PG&E’s New Tariff Could ‘Gut the PV Opportunity’ for the Commercial Sector

PG&E’s New Tariff Could ‘Gut the PV Opportunity’ for the Commercial Sector

The proposed regulation threatens commercial rooftop solar economics in Northern California.

by Jeff St. John

If you were wandering the halls of last week’s Intersolar conference in San Francisco, you probably heard a lot of worried, angry talk about something called the A-6 tariff, and how proposed changes to it were threatening to undercut commercial solar PV economics in Northern California — or, maybe, make energy storage a must-have part of any new commercial-scale solar project in the region.

The controversy over Pacific Gas & Electric’s special tariff for mid-size businesses, school districts, and other commercial customers that want to go solar has been brewing for years now. But lately, it’s been kicked into high gear, driven by an unusually poorly worded proposed decision from the California Public Utilities Commission that could, if left unchanged, slash the economic returns of the majority of commercial PV projects in PG&E territory by about 30 percent.

That’s the calculation that Tom Williard at Sage Renewable Energy Consulting has been warning his solar customers about since June 23, when the proposed decision (PDF) from CPUC administrative law judge Douglas Long was published. This document was meant to resolve a years-long legal argument over what to do with PG&E’s Schedule A-6 tariff. But according to Williard, the solution it proposes is far worse than the problem it was trying to solve.

“It’s really happening, and it’s happening in a very abrupt way,” he explained. “The transition is really disorderly, which is one of the biggest problems.”

In fact, the way the proposed decision would alter rate structures and customer energy costs is so dramatic and uncertain that the CPUC decided this week to assign a new administrative law judge to the issue, and postpone a final decision on the matter until at least next month. That could give the agency time to fix what Williard described as the key flaws in the previous document, including a lack of clarity about what will happen to existing A-6 tariff customers, and what customers with solar projects in development should do to preserve their economic value.

“A regulatory environment with this much lack of transparency and inconsistency makes these kinds of projects virtually impossible,” he said. “You cannot plan in an environment like that.”

Complex rate structures can make or break solar economics

Why is the existing A-6 tariff so valuable for solar economics? First of all, it’s an “all-volumetric rate,” which means that it doesn’t assess the demand charges, based on maximum electricity consumption at any one moment in time, that apply to almost all other commercial rates in California.

Instead, it charges customers only for the energy they consume, with much higher rates during times of the year and the day when demand is highest, typically summers and late afternoons. Those, of course, tend to be the same times that rooftop solar PV will be at peak generation, which makes the A-6 tariff structure very profitable for net-metered solar systems.

And because the A-6 tariff was open to customers with up to 500 kilowatts of average power consumption over a three-month period, it applied to a very broad class of commercial buildings, school districts, government agencies, small industrial sites, and other key classes of commercial solar customers.

In its 2012 general rate-case filing, PG&E asked to reduce the cap on customers eligible for the A-6 tariff from 500 kilowatts to 75 kilowatts, which would cut out a large number of commercial customers. Solar advocates protested, the issue went into litigation, and last month’s proposed decision was how the CPUC decided to resolve the disputes.

The first big problem with the proposed decision has to do with its timing, Williard said. PG&E had asked for any new tariff to start in November of this year. But the proposed decision abruptly declared that any customer not already on the A-6 rate would have that option closed to them as of the moment the decision was approved as law — which would have been this week.

“We have clients getting close to finishing projects in the next two to three months, public agencies that have been in this process for a long time,” preparing for a November deadline for switching to the A-6 tariff. “Now all of a sudden this says, if you don’t have a signed contract for A-6,” you’ve only got a month to make the move.

Another big problem is that the proposed decision didn’t offer a specific alternative for all those customers with more than 75 kilowatts and less than 500 kilowatts of demand, he said. Instead, “they just closed it completely off without any other carrot in place that adequately values the solar PV generation on PG&E’s network.”

The other tariff that applies for customers with between 75 and 500 kilowatts of demand is called the A-10 tariff, and it includes a more typical demand-charge regime, along with less-steep rates on the energy side of the equation, he said.

“For a typical school district, their PV production on A-6 is usually about 26 to 27 cents per kilowatt-hour on average,” he said. “On A-10, it’s somewhere around 19 cents per kilowatt-hour,” taking the changes in energy rates and the new demand charges into account. That’s the calculation that led him to predict that solar systems losing the A-6 tariff could expect to lose 30 percent of their long-term economic value, more or less overnight.

Customers tend to stay on the A-10 rate until their solar system is ready to turn on, and then switch to A-6. With the uncertainty brought about by the CPUC’s proposed decision, customers with solar systems in the midst of being built might want to switch to the A-6 rate before the opportunity is taken away from them.

But that’s a problem too, because going to A-6 will add much higher energy costs to the building until the solar system is turned on — between 30 percent and 50 percent higher, depending on what time of year the transition comes, he said. “And if a PG&E client switches tariffs — if they go onto A-6 right now — they can’t change their tariff for a year,” he said.

Uncertain grandfathering rules could undercut existing projects

Finally, the proposed decisions was quite vague on how existing A-6 tariff customers might be “grandfathered in” to any new tariff regimes, he said. “When this thing closes, you’ll be able to remain on that rate,” he said. “But the proposed decision did not specifically [state] that. It says, ‘You can remain on that rate until we figure out what to do with it in a future rate case.’”

The proposed decision directed PG&E to create a new solar-friendly rate for customers with between 75 kilowatts and 500 kilowatts of average demand, most likely based on the “Option R” tariff structures now in use at PG&E and Southern California Edison. These are more cost-effective for solar than the existing rates, but they still include demand charges, and Williard estimated that it would reduce solar paybacks by 15 percent compared to the existing A-6 rate.

What’s more, solar customers who’ve built 20-year economic forecasts based on their existing A-6 rates will have to wait until PG&E’s next rate case, which opens in 2017 and may not yield final tariffs until 2018 or later, to learn what options are open to them.

“They created this donut hole — you bring A-6 down to 75 kilowatts, then you don’t have any solar-friendly tariffs between 75 kilowatts and 500 kilowatts,” he said. “There are two and a half years where they have no commercial PV tariff.”

Williard said he’s hopeful that the CPUC will correct some of the proposed decision’s most glaring problems — but he’s not confident all of them will be addressed. “There are two pressing issues here: timing of any A-6 closure and the grandfathering-in of existing A-6 customers,” he said. “I imagine they will fix the timing at least a bit, but the far larger issue is grandfathering. And that is very much in question.”

Can energy storage help fill the gaps?

One of the interesting upshots of this situation is that it could open an opportunity for energy storage to help shore up the economics of affected solar systems. Behind-the-meter batteries can store power from solar or the grid, and then inject it when a customer’s energy usage is approaching a peak. That, in turn, could at least reduce the impact of the demand charges that could start affecting customers losing access to the A-6 tariff.

That has no doubt been one of the factors driving companies like Stem and SunPower, SunEdison and Green Charge Networks, and SolarCity and Tesla into the California solar-storage field. SunEdison recently partnered with storage provider Green Charge Networks to deploy battery-solar projects in California, and SunEdison’s Tim Derrick told us that “a lot of RFPs from schools and municipalities are coming with a storage component.”

Those are the same types of customers that Williard said could be negatively affected by changes to the A-6 tariff, and which could find value in storing that energy. But right now, “with demand charges on the Option R tariffs, it’s hard to make storage pencil out,” he said. “Generally speaking, they reduce demand charges by a half to a third of what you’d expect from standard tariff demand charges. So they aren’t as high, and right now what we’ve seen is, it’s very close to penciling out or not,” depending on the individual customers’ load profiles.

“Storage guys kind of like this, because they’re saying, ‘Now we can get into PG&E territory.’ But that’s a less efficient way to address energy usage than PV by itself,” he said. “There are no storage projects going in on A-6, because it makes no sense — it would cost a lot more than PV alone.”

Of course, changes to the A-6 tariff are just one of the many changes underway in California that could alter solar-storage economic models. The state is in the midst of restructuring its entire net-metering regime, which could bring about entirely new models for how customers are compensated for the solar power they produce. It’s also in the midst of a long-term shift away from steeply tiered monthly rates to daily time-of-use rates for residential customers, which could alter the value of household solar and solar-storage systems in new ways.

Kirk Stokes, the director of sales for Sharp Electronics’ energy systems and services group who’s leading the company’s U.S. solar-storage business, noted at last week’s Intersolar conference that the proposed changes to PG&E’s A-6 tariff could well “gut the PV opportunity” for the commercial sector. “These A-6s, and the Option R rates in Southern California and SDG&E territory, are going to create limits for PV [companies] to sell solar. But it also creates opportunity.”

TAGS: a-6, california, cpuc, green charge networks, pg&e, rooftop, sharp, solar, solarcity,stem, storage, sunedison, sunpower, tesla

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