Utilities traditionally have met renewable portfolio standards with power purchases from IPPs. But new approaches are allowing utilities to build their rate bases with investments in solar...
Buying Into Solar
Rewards, challenges and options for rate-based investments.
regulated ownership related specifically to distributed generation like PV solar. Many utilities are using these arguments successfully to obtain regulatory approval for the opportunity to build these investments.
The traditional arguments that IPP contracts must be re-contracted at expiration or replaced while regulated generation assets continue to generate power after they’ve been paid off, is as true for solar generation as it is for any other type of generation. While such solar assets as PV panels and concentrating solar power (CSP) plants are expected to last 25 years or longer, typically they’re depreciated over a 20-year life. After 20 years such assets are fully depreciated and, with no book value, produce power at virtually no cost to ratepayers, except for operations and maintenance expenses. Once a 20-year contract with an IPP to purchase solar power expires, it must be renewed or replaced and ratepayers must re-up to pay for those ongoing costs.
Another traditional argument for regulated ownership is related to the balance-sheet impacts of utilities’ power-purchase agreements (PPAs) with IPPs. PPAs represent long-term obligations that a utility must meet. As the proportion of these liabilities to owned assets grows, a utility’s balance sheet can become relatively weaker as judged by bond rating agencies such as Standard and Poor’s. As bond ratings drop, utilities’ borrowing costs (interest rates) rise; and these increased costs are passed on to ratepayers in the form of higher rates. Too many PPAs, for solar or traditional energy, can increase electric rates.
There also are arguments for regulated ownership specific to renewable generation. One of the principal arguments is operational flexibility. “When we own distributed solar systems, we decide where to put them,” says Jonathan Marshall, spokesperson for Pacific Gas and Electric. “Brownfield development, substations, transmission constrained areas—these choices help us keep costs down for customers.” Utilities typically have little or no control over the location of customer- and IPP-owned generating assets. Customer-sited generation presents an additional challenge in that utilities rarely have access to detailed production, voltage, and power quality data.
Also, regardless of personal opinions on climate change, legislators in many states have deemed clean electric generation a social benefit. A case can be made that utility investment in renewable generation facilitates the achievement of the social benefit. Utilities’ access to capital, technical expertise, and program management capabilities can increase the rate and scope of renewable energy generation installation above what it might have been without such capabilities. Thus, utility investment can help ensure that challenging renewable energy standards are met.
There also are benefits to regulated utilities’ regulated status. It’s hard to tell where renewable technologies will lead; decisions might one day need to be made regarding renewable generating assets ( e.g., upgrades, relocations, etc.). By enabling a portion of a solar resource portfolio to be owned by a utility, a regulatory agency preserves its control of options and oversight. This might be in the ratepayers’ interests in the long run.
Finally, central solar plants (PV or CSP) generally require new transmission to get power to loads, in contrast to distributed solar generation, which