EMs

Solar
Installation A new trend in US Utilities

January 2015

Solar Photovoltaic installations driving capacity additions in the US

The total power generation capacity installations every year in the US has expanded significantly, led majorly by solar energy sources.
Specifically, solar Photovoltaic (PV) installation has been gaining pace since 2007, contributing ~53% to total capacity additions in the
US in 1H 2014. Within PV, Distributed Generation (DG) capacity increased at a CAGR of over 55% since 2007. A favorable
environment, with declining costs of solar rooftop installation and energy production as well as beneficial regulations including Net
Metering and the SunShot initiative, has further driven this growth. These factors have cumulatively led to growth in solar capacity
installations, both DG and the traditional centralized model of operating solar farms and supplying through the grid. PV installation
capacity is expected to expand at a four-year CAGR of around 48% over 2013-16. However, certain regulatory and legislative
challenges may impede the growth in DG capacity.

Government support and lower costs boost solar electricity installations in the US
Solar energy capacity addition growing at high rate
Solar energy propelling growth of overall electricity generation capacity in the US
Solar electricity generation has been witnessing high growth rate in the US, driven by an increase in affordability and accessibility.
Installed Solar Photovoltaic (PV) capacity in the US rose to over 14,500 megawatts (MW) in 1H14 from just ~140MW in 2004. This
growth has been contributed equally by Distributed Generation (DG) companies (added ~7,100MW to capacity over the period) and
utility companies (added ~7,300MW to capacity). Overall, there has been an uptrend in the contribution of solar electricity generation
compared with other sources since 2012.

Solar energy driving US electricity generation capacity additions

Total Additions

33.7 GW

100%

2%

80%

41%

16.4 GW

20%
0%

3%
14%
0%

8%
7%
10%

30%

60%

40%

4.7 GW

46%

16%

53%

31%
29%
10%
2012
Solar

Natural Gas

2013
Coal

1H 14
Wind

Other

Source: Greentech Media Research, Solar Energy Industries Association, Aranca Research

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Solar
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January 2015

Growth in PV capacity installation resulting in 10-yr CAGR of over 65%

Decline in solar energy system installation costs and an increase in retail utility electricity prices have made distributed generation of
solar energy a viable option for the middle class. As per Lawrence Berkeley National Laboratory, the cost of a DG solar energy systems
has been declining at a CAGR of about 1011% ($4.73.9 per watt over varying capacity ranges) over 2007-2013 due to an increase
in global production of solar panels (creating economies of scale), government incentives and declining raw material costs. On the other
hand, according to EIA, retail utility electricity prices in the US expanded at a CAGR of 3.2% over 200413. Installations of DG solar
energy systems have grown at an annual rate of 56% over 200313 (Source: Solar Energy Industries Association).
Separately, the governments SunShot Initiative aimed at reducing the cost of solar-powered electricity generation across the US, along
with increasing competitive threat from DG, has resulted in utilities adding large, centralized PV systems to their existing generation
portfolios. Overall, PV installation capacity of utilities increased at a CAGR of 93% over 200313.
On a cumulative basis, total PV installations have improved by over 65% CAGR over the 10-year period between 2003-2013. This
growth has been better than the world average of ~49% CAGR, while in-line with the growth in Europe (~63% CAGR) and less than
that of China (~80% CAGR)
Total PV installations grew 59.4% Y-o-Y (2,478 MW) in 1H14 (36% Y-o-Y for 2Q14), mainly driven by the Utility PV market, which
accounted for 60% of the capacity installed in 1H14 (55% for 2Q14). Utility PV installation surged 94.5% in 1H14 (38%), while DG
installations grew 24.8% (34%).
PV installations are expected to remain the largest additions to energy generation capacity, driven by traditional utilities and DG
companies. According to GTM research, PV installation capacity is expected to increase at a CAGR of around 48% (approximately
9,000MW addition per annum) to around 40,000GW over 201316.

Installed Capacity (MW)

Solar PV capacity installations growing at high rate

45,000

55% CAGR over 2013-2016

36,000

41% CAGR over 2013-2016

27,000
18,000
9,000
0
2007

2008

2009

2010

2011

DG PV

2012

2013

2014E

2015E

2016E

Utility PV

Source: Greentech Media Research, Solar Energy Industries Association, Aranca Research

Competitive pricing and cost efficiencies driving the DG business model

DG solar utility companies such as SolarCity Corp and Vivint Solar Inc provide electricity through solar energy systems installed at
customers rooftops, as against the traditional model of supplying electricity through the grid from solar farms (traditional utility model).
Customers sign long-term contracts for solar electricity wherein they can pay DG companies recurring monthly payments for the PV
energy systems, thus avoiding an upfront installation cost. Alternatively, customers may also purchase the systems on loan basis.
Furthermore, customers also benefit from lower monthly bills owing to a phenomenon called Net Metering which reduces tariff by
providing credit to the customers for unused electricity generated.

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Solar
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January 2015

Hence, with low upfront installation payments and running costs, the DG solar energy model helps customers save 1530% in utility
bills over traditional electricity sources. In addition, the business model does not require grids to transmit power to customers, thereby
eliminating grid (transmission & distributions) losses of at least 67% percent, which would have been passed on to the customer in
case of traditional utilities.
In recent times, DG utilities have also started offering battery storage systems that provide power backup in case the utility grid goes
down. The size of a battery unit is similar to that of a solar power inverter, and can be mounted on the wall or near an electrical panel.
DG Utilities also benefit from this business model in the form of long-term contracts (typically for about 20 years) providing revenue
visibility and stable recurring cash flows. In addition, the federal government offers a 30% Investment Tax Credit (ITC) to such
companies under Section 48(a) of the Internal Revenue Code for installation of solar power facilities. However, this tax credit would
reduce to 10% from January 1, 2017.

Decline in generation cost and threat from DG pushing utility companies toward PV installations
The Utility PV segment has emerged from a greenhorn in the solar market to fastest growing sector in the industry. Utilities build large,
centralized PV systems that feed power directly to the grid.
Utilities providing electricity to the US have started considering residential solar systems as a threat. According to a study by Lawrence
Berkeley National Laboratory, if rooftop solar gains 10% of the market share in the next decade, utility earnings could decline by about
41%.
Utilities have also started considering solar energy as a means to reduce costs. Government initiatives have helped lower solar power
generation cost from $0.21 per kilowatt-hour in 2010 to $0.11 per kilowatt-hour in 2013. The falling price of utility PV projects since
SunShots inception has driven major expansions in the segment, with utilities quadrupling their capacities to 7,308MW since 1H2012.

Utility PV Installed Capacity quadrupled since 1H 12

Increasing Average Retail Electricity Prices

c/kwh

Installed Capacity (MW)

11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5

8,000
6,000
4,000
2,000
0

7.0

Residential
2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

6.5

Source: EIA Electric Power Monthly October 2014, Aranca Research

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Non Residential

1H 12

Utility

1H 14

Source: Greentech Media Research, Solar Energy Industries Association, Aranca

Research

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Solar
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January 2015

Regulations and Policies: All you need to know

SunShot Initiative to help lower cost of utility PV generation
In 2011, the Energy Department of the US launched the SunShot Initiative to reduce solar energy cost and make it cost competi tive
compared with other traditional energy sources in the US. Through affiliations with the industry, universities, local communities and the
Departments national laboratories, the initiative is aimed at reducing the cost of solar energy from about $0.21 per kilowatt-hour in
2010 to $0.06 per kilowatt-hour by 2020. The initiative has been successful in reducing the solar energy cost to $0.11 per kilowatt-hour
at the end of 2013 which is below the average US electricity price of about $0.12 per kilowatt-hour (Source: Energy Information
Administration).

Decline in cost of Utility PV Projects

Cost of Electricity (c/kwh)

24

Module

Inverter

Other Hardware

Soft Costs

18

12
2020 Target

0
2010

2011

2012

2013

Source: National Renewable Energy Lab, Aranca Research

Net Metering continues to be accepted by most states

Net Metering, also called Net Energy Metering (NEM), allows residential and commercial customers who generate their own electricity
from solar systems to feed excess electricity back into the grid and earn credits in return.
NEM is a billing mechanism that allows solar energy systems that generate more electricity than required to feed it back into the grid.
Since the output from a PV system may not exactly match the on-site demand for electricity, a home or business with a PV system
could export the excess power to the electric grid and import power from the grid when required.
For example, if a residential customer has a PV installation on his/her rooftop and it produces excess electricity than what is needed
during daytime, it may return the excess units back to the grid; during this time, the electric meter runs backward, providing credit to the
customer. The customer can use these credits in times of shortage in electricity production or when the homes electricity use exceeds
the systems capacity. Customers are only billed for their net energy consumption.
Currently, 43 states and Washington D.C. have passed Net Metering laws. In other states, utilities may offer net metering programs
voluntarily or as a result of regulatory decisions.

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Solar
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January 2015

Net Metering Policies effectiveness varies among states

Source: www.freeingthegrid.org

Grades in the above map represent various levels of effectiveness of the Net Metering Policies in each state depending on the fee,
additional charges, and other obstacles in installation of the Net Metering Systems, with A being the most effective and E the least.
States with grade equivalent to N/A do not have any statewide net metering policy.
Some utilities perceive this net metering as lost revenue opportunities. On the other hand, proponents of this methodology claim that
net metering policies create a smoother demand curve for electricity and allow utilities to better manage their peak electricity loads,
thereby increasing reliability of the system.

Property-assessed Clean Energy (PACE) program supporting DG installations

Property-assessed Clean Energy (PACE) program is aimed at helping homes and business owners finance energy efficiency and
renewable energy projects for their properties. It is a voluntary program under which a home or business owner is entitled to receive
financing from the local government to cover the up-front cost for qualified energy improvements. Owners have to repay the amount in
the form of special assessment on their property tax over a period of years or decades. This financing is secured with a lien on the
property, i.e., in case of a foreclosure, financing must be repaid before other claims against the property.
Energy efficiency improvements covered include insulation, weather sealing and high-efficiency water heaters as well as solar and
other on-site renewable energy systems.

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Solar
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January 2015

Some best practices favoring DG

Interconnection Standards need to be pro-DG
These are the rules for connecting solar and other electrical systems to the grid and apply to both electricity customers and
utilities:
State Interconnection Standards: States have jurisdiction over interconnection of customer-owned solar generation to the
distribution grid, including projects that are net metered.
Federal Interconnection Standards: The Federal Government holds jurisdiction over the interconnection of distributed generation
solar projects involving sale of electricity to a utility through the Federal Energy Regulatory Commission (FERC).
The FERC issued standards in 2005 facilitating interconnection procedures for small generators that generate 20 megawatts (MW)
or less.
15-percent rule/screen: Under the rules governing solar generators interconnections, solar projects under 2 MW may enter into a
fast-track process of interconnection as long as the total distributed generation is less than 15% of the circuit peak load.

Stringent local solar permitting procedures to affect DG adversely

In order to install a solar system on a property, the property owner needs to obtain the requisite permissions.
Legislations under consideration:
According to a report released by SunRun, a streamlined and cost-effective process for permitting solar system installations could
reduce the costs for residential systems equivalent to $1 billion in 5 years.
Legislation S. 1108 (10 Million Solar Roofs Act of 2011) would provide local communities with a grant and the methods to make
solar permitting more feasible.

Solar Access Rights to protect property-owners' rights to unobstructed sunlight

Local ordinances and Homeowners Association (HOA) rules may affect the installation of solar energy systems in homes and
businesses. In lieu of outright prohibition, some rules allow third parties to require that solar customers make modifications to their
system design; this could unreasonably increase costs, decrease efficiency, or both.
Lawmakers are trying to protect property-owners solar access rights.

Solar Easements: allow a property owner to negotiate for the rights to unobstructed sunlight on their property

Solar Access Laws: provide more protection to solar customers by prohibiting or limiting private restrictions on solar
energy installations

Legislations under consideration:

The Solar Opportunity & Local Access Rights (SOLAR) Act establishes the right of every American citizen to:

operate a solar energy system on their property;

restrict excessive local solar permitting fees; and

establishes national net metering and interconnection standards, solar access rights, and 30-year government power
contracting authority.

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Solar
Installation A new trend in US Utilities

January 2015

Solar electricity generation a long way to go...

Constitutes just a small proportion of the US electricity generation capacity
Considering the prevalence of natural gas and coal as major sources of fuel in the US (constituting about 68% of the countrys total
generation capacity), solar at 1% accounts for a very small portion of this huge generation base. Therefore, the impact of growth in
solar has not been as phenomenal in terms of generation as one would have expected. Nevertheless, the trend is positive and solar as
a base fuel can be considered a viable option with more government support programs (like the SunShot initiative) that promote
distributed generation.

Solar electricity accounting for small % of overall generation capacity

Solar energy Other Sources
3%
Petroleum Liquids 1%
4%
Nuclear
9%
Natural Gas
40%

Other renewable
Sources
15%

Coal
28%

Source: EIA Electric Power Monthly October 2014, Greentech Media Research, Solar Energy Industries Association, Aranca Research

Reduced electricity usage from grid to adversely impact prices due to fixed grid maintenance charges
Electricity demand from utilities has declined following the increase in DGs reach. However, utilities would still be required to incur fixed
costs associated with maintaining grids, as customers with installed solar rooftops would still be connected to the grid. This would result
in higher electricity rates for existing utility customers; this would encourage more people to install solar rooftop panels for cheaper
electricity.
Traditional utilities trying to limit solar rooftop installation growth, sighting DG companies as threat
Consumers with rooftop solar installations have already reduced their electricity usage from the traditional grid. Not only is the solar
rooftop energy model cost efficient but also the net metering system provides end users with electricity credit for the excess energy
generated and exported to the grid. Traditional utilities are protesting against the net metering laws and battery backups wired to solar
panels, stating that the power flowing back to the grid may not be clean energy. The net metering policy requires utilities to purchase
electricity from consumers with solar installations (obligatory by state legislation or voluntarily by some utilities) at the price that
customers pay for the grid. This results in loss of revenues for utilities. Furthermore, utilities are demanding a maintenance or
connection charge from rooftop solar owners. Alternatively, utilities in a few states have proposed lower prices to be paid for exported
excess solar electricity.
The Arizona Public Service Company (an electric utility engaged in retail and wholesale electric distribution in the State of Arizona), for
instance, demanded a $50 per month charge from its rooftop solar owners. The regulator approved a charge of $5 for the same.
Currently, there are pending proposals to scale back net metering laws in 20 states. While new regulatory laws are expected to be
issued at some point in future, how much would those favor solar rooftop installations or hamper their growth is anybodys guess.
Research Note by: Kartik Sabharwal and Jay Thakker

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Solar
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January 2015

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