SOLAR PORTFOLIO STANDARD SUBCOMMITTEE REPORT Presented to Unbundled Services and Standard Offer Working Group for Review and Inclusion

SOLAR PORTFOLIO STANDARD SUBCOMMITTEE REPORT
Presented to Unbundled Services and Standard Offer Working Group for
Review and Inclusion in The Working Group Final Report
Retail Electric Competition Working Group Process
Docket No. U-0000-94-165
September 26, 1997

I. BACKGROUND

The Commission has supported development of renewables by utilities in Arizona for a number of years. In the first two cycles of Integrated Resource Planning (IRP), the Commission encouraged Arizona utilities to diversify their generation mix by adding renewable resources. Very little in renewable resource generation has resulted from the IRP orders. Now, through the Retail Electric Competition Rule, the Commission has required that all Electric Service Providers must provide part of their competitive electricity from solar.

A. Staff Analysis of the Solar Portfolio Standard

Solar electric technologies are the most applicable renewables in Arizona. The phase-in program extends the Commission's interest in renewables by requiring that suppliers in the competitive market obtain at least one half of one percent of the total retail electric energy sold competitively from solar resources, whether that solar energy is purchased or generated by the seller. Solar resources include photovoltaic resources and solar thermal resources (for example, dish-Stirling generation). After December 31, 2001, the Commission may change the solar portfolio percentage; if it does not act, the percentage increases to one percent of electric energy sold competitively.

Solar resources may be built and operated by sellers of electricity in the competitive market. However, it is expected that some of the solar energy will be supplied by firms specializing in solar resources which sell their electric output to competitive suppliers under contract. The rule indicates that the solar resources must be new, i.e., installed on or after January 1, 1997. The purpose of the requirement is to foster advances in technology, encourage economies of scale in manufacturing, and gain greater experience with applying solar resources. Sellers must report regularly on their compliance with the standard; they must clearly demonstrate the output of solar resources, the installation date of solar resources, and the transmission of energy from those solar resources to Arizona consumers.

The rule encourages early development of solar resources through a "double credit provision." Any company certificated under the provisions of the rule can credit two times the electric energy generated before January 1, 1999 using solar electric resources installed in Arizona on or after January 1, 1997 to the percentage requirement cited above.

Competitive market consumers and suppliers will pay for the solar portfolio standard. The costs will be shared by both consumers and suppliers reflecting the price elasticities of demand and supply. Further, among consumers, a large share of the costs are likely to be borne by those competitive market consumers who desire "green power." That is, those consumers who value solar power the most are likely to bear a large fraction of the costs of the solar portfolio standard and they will satisfy their demand for solar electricity. In another section of the Retail Electric Competition rule (R14-2-1604 E3) there is a provision that allows customers who receive at least 10% of their electricity from solar resources to be automatically eligible for competitive electric service.

The percentage standard was selected in order to balance the interest in encouraging solar power and the higher costs of solar power relative to conventional generation. The cost impact of the solar portfolio standard is expected to be smaller than the savings which can occur through competition, especially as stranded cost recovery concludes.

With a solar portfolio standard of 0.5 percent and with 20 percent of the market served competitively, about 21 MW of solar generation capacity would be needed if SRP is included; if SRP were excluded, solar generation requirements would be about 13 MW.

The percentage standard is consistent with the utilities' planned generating capacity additions, as reported in the 1995 Resource Planning filings. By 2003, the year full competition is to start, the utilities have planned to add 377 MW of generating capacity; by 2004 they have planned to add 602 MW of generating capacity. These figures should be regarded as estimates. Including SRP, a solar portfolio standard of 1 percent of competitive kWh sales would result in solar capacity additions of 256 MW by 2004. The solar generating capacity would be in addition to the renewable goals established for utilities in the most recent Integrated Resource Planning order.

There are four solar technologies that could meet the needs of competitors in the Arizona phase-in: photovoltaics, solar dishes, solar troughs, and solar central receivers.

B. Staff Objectives of the Arizona Solar Portfolio Standard

In developing the details of the Solar Portfolio Standard, the Corporation Commission Staff was guided by the following objectives:
Encourage the use of solar electric technologies to increase the fuel diversity in the electricity generation mix.
Increase utility and electric service provider expertise and experience in the procurement, installation, and operation of solar electric systems or in the purchase and transmission of solar electricity from other sources.
Encourage new solar electric technologies as a reasonable percentage (1/2 to 1% of competitive retail electric sales) that is significantly less than the annual growth (2-3% per year) of demand for electricity. (This allows utilities and other electric service providers free choice of the technologies for 99-99.5% of electricity generation.)
Encourage the use of modest-sized, distributed solar generators to reduce the loading on existing transmission lines and also reduce the need to build new, expensive transmission lines as the demand for electricity increases in the future.
Contribute to the commercialization of solar electric technologies, which will decrease the cost of solar electricity to Arizona customers in the future.

II. ACTIVITIES OF THE SOLAR PORTFOLIO STANDARD SUBCOMMITTEE

The Solar Portfolio Standard Subcommittee had its first meeting on May 8, 1997. The second meeting, on June 2, 1997, included a morning workshop and an afternoon meeting. Follow-up meetings were held on July 9, August 1, August 27, and September 12, 1997.

Prior to the first meeting, subcommittee members submitted 27 major issues of concern. At the first meeting, an additional 27 issues were identified. The subcommittee then grouped the 54 issues into eight major issue categories:

A. Major Issue Categories Related to the Solar Portfolio Standard:

Goals & objectives of the SPS
Technology choice (definition of equipment allowed in the Solar Portfolio Standard)
Costs/timing
Incentives (reward intended results, discourage unintended results)
Economic development/solar industry development
Administration
Level playing field
Technical details

B. Objectives. The Subcommittee discussed objectives developed by Staff and, at the August 1 meeting, the Subcommittee developed additional objectives for the Solar Portfolio Standard and slightly modified the wording of the original Staff objectives:

REVISED OBJECTIVES OF THE SOLAR PORTFOLIO STANDARD

Encourage the use of solar electric technologies to increase the fuel diversity in the electricity generation mix.
Increase utility and electric service provider expertise and experience in the procurement, installation, and operation of solar electric systems or in the purchase and transmission of solar electricity from other sources.
Encourage new solar electric technologies as a reasonable percentage of competitive retail electric sales that is significantly less than the annual growth of demand for electricity.
Encourage the use of modest-sized, distributed solar generators to reduce the loading on existing transmission lines and also reduce the need to build new, expensive transmission lines as the demand for electricity increases in the future.
Contribute to the commercialization of solar electric technologies, which will decrease the cost of solar electricity to Arizona customers in the future.
Contribute to economic benefits throughout Arizona.
Encourage environmental benefits.
Encourage a market-based solar electric industry.
Increase public information/awareness of solar electricity.
Reach an acceptable cost/benefit point.
Encourage solar resource development, rather than payment for non-compliance.

C. Suggested Changes to the Solar Portfolio Standard:

Subcommittee members were asked to suggest ideas for changes to the Solar Portfolio Standard. The following suggestions were made by various Subcommittee members:

Arizona Electric Power Cooperative, Inc. (AEPCO) said that the Solar Portfolio Standard is unduly burdensome and that both AEPCO and its members should be excluded from the requirements. AEPCO and its members do not need any new generation until after the turn of the century. The cooperatives are non-profit and member-customer owned, who have no shareholder venture capital to invest in expensive excess capacity. AEPCO does not believe an investment in solar resources according to the SPS timetable would benefit the member-customers that the member-owner cooperatives serve. AEPCO proposed, as an alternative, a portfolio standard that could be phased in as new generation resources are needed to serve the retail competitive load. It should also be noted that, as a precedent, the Nevada Legislature in its competition rules exclude cooperatives from its SPS.

Arizona Public Service Company (APS) suggested that the Solar Portfolio Standard should encourage the local economic development of the solar industry. APS suggests the establishment of a "wires" charge of 30 cents for each solar kWh required for the solar standard, which can be offset, i.e. reduced, by 30 cents for each solar kWh actually provided by the ESP. This avoids the problems with penalties, and assures that the money will be spent on solar and encourage competition to purchase solar energy in the market at the least price available below 30 cents. The charges for solar kWh requirements that are not offset by the ESP would be paid to the regulated "wires" companies for them to purchase solar kWh, or install solar to meet the kWh requirement. If the cost of solar kWh to the "wires" companies exceeds 30 cents, the companies would obtain the maximum Kwh possible with the funds. The wires companies would resell the solar kWh and use the revenues to offset or reduce wires charges in the future. This approach would also provide a limit to the cost of the SPS. The .5% portfolio requirement should be kept until 2003 and increased by .1% each year thereafter, until reaching 1% in 2008. A 2-times credit should be given for solar kWh from equipment manufactured and installed in Arizona. The double credit should be good for five years and apply to plants installed through 2008.

ElectriSol Ltd. recommended minor modifications in the gradation of the Solar Portfolio Standard over time to produce (in conjunction with the major step increases in eligible customers in 1999, 2001, and 2003) a more gradual solar increase over years and increasing above 1% in later years. SPS % suggestions were: 1999: .5%; 2000: .75%; 2001: .5%; 2002: .75%; 2003: .5%; 2004: .75%; 2005: 1%; 2006: 1.25%; 2007: 1.5%.

The Arizona Solar Energy Industries Association (ARISEIA) recommended that solar water heaters be included in the Solar Portfolio Standard.

KJC Operating Company recommended that the Solar Portfolio Standard not be limited to modest-sized solar installations. KJC feels that the SPS % should be increased to 1% in 1999 and, after that, increased by at least .5% per year for at least five years.

The Land and Water Fund of the Rockies suggested that a way needs to be found to allocate penalty monies to the installation of solar equipment, possibly in conjunction with the System Benefits Charge programs, rather than having the penalties go back to the General Fund.

Solel Solar Systems Ltd. said that there is a minimum "critical mass" for solar projects of 30-35 MW.

Entech, Inc. suggested rule clarification that would "grandfather" solar systems already installed or solar electricity already contracted for, if the Commission decided at a later date to drop the SPS requirement. This would avoid stranded solar investment.

A Tucson Electric Power Company (TEP) representative suggested starting with a lower SPS % of 1/4 of 1%, increasing to 1/2 of 1% in 2003, 3/4 of 1% in 2005, and 1% in 2007, assuming that the competitive phase-in currently contemplated by the Rules were to be changed in favor of a flash-cut (i.e., 100% competition starting at once) in 2001. TEP suggested adding a credit for solar "Competitive Suppliers" who own or invest in solar manufacturing, system integration, or similar businesses in Arizona. TEP also suggested double credits for early installations.

Enron presented a detailed proposal that would incent parties to enter into power purchase agreements of various terms. To hedge pricing risk associated with such contracts, Enron outlined a series of incentive credits for generated kWhs with larger credits for longer power purchase agreement terms. To the extent that the market share fluctuations and incentive credits create shortages/surpluses of kWh credits, Enron proposed allowing the trading of credits. Enron also recommended that the penalty should be increased to 50 cents per kWh to discourage participants from simply deciding to pay the lower 30 cent penalty. Given the reluctance of energy providers to enter into long-term agreements, the higher prices of "spot" or short term solar energy make the current penalty more appealing than a penalty should be. Enron further recommended that any penalty funds be used to buy down the consumer cost of purchasing distributed solar generation, including solar rooftop systems. To enhance the economic appeal of these rooftop systems, Enron proposed that legislation promoting net metering at retail rates be implemented. Enron believes that the Solar Portfolio Standard should not include DSM, energy efficiency, or other renewable technologies. Enron also recommended that certain technical solar standards and a certification of solar facilities be met by all solar providers.

Both Boeing and York Research Corporation recommended keeping the Portfolio Standard as originally adopted.

Stirling Energy Systems, Inc. recommended that the 1% requirement should be gradually increased to 5% by January 1, 2008.

ASARCO, BHP Copper, Cyprus Climax Metals, Phelps-Dodge, and the Public Interest Coalition on Energy (the Mines & Coalition) object to the imposition of the solar portfolio mandate. The Solar Portfolio mandate will hamper the implementation of retail competition by increasing retail prices and by adding supply-risk to the provision of competitive resources.

D. Spreadsheet Analyses of Solar Options

Thanks to funding from the National Renewable Energy Laboratory (NREL), a consultant to NREL, Pacific Energy Group, was able to develop a sophisticated spreadsheet tool to evaluate five options that had been suggested for the Solar Portfolio Standard. A representative of Pacific Energy Group (PEG) made a presentation to the Subcommittee at the August 27 meeting. Based upon input from the Subcommittee, PEG refined the spreadsheet and it was e-mailed to Subcommittee members on September 4, 1997. (See Appendix A for the Major Findings of the Report from the Pacific Energy Group.)

E. Energy Efficiency and Renewable Energy Economic Development Impact Study

Several Subcommittee members attended a workshop presented by Economic Research Associates that described the results of a study jointly funded by the National Renewable Energy Laboratory, the Land and Water Fund of the Rockies, and the Arizona Department of Commerce Energy Office. The Study called Arizona Energy Outlook 2010: Energy Efficiency and Renewable Energy Technologies as an Economic Development Strategy presents a scenario that recommends a $4.8 billion cumulative investment for energy efficiency and renewables for years 1998-2010. Such an investment, representing less than .3% of Arizona's cumulative GSP for the period, would result in energy bill savings of almost $2 billion, generates a positive benefit-cost ratio of 1.92 and creates 11,100 new jobs. (See Appendix B for the Executive Summary of Arizona Energy Outlook 2010.)

American Hydrogen Association

Mike Loomis

Amoco/Enron Solar Power Development

Jeffrey Golden, Chad Small

Amonix

Vahan Garboushian

Annan, Robert

Robert "Bud" Annan

AZ Department of Commerce, Energy Office

Stephen Ahearn

AZ Electric Power Coop. (AEPCO)

Karen Fenzi, Cliff Cathers

AZ Public Service Co. (APS)

Barbara Klemstine, Herb Hayden, Ed Fox

AZ Solar Energy Ind. Assn. (AriSEIA)

Michael Neary

ASARCO, BHP Copper, Cyprus Climax Metals, Phelps-Dodge, & Public Interest Coalition on Energy (Mines & Coalition)

Kirsten Dyk

Bechtel

Ray Draker

Boeing

Andrew Perez, Dale Rogers

Center for Energy Efficiency and Renewable Technologies (CEERT)

James Caldwell, Jr.

Conservative Energy Systems

Jim Combs

Electrisol Ltd.

Lee Tanner

Enron

Lyndon Taylor, Janel Guerrero, Mona Petrochko, Elliot Mainzer

ENTECH Inc.

Robert Walters

KJC Operating Company

Gilbert Cohen

Kearney and Associates

David Kearney

Land & Water Fund of the Rockies (LAW Fund)

Rick Gilliam, Sam Swanson

Nordic Power

Andy Baardson

P G & E Energy Services

Tom Broderick

Phasor

Tom Lepley

Photocomm, Inc.

Michelle Hart, Julie Lanning, Mike Davis

Photovoltaic Resources International (PVRI)

Bill Kaszeta

PowerMark

Steve Chalmers

Progressive Solar

Gale Proski-Marsland

Residential Utility Consumer Office (RUCO)

Deb Scott

Salt River Project (SRP)

Jana Brandt, Jan Miller, Ernie Palomino

Science Applications Intern. Corp (SAIC)

Barry Butler

Solar Energy Industries Association (SEIA)

Mac Moore

Solel Solar Systems

Avi Brenmiller, Israel Krozier

Stirling Energy Systems

Harry Braun III

Tucson (City)

Vinnie Hunt

Tucson Electric Power Company

David Lamoreaux, Rick Mack

United Solar Systems Corporation (USSC)

Larry Slominski

York Research Corporation

Alphonse Bellac

AZ Corporation Commission Staff

Ray Williamson, Prem Bahl, Roland James

Invited Speakers

Christy Herig (NREL), Craig Tyner (Sandia), Howard Wenger (Pacific Energy Group)

III. MAJOR AREAS OF AGREEMENT

In its deliberations, the Solar Portfolio Standard Subcommittee developed some major areas of agreement.

A. ISSUE:
Changing the Penalty Provision in the Standard. The Subcommittee agreed that the penalty provision in the rule was inappropriate, as written. As written, the penalty funds would not ensure the installation of any new solar electricity projects. The penalty funds would return to the General Fund of the State of Arizona. This would not promote the widespread use of solar electric technologies by electric service providers as intended by the Solar Portfolio Standard. The Subcommittee agrees that the penalty wording should be changed to a mechanism whereby the penalty funds are utilized to install solar electricity systems in Arizona. (There is no agreement on how the penalty should be handled. See Issue F. in the next section.)

B. ISSUE:
Incentives. The subcommittee agreed that the Solar Portfolio Standard should include incentives of some type to encourage the electric service providers to take actions which will better meet the objectives of the solar portfolio standard. There is general agreement that the incentive in the existing rule is not substantial enough to encourage a significant number of early solar installations.

C. ISSUE:
Banking and Trading of Solar kWh. The Subcommittee agreed that Electric Service Providers should be allowed to "bank" or save up any extra (that is, above the annual portfolio requirement) solar kWh produced in a year for use in later years. The Subcommittee agreed that excess solar kWh should be tradable commodities that may be sold to other interested parties.

D. ISSUE:
Cost Reduction Incentive. The Subcommittee agreed that the cost of the Solar Portfolio Standard should be limited to an acceptable cost/benefit point, and a cost-reduction incentive should be provided to protect Arizona consumers from increasing solar purchases if lower-price objectives are not met. A kWh cost-impact cap could be set to insure that costs must decline in order for solar installation rates to increase. If the kWh cost-impact cap is broadly accepted and achieved, it could help provide a reasonable expectation for the solar industry that the Solar Portfolio Standard requirement would remain or could even increase. This range and the related assumptions and uncertainties would need to be considered in determining an acceptable cost-impact cap. Other measures such as the average solar installed cost and performance should be monitored as well. The Subcommittee agreed that the Commission should establish a mechanism to develop the cost-impact cap and decide on a date when the costs of solar electricity is to be compared to the cost-impact cap. This "decision point" would be used by the Commission to determine if the Solar Portfolio Standard percentage should change.

IV. MAJOR AREAS OF DISAGREEMENT

A. ISSUE:
Allowable Technologies in the Solar Portfolio Standard Definition. The issue is whether the Solar Portfolio Standard definition should be expanded to include renewables other than solar electric systems. Some Subcommittee members suggested including other renewable technologies, such as wind, biomass, or geothermal, in the definition. Representatives of the Arizona Solar Energy Industries Association suggested expanding the definition of solar equipment eligible for the Solar Portfolio Standard by adding the following wording to the definition: "or displace electricity by active or passive solar thermal energy technologies."

Majority Opinion:The Solar Portfolio Standard definition should stay as it is: requiring the use of solar electric technologies. This will increase fuel diversity in the electricity generation mix. It will increase electric service provider expertise in using solar electricity systems. By concentrating on four solar electric technologies, the Solar Portfolio Standard will contribute to the commercialization of those four technologies in a major way. This concentration will lead to manufacturing expansions which will reduce the future costs of electricity produced by solar. Focusing on solar electric technologies is more consistent with the business in which electric service providers operate. The "portfolio" to which the standard refers is the provision of electricity. Adding a long list of other "renewable" technologies would dilute that commercialization effort.

Renewables other than solar electricity, such as wind or solar water heating (SWH), should not be included in the SPS. Wind resources are not widely available in Arizona, and are poorly matched in time and location to the daily and seasonal electric load of the state. Wind is already in large scale use and is well supported in other states that have more wind resources. Water heating provides thermal energy which is a totally different product than electricity, measured in thermal BTUs which have a much lower value and cost than electric kWh. Solar water heaters are devices that normally must be installed as part of a customer's water plumbing and heating system and their cost-benefits are better handled by companies that sell equipment and services for energy savings. Finally, it was recognized that there was another mechanism in the rules, the System Benefits Charge, that allows the use of all other renewable technologies that were suggested for inclusion in the definition. The majority felt that the System Benefits Charge was the proper mechanism to encourage solar water heaters and other renewables. Any incentives for wind, solar water heating or other renewables should be considered separately, under the System Benefits Charge. (ElectriSol, Tucson Electric, R. Annan, Boeing, LAW Fund, Enron, Stirling Energy Systems, Arizona Public Service Company, USSC, KJC Operating Company, PVRI, PowerMark, City of Tucson, American Hydrogen Association)?

Dissenting Opinion(s): Solar water heating should be included as part of the Solar Portfolio Standard. Solar water heating does produce BTUs, which can be expressed in electric terms by the following simple formula: 3250 BTUs = 1 kwh. Meters are available that make this calculation. Like other solar technologies, the cost of solar water heating would decrease significantly if used on the scale expected to be created by the SPS. Unlike other solar technologies, solar water heating panels are presently manufactured in Arizona and other manufacturers have indicated that they would open facilities here if solar water heating were included in the SPS. Solar water heating is by far the most economical solar technology. A standard solar water heater, which costs approximately $2,500 offsets as much electricity in a year as $20,000 photovoltaic would. That is obviously a substantial difference.

Unlike the other solar technologies, such as central receiver, Stirling dish, or central station photovoltaic, solar water heating will be located at the home of the residential user instead of a remote location. At this home location, it will produce a direct observable benefit to that consumer immediately. In addition, the "majority opinion" is seriously compromised since those who comprise the majority stand to lose financially if it is included. The only winners would be residential users. It gives them five to ten times the amount for their money. The only state with similar conditions with a Solar Portfolio Standard, Nevada, included solar water heating in its renewable standard. (Arizona Solar Energy Industries Association, Entech, York Research Corporation, AEPCO, Conservative Energy Systems, SAIC, Solar Energy Industries Association, Bechtel)

Individual Dissenting Opinion(s):

A provision for solar water heating and other renewable technologies could be incorporated after the year 2003, assuming there is an increase of an additional 4% of the total electrical power generation for renewables in Arizona. (Stirling Energy Systems, American Hydrogen Association)
Pacific Energy Group joins with the dissenting opinion under the following conditions: If solar water heating were allowed in the SPS, then:
It should be allocated a maximum percentage of the SPS to address concerns of diluting commercialization efforts of competing solar electric technologies. We suggest a maximum percentage of 15%. This does not mean that 15% of the SPS is reserved for solar water heating, it means that solar water heating is eligible to fulfill up to 15% of the SPS on a per Energy Service Provider basis;
The definition of eligibility should be more strictly defined. For example, replace the dissenting opinion language to read, or solar hot water systems that directly displace electricity used to heat water; and
Solar hot water systems that qualify under the SPS shall not be eligible for other funds resulting from restructuring, such as a system benefits charge, only if other technologies such as troughs, towers, dishes, and PV are similarly ineligible. (Pacific Energy Group)

B. ISSUE:
Solar Portfolio Standard Percentage and Timing. The issue relates to the size of the Solar Portfolio Standard percentage and how that should change over time. Some feel that the percentage is too high in the early years, when solar is more expensive. Others feel that the timing of the phase-in should be extended.

Majority Opinion: The majority of the Subcommittee members believe that either the percentage should be changed, or, by the use of multiple-credit incentives, the "effective percentage" should be reduced. (The "effective percentage" idea relates to the idea that a double credit, for instance, will effectively temporarily reduce the percentage to one-half of the required amount, though the full amount would be built after the credit expires. ) There is no majority agreement on what the percentage should be. There also is no majority agreement on when the percentage should be increased.

Some of the suggested changes mentioned are:

Mixed Opinions:

The .5% portfolio requirement should be kept until 2003 and increased by .1% each year until reaching 1% in 2008. (Arizona Public Service Company, AEPCO, Tucson Electric)
If there is a delay in the percentage increase, there should be a commensurate increase in the percentage above the 1% amount to compensate for the resulting delay in adding new solar resources. There should be minor modifications in the gradation of the Solar Portfolio Standard over time to produce (in conjunction with the major step increases in eligible customers in 1999, 2001, and 2003) a more gradual solar increase over years and increasing above 1% in later years. SPS % suggestions were: 1999: .5%; 2000: .75%; 2001: .5%; 2002: .75%; 2003: .5%; 2004: .75%; 2005: 1%; 2006: 1.25%; 2007: 1.5%. (ElectriSol, Bechtel)
The SPS % should be increased to 1% in 1999 and increased by at least .5% per year for at least five years. (KJC Operating Co.)
Starting with a lower SPS % of 1/4 of 1%, increasing to 1/2 of 1% in 2003, 3/4 of 1% in 2005, and 1% in 2007, assuming that the competitive phase-in currently contemplated by the Rules were to be changed in favor of a flash-cut in 2001. (Tucson Electric, AEPCO)
The 1% requirement should be gradually increased to 5% by January 1, 2008. (Stirling Energy Systems, Inc., American Hydrogen Association)
The percentage requirements, as stated in the Solar Portfolio Standard, should remain in place although effective percentages would be adjusted by any approved credit incentive. (Enron)
Changing the effective SPS percentage phase-in and/or the ultimate percentage appears to be prudent to optimize the success of the Solar Portfolio Standard. However, it is not prudent to change the SPS percentage and timing until it is known whether or not Salt River Project is a full participant of the SPS. (Pacific Energy Group)
The SPS percentage should be increased and ramped up to respond to national renewable portfolio standards. (Science Applications International Corporation)

Dissenting Opinion(s):

Some members of the Subcommittee felt that the Solar Portfolio Standard percentage and timing should remain as written in the rules. No change is needed. (Boeing, York Research Corporation, R. Annan, LAW Fund, Solar Energy Industries Association, USSC, City of Tucson)
The Mines and Coalition do not support the mandate of the Solar Portfolio Standard; but if the Solar Portfolio Standard is implemented, we do not support any increase in the SPS percentage requirements currently mandated by the ACC rule. (Mines & Coalition)

C. ISSUE:
Incentives.

Majority Opinion: The majority of the Subcommittee members agree that some sort of incentives should be incorporated into the Solar Portfolio Standard. The majority agree that two different incentives should be offered: one incentive to encourage early installation of solar electric systems and another incentive to encourage solar economic development in Arizona:

Early Installation Extra Credit Multiplier: For new solar electric systems installed and operating prior to December 31, 2003, electric service providers would qualify for multiple extra credits for kWh produced for five years following operational start-up of the solar electric system. The five-year extra credit would vary depending upon the year in which the system started up, as follows:

The Early Installation Extra Credit Multiplier would end in 2003.

Solar Economic Development Extra Credit Multiplier: There are two equal parts to this multiplier, an in-state installation credit and an in-state content multiplier.

In-State Power Plant Installation Extra Credit Multiplier: Solar electric power plants installed in Arizona shall receive a .5 extra credit multiplier.

In-State Manufacturing & Installation Content Extra Credit Multiplier: Solar electric power plants that are installed in Arizona shall receive up to a .5 extra credit related to the manufacturing and installation content that comes from Arizona. The percentage of Arizona content of the total installed plant cost shall be multiplied by .5 to determine the appropriate extra credit multiplier. So, for instance, if a solar installation included 80% Arizona content, the resulting extra credit multiplier would be .4 (which is .8 X .5).

All multipliers are additive, allowing a maximum combined extra credit multiplier of 1.5 in years 1997-2003, for equipment installed and manufactured in Arizona. So, for example, if an Electric Service Provider installed a solar power plant in 1999 in Arizona, using 100% Arizona content, which produced 1 million kWh, the ESP would receive credit for 1 million kWh plus extra credit of 1.5 million kWh, totalling 2.5 million kWh.

(LAW Fund, Pacific Energy Group, Bechtel, SAIC, USSC, Enron, Solar Energy Industries Association, KJC Operating Company, Stirling Energy Systems, American Hydrogen Association)

Some of the suggested incentives are:

Mixed Opinions:

The Solar Portfolio Standard should encourage the local economic development of the solar industry. A 2-times credit should be given for solar kWh from equipment manufactured and installed in Arizona. The double credit should be good for five years and apply to plants installed through 2008. Economic development incentives are fully described in Issue D. (Arizona Public Service Company, Tucson Electric, AEPCO, R. Annan, City of Tucson)
Double credits for early installations and credit for competitive suppliers who invest in solar manufacturing, systems integration, or similar businesses in Arizona. (Tucson Electric)
An expanded crediting system which would encourage parties to enter into long-term power purchase agreements. Parties signing long-term agreements (from 5 to 20 years) would receive incentive credits with larger credits for the 20-year agreements and relatively smaller credits for the shorter agreements. (Enron)
Recommends a combination of incentives, such as incentives that encourage economic development and longer-term agreements. The development of these incentives should be in concert with the development of the SPS Percentage and Timing. (Pacific Energy Group, LAW Fund)

Dissenting Opinion(s): Some of the Subcommittee members feel that no changes to the Solar Portfolio Standard are needed. (Boeing, ElectriSol, and York Research Corporation)

D. ISSUE:
Economic Development Incentives.

Majority Opinion: A majority of the committee agreed that the SPS should be modified to enhance its economic benefits for Arizona consumers. The present rule does not contain a mechanism to specifically encourage the long-term development of the Arizona solar industry, or for installations of solar in Arizona. Arizona consumers who subsidize solar under the SPS are likely to expect substantial economic benefits from the resulting development of the solar industry. The majority agreed to a two-part economic development incentive (as shown in Issue C.) that offers incentives for in-state power plant installation and in-state solar equipment manufacturing. (Arizona Public Service Company, ElectriSol, Bechtel, Tucson Electric, R. Annan, York Research Corporation, AEPCO, Stirling Energy Systems, SAIC, USSC, Enron, City of Tucson, KJC Operating Company, American Hydrogen Association)

Additional opinion(s):

Credit for competitive suppliers who invest in solar manufacturing, systems integration, or similar businesses in Arizona. TEP suggests that a Competitive Supplier should be entitled to receive a credit against the Solar Energy Requirement if the Competitive Supplier owns or otherwise makes an investment in any solar energy-related manufacturing, systems integration, or other similar business enterprise for which physical facilities are located in the state of Arizona. TEP proposes that any such credit against the Solar Energy Requirement will be equal to the amount of nameplate capacity produced in a calendar year times 2,190 hours (based on an assumption of 25% capacity factor for solar energy generation). Any assumptions and standards related to the determination of the Solar Energy Requirement could be adjusted by the Commission from time to time to reflect changes in the cost and operation of solar technology and related market conditions. (Tucson Electric, Bechtel)
Pro-rata credit for Arizona content. Allow a credit to apply toward Arizona construction content for central station. (Bechtel)
The SPS should be modified to provide economic development incentives that will more directly benefit Arizona. Particularly, incentives that promote the installation of systems in Arizona are viewed favorably. The approach proposed that includes a determination of Arizona content merits consideration, however, there is concern that it may prove to be overly burdensome to administer. The development of these incentives should be in concert with the development of the SPS Percentage and Timing. (Pacific Energy Group)

Dissenting Opinion(s): Some Subcommittee members believe that the Solar Portfolio Standard is not an appropriate place to have economic development incentives. Manufacturers will make plant location decisions based on other considerations and not on market issues such as those in the Portfolio Standard. (Boeing, Solar Energy Industries Association)

E. ISSUE:
Protection for Electric Service Providers in Case of Future Commission Changes in the Portfolio Standard Requirement. One of the major barriers to the Affected Utilities and Electric Service Providers meeting the Solar Portfolio Standard is that, in the future, the Commissioners may decide to change or eliminate the Solar Portfolio Standard. This might leave the early participants at a competitive disadvantage.

Majority Opinion: A rule clarification was suggested that would "grandfather" solar systems already installed or solar electricity already contracted for, if the Commission decided at a later date to drop the SPS requirement. The majority agreed that some wording should be added to the rules to protect the participants from the adverse affects of a future change in Commission rules to reduce or eliminate the Solar Portfolio Standard. (ElectriSol, Tucson Electric, R. Annan, AEPCO, York Research Corporation, Bechtel, Boeing, LAW Fund, Stirling Energy Systems, Solar Energy Industries Association, SAIC, USSC, KJC Operating Company, American Hydrogen Association)

Dissenting Opinion(s): The ACC Rule clearly presents the definition of stranded cost "as the value of all the prudent jurisdictional assets and obligations necessary to furnish electricity...acquired or entered into prior to the adoption of this Article, under traditional regulation of Affected Utilities. Alone, this definition should provide reason to reject any proposal to recover future stranded solar investment.

Additionally, the current amount of stranded cost recovery imposed by the ACC Rule is burden enough to customers. Imposing future increases in stranded cost recovery will continue to impede pure competitive pricing for customers. Furthermore, the assurance of future recovery of stranded costs associated with solar investments can lead to imprudent solar investment on the part of the ESPs, which the customers will be responsible for subsidizing if stranded costs are imposed.

Ultimately it will be all customers that will be negatively impacted if future solar stranded investments are allowed to be recovered. We do not support a mechanism which will impose additional costs to competitive electricity prices as a result of stranded investment in solar facilities. ( Mines & Public Interest Coalition on Energy, Enron)

F. ISSUE:
Details of the Penalty in the Standard. Although there was majority agreement that the penalty wording in the rule should change, there was no general agreement in how the penalty monies should be used or what the penalty level should be. Some of the ideas suggested were:

Mixed Opinions:

Increasing the penalty to 50 cents per kWh to discourage participants from simply deciding to pay the lower 30 cent penalty deserves consideration since energy providers are unlikely to enter into long-term contracts that would offer energy pricing well below the current penalty level. While it is understandable that the Commission would like to set limits on solar power pricing in order to minimize the rate impact on consumers, the penalty is not the optimal mechanism to achieve this goal. Instead, the Commission should evaluate the various pricing scenarios that may occur if energy service providers buy spot solar power versus if they enter into longer term contracts and establish target prices for solar power over time.(Enron, ElectriSol, Boeing, LAW Fund)
The penalty funds should be allocated to the System Benefits Charge to be used to purchase solar electricity for public schools or other public facilities. (LAW Fund, City of Tucson)
The funds should be given to "wires" companies to be used to purchase solar electricity or install solar electric systems. (Arizona Public Service Co., Tucson Electric, York Research Corporation, AEPCO, SAIC, LAW Fund)
The penalty funds go into a "solar fund" to be used for a consumer-based program to foster the development of solar technologies in small-scale, distributed generation applications. The fund approach could be similar to California's emerging technology fund that is resulting from restructuring. The fund should provide monetary rebates, buydowns, or equivalent incentives, to purchasers, lessees or lessors of eligible solar electric systems. (Pacific Energy Group, LAW Fund)
SEIA agrees with the concept that penalty funds should be used to fund a solar deployment trust fund. SEIA does not agree with any of the mixed options. (Solar Energy Industries Association, KJC Operating Company)

Dissenting Opinion(s):

Some organizations are firmly against increasing the penalty levels. ( Mines & Public Interest Coalition on Energy, Bechtel, Stirling Energy Systems, American Hydrogen Association)
Leave the penalty as written in the rule. (R. Annan)

V. RECOMMENDATIONS TO THE WORKING GROUP AND COMMISSION

The Subcommittee recommends that the revised Objectives of the Solar Portfolio Standard as agreed upon by the Subcommittee and included in this report be incorporated into the rules to clarify the purpose and future implementation of the Standard.

The Subcommittee recommends that the penalty be changed to a mechanism whereby the penalty funds are utilized to install solar electricity systems in Arizona.

The Subcommittee recommends that the Solar Portfolio Standard include incentives of some type to encourage the electric service providers to take actions which will better meet the objectives of the solar portfolio standard.

The Subcommittee recommends that Electric Service Providers be allowed to "bank" or save up any extra (that is, above the annual portfolio requirement) solar kWh produced in a year for use in later years.

The Subcommittee recommends that excess solar kWh should be tradable commodities that may be sold to other interested parties.

The Subcommittee recommends that the cost of the Solar Portfolio Standard should be limited to an acceptable cost/benefit point, and a cost-reduction incentive should be provided to protect Arizona consumers from increasing solar purchases if lower-price objectives are not met. The Subcommittee recommends that the Commission establish a mechanism to develop the cost-impact cap and decide on a date when the costs of solar electricity is to be compared to the cost-impact cap. This "decision point" would be used by the Commission to determine if the Solar Portfolio Standard percentage should change.