Utility Wins A Round With Solar In Wisconsin

http://seekingalpha.com/article/2694545-utility-wins-a-round-with-solar-in-wisconsin?page=2

Nov. 19, 2014 5:31 AM ET | 2 comments | Includes: SCTY, VSLR, WEC
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary

We Energies scored a significant victory over the solar industry in the most recent rate structure.
The new rate structure significantly protects We Energies from rapidly increasing solar penetration and makes it very difficult for companies like Vivint Solar and SolarCity to succeed in We territory.
We expect this is first in a series of likely utility rate changes that will reduce the growth of solar in the US residential market.

According to an article on GreenTechMedia, the Wisconsin Public Service Commission made several controversial decisions in the context of Wisconsin Energy's (NYSE:WEC) 2015-2016 rate request. In a preliminary approval, the Public Utilities Commission voted 2-1 in favor of many We Energies' proposals and deviated significantly from past precedents that have been helpful to the solar industry.

Among many things that the solar industry finds adversarial, the approval includes a larger fixed charge on residential monthly electric bills, and reduces the amount We Energies will pay for the power that customers generate with solar panels. In a series of articles on solar panel installers and utility rate structures, we have argued that with this type of rate structure changes on utilities part is imminent.

While the solar market in Wisconsin is small today and does not materially impact on any of the national installers, there are several takeaways from this PUC ruling. As we forecasted, utilities are starting to respond to the threat of solar and we expect the We Energies' victory at the PUC a beginning of the tidal wave of utility rate structure changes across the industry.

Some of the salient points of Wisconsin PUC's preliminary approval and their impacts are as follows:

- Customers who install solar systems on their own property will be required to pay We Energies $3.80 per KW per month. For example, a homeowner with a 5 KW solar system will be required to pay $228 annually to We Energies for owning solar. This fee is a major setback to the growth of solar in We Energies' territory. This single change will make many marginal solar systems uneconomical. This type of fee is a significant headwind to the solar industry and especially installers like SolarCity (NASDAQ:SCTY) and Vivint Solar (NYSE:VSLR) that depend on favorable utility rate structures.

- The fixed charge on all residential bills will increase from about $9 to $16 a month - a 75% increase. The amount paid per kilowatt hour will be reduced one-half cent to $0.1349/KWH from $0.139/KWH. Coupled with the above per KW charge, this KWH change will make several solar systems uncompetitive in the state.

- The new rate structure constitutes approximately 1.8% average increase for residential customers. Note that this rate of increase is substantially lower than the escalators that SolarCity and Vivint Solar use in their contracts. We expect that over the next several years the rate increases will initially moderate and then will start declining. This is one of the many headwinds that will destroy the SCTY and VLSR business models over time.

- According to the new tariff, business customers will see a slight decrease in electric bills in 2015 and an increase of about 1% in 2016. This, once again, this type of rate structure is to be expected as Utilities will increasingly make an effort to retain their high value commercial customers from migrating to renewable alternatives.

- We Energies will change net metering from annual netting to monthly netting and will also reduce the credit for excess generation from the 14 cents/KWH to 3 cents/KWH. This is yet another change that can significantly reduce the economics of a solar system.

However, the PUC ruling is not all bad news for the industry. Hidden in the bad news are some concessions to the solar industry and companies like SolarCity and Vivint Solar.

- Existing owners of solar systems will be grandfathered for a period of 10 years. The new net metering changes will not apply to existing owners until December 31, 2024. If not for the grandfathering, any current solar PPA/lease contracts would have likely been immediately underwater.

- PUC denied We Energies' request to ban solar or wind projects from connecting to the grid and net metering with the grid if it is not owned by the customer. This is about the only good piece of news in this PUC ruling for installers like SolarCity and Vivint Solar.

In what is likely an ominous sign for the solar industry, the 2-1 vote was on party lines. The vote was split down partisan lines with Gov. Scott Walker appointees Phil Montgomery and Ellen Nowak supporting the changes and Eric Callisto, an appointee of Gov. Jim Doyle, opposing the changes. With Republicans taking control of both houses of congress, and increasing their advantage in key states, this type of decision may be a harbinger of things to come.

While these types of changes will certainly impede the penetration of solar, we are optimistic that the solar technology cost curve will, over time, overcome the utilities resistance to solar. However, for companies like SolarCity and Vivint Solar that depend on favorable solar rate structures, the salad days may be coming to end.

Our sentiment on VSLR and SCTY: Avoid.