Bernstein reflects on Arizona utilities move into distributed solar

The Arizona Corporation Commission (ACC) has endorsed plans by two regulated utilities in the state to invest in the distributed solar market, and a Bernstein Research analyst sees this as evidence of utility resilience in changing times.

Pinnacle West Capital (NYSE:PNW), which is the parent of Arizona Public Service, and Fortis subsidiary Tucson Electric Power (TEP) have recently gotten the commission’s approval to wade into the distributed solar market. The moves were discussed in a Jan. 6 commentary by a Bernstein Research team led by Senior Analyst Hugh Wynne.

Pinnacle West is planning to invest $28.5m in 10MW of residential capacity in its service territory. On Dec. 22, the ACC voted “no objection” to Pinnacle’s proposal, which had been previously modified to address the objections of the ACC staff.

Pinnacle will become one of the first utilities in the United States to invest directly in distributed solar. To address concerns raised by the ACC staff, Pinnacle won’t seek immediate recovery of associated costs through Arizona’s Renewable Energy Standard surcharge. Rather, PNW will recover the program’s costs in a future rate case, and to do so will have to demonstrate the prudence of the investment, likely judged on the basis of its compliance with the state’s Renewable Energy Standard and Tariff.

The Pinnacle program will focus on households with low credit scores, who would not be viable customers for distributed solar providers, Bernstein noted in its analysis.

Pinnacle also scaled back its proposal from 20 MW to 10 MW. “The company intends to contract with local installers to set up the systems, as opposed to the larger, national solar installers active in the state,” Bernstein said.

Meanwhile, the commission also approved the Tucson Electric plan to install less than 4 MW (3.5 MW) of distributed solar on 600 customer roofs. Participants will pay a $250 fee upfront, but then will enjoy a locked-in electricity rate over the next 25 years unless their energy usage changes dramatically.

The fixed-cost aspect of the Tucson Electric program is likely to be attractive to the region’s numerous retirees, Bernstein noted.

If Pinnacle and Tucson are successful, they could widen customer access to rooftop solar generation and potentially reduce its cost, Bernstein said in the analysis. “To date, the growth of distributed solar generation has tended to benefit utilities’ most prosperous customers: business owners and residential customers with high credit scores,” the firm said.

Utilities might also be able to provide access to distributed solar at lower cost than their independent competitors, Bernstein Research said.

“Utilities’ familiarity with their customers’ patterns of electricity use may also allow them also to target those customers that will benefit most from distributed solar,” Bernstein said. “Finally, utilities’ knowledge of the power dynamics of their distribution grids will enable them to situate distributed solar systems in locations that optimize the overall performance of the grid and thus minimize the cost of integrating distributed solar generation.”

“As we’ve detailed previously, we believe solar generation could also become a growth opportunity for utilities, should regulators permit,” Bernstein Research said. “Utilities in areas of high solar penetration are pursuing these opportunities in various ways.”

Until now, however, most utilities have largely avoided direct investment in distributed solar, according to Bernstein Research.

There has also been much debate about whether distributed generation and flat electric demand could trigger a “death spiral” for regulated utilities.

Bernstein Research is affiliated with Sanford C. Bernstein, a leading Wall Street sell-side research and brokerage firm.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at