The incentives offered by Arizona’s electric utilities have spurred their customers to install photovoltaic systems, which helps the companies comply with a mandate for renewable energy distribution. The incentives are renewable energy certificates, which are purchased by utilities from customers producing energy. But the RECs may soon become unnecessary – at least for the residential market – because the cost of producing PV energy is sinking towards parity with the cost for grid power.

This rapidly approaching reality is raising a tricky question: how will utilities demonstrate their compliance with the state’s renewable energy mandate without RECs?

Under the Renewable Energy Standard and Tariff, all utilities regulated by the Arizona Corporation Commission (ACC) are required to confirm their renewable energy distribution by purchasing and retiring RECs. Adopted in 2006, REST requires utilities to source 15% of their energy portfolios from renewable sources by 2025 – with 30% of the total sourced from distributed generation (DG).

“Arizona is probably the first state that’s reaching a point where incentives won’t be needed,” Lori Singleton, Salt River Project

The 2012 milestone is 3.5% of total retail distribution, and it’s expected that every Arizona utility will meet or exceed that goal. However, as the cost of PV hardware has declined and PV demand has increased, the utilities have lowered their REC payments. For example:

•Tucson Electric Power (TEP), which has 404,000 customers, was paying $3.00 a watt in 2007; it’s now paying 20¢. (The number of TEP ratepayers behind the meter was unavailable.)

•APS), which has 22,500 ratepayers behind the meter (out of 1.2 million), was paying $3.00 per watt in 2007: it’s now paying 20¢.

•The Salt River Project, a quasi-municipal utility which isn’t regulated by the ACC, is paying its 5,700 behind-the-meter ratepayers (out of 950,000) 40¢ a watt. Prior to REST, Salt River had been paying $3.00.

“Arizona is probably the first state that’s reaching a point where incentives won’t be needed,” Lori Singleton, director of Program Operations and Emerging Customer Programs for SRP, told Breaking Energy. “All of the state’s utilities are looking at this issue and thinking about how to go forward in the future.”

Some of those possibilities were spelled out in the utilities’ compliance plans for 2013. TEP, which didn’t express a preference for any particular option, said one approach would be eliminating the requirement to retire RECs to demonstrate compliance; another option would be requiring ratepayers producing power behind-the-meter to “surrender all credits” to the utility.

In the plan filed by APS, the utility said “it is not clear how APS will continue to acquire RECs,” and requested permission to demonstrate its compliance by “tracking and recording” DG production.

REC Retirement is a Contentious Issue

The ideas from TEP and APS are controversial. In its comments to the ACC, the Renewable Energy Markets Association argued that acquiring “the inherent value” of RECs without paying for them “constitutes a government taking of private property.”

REMA also argued that allowing utilities to use RECs for compliance purposes would prevent ratepayers from selling the RECs elsewhere. That’s because “once a REC is used for renewable-portfolio-standard compliance it has to be retired,” Jeff Swenerton, communications director for the Center for Resource Solutions, told Breaking Energy. “A REC can only go to one entity.”

But SRP has a counter-argument; namely, that net metering itself incurs costs. That’s because “we’re buying the distributed generation at retail prices, so we lose the opportunity to recover our fixed costs,” Chico Hunter, principal analyst in SRP’s Resource Planning and Development Department, told Breaking Energy. “There is value to what we’re providing [through net metering] and that’s an incentive in itself.”

Lon Huber, Arizona lead for the Solar Energy Industries Association, counters that assertion. “The claim that there’s an incentive embedded in net metering is not as straightforward as some make it appear,” Huber told Breaking Energy. “Studies, including one conducted for APS, show that the value of DG solar can surpass retail rates, especially for some commercial customers.”

Because SRP isn’t regulated by the ACC, the utility didn’t have to submit a compliance plan. SRP’s Singleton said “we do not have a plan, to date, to stop purchasing RECs.” But the question of REC ownership in scenarios where they are acquired without financial transactions remains open.

In his comments on the track-and-record proposal from APS, Michael Neary, executive director of the Arizona Solar Energy Industries Association, told Breaking Energy that the ownership question has to be resolved “to preserve the integrity of the RECs.

“We’re not sure,” Neary continued, “that a track-and-record system would allow the REC’s to be sold. They might be invalidated. So, our goal for the post-incentive environment would be preserving the integrity of the REC’s so that folks who install solar and participate in net metering don’t have to relinquish their RECs – and have them available to sell if a [state] market develops for them.”

But how would a track-and-record system invalidate a REC? Theoretically, if the ACC counts them up to confirm compliance progress, then the RECs have to be retired – even though the utility itself hasn’t formally submitted them for compliance purposes.

“If the utilities used [unpurchased] RECs as a yardstick to show the commissioners that they’re ahead or behind the targets by some amount, there’s an implicit link to compliance,” Huber said. “That might be enough to invalidate a system owner’s RECs. It’s a slope that gets very slippery very fast.”

Huber also said there isn’t any easy way around the current compliance criteria unless the rule is re-opened, sections are temporarily waived, or a state REC auction is set up. “Each option has its complexities,” he pointed out. “Arizona has so much sun and it has developed its PV market so much that we’re approaching the point where direct cash incentives play less and less of a role. In the long run, this is a good thing, but we have to figure out a path forward that works for all stakeholders and serves as a guide for other REC-based states approaching grid parity.”