In a stunning development, Hawaii Public Utility Commission ruled , without any notice, that Hawaii's Net Metering program has come to an end. Investors who are not policy wonks can read an abbreviated summary here.
This ruling caps the Net Energy Metering program in HECO (NYSE:HE) territory at existing levels, including current NEM customers and those customers with applications pending in the queue at time of this Order. Under this Order, current NEM customers and new customers with NEM applications submitted by 10/12/15 are unaffected are grandfathered.
However, for customers who do not get grandfathered, i.e., all new customers, the rules change dramatically. The Order creates 3 new options for customers who wish to invest in rooftop solar and other distributed energy resources. These options are:
- Self-Supply systems: This option is for customers who intend to consume all of the energy produced by their solar system onsite at their home or business, and do not need to export excess energy to the grid. These systems will typically be designed to use energy storage and management to balance onsite generation with demand. This scenario, while a possibility for a small subset of customers is a non-starter for most utility customers due to the high cost of current battery systems.
- Grid-Supply systems: The option will allow customers to export excess energy to the grid as needed, and customers will receive energy credits on their monthly bills, similar to the NEM program. The Grid-Supply option also reduces the credit rate for energy exported to the grid for participating customers. Residential customers using this option will also need to pay a minimum monthly bill of $25. Commercial customer minimum bill is set at $50. This scenario is likely to be far more economical to many users than deploying self-supply systems. We expect this to be most popular solar deployment option in the near future. However, given the reduction in credit rate for exported power and the minimum bill, the payback period under this scenario will substantially longer than what was possible prior to this ruling took effect. While it will take some time for the data to come in, we expect that solar installations in Hawaii will likely plummet by 90% under this deployment model.
- Time-of-Use tariff: The Commission has also directed the HECO Companies to develop a new, expanded time-of-use tariff that allows customers to save money by shifting energy demand to the middle of the day to take advantage of lower-cost solar energy. Initially, this tariff will be available for any residential customers that opt-in to the program. By sending the right price signals to customers, customers can increase energy demand during times of high solar supply and alleviate some of the grid constraints to further renewable integration. This landmark observation means that utilities now not only realize that intermittent solar energy is worth *less* than dispatchable energy but sending a message to consumers about this fact.
Investors must not underestimate the impact of this ruling and the options. Each of these options is a seismic shift for the solar industry. The combined impact of these changes is as follows:
- Utilities across the US now have a precedent from Hawaii PUC on an enlightened rate structure in the emerging solar energy world.
- This ruling will dramatically reduce the subsidy driven uneconomical rooftop solar penetration in Hawaii - likely by about 90%
- With California Net Metering hearings in progress, we expect Hawaii PUC decision will have considerable impact on the dialogue and decision makers. If California goes the Hawaii route, it is likely curtains for the residential solar industry players SolarCity (SCTY), SunRun(NASDAQ:RUN), and Vivint Solar (NYSE:VSLR). Also impacted negatively would be RGS Energy (NASDAQ:RGSE), SunEdison (SUNE), SunPower (NASDAQ:SPWR) and NRG Energy (NYSE:NRG).
- By going to self-supply systems, utilities will be slowly but surely encouraging the growth of the battery industry. While the short term impact is likely to be minimal, long term this could benefit battery players like Tesla (NASDAQ:TSLA)
- By going to TOU tariffs and openly stating that solar energy is likely going to be cheaper during day time, the Utility has fundamentally changed the calculus on peak time pricing as well as value of non-dispatchable solar energy. Uninformed customers signing long term leases based on the false assumption of every increasing energy prices will wake up and realize they have signed bad leases.
- Utilities and PUCs are wisening up to the practice of installers to speed up installations ahead of a deadline and are moving to making rulings without any grace period. Investors can expect more of this type of surprise announcements in the future.
From a solar installer industry perspective, we expect to see two actions:
- Try hard to reverse PUC course in Hawaii - we find the likelihood of success in this regard low
- Try to convince California PUC and other PUCs where net metering is under review that Hawaii changed rules when solar penetration reached 12% and that other PUCs should also wait for a while before they take Hawaii's path. We believe this argument may hold some sway especially in solar supportive states such as California where PUCs have largely accommodated solar interests.Investment Thesis:
The value of residential installers like SolarCity is currently in the stratosphere based on completely unsupportable assumptions. We expect Hawaii decision to result in retrenchment for all the major players and effect the growth forecast of all residential players for 2016.
If the Hawaii thinking about Net Metering and energy prices were to spread to California, and we believe there is a good chance this will happen, most of the residential installers will become nearly worthless overnight. Given the regulatory history, it is possible that the NEM actions in California, while negative to the industry, could be far more favorable to solar interests than what we see in Hawaii.
However, if California goes Hawaii CPUC route in terms of the rate structure, we see at least a 60% downside to SolarCity and a 90% downside to SunRun. Vivint Solar would have a 90% downside but stockholders would have a protection as long as SunEdison goes through with the acquisition. Other players, with more moderate exposure to Hawaii and California residential, will also see some downside.
Disclosure: I am/we are long SUNE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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