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A new California energy bill has vast implications for the solar industry. Although the bill is positive overall from a solar perspective, the proposed rate changes will have some unfortunate side effects.

California currently has a four-tier electricity rate structure, where those who use the most electricity pay the highest rates. Electricity is also more expensive during peak usage hours. This four-tier structure was implemented in 2001, after a series of rolling blackouts, and it has encouraged energy efficiency. With very high electric rates (as high as 35¢ per kilowatt hour) in the top tiers, California quickly became the nation's largest market for distributed solar.

A new energy bill that was passed by the CA legislature on September 12th would throw out that arrangement. Assuming the governor signs off, the "Perea Bill" would trim the rate structure to just two tiers and the majority of customers would end up paying the same rate.

The Perea Bill would authorize the Public Utilities Commission (PUC) to conduct a study and adjust rates across the state. The PUC would also be authorized to charge a flat fee of up to $10 each month, to every customer, in order to cover maintenance of the electric grid. Assemblyman Perea has stated that the initial charge would likely be two to three dollars per month but, of course, that would be up to the PUC to decide. This monthly fee is really at the heart of the solar debate. It is intended to get the owners of distributed solar to pay for their share of grid maintenance. Utilities estimate that solar system owners avoid paying hundreds of millions of dollars worth of grid maintenance every year --and the tab is picked up by their non-solar neighbors. The flat fee will discourage new rooftop solar adopters.

On a positive note, the bill removes a cap on the total number of solar owners who are eligible for net metering payments. Also note that California utilities are required to source 33% of retail electric sales from renewable sources by 2020. Currently, approximately 20% of California's energy comes from renewable sources.

Winners and Losers in California

Assuming the bill is signed, these groups will come out ahead:

  1. Electric utilities can rest assured that grid maintenance costs are covered.
  2. Consumers with large houses, swimming pools, etc., who have very large power bills will see their rates decrease.
  3. Consumers who use significant amounts of air conditioning will see their rates decrease.

The losers will be:

  1. Consumers who use very little electricity may see their rates go up.
  2. Future owners of distributed solar systems will have less of an advantage over grid customers.

Assemblyman Perea references average Joe consumers from the Central Valley region, in particular, when he touts the bill. "When it's 110 for 20 days in Fresno, nobody's turning off their air conditioner," Perea said. "We're never out of the higher tiers." Perea's motives may or may not be benign... My opinion has changed from negative to positive as I considered the long-term impacts. It seems like a fair deal which settles many budding issues. The solar industry has generally embraced the bill, in part, because it removes a great deal of uncertainty from the industry's future.

As I implied above, the bill's impact on the solar industry will be mixed. The national Solar Energy Industries Association, The Alliance for Solar Choice, and the Vote Solar Initiative have all expressed support. SolarCity (NASDAQ:SCTY), the US's largest residential installer, may feel the largest impact. SolarCity's margins will likely be cut as cheaper electricity rates from the grid reduce the advantage of rooftop solar. The monthly flat fee will also discourage new rooftop installations. However, SolarCity CEO Lyndon Rive has expressed support for the measure overall.

The California Solar Energy Industries Association initially opposed the bill because it would have allowed the PUC to retroactively modify the contracts of existing net metering customers. Since then, that provision has been removed, and the governor's office has promised that "a deal is a deal." In other words, existing solar contracts will be locked in. CALSEIA has swung around now to support the bill.

Winners and Losers in the Solar Industry

I believe the Perea Bill will encourage large utility-scale solar installations, because utilities still need to meet the 33% renewable mandate. As new rooftop installations are discouraged by the monthly fee and lower electricity cost from the grid, utility-scale solar will have to step in and provide the extra capacity. That is a shame, because distributed energy production is the most efficient method (i.e. there are no transmission losses).

First Solar (NASDAQ:FSLR), which specializes in utility-scale solar, is a clear winner. Those rooftop solar installers who are heavily exposed to the California market (e.g. SolarCity) may be hit hard by the flat fee and reduced electric rates in the short term, but they will benefit from more net metering in the long term. I predict very little net effect on SunPower (NASDAQ:SPWR) as SunPower is already supply-constrained and quite diversified. If the residential California market becomes more difficult for SunPower in the short term, the company can shift its business to Japan or towards more utility-scale installations.

As a closing note, the average price of a solar system ($/Watt) dropped by 11% in the past year (Solar Energy Industries Association), while the average price of electricity from the grid was projected to increase by 2% (US Energy Information Administration). If this trend continues, expect more finagling over electricity payment schemes from other states in the near future. It is nice to see that solar power is, apparently, already driving lower electric rates for California residents.

Source: Impacts Of California's New Bill On The Solar Industry