With the growing media attention on the need for clean energy to combat climate change and to increase the U.S. domestic energy supply, renewable energy resources have moved toward the forefront as a principal means of addressing both environmental and energy concerns. Energy generated from renewable resources helps to reduce greenhouse gas emissions, lessens the need to import oil for electricity and provides a secure source of domestic power. In recognition of this, and the need to keep the cost of renewable energy affordable, Congress has considered several financial and regulatory incentives to promote its use. States with abundant renewable resources have already imposed renewable energy portfolio standards that require utilities to generate or otherwise procure a certain percentage of their energy from renewable resources.
Although renewable energy resources are becoming an increasingly viable option, these resources present their own set of challenges with respect to their operation in both the wholesale and retail energy markets and the corresponding regulatory environments, neither of which were designed with such resources in mind. On its face, it would appear that replacing or supplementing traditional energy resources with renewable resources would be largely seamless. In practice, however, there are a number of issues that regulators and system operators are addressing to facilitate the integration of renewable resources in the energy supply mix.
For the most part, renewable energy resources are sized and operated to sell electricity in the wholesale energy markets, primarily to local utilities (many of which require such purchases to comply with their renewable portfolio standard obligations). Unlike many of the renewable resource technologies, however, solar energy projects may be either large-scale generating facility stations or smaller photovoltaic (PV) solar projects (typically, a single megawatt in size or smaller) designed to suit individual customer applications. We focus this article on certain issues that have arisen lately in several states as state regulators, local utilities, solar project developers and customers attempt to address issues associated with increased use of solar generation on-site at customer facilities as an alternative (or as a supplement) to traditional electric service from local public utilities.
Relationship between Solar Projects and Net Metering
In general, developers of the smaller-scale solar projects have adhered to one of the following two (and sometimes both) business models:
(i) the developer installs PV solar generation equipment at the customer’s site for the purpose of selling the generated energy to the customer; or
(ii) the developer leases or sells the PV solar generation equipment directly to the customer for the generation of energy.
Regardless of which business model is utilized, these smaller-scale solar energy projects require that the local utility have a program in place to facilitate “net metering.” The Energy Policy Act of 2005 requires state regulatory authorities to consider adopting a standard requiring each utility to offer net-metering service.1 Under this standard, states are required to determine how net metering fits into their regulatory framework, with input from all the stakeholders. In general, net metering allows a utility customer to continue taking electric service from the local utility while also generating electricity through renewable resources located at its site to meet its then-current energy demand. In the event the solar facility generates more electricity than necessary to satisfy the customer’s energy demand at any point, the excess electricity is delivered into the utility grid. To facilitate the flow of electricity in both directions, the customer and local utility enter into a net-metering agreement. The customer is typically compensated through either a credit on its utility bill against future electric consumption or payment for the electricity supplied to the local utility.
Consequently, these solar business models, combined with the necessity of net metering, have raised a number of state regulatory questions, few of which have been conclusively resolved by any state’s public utility regulators, including:
(i) Should customers or developers that operate and generate electricity to be used at the customer’s facility be regulated as traditional public utilities?
(ii) What is the appropriate balance between local public utility resource planning for load requirements and customer desire to generate its own electricity through renewable technology?
(iii) Are there possible ratepayer subsidization issues arising out of net-metering programs?
(iv) Who is entitled to retain renewable energy credits?
Recent State Regulatory Activity
In the last nine months, Nevada, Arizona and Oregon have all offered clear guidance on issues that arise from netmetering smaller-scale solar projects.2
The Nevada Public Utilities Commission (“Nevada PUC”) declined to issue an opinion on the potential regulatory ramifications of equipment ownership, despite being asked to rule on whether solar equipment could be leased to customers and whether such leases would render a customer or equipment provider a regulated public utility. Instead, the Nevada PUC opened a new docket, Nevada PUC Docket No. 08-03022, to resolve other aspects related to net metering, including the prudence of a cap on net-metering systems and the impact on the state’s ratepayers. Some in the energy industry contend (and with validity) that net metering makes load and resource planning more unpredictable and can result in overall higher utility rates since fewer customers are purchasing electricity from the utility, thereby reducing the number of customers paying for the infrastructure. Solar technology proponents counter that net-metering customers help supply energy to the utilities during times of high demand and help utilities meet their renewable portfolio standard requirements. They further contend that Nevada’s 1 percent net-metering facilities cap would hinder additional development of renewable energy producers. While the Nevada PUC recognized the need for further clarification of the state’s view of net metering, thus far it has not provided any definitive guidance for the solar industry, particularly the extent to which net-metering activities may be regulated under Nevada’s public utility regulatory framework. The issues of third-party ownership and leasing also remain unanswered in Nevada.
In March 2008, the Arizona Corporation Commission (“ACC”) issued proposed net-metering rules (Docket RE-00000A-07-0608) which examined similar issues to those investigated by the Nevada PUC. The ACC examined caps on the size of net-metering facilities, payment for generated electricity and imposition of fees related to equipment and system costs. Arizona’s rules authorize a customer to generate up to 125 percent of its peak load (a cap), but allowed the installation of larger systems upon special agreement between the utility and the customer. A customer is credited for excess energy generation at the retail rate. The cap attempted to strike a balance by providing a ceiling for the purpose of utility resource planning while allowing customers to generate additional electricity to sell back to the utility. The issue of third-party ownership was raised early in the proceedings and drew comments from the solar industry. The ACC quickly amended its proposed rules to eliminate the requirement that the solar generation equipment be “owned and operated by the customer.” While the ACC did not explicitly address the issue of third-party ownership, the rule revision allowed potential customers to participate in net metering through solar equipment leasing or other ownership arrangements, thereby relieving customers of prohibitive upfront equipment costs.
The ACC enacted its final net-metering rules on October 16, 2008, and, consistent with the earlier proposed rules, has required all utilities to file compliance tariffs by mid-January 2009. Under the final rules, net metering is available to any customer who generates electricity using solar, wind, hydroelectric, geothermal, biomass, biogas, combined heat and power (CHP) or fuel cell technologies, provided that the customer’s generated capacity does not exceed 125 percent of its total connected electric load.
The Nevada and Arizona proceedings highlight competing interests between the solar industry and traditional public utility regulation with respect to net metering. As each state has its own definition of what constitutes a public utility, nuances in each state’s regulatory framework make it difficult to formulate a uniform answer to challenges facing solar developers or customers that rely on net metering to accommodate on-site solar resources. For example, Nevada’s definition of public utility focuses on the actual equipment that is owned or operated in producing electricity.3 Other states focus on whether energy is delivered by the producer to the general public through a retail sale. Still other states, such as Oregon, have exempted solar energy providers from the definition of public utility altogether.4 One of the central questions in jurisdictions still grappling with these issues concerns whether a customer can avoid what would otherwise constitute a regulated transaction by owning the solar generation equipment.
The Oregon Public Utility Commission (“Oregon PUC”) has most recently considered and ruled on the issue of thirdparty ownership of on-site smaller-scale solar generation equipment in Order No. 08-388, In the Matter of Honeywell International, Inc. and PacifiCorp, Oregon PUC Docket DR-40 (July 31, 2008). The Oregon PUC evaluated the regulatory ramifications for solar energy services agreements offered by Honeywell to customers, whereby Honeywell finances, builds, owns and operates a solar photovoltaic system located on a customer’s premises and sells the electricity generated by the solar facility to the customer. The customer enters into a net-metering arrangement with its local electric utility under which energy produced by the solar facility in excess of the customer’s load is delivered to the electric distribution system, and the customer receives a credit for such delivered electricity against the electricity it purchases from the utility.
In issuing Order No. 08-388, the Oregon PUC determined that customers who entered into energy services agreements with Honeywell were entitled to take advantage of net metering, under Oregon law.5 The Oregon PUC also found that the legislature intended the term “customer-generator” to mean a “user of the net-metering facility” and determined that Honeywell’s customers satisfied this definition. The Oregon PUC stated that the omission of ownership requirements in the current statutory framework did not compel customers to own any portion of the net-metering facility, but it reserved the right to impose ownership requirements in the future. The order also declined to address federal issues raised by some parties questioning whether such sales constituted wholesale sales of electricity.
The Oregon ruling clears the way for solar equipment providers to market energy services agreements to individual customers without risk of violating current Oregon utility regulations. The order also serves as one of the nation’s first rulings directly addressing the issue of third-party ownership of equipment used to produce power covered by net-metering arrangements. While the Oregon decision clears the way for such agreements only within Oregon, it may also serve as a bellwether as other states analyze their net-metering programs.
The necessity of net metering to on-site solar projects has pushed many of these issues to the forefront, and, to a large degree, the continued development of the smaller-scale solar generation industry rests with the resolution of these questions. Because of the varying nature of state regulatory structures and on-site industry demand, thus far a “one-sizefits- all” solution is not apparent. Rather, it appears that state regulators are attempting to balance the legitimate needs of the local utilities implementing these net-metering programs with the development of on-site generation projects such as solar. Nevertheless, one conclusion that can be drawn from these recent proceedings is that all stakeholders should pay close attention as these issues continue to play out, both in their home states and elsewhere.
Previously published in the October issue of Solar Industry magazine.