Rapidly growing U.S. residential photovoltaic (PV) solar system installations and net energy metering (NEM) are potential long-term threats to the creditworthiness of investor-owned utilities (IOUs), according to Fitch Ratings.
PV solar, primarily rooftop, is a small but rapidly growing portion of U.S. electricity production. Annual residential PV solar installs increased 71 percent in 2015 and at a 55 percent CAGR from 2005-2015. Nonetheless, solar generation, including residential PV solar, represents approximately 1 percent of 2015 US electricity production.
Fitch says he key to sustaining long-term IOU creditworthiness in the face of rapid distributed generation (DG) growth is modification of volumetric-based tariff design to incorporate a larger fixed charge component. Failure to address NEM rate design issues could lead to an unsustainable cycle of rising monthly bills for non-NEM customers, incentivizing them to acquire residential DG systems and leading to further rate increases and more departures.
The conundrum for regulators and utilities from an energy policy point of view is facilitating development of distributed PV solar and its clean energy attributes without unduly burdening non-NEM customers with higher bills due to cross-subsidization of NEM customers. NEM customers typically receive credits for exports to the grid at the fully loaded retail tariff and avoid paying fixed costs by way of reduced kWh usage.
A robust dialogue has emerged in several Sun Belt and other states regarding NEM and its impact on the distributed PV solar industry, utility customers, IOUs and other constituents. Decisions with decidedly mixed results have been issued, and proceedings have been initiated and continue in several key states, including California, Arizona, Nevada, New York and Hawaii.
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Rapid growth in residential PV solar is supported by a combination of declining system costs, tax subsidies and feed-in tariffs. NEM allows customers with residential PV systems to offset energy purchases from their local utility and export excess power to the grid, receiving credits often at the full retail rate. While higher utility power supply costs from DG exports are generally deferred and recovered, lost revenue associated with lower volume is absorbed by the IOU, absent implementation of full revenue-decoupling mechanisms, until completion of a subsequent general rate case filing.
Fitch believes the impact of PV solar is manageable within the regulatory compact, based on existing technology, via adoption of tariff mechanisms with appropriately calibrated fixed versus variable cost-recovery mechanisms and avoided cost-based payments for exports to the grid. The emergence of disruptive technology which enables customers to economically and permanently disconnect from the grid in large numbers is, in Fitch’s view, a low-probability risk factor that cannot be ruled out.
While potential adverse effects associated with residential PV systems are a concern from a credit perspective, they have not directly affected utility sector ratings and appear unlikely to do so in the near to intermediate term, based on existing technology.
For more information, check out the company’s special report titled, “Net Energy Metering: A Secular Credit Challenge for IOUs,” on its website.
— Solar Builder magazine
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