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.

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/kilowatt 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 kilowatt-hours (kWh) per month; a $240/month customer is using 2,044 kWhs. 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.



Paving the Road for Progress on Climate Change?

— September 25, 2015

The Obama era has been blackened by Congressional dissent and contention on issues across the board—ranging from raising the minimum wage to climate change. As a result of the stalemates in progress for energy policy development through legislation, the president has released a steady stream of Presidential Actions that outline—and in some cases mandate—federal leadership on climate change while circumventing the protest lines of the legislators. What lies ahead for U.S. energy policy is up for debate, what with the upcoming 2016 election, and the Obama administration has been busy in its attempts to set that stage:

  • International collaboration—United States-China Climate Leaders’ Declaration (9/14/15): 18 United States and 11 Chinese cities, states, and provinces have agreed to demonstrate leadership in the climate change battle with specific targets, commitments to report greenhouse gas (GHG) emissions, climate action plans, and coordination in efforts to make progress on combating climate change.
  • Federal mandate—Executive Order on a Decade of Federal Sustainability (3/19/15): Includes targets of 40% GHG emissions reductions by 2025 relative to a 2008 baseline.
  • Rulemaking: Most notable of all was the August 3 announcement of the Clean Power Plan by the president and the Environmental Protection Agency. This landmark ruling leveraged the authority of the Clean Air Act to establish GHG emissions reductions mandates for power plants across the country.

So, Where Do the Candidates for 2016 Stand?

While it may be hard to believe the presidential election is still over a year away with all of the media hype and constant advertising, an early review of the contenders illustrates a very uncertain future for U.S. climate change policy. A quick scan from the official campaign pages of a few of the candidates shows a rough road ahead:

  • Hilary Clinton’s campaign slogan on climate change is “Making America the clean energy superpower of the 21st century.” All focus is on renewables, and there is no stated stance on regulation.
  • Bernie Sanders aims for international leadership and proposes to tax carbon and methane. His campaign further opposes the Keystone XL pipeline.
  • Donald Trump has not directly addressed climate change policy in his campaign events or via his website. According to The Washington Post, he did speak on the topic on the Palin radio show in late July, stating: “You look back and they were calling it global cooling and global warming and global everything, but if you look back and the biggest tornadoes were in the 1890s, the biggest hurricanes were in the 1860s and 1870s.”
  • Jeb Bush’s campaign page also omits climate change as an issue. His perspective on the issue is foggy at best. A series of stories in the spring highlighted his uncertainty on any official stance. According to The Nation, he was quoted early on in his governorship as stating, “At this point, global warming is not the top priority.” Recently he has been even more vague: “I don’t think it’s the highest priority,” he said in May, adding, “I don’t think we should ignore it, either.”

The year ahead holds many questions on climate and energy policy, but federal leadership will likely continue through the non-legislative channels of the president as the candidates set their eyes on the office.


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.


President Renews Commitment to Clean Energy, but Sustained Effort by Stakeholders Needed as Well

— September 17, 2015

U.S. President Barack Obama has renewed his commitment to promoting clean energy and energy efficiency with a set of executive orders designed to drive wider adoption of greener technologies. The president outlined his goals in a speech on August 24, in which he called for a greater penetration of renewable energy sources—wind and solar in particular.

The president’s executive orders encompass funding and a mix of private sector obligations, including:

  • Providing $1 billion in additional federal loan guarantees available for distributed energy projects using innovative technologies.
  • Releasing residential Property Assessed Clean Energy (PACE) financing for single-family homes to invest in clean energy technologies.
  • Creating a Department of Defense Privatized Housing Solar Challenge, as well as noting that companies are committing to providing solar power to housing on more than 40 military bases across the United States.
  • Announcing $24 million for 11 projects in seven states to develop advanced solar technologies that double the amount of energy each solar panel can produce.
  • Approving a transmission line that will support a 485 MW photovoltaic facility to be constructed in Riverside County, California and produce enough renewable energy to power more than 145,000 homes.
  • Creating a new interagency task force to promote clean energy, and announcing commitments from local governments, utilities, and businesses to drive energy efficiency in more than 300,000 low-income households, as well as investing more than $220 million in energy saving activities for veterans and low-income customers to help lower energy bills.

Energy Cloud and New Utility Thinking

These moves by the president and his administration are part of a larger trend already taking place, which Navigant Research has dubbed the energy cloud. In this emerging scenario, a broad range of technical, commercial, environmental, and regulatory changes are expected to combine to alter the traditional hub-and-spoke grid architecture. These changes are also resonating among some utilities. A recent survey of utility executives found that some 30% of respondents are planning investments in behind-the-meter technology (such as microgrids, energy storage, and distributed generation), and more than 40% of respondents are considering these types of investments.

The effort to promote clean energy has momentum and the government at the federal level can play a role, but utilities, their customers, and technology vendors are also needed to sort out what works and what doesn’t as part of a sustained effort. The approach taken by New York’s Reforming the Energy Vision (NY REV) seems to strike the right balance of government regulators setting some new guidelines and letting market participants come up with solutions and business models that can drive the cleaner energy market forward.


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