Arizona Public Service’s ground breaking rooftop solar program could become the 21st century business model utilities have been looking for — if it gets past state regulators.

APS, Arizona’s dominant electric utility, wants to fund, install, own, and maintain 3,000 rooftop solar systems. The utility proposes to reimburse each customer who hosts part of the cumulative 20 megawatts of solar with a monthly $30 bill credit for the entire 20 year program.

The bill credit is a lease payment for rooftop real estate, explained APS Renewables Manager Marc Romito. The roofs will be pre-screened by APS but, as with the third party ownership (TPO) lease contracts offered by private sector companies like SolarCity, Clean Power Finance, and SunPower, the hosts will pay no upfront fees and have no ownership responsibilities.

APS determined $30 to be the value of the roof space through a study of other U.S. utility programs and consultations with local solar installers. That is significantly higher than Arizona’s average $5 to $10 per month savings from a solar lease deal, according to TPO market leader SolarCity’s VP Jonathan Bass.

Rate-basing rooftop solar

“They don’t have to think about whether they can do something profitably. It will be profitable because they can rate-base it,” SolarCity's Bass argued. “If there were ever a reason for a regulatory body to exist it would be to stop a state-sponsored monopoly from unfairly competing against the free market in an entirely new industry.”

APS is "not trying to compete with [the third-party ownership] model,” Romito countered. “Customers will still have lease and cash purchase options. This is for an entirely new class and category of customers that have no way to access a lease or cash purchase.”

APS developed the solar business model by listening to its customers, Romito said. “They like the idea of their utility participating in rooftop solar.”

APS began hearing that message in protests by pro-solar utility customers during last fall’s passionate fight over Arizona’s net metering policy. In that case, the TPO leasing companies and APS fought bitterly over the utility’s proposed $8 per kilowatt bill charge on net metered solar owners. The Arizona Corporation Commission (ACC) disappointed APS by reducing the bill charge to $0.70 per kilowatt.

Net metering

Through its AZ Sun Program, APS has built hundreds of megawatts of utility scale and commercial-industrial scale projects. It has almost fulfilled its commitment to the ACC to build more solar than is required by the state’s 15% by 2025 renewables mandate. This year, it will invest $50 million to $70 million more, either for the rooftop program or a less costly 20 megawatt community solar array.

“Another 20 megawatts of solar is going on the system,” Romito said. “This creates an opportunity to expand rooftop solar in our service territory.”

The program “avoids any tie in with a net metered rate or rate design,” Romito said. Though its renewable energy credits will help APS meet the renewables mandate, it also helps satisfy the mandate’s 30% distributed generation requirement. “We are interconnecting these systems on our side of the meter. There is no net metering involved. We are tying the production directly into the APS distribution system.”

If it wins ACC approval in an open regulatory proceeding expected later this year, APS wants to complete development by the end of 2015. It would partner with qualified local solar installers selected through an open bidding process. And it would set installation standards and specify the most reliable solar modules and the most advanced inverters, Romito said.

The legal question

Solar leasing companies like SolarCity think the APS program may be illegal.

But unlike solar leasing companies, Romito said, “we have been here for over 100 years. We are held accountable by a regulatory body and we are accountable to our customers. We are putting this project into our regulated portfolio.”

That is why, Bass said, the ACC should not approve the proposal. “Rate-basing allows them to get paid for their cost and get a guaranteed return. That is a totally unlevel playing field. It takes away the incentive to keep costs down and would reverse a lot of the progress made by the free market in lowering solar costs.”

“It is illegal,” added Rose Law Group Sr. Partner Court Rich, who specializes in energy policy law. “It saddles all ratepayers with the tab for APS’s investment and profit on each solar system for decades.” If the ACC approves the proposal, Rich added, regulators could find themselves “settling landlord tenant type disputes between thousands of customers and the utility.”

The commission last year considered and rejected a proposal to deregulate APS but “I don’t think they contemplated the idea of expanding the monopoly,” Rich said.

There is “absolutely” no legal issue, Romito said. Rate-basing assets “is routine business for us. The fixed rate of return is how we recover costs if we demonstrate we are serving our customers.”  Rate-basing has been “legally vetted in the commission process,” he added. It exists because “the regulated utility gives you reliability and quality.”

The program is not in direct competition with solar leasing companies, he added. “It is another option and creates more rooftop solar, in partnership with any solar company that bids to participate.”

Total production versus peak production

Rate-basing will allow APS to make one crucial change in rooftop solar.

“We have a unique opportunity because we are participating in the system deployments, to maximize the potential system benefits,” Romito said. “Every opportunity we can, we will be facing these systems west or southwest.” 

That orientation would reduce the APS rooftop installations’ total output but push production from the early afternoon solar peak toward the utility’s peak demand later in the day, Romito explained. “We hope to see peak production around 3 PM.”

Anything but total production compromises a leasing company’s business model, Romito said. “But if rooftop solar is going to be deployed, we want to maximize overall system performance.”

“It is not about peak production versus total production but what makes sense for a particular customer,” SolarCity's Bass countered. “APS wants to do solar on terms that are most favorable to them. But it is not necessarily in the best interests of ratepayers and certainly not in the best interests of the general public or solar customers.”

Arizona’s solar industry employs approximately 8,500 people and has built more than 35,000 installations, Bass added. “This is a threat to the entire solar industry in Arizona. I think utilities should get involved in distributed generation but they should do it through an unregulated division that competes on the same terms as everybody else.”