UNS Electric, Inc., is a small utility serving approximately 93,000 ratepayers in Santa Cruz and Mohave Counties in Arizona.
The utility faces challenges in paying for fixed assets with a declining demand and a business model built on increasing energy consumption.
As a remedy, UNS is applying for a rate change focused on increasing the cost of electricity for small volume electricity users, especially those that may benefit from net-metering policies for distributed (primarily solar) generation.
Although the utility is small, the rate case is being closely watched, as it may be precedent setting for other utilities.
See our previous brief sheets for background on What a Renewable Energy Credit (REC) is and the background on why the Arizona Corporation Commission is addressing how utilities obtain the Renewable Energy Credits needed to comply with the Arizona Renewable Energy Tariff and Standard (REST).
Arizona’s Renewable Energy Standard & Tariff (REST) requires that 4.5% of electricity comes from distributed generation (DG) systems such as rooftop solar.
Regulated utilities demonstrate compliance with the REST by purchasing Renewable Energy Credits (RECs) from their customers who have installed DG systems, typically with upfront cash incentives meant to help customers finance the installation of the DG system.
With the rising demand for DG installations since the start of the REST, the Arizona Corporation Commission agreed to significantly reduce upfront incentives. As a result, the regulated electric utilities lost their guaranteed source of RECs that are needed to demonstrate compliance.
In June 2012, utilities proposed a Track and Record option that would allow utilities to demonstrate compliance by tracking and counting towards compliance any new DG connection added within each service territory, independent of REC ownership.
The REST rules had not been updated since they were approved in 2006.
The Utilities Division Staff (“Staff”) of the ACC proposed seven options to modify the REST rules. Ultimately, the ACC adopted a modified version of APS’s Track and Record option.
The adopted modifications require a utility to include in its compliance reports the actual kWhs of energy produced within its service territory from DG. A utility must differentiate between kWhs for which it owns the REC, and kWhs produced in the service territory for which it does not own the REC. Those kWhs for which a utility does not own the REC will not count towards compliance, but will be “acknowledged” by the ACC for informational purposes only. The REC remains with the producer of DG energy, unless purchased by a utility.
In 2013 the Arizona Department of Revenue reinterpreted A.R.S §42-11054(C)(2) and A.R.S. §§ 42-14155(B)(C) to require third-party financed solar installations to be assessed a property tax. Homeowners, governments, businesses, and other entities that own their rooftop systems would continue to be exempt from property tax assessments.
Taxing leased systems would add roughly $150/year to system costs. The added cost is expected to be passed onto the solar equipment lessees.
During the most recent legislative session, some legislators proposed a bill codifying the DOR’s reinterpretation while others worked to exempt all solar panels from property taxation, regardless of how they are financed. However, neither position was codified.
Crowdfunding presents a new model for public investment in large-scale renewable projects.
Crowdfunding would allow businesses access to an estimated $2 trillion in capital from the general public. It has been successfully applied to financing utility- and commercial-scale solar projects by Mosaic, a California-based start-up company.
Rewards-based crowdfunding (as opposed to “donation-based” crowdfunding) is the funding of a company or project by selling small amounts of equity to many investors with an expectation of return on investment.
At this time, only residents of New York and California can participate in crowdfunding investments. However, the 2012 JOBS Act obligates the SEC to issue regulations allowing start-up companies to raise up to $1 million in capital via crowdfunding from the general public across the country.
The new crowdfunding regulations will likely be issued in the third quarter of 2014.
When crowdfunding regulations are issued, it will allow the general public to invest small amounts in renewable energy with a reasonable expectation of return on investment.
Property Assessed Clean Energy (PACE) offers a path for building owners to fund energy efficiency upgrades and renewable energy projects.
Under the PACE framework, a local government provides the up-front capital for a building owner to install an energy efficiency project and/or a renewable energy system on their building. The building owner repays the capital over the course of 20 years through a property assessment tax.
PACE is being successfully used in 12 states and Washington, D.C. for commercial properties. Many states also allow PACE financing for residential properties, but most residential financing programs have been shelved for now while the Federal Housing Finance Agency (FHFA) issues rules related to lien seniority for mortgaged homes.
Developing a PACE program in Arizona would require passage of PACE-enabling legislation. PACE-enabling bills have been introduced in past legislative session, but have not been signed into law.
During the current 2014 session, State Reps. Orr (R) and Sherwood (D) are sponsoring PACE-enabling bill HB 2206.
Basic net metering requires an agreement between an electrical utility and an individual customer. That customer must have a single meter that is connected to a single, on-site renewable energy system.
Under current net metering rules, Arizona allows community net metering but not aggregated and virtual net metering.
Several states have revised their net metering policies to allow a broader swath of utility customers to participate in net metering. These customers include municipalities with multiple buildings, tenants in multi-family buildings and stores in shopping malls.
Rooftop solar installations have exponentially increased in recent years, in Arizona and nationally. With the continued increase penetration of distributed generation from rooftop solar installations, utilities have begun re-evaluating the price structures they use to compensate owners for the electricity their installations feed into the grid.
Currently, Arizona Public Service Company’s (APS) net-metering program compensates a solar rooftop owner at retail rates for the excess electricity the solar rooftop installation exports to the grid.
APS recently proposed to reduce compensation for electricity put onto the grid by solar rooftop installations, reducing the value that rooftop installations provide to their owners.
APS argues that the current net-metering rates effectively subsidize rooftop solar owners and unfairly shift costs from solar rooftop owners to non-solar rooftop owners. Rooftop solar installations also decrease residential electricity demand, thereby decreasing APS’s revenue.
The solar industry opposes the proposal because they argue the current plan fairly compensates for the value solar provides to the system, and will stall the development of the industry. Free market proponents also argue that the policy hurts competition and endorses the regulated monopoly utility model.
On October 1, 2013, the Arizona Corporation Commission (ACC) staff rejected both of APS’s suggestions for net-metering changes. Instead, they recommended addressing the distributed generation concerns during the next APS rate-case.
On November 14, 2013, the ACC voted to implement a $0.70/kW fee for customers with rooftop solar installations who participate in their net metering program. The fee equals roughly $5/month for a typical residential installation. The ACC agreed to review the net metering policy in more depth during the next APS rate case.
In the U.S., when electricity is generated by a renewable energy source, two products are created: electricity and a Renewable Energy Credit (REC).
In Arizona, a Renewable Energy Credit (REC) represents the non-power attributes of a kilowatt hour of electricity from renewable energy. These attributes include renewable benefits (such as hedging against fossil fuel price increases) and environmental benefits (such as avoided pollutants).
The Arizona Corporation Commission requires regulated utilities to demonstrate their compliance with the Renewable Energy Standard and Tariff (REST) by obtaining RECs.
RECs can be bundled or unbundled, and traded, bought or sold in markets such as the Western Renewable Energy Generation Information System (WREGIS).
Arizona law bars Homeowners’ Associations (HOAs) from “effectively prohibiting” the installation or use of a solar energy device (SED) within their jurisdiction.
Some “reasonable” restrictions on the placement of solar energy devices are allowed, but they must not “adversely affect” cost and efficiency. Whether a restriction or reasonable or adversely affects cost and efficiency is decided on a case-by-case in the courts.
Arizona is one of 22 states with solar rights laws. Arizona has a relatively stringent policy supporting homeowner’s solar rights, although some states are more stringent and much more explicit about the types of restrictions HOAs can impose on homeowners.