Fitch: Net energy meeting presents credit challenge for U.S. utilities

The rapidly growing domestic residential photovoltaic (PV) solar system installations and net energy metering (NEM) are potential long-term threats to the creditworthiness of investor-owned utilities (IOUs), Fitch Ratings said July 19.

Fitch said in a news release that it has issued a new report titled “Net Energy Metering: A Secular Credit Challenge for IOUs."

PV solar, primarily rooftop, is a small but rapidly growing portion of U.S. electricity production. Annual residential PV solar installs increased 71% in 2015 and at a 55% CAGR from 2005-2015, Fitch said.

Nonetheless, solar generation, including residential PV solar, represents approximately 1% of 2015 U.S. electricity production, said the ratings agency.

The key to sustaining long-term IOU creditworthiness in the face of rapid distributed generation (DG) growth is modification of volumetric-based tariff design to incorporate a larger fixed charge component, Fitch said.

Failure to address NEM rate design issues could lead to an unsustainable cycle of rising monthly bills for non-NEM customers, incentivizing them to acquire residential DG systems and leading to further rate increases and more departures, according to the ratings agency.

The conundrum for regulators and utilities from an energy policy point of view is facilitating development of distributed PV solar and its clean energy attributes without unduly burdening non-NEM customers with higher bills due to cross-subsidization of NEM customers. NEM customers typically receive credits for exports to the grid at the fully loaded retail tariff and avoid paying fixed costs by way of reduced kWh usage.

“A robust dialogue has emerged in several Sun Belt and other states regarding NEM and its impact on the distributed PV solar industry, utility customers, IOUs and other constituents,” Fitch said. “Decisions with decidedly mixed results have been issued, and proceedings have been initiated and continue in several key states, including California, Arizona, Nevada, New York and Hawaii.”

Rapid growth in residential PV solar is supported by a combination of declining system costs, tax subsidies and feed-in tariffs, Fitch noted.

NEM allows customers with residential PV systems to offset energy purchases from their local utility and export excess power to the grid, receiving credits often at the full retail rate.

“While higher utility power supply costs from DG exports are generally deferred and recovered, lost revenue associated with lower volume is absorbed by the IOU, absent implementation of full revenue-decoupling mechanisms, until completion of a subsequent general rate case filing,” Fitch said.

“Fitch believes the impact of PV solar is manageable within the regulatory compact, based on existing technology, via adoption of tariff mechanisms with appropriately calibrated fixed versus variable cost-recovery mechanisms and avoided cost-based payments for exports to the grid. The emergence of disruptive technology which enables customers to economically and permanently disconnect from the grid in large numbers is, in Fitch’s view, a low-probability risk factor that cannot be ruled out,” the ratings agency went on to say.

“While potential adverse effects associated with residential PV systems are a concern from a credit perspective, they have not directly affected utility sector ratings and appear unlikely to do so in the near to intermediate term, based on existing technology,” Fitch said.

About Corina Rivera-Linares 3286 Articles
Corina Rivera-Linares was TransmissionHub’s chief editor until August 2021, as well as part of the team that established TransmissionHub in 2011. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial from 2005 to 2011. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines.