For years, Arizona has been a leader in solar-power generation. Utilities in the state have been held to an expensive renewable-energy standard, jobs have been added, and solar projects have been installed at a rapid-fire pace.
But after a period of explosive growth, the industry that Arizona helped pioneer is slowing as utility regulators grapple with how much of a premium energy customers should pay to implement solar and other renewables.
The U.S. solar market is expected to grow by one-third this year compared with 2013. But the forecast for Arizona is cloudier. For the first time in several years, no large solar plants are under construction in the state, and the number of rooftop-solar installations is down year over year, particularly for businesses.
Arizona has a lower renewable-energy standard than neighboring states. But in the past year, regulators, utility officials, consumers and clean-energy advocates have intensely debated the additional costs associated with alternative energy.
Arizona’s renewable efforts are solar-heavy because the state does not have as much inexpensive wind or geothermal energy potential as some of its neighbors. The price for cleaner energy often is higher bills, and the costs can end up falling on people already struggling to make ends meet.
Most of the solar and other renewable-energy projects built in Arizona have come about because of the state’s renewable-energy standard, requiring utilities to get 15 percent of their energy from solar and other renewables by 2025. That is now the lowest standard in the eight most populous Western states, although Utah’s standard is more of a goal than a mandate.
Last year, California’s three largest regulated utilities got nearly 23 percent of their electricity from renewables, far more than Arizona will produce in a decade under its current rules.
The Washington, D.C.-based Solar Foundation reports that nationwide the industry added about 24,000 jobs in 2013, representing growth of nearly 20 percent. But Arizona is one of five states that went the other direction and lost jobs after a busy solar-building phase.
To be sure, Arizona has lots of solar already, including two of the largest solar plants of their kind near Gila Bend and Yuma, and one of the highest rates of rooftop solar in the nation. But the pace of new installations is waning as utilities have found they are meeting the requirements to use alternative energy.
Solar companies would like to see the pace of development stay high, but Arizona Public Service Co. officials say it isn’t so simple.
“Arizona is already a high-penetration solar state, more so in APS territory than utilities in Colorado and Nevada,” APS spokeswoman Jenna Shaver said. “When we talk about increasing something, we can’t discount the complexity associated with integrating the existing resources intelligently and cost-effectively.”
The state’s energy regulators at the Arizona Corporation Commission have eliminated utility subsidies meant to spur rooftop-solar installations, and delayed a large solar project at the Redhawk power plant because it is not needed immediately to meet the renewable-energy standard.
Renewable-energy advocates are calling on the state to increase the standard, which would maintain the pace of development, but regulators are hesitant to make such a move, fearing it would cost utility customers too much on their power bills.
APS expects to spend $154 million next year complying with the standard. Even if the rules were repealed today and the company didn’t build any more renewables, it would face $669 million in ongoing costs for the incentives paid annually to large rooftop-solar projects already built, and billions more in long-term contracts to purchase power from third-party-owned solar plants. APS will spend $4 billion on power from a single solar plant near Gila Bend during the 30-year contract.
Arizona was ahead of the times in 1996 when it passed a “solar portfolio standard” requiring utilities to get 1 percent of their electricity from solar by 2003. The Corporation Commission updated the requirement in 2006 to the current 15 percent standard by 2025. It further requires that 30 percent of the renewable energy comes from “distributed” sources such as rooftop solar.
At the time, Arizona’s requirement was in line with its peer states, but those states have since adopted even more aggressive requirements, though they vary widely in details.
“There is no reason why Arizona cannot have a larger renewable-energy standard,” said Ken Johnson, vice president of communications for the Solar Energy Industries Association in Washington, D.C. “The neighboring states have placed a priority on developing renewable projects for their energy portfolio, and we encourage Arizona to do the same.”
With several large-scale solar-power plants proposed in Arizona but not built for lack of demand, he said the state is missing an opportunity.
“Without question, there are significant economic benefits to developing renewable projects, and Arizona would definitely reap those benefits by encouraging additional renewable development,” Johnson said. “This would create new jobs statewide, pump millions of dollars into the state and local economies and help to protect the environment.”
But neighboring states have an easier time meeting their targets because they have renewable resources that are less expensive to build than solar, APS officials said.
Wind power, for example, costs about $80 per megawatt-hour of electricity when the lifetime costs of building a new project are factored in, according to the Energy Information Administration. Solar is closer to $130 per megawatt-hour. Certain natural-gas plants can deliver power for about $66 a megawatt-hour, even factoring in the price of fuel, according to the EIA. A megawatt-hour is enough electricity to serve about 250 homes for an hour.
“These other states have more diverse resources,” Shaver said. “California and Nevada have more geothermal and wind. We are very solar-heavy. It paints a different picture.”
The standard and its associated tariff on utility customers have faced intense scrutiny from regulators. The five members of the Arizona Corporation Commission, none of whom was in office when the standard passed, have either suggested cutting back on the requirement or have said they would not have placed such a mandate on utilities in the first place.
Renewable-energy standards are not the only way of encouraging solar development in a state, but they play an important role.
Some projects are developed because of requirements by individual cities, such as Phoenix, to use more renewable energy. The Defense Department’s energy requirements also have spurred large solar projects. Arizona State University has been notably aggressive with solar installations.
The federal tax credit of 30 percent available to rooftop solar and large power plants alike remains key to making most of these projects cost-effective.
But state renewable-energy standards have been responsible for the vast majority of large renewable power plants and the surge in the number of homeowners installing solar. State standards essentially force monopoly utilities to buy renewable energy from large power plants and incorporate rooftop solar into the power grid, creating a market for the projects.
APS and Tucson Electric Power Co. customers pay an average tariff of about $4 a month that the utilities use to meet the standard. Businesses pay a much higher tariff, depending on how much electricity they use.
In the past seven years, the commissioners have spent a considerable amount of time debating how much to charge in that tariff and how best to spend the money.
They are hesitant to even enforce the full standard because of concerns about cost, commission Chairman Bob Stump said.
“This commission has striven mightily to balance the impact on ratepayers while ensuring that we have an appropriate amount of renewables on the grid,” Stump said. “I would simply ask those who are asking to raise (the standard) if they feel the costs are justified.”
The commission has considered alternatives that would reduce the tariff for customers by loosening the standard, but Stump said it is unlikely any commissioners would vote to remove the 30 percent carved out for rooftop solar.
“That is an ongoing argument we need to continue examining,” he said. “Solar is very popular when it is polled. When one gets into the weeds is how much customers are willing to pay. Then the picture changes.”
He said most of the polling he’s seen indicates that the majority of ratepayers are willing to pay $5 or so a month to support renewable energy. With the current APS tariff at about $4 a month, and the standard increasing for the next 11 years, he said the costs will eventually run into the limits of what customers are willing to pay.
“Even as it stands, with no future commitments, we will be breaking that $5 mark in years to come,” he said.
A 2013 study by the Beacon Hill Institute at Suffolk University in Boston, which has been critical of state renewable-energy rules, found that in 2025, the renewable-energy standard in Arizona is likely to cost the average household close to $11 a month.
Depending on how it is implemented, the cost could reach $17 a month.
As it stands today, APS has enough solar on its grid to meet the renewable-energy rules through 2016 without adding a single new array.
The renewable-energy standard requires that half the rooftop solar on the APS grid come from homes and half from businesses, and APS already is meeting requirements for solar on businesses through 2020.
That’s why the regulators have allowed the utility to cut back on rebates for customers adding their own solar, and why regulators have asked the company to slow its own development of large-scale solar-power plants. The company doesn’t need any more solar to meet the requirements today.
The number of businesses applying to connect solar arrays in APS territory this year is down 47 percent to 31, compared with 59 through the first six months of 2013.
But the utility could incorporate more renewables into its system with a minimal impact on customers, said Mark Holohan, solar-division manager at Wilson Electric in Tempe and board president of the Arizona Solar Energy Industries Association.
The money that APS and other utilities collect as part of the renewable tariff is used to purchase power from a variety of renewable projects, from wind farms in New Mexico and Arizona to solar plants.
Previously, homeowners and businesses that installed solar received rebates from APS. The rebates were paid out of the money collected from the renewable-energy tariff.
As the costs of solar decreased, and as APS began exceeding the renewable-energy requirement, the rebates were reduced. A few years ago, the average home could collect $18,000 or more from APS in rebates. Today, it gets nothing.
The price of solar panels has fallen from about $4 per watt to less than $1 a watt in recent years, and even with a price hike expected this year because of a trade dispute with China, solar can be added for less cost than originally anticipated by the regulators who passed the standard, Holohan said.
“Arizonans deserve to have that conversation to be more responsible by matching the efforts of our neighboring states to cut down pollution,” Holohan said.
One way to encourage more solar, without higher customer tariffs, would be to change the way solar customers are billed, he said.
For example, rate plans for commercial buildings in Arizona don’t encourage solar, because regardless of how much electricity they generate, the businesses still face “demand charges” based on their highest momentary use of electricity in the month. Even if a business generates a substantial amount of its own electricity with solar, it can pay a high bill, minimizing the value of solar, he said.
That’s why solar installations on commercial buildings have dropped off so much since APS cut the incentives, he said.
Holohan said some California utilities offer solar rate plans for businesses that put a higher value on solar. Changing Arizona rate plans would encourage more solar but not require a higher renewable-energy tariff, he said.
“Modifying that rate would be a good approach,” he said. “It gives solar customers an advantage in justifying their systems.”
However, APS and the regulators have an ongoing debate regarding the true value of solar.
APS officials have said that if solar customers are not charged enough for their use of the utility grid, it can result in non-solar customers paying an unfair share of power-grid expenses, such as new transmission lines.
That debate would make it difficult to enact the rate changes Holohan suggests.
SRP holds steady
Salt River Project, a municipal utility not regulated by the state, has set its own, less ambitious, goal for renewable energy.
SRP seeks to get 20 percent of its energy supply from “sustainable” sources by 2020.
On its face, that looks higher than the state standard, but SRP includes energy efficiency in its goal, which neither Arizona nor neighboring states include in their standards.
Utilities such as APS face a separate standard of 22 percent by 2020 for efficiency, which includes things such as subsidizing low-watt light bulbs and helping customers buy less wasteful appliances.
SRP is actually seeing more of its customers install rooftop solar this year compared with 2013.
In SRP territory, rooftop-solar applications have increased 46 percent to 1,583 for the first five months of the year from 1,086 in 2013 from January to June.
Through the end of May, APS rooftop applications were down 27 percent to 2,275, compared with 3,102 during the same five months of 2013.
SRP has no additional plans for new solar-power plants to complement the two large projects it built in recent years in Florence and Queen Creek.
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