Market Update

Arizona’s solar industry has grown tremendously in recent years. With abundant solar resources and (until recently) favorable policy frameworks, the state has grown to total 701 MW of installed solar capacity, ranking it second nationally behind only California. However, Arizona’s growth in solar has slowed since 2013, in part as a result of ongoing controversies involving the state’s major electric utilities. Arizona is seen by many as ground zero in the evolving battle between utilities and distributed generation proponents.

Utility Charges Impeding Solar Deployment

In 2013, the Arizona Public Service (APS) sought to impose major charges on distributed generation customers, but was largely rebuffed by the Arizona Corporation Commission (ACC). APS requested a monthly charge for net-metering customers of $8 per kilowatt of installed capacity for grid connectivity, a charge that could have exceeded $50 monthly on average. A compromise was approved by the ACC, authorizing a “connection fee” of $0.70 per kilowatt of installed capacity per month for net-metered customers, about $5 a month based on average usage. This result was generally viewed as averting a major threat to distributed generation deployment in the APS service territory.

In February 2015, however, Salt River Project (SRP), the retail electric utility for Phoenix, approved a pricing plan that would add a fee of about $50 per month to all leased and owned solar systems, through a higher fixed service charge and demand charges. The new charges are scheduled to take effect in April.

SRP claims the new fees are needed to ensure solar customers pay their fair share for their use of the electrical grid, and to support maintenance and upgrades on the network. According to Credit Suisse, the $50 per month charge makes the economics of solar in SRP’s area “effectively non-viable.”

In response, SolarCity filed a lawsuit in federal court in Arizona, asking the court to stop SRP’s allegedly anti-competitive behavior. SolarCity says that SRP has “sabotaged the ability of Arizona consumers to make this choice if they happen to live in SRP territory. We can already see the intended effects: After the effective date of SRP’s new plan (December 8 of last year), applications for rooftop solar in SRP territory fell by 96%.” SolarCity contends that the fee would jeopardize the more than 9,000 solar jobs in Arizona.

Utilities as Solar Providers

As an alternate strategy, in mid-2014 APS sought regulatory approval of its proposal to install solar panels at no cost to the homeowners. The program, called “AZ Sun DG” would install 3,000 residential 4-8kW solar systems. APS would effectively be leasing consumers’ rooftops for a $30 a month savings on their bill.

In late December, the ACC voted to approve APS’s request, although with certain restrictions and conditions. The ACC approved a similar type of program proposed by Tucson Electric Power Company. With these decisions, Arizona utilities may increasingly seek to act as active participants in the solar and distributed generation markets.

Tax Interpretation Under Fire

In July 2014 the Arizona Department of Revenue (ADOR) took the position that solar energy equipment is taxable if it is owned by a solar company and installed on another person’s property. ADOR assigned the value for property tax purposes at 20% of the system’s depreciated cost, which amounts to about $152 a year for an average solar customer. The Department’s action has prompted a lawsuit by SolarCity and SunRun. As 85-90% of the state’s rooftop solar installations are leased, rather than owned, this new tax could have a strong negative impact. The lawsuit is ongoing.

Solar Business Practices Investigation (or Anti-competitive Utility Assault?)

In December 2014 the ACC launched an investigation into the business practices of the rooftop solar industry, a move that aims to address mounting concerns that solar leasing companies are misleading consumers. More recently, information has surfaced that APS was behind a campaign to have members of the U.S. Congress call for similar investigations into alleged deceptive solar business practices.

As these developments indicate, distributed generation will continue to be a contentious issue in Arizona. Developers and investors considering the major opportunities presented there should give careful consideration to these shifting dynamics.

Special thanks to Morgan Gerard and Emma Spath who assisted in the preparation of this post.