Navigant Research Blog

TEP’s Program a Win-Win for Solar Proponents and Utilities

— October 7, 2015

I’ve written extensively about the solar/net metering brouhaha in Arizona over the past 2 years (you can see related blogs here and here). I’ve also previously posited (here, here, and here) that electric utilities worried about solar encroaching on their core business and profitability need to embrace solar, suggesting that if you can’t beat ‘em, join ‘em.

That is exactly what one offering from Tucson Electric Power (TEP) attempts to do. Well, sort of. My analysis indicates that the deal is pretty good for all involved.

In August 2014, TEP proposed a rooftop rental arrangement for customers in its territory whereby TEP would rent its customers rooftops and install solar panels for its own generation needs. In exchange, the utility fixes customers’ monthly bills at their current level for the next 25 years, which TEP considers to be the life of the panels. According to the company website, TEP intends to accept 500 participants in 2015 and was still accepting applicants through September. The plan has been viewed with caution—but not outright hostility—by solar advocates because TEP is subcontracting out the panel installation business rather than creating its own internal, division.

Long-Term Benefits for All

TEP’s proposal could have a substantial positive financial value to customers in its territory. Here’s why: If you run a discounted cash flow analysis, using an 8% cost of capital assumption and a 25-year time horizon, the present value of the savings that TEP customers might enjoy is substantial—assuming that electric prices in Arizona continue to rise at historic rates.

In running my calculations, I assumed a customer would start the program at the beginning of 2015 and that the current $0.12/kW cost rises 3.4% annually through 2040 (this is the average annual increase between 2003 and 2013 in Arizona).

A current $100/month TEP customer is using 852 kWh per month; a $240/month customer is using 2,044 kWh. Keep that usage fixed for 25 years, and the net present value to these customers of the fixed rate versus projected actual monthly bills ranges from more than $6,000 to more than $14,000. The nominal (undiscounted) value of the savings amount to more than $20,000 for the $100/month customer and an eye-popping sum of more than $50,000 for the $240/month customer.

Tucson Electric Power Solar Rooftop Proposal: Potential Net Benefits to Consumers

Richelle Table(Source: Navigant Research)

Even if the rise in electric rates were to fall to half of its historic rate in Arizona (1.7% rather than 3.4%), the savings to TEP rooftop renters would be $2,600 and $6,200 respectively on a present value basis, and the nominal benefits accrue to $9,000 and $21,000 for $100/month and $240/month customers. Considering the heat in Arizona, I’d be willing to bet there are quite a few $300+/month customers for whom this is an even more attractive proposal.

It Takes a Village

Solar installers in Tucson do not view TEP as a competitor because they continue to get the business. Customers do not have to worry about credit scores or qualifying for financing. TEP expands its solar generation capabilities. The deal truly appears to be a win-win-win. In fact, the financial benefits to TEP are probably the lowest on management’s totem pole. The program helps the utility meet renewables requirements and keeps customers happy—and that is worth quite a lot.


GreenCo in the Red: NRG Reset Highlights Tenuous Solar Model

— September 21, 2015

On September 18, NRG Energy announced a restructuring designed to firm up the balance sheet of its core business and move the cash-losing solar and electric vehicle charging businesses into a new company, dubbed GreenCo. NRG’s stock has fallen by a third this year, and with interest rates poised to rise, investor pressure forced the move.

NRG CEO David Crane said in a webcast that the company will provide GreenCo with a $150 million revolver through 2016, adding that NRG believes “Now is neither the time to abandon GreenCo nor to transfer its full value to someone else, but it is very much the time to impose a new higher level of financial rigor on GreenCo befitting the type of capital discipline imposed on entrepreneurial startups by venture capitalists.” Crane also noted that formal efforts are underway to find GreenCo a strategic partner.

Selling the Upside or Saving Itself?

Back in early 2014, I wrote a blog suggesting utilities invest in solar and highlighted NRG’s (the non-utility) aggressive moves in the sector. I noted that many telecoms that invested in cellular early and consolidated (rather than divested) today find that business line to be their largest and most profitable.

But 18 months later, the losses at GreenCo have become too much for NRG’s investors to stomach. I looked at other public solar companies and, sadly, analysis of SolarCity’s financials don’t fill me with hope, either. The long-term lease model and aggressive marketing employed by solar firms recently have ballooned losses and reduced working capital, and long-term debt has grown.

Now, like solar, the cellular industry in the nineties was particularly capital intensive, and free cash flow losses for many were huge. But once the networks were built, cellular has turned into a nicely profitable business. Will that same dynamic prove true as the solar industry matures?

Who Should Own Solar Panels?

The difference between the telecom/cellular dynamic 20 years ago and the uneasy utility/solar relationship today is at least partially due to the fact that individuals—or even the Walmarts of the world—weren’t out buying their own cellular towers and building their own networks in the nineties in order to save money with AT&T or Verizon. It wasn’t an either-or proposition; for a long time, most people had both cellular phones (which were great when they worked) and landline phones.  Of course, cellular phones dominate today, and many people no longer find a need for a home phone.

But if I put solar panels on my home today, that creates an immediate, permanent reduction in the amount of power I buy from the utility. Other critical differences include the fact that the cellular network grew exponentially in value as it became truly nationwide; solar will remain a much more local/regional business. And cellular is regulated at the national level by the Federal Communications Commission, while electric utilities all have to contend with their state-level regulatory bodies.

That doesn’t change the fact that solar will inevitably have a measurable impact on demand for the local utility’s product. Many large regulated utilities are weighing the risks of building community solar projects within their regulated business units; others, like Exelon’s Constellation, are aggressively going for the NRG GreenCo/SolarCity model.

At the end of the day, the differences between utility/solar and telecom/cellular may be greater than the similarities. But if I were a traditional utility watching more and more solar panels take up position on rooftops across my territory, I’d certainly be seeking a way to capitalize upon the trend.


Solar vs. Utilities: Can’t We All Just Get Along?

— September 4, 2015

Tightrope_webTo say that the battle over net metering payment schemes is getting heated is an understatement. But nearly 2 years after I wrote about how the net metering debate was playing out globally (see those blogs here, here, here, and here), what troubles me most is that little progress appears to have been made in terms of finding an equitable, transitional solution that promotes solar adoption without unfairly affecting the business models of regulated power utilities.

In the United States, the state-level regulation of utilities means that 50 different public utilities commissions (PUCs) are considering proposals from numerous utilities, and no two proposals are exactly alike. But nationwide, solar supporters are still doing their best to make utilities look like the bad guy—and inflammatory solar tax headlines still dominate in the media.

War in the Great Lakes State

This summer, a bill before the Michigan State Senate has created more sturm und drang because, as written, the bill would not grandfather in existing solar customers. I found article after article where homeowners who’ve invested tens of thousands say that rather than a 10-year payback, it will now take 20, 30, or more years for their solar system to pay for itself. Why? Because the proposal would make solar customers sell their power to their utility at wholesale rates, then buy back what they need at retail.

As in most net metering battles, solar advocates argue that the incentive for consumers to install solar will be eliminated under such rules. Combine that with that the expiration of the federal solar tax credits at the end of 2016, and solar supporters imply the end of their industry (and jobs) is nigh.

On the other side of the table are utilities that typically rely upon the cross-subsidization argument to defend their efforts to implement higher fixed fees or reduced net metering payments for solar customers. Their argument is that, in order to pay for the grid that everyone—even solar customers—still needs, those customers should pay a connection fee so that fixed grid maintenance costs aren’t unfairly shouldered by non-solar (often lower income) customers.


Both sides of the argument have merit. Increased fees or reduced net metering payments to solar customers will make a potential customer think twice before committing to a $20,000 (or much more) investment. But utilities do have to maintain and operate their power plants, distribution grids, billing systems, etc. whether a customer buys $200 worth of power in a month or $20. Today, solar penetration in the United States is still low, but it’s growing rapidly. There’s no reason to think that growth will slow—especially if the federal tax incentives are extended, as has been proposed by New York Senator Charles Schumer.

What’s harder to understand is why more utilities and solar companies aren’t working together to create a plan that allows solar investment to continue growing—creating jobs, reducing carbon footprints, and taking stress off of the grid—without creating abrupt, unfair financial stresses for these utilities that have been bringing power to Americans for more than a century.

Yes, the business is changing. Yes, regulatory action often comes too slowly while business forces can shift rapidly—just ask the old school telcos that still had more customers than mobile carriers less than 10 years ago. But there ought to be enough creative juice among advocates on both sides to imagine a transition plan that works for all. Industry-driven compromise would be embraced and emulated by regulators nationwide. Let the mudslinging end and productive dialogue begin, I say.


Salt River Project, Others, Buying 700 MHz Spectrum for Smart Grid Applications

— July 2, 2015

Utilities have long bemoaned their lack of access to appropriate, affordable wireless spectrum for their smart grid communications networks.  But this year, a handful of utilities have taken the plunge, acquiring 2 MHz of licensed 700 MHz band spectrum from private investors.

Salt River Project (SRP), based in Phoenix, Arizona, has made one of the largest purchases to date in terms of population covered. Earlier this year, SRP acquired the Phoenix-Mesa economic area (EA) license #158, which covers an estimated 4.3 million people (pop) in central Arizona.

The license includes two 1 MHz swaths of spectrum at 757 MHz to 758 MHz and 787 MHz to 788 MHz. Access Spectrum was the seller; the company, along with Columbia Capital and Beach Point Capital, is marketing similar licenses nationwide for $0.75/MHz pop (pops x MHz).  This implies a price tag in the $6.45 million range for the SRP transaction.

I spoke with Ron Taylor, senior principal engineer for SRP, about the purchase and what still needs to happen for this spectrum band to meet utilities’ needs.

“We have to find the right vendors; we’re working with standards bodies right now,” he said, to develop a standard protocol.  “We’re not interested in a proprietary solution; we don’t want a single point of failure.”  Taylor added, “We took a bit of a risk [buying the spectrum].  Others were waiting for someone to put a foot in the water.”

As of April 2015, two other utilities—NorthWestern Energy and Great River Energy—had also contracted to acquire spectrum in this band.

Distribution Automation Is the Goal

SRP intends to use the private network to fill the connectivity gap between its substations, which are all connected by fiber, and its advanced metering infrastructure (AMI) networks.  Taylor noted that they are interested in distribution automation applications like voltage control and fault location, isolation, and service restoration (FLISR), adding that it is also looking at smart inverters for solar installations and monitoring of distribution transformers and dynamic line rating applications.

When asked if 2 MHz of spectrum is enough to do it all, Taylor admitted that SRP won’t be able to do it all.  “We did the math.  What is smart grid?  We had to trim our list,” he said.  But he added, “Everything that’s critical, and even nice to have, should be accommodated for 10 years.  It all fits except meter reading; that would overload our network.”

Prior to the acquisition, SRP leased the license and tested for interference with Verizon Wireless’ adjacent licenses and network.  The field test validated the license for SRP’s planned purposes.

Just a Start

SRP and other utility buyers of this slim license band are hoping the vendor community can standardize around a single technology, yielding economies of scale for utilities still seeking an efficient communications strategy for high-performance-need applications in the distribution network.

But as SRP’s chief engineer pointed out, just 2 MHz really does limit the options for longer-term smart grid goals—but with no sign the Federal Communications Commission (FCC) is  considering dedicated spectrum for power utilities in the near term, the availability of this contiguous, nationwide set of licenses is a start.


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