at its annual meeting in early August. It's called the "Market-Power Renewable Act," and the Center for Media and Democracy calls it "a stealth attack" that claims to be in favor of renewable energy by allowing utilities to purchase renewable energy from out of state, "which would result in fewer jobs and clean energy investment in many states if passed."

But Arizona is uniquely set up for making such decisions with just three individual votes, thanks to the state constitution.

"Other states have their commissions established in their state constitution, but the scope of their jurisdiction is set by the Legislature," says the ACC's Jerich. "Ours is set in the constitution and the Legislature added to that jurisdiction over the years."

Such sweeping power is why critics are wary of past ALEC affiliations. According to the Center for Media and Democracy, ACC Chairman Bob Stump's name is "all over older ALEC documents." Commissioner Brenda Burns served on ALEC's board for nine years and was national chairwoman in 1999, while Commissioner Bob Burns is a former Arizona ALEC state chairman.

Bob Burns, Pierce and Stump have all received money from the corporate-funded ALEC "Scholarship Fund" as well.

"The staff would literally introduce amendments that were obviously ALEC amendments or Goldwater amendments," says former ACC staffer LaPlaca. "I remember Paul (Newman) looking at Brenda Burns and asking Brenda, 'Who wrote this? Was it Goldwater, was it ALEC or who?' We still joked about it, Paul would say 'Nancy don't forget, this is pure politics; it's not about policy, it's about politics.'"

APS and its parent company Pinnacle West Capital Corp. don't hide the fact that they're also ALEC members.

"And the reason for that is, it's important for us to be completely engaged in the legislative process," says APS' Guldner.

Despite the national attention on Arizona as a "test ground" for pushing back on rooftop solar, the five-member ACC has been mostly tight-lipped about the issue.

"They have certain quasi-judicial characteristics about their job and one of those characteristics is that they are obligated to keep their mind open to all evidence as it comes in and their opinion cannot be closed until the evidentiary record is closed," says the ACC's Jerich. "So, if they express any kind of opinion, it can be seen that they are closed to accepting more information."

"I believe we have the best possible decisions when we have the most robust discussions from the most viewpoints," counters LaPlaca. "These guys don't believe that. They just want to jam through their ideology. They don't want a discussion; they don't want to debate."

Another reason for the political backlash against rooftop solar may be who is sitting in the White House. In late August, installation began on new solar panels on the White House, making good on a promise President Obama made three years ago. And recently, Obama's nonprofit advocacy group, Organizing For Action, created a Web page to encourage people "to tell the Arizona Corporation Commission to protect full credit for clean energy."

"I think a big part of it is that Barack Obama is president and they perceive him as promoting renewable projects. So then it's "OK, then we don't like it,'" says the Sierra Club's Bahr. "And obviously a great deal of the dollars come from the fossil fuel industries, so you can't underestimate the impact of that."

Because net metering rules are already in place, the ACC will either vote on net metering—likely Oct. 16 or 17-or send it to an evidentiary hearing before an administrative law judge with witnesses providing testimony. The judge then would send an opinion back to the commissioners to vote on.

"The bottom line is that they vote, and the only thing that matters is the final vote," says LaPlaca.

But the ACC has a way of surprising people. After months of input from a variety for interests, many thought commissioners would vote for deregulating the state's electricity markets. But the commission voted 4-1 on Sept. 11 to shelve the proposal for now after legal counsel said it might be unconstitutional.

"I think it is very unlikely that ACC adopts either of APS' proposals. They're both so obviously ridiculous on their face ... my sense from meeting with all the ACC commissioners personally is that if anything, APS' ask was so overreaching that it was kind of a turnoff," says SunRun's Fenster.

If the ACC rejects the APS requests, there is almost no chance it would OK similar net metering changes for TEP. But if APS gets its way with net metering, solar advocates are wondering just how long it will be before TEP introduces similar changes.

While TEP's solar reputation has shined in past years, critics point to TEP's recent rate increase—which took effect July 1—as an indication of what the utility may do if APS gets its way with net metering. The TEP rate increase was first presented to the ACC in July 2012, but it took a year to settle after a number of organizations intervened, including SEIA and Vote Solar, who saw TEP's rate changes as designed to weaken the ability of solar customers to save money on their electric bills.

TEP had proposed an increase in its flat monthly customer charge to guarantee recovery of some of its fixed costs. TEP had argued it needed the increase "to mitigate the negative financial impacts" of complying with energy-efficiency rules "and the rising number of distributed generation resources in TEP's service territory"—the same arguments APS is making now.

A February rate increase settlement tweaked the language for how TEP determines the impacts from solar on sales, allowing TEP "to recover a portion of distribution and transmission costs" when "sales levels are reduced" by distributed generation, with a 1 percent "year-over-year" cap. According to TEP documents, "Residential customers will have the option of selecting a fixed monthly service charge" rather than a charge based on kilowatt hours used. "Initially, the fixed rate option is set at $2.50 for usage less than 2,000 kWh and $6.50 for usage of 2,000 kWh or more."

The Southwest Energy Efficiency Project, the Sierra Club and APS participated in settlement discussions but did not sign the settlement agreement, with APS stating that it neither supported nor opposed TEP's rate increase.

Many solar supporters believe that the war on solar is an admission by utilities that solar can now compete in the electricity marketplace, and that utilities want to slow private investment in rooftop solar and stifle the distributed generation energy movement because they don't own or control it. In fact, some believe the hostility toward rooftop solar by investor-owned utilities is a sign that the old business model of giant, centralized power plants and transmission lines is in its death throes.

In fact, the fight over distributed generation has become the poster child for what is perceived as needed technology transformation to mitigate climate change.

Gregg Garfin of the UA Institute of the Environment warned attendees at the Southwest Climate Conference in Tucson earlier this month of "the vulnerability of the energy sector in the Southwest."

"Increased temperatures means demand for cooling and more stress on peak demands," noted Garfin, who is a lead author of the Assessment of Climate Change in the Southwest United States, a recent report prepared for the National Climate Assessment. According to that report, "electricity delivery may be disrupted more often due to climate-induced extreme heat waves and droughts resulting in ... reduced transmission line, substation, and transformer capacities; potential loss of hydropower production; and the threat of wildfire to transmission infrastructure."

Just how fragile that centralized transmission infrastructure—"the grid"—is in the Southwest was made clear on Sept. 3 when about 10,000 TEP customers lost power after a thunderstorm hammered the area and snapped power lines south and southwest of Tucson.

SunRun's Fenster says the way power is generated, stored and distributed over the next 20 years will be very different from today and that it creates "business opportunities and risks for existing companies.

"Some will seize that opportunity and become larger and stronger companies than they are today; some may miss the opportunity and shrink," Fenster says. "But to say that the (current) model is 'dead,' I think is too strong."

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