Utility Solar Business Models:

Emerging Utility Strategies & Innovation

SEPA REPORT # 03-08 MAY 2008

John Nimmons
President, John Nimmons & Associates
Sustainable Energy Strategies

Mike Taylor
Director of Research
Solar Electric Power Association
 May 2008

ACKNOWLEDGEMENTS
The authors would like to thank the individuals involved in the Utility Solar Business Models working
groups, too numerous to list here, who are outlined in Table 3 of the report.

SEPA would like to extend heartfelt appreciation to John Nimmons, whose dedication and effort has
exceeded our expectations.

This material is based upon work supported by the Department of Energy under Award Number DE-
FC36-07GO17040.

DISCLAIMER
This report was prepared as an account of work sponsored by an agency of the United States
Government. Neither the United States Government nor any agency thereof, nor any of their employees,
makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy,
completeness, or usefulness of any information, apparatus, product or process disclosed, or represents
that its use would not infringe privately owned rights. Reference herein to any specific commercial
product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily
constitute or imply its endorsement, recommendation, or favoring by the United States Government or
any agency thereof. The views and opinions of authors expressed herein do not necessarily state or
reflect those of the United States Government or any agency thereof.
 May 2008

LETTER FROM SEPA LEADERSHIP

May 30, 2008

Utility and Solar Colleagues,

We are pleased to release a new report, “Utility Solar Business Models,” the third report that the Solar
Electric Power Association (SEPA) has released in 2008.

Phase 1 of this Utility Business Models project, and its culmination in this report, has provided an
excellent forum for utilities and the solar industry across the country to both examine various solar
program options tried to date and explore win/win/win business models for the future. And the timing
could not have been better. Within the last year, major photovoltaic and concentrating solar thermal plant
announcements by utilities across the country are showing how the utility industry can drive solar market
transformation. A combination of external drivers is causing utility executives to consider the relevance
and importance of solar in their overall business plans, including renewable portfolio standards,
impending climate change policy, and the inverse relationship between increasing costs of traditional
generation resources and declining costs of solar resources. Solar electricity is moving into boardrooms
and executive meetings across the United States as leading utilities begin to make concrete decisions for
major solar deployment. This report provides a compendium of emerging utility innovations that will
provide valuable information both across utility departments and into upper management.

Reports such as this one are just one of the many ways in which SEPA bridges electric utilities, solar
companies and other stakeholders to push solar forward more tangibly, one real business at a time. From
research projects and national conferences to one-on-one counseling and peer matching services,
SEPA’s unique joint partnership offers members critical access to key business relationships and
unbiased, actionable intelligence needed to make solar practical and profitable in today’s shifting energy
landscape.

If you have any suggestions or comments, feel free to contact either of us.

David Rubin Julia Hamm

SEPA Board Chairman SEPA Executive Director
Pacific Gas & Electric Company
 May 2008

CONTENTS
Executive Summary ....................................................................................................................................... i 
1. Introduction ............................................................................................................................................... 1 
2. Project Description ................................................................................................................................ 3 
2.1 Problem Statement .............................................................................................................................. 3 
2.2 Project Objectives................................................................................................................................ 3 
2.3 Project Approach and Activities........................................................................................................... 4 
3. What is a Business Model? ....................................................................................................................... 8 
3.1 Generally ............................................................................................................................................ 8 
3.2 What’s Different About a Utility Business Model? .............................................................................. 8 
3.3 Evaluating Utility Solar Business Models .......................................................................................... 11 
4. Typical Solar Initiatives ........................................................................................................................... 15 
4.1 Financial Incentives ........................................................................................................................... 16 
4.2 Other Regulatory and Policy Initiatives ............................................................................................. 18 
5. Emerging Solar Utility Models ................................................................................................................. 23 
5.1 Utility Ownership of Solar Assets ...................................................................................................... 23 
5.2 Utility Financing of Solar Assets ........................................................................................................ 36 
5.3 Utility Purchase of Solar Output ........................................................................................................ 41 
5. Conclusions and Next Steps ................................................................................................................... 48 
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LIST OF TABLES
Table 1. Solar Power 2007 Workshop Confirmed Registrants .................................................................... 5 
Table 2. SEPA Working Group Definitions .................................................................................................. 5 
Table 3. Working Group Participants ........................................................................................................... 6 
Table 4. Key Stakeholders Affected by Utility Solar Initiatives .................................................................... 9 
Table 5. Working Group Questions Applied to Business Model Elements ................................................ 10 
Table 6. SDG&E Sustainable Communities Program – Value by Stakeholder ......................................... 25 
Table 7. Southern California Edison Proposed Solar PV Program – Value by Stakeholder ..................... 28 
Table 8. Pepco & Delmarva 2007 Utility-Side Ownership Proposals – Value by Stakeholder .................. 29 
Table 9. Ellensburg Community Solar Electric Project – Value by Stakeholder ........................................ 30 
Table 10. Chelan PUD Inverter Ownership & Feed-in Tariff Scenario – Value by Stakeholder................. 32 
Table 11. PSE&G 2007 Solar Initiative Proposal – Value by Stakeholder ................................................ 37 
Table 14. Pepco and Delmarva 2007 Customer Installation Proposals – Value by Stakeholder .............. 39 
Table 12. Production-Based, Shareholder-Funded Credit to Supplement Other Solar Revenue Streams 40 
Table 13. Utility Component Ownership & Feed-in Tariff – Value by Stakeholder ................................... 40 
Table 15. SMUD Solar Shares Program – Value by Stakeholder ............................................................ 44 
Table 16. Summary of Stakeholder Values Associated with Emerging Utility Solar Business Models ...... 46 

LIST OF FIGURES
Figure 1. Project Time Table ........................................................................................................................ 4 
Figure 2. The Business Model Concept ....................................................................................................... 8 
Figure 3. STAC Cost/Benefit Results: Utility-Owned CCHP (single installation model) ............................ 13 
Figure 4. STAC Cost/Benefit Results: Commercial Customer-Owned PV (single installation model) ...... 13 
EXECUTIVE SUMMARY
This report describes a collaborative project, funded through the U.S. Department of Energy’s (DOE)
Solar America Initiative and sponsored by the Solar Electric Power Association (SEPA), to explore
promising business models for U.S. utility participation in solar electric generation markets. Participating
stakeholders included investor-owned utilities (IOU) and publicly-owned utilities (POU) throughout the
U.S.; solar industry designers, manufacturers, distributors, integrators, vendors and installers; and clean-
energy financial advisors and investment management firms. DOE and SEPA staff also participated
actively in the project.

The project had two primary objectives. The first was to explore business approaches that will enable
utilities to turn what some view as the ‘threat’ of customer-sited solar generation into an opportunity – by
creating new value in the solar value chain; capturing some share of that value for utility stakeholders; and
finding ways to sustain it over time. The second objective was to explore innovative legal and regulatory
strategies to help utilities apply their strengths to advance opportunities for large-scale solar, driven by
increasing resource constraints and climate change concerns.

Successful utility business models must serve the interests of multiple stakeholders with diverse,
sometimes competing interests. The task for SEPA’s Working Groups was to start with solar technology
inputs (i.e., resource, technology, performance and environmental characteristics, and application types);
consider where and how utilities could add distinct value for various target markets; and begin to identify
cost allocation, pricing, regulatory and other mechanisms that can deliver this value to utility owners,
participating and non-participating customers, and society at large, while expanding solar industry and
investment opportunities.

These challenges were distilled into three fundamental questions utilities need to answer to develop
promising solar business models:

1. How will the utility create value in the solar marketplace?

2. How can the utility benefit by capturing some share of that value?
3. How can the utility sustain its solar business over time?

An important goal of this project has been to find utility business approaches that are cost-effective for all
stakeholder groups, i.e., approaches whose net benefits equal or exceed their net costs for each group. In
laymen’s terms, the goal is to find ‘win/win/win’ solutions – outcomes where multiple stakeholders benefit,
and none are harmed. Beyond the customer–shareholder–societal stakeholders normally considered by
utility regulators and management, the Working Groups looked for business approaches that could benefit
the solar industry and investors whose contributions are critical to long-term success.

With this in mind, innovative utilities have begun to explore new approaches with emerging solar models.
Most of them originated or are being considered by the utilities that participated in SEPA’s project working
groups, and this is the first time that much of this information has been available for discussion, comment,
and comparison among utilities, solar providers, and the financial community.

For convenience, the paper classifies new and emerging utility approaches into three broad categories:
utility ownership of assets, utility financing of assets, and utility purchases of solar output. For all three
categories, discussions revealed important differences between IOU and POU solar business drivers. This
 May 2008

was true whether the program involved retail service to customers, wholesale supply to the grid, or some
hybrid of those.

IOUs generally focus on regulatory compliance, and on solar impacts on shareholder earnings and the
utility’s bottom line. POUs usually prioritize responsiveness to customer preferences and community
environmental concerns. IOUs operating in adversarial proceedings before state regulators are more
constrained in assigning solar costs among stakeholders, while POUs report more flexibility to allocate
costs and benefits to pursue broader community goals. Federal income tax considerations remain
important for all market participants, and changes being considered in Congress could impact IOUs and
POUs differently. These themes recurred throughout the Working Group discussions, and are reflected in
some of the emerging models they considered, discussed next.

Utility Ownership of Solar Assets

At least for distributed resources, previous work indicates that ‘win/win/win’ outcomes for all stakeholders
are most likely where the utility owns the generation assets and places them on its side of the meter
(whether on customer premises or otherwise) to supply the grid instead of the customer. Ownership
increases utility benefits, because it allows the utility to earn a return on the asset (as it would on other utility
investments). Placing generation on the utility side of the meter benefits the utility because its output does
not displace customer grid purchases, reducing utility revenues. In some cases, these two conditions can
increase the utility’s benefits and reduce its costs enough to make projects economically viable for all
stakeholder groups – a promising direction for any utility business model.

Today, utility ownership of solar assets confronts important obstacles. In states that have restructured their
electricity industries, utilities may not be allowed to own generation, or may be limited to owning certain
types of generation. Even where they can own solar generation, federal tax provisions have left utilities at a
significant disadvantage relative to other owner/developers. This is because property owned by regulated
investor-owned utilities (IOUs) has generally been ineligible for solar tax benefits, and publicly-owned
utilities (POUs) do not pay federal taxes against which they could offset those benefits.

Since tax benefits contribute substantial value for most solar projects, utilities’ inability to utilize them
increases costs for utility-owned projects, making them potentially less attractive to management, customers
and regulators. Nonetheless, some utilities are now pursuing utility-owned solar, and proposing to offset
these tax drawbacks with other values they believe they are uniquely positioned to bring to the table.

This report explores in detail options including:

• Ratebasing Solar on Nonresidential Customer Sites

• Ratebasing Solar at Substations and Utility Facilities
• Owning Community Solar Equipment
• Owning Inverters on Customer Sites
• Acquiring Solar Projects from Developers
‐
turnkey acquisition, or purchase and sale agreement,
‐
power purchase agreement with buy-out option,
‐
acquisition of sites for development, and
‐
‘flip’ transactions that could take various forms.

Utility Financing of Solar Assets

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Some utilities that do not choose to own solar assets for tax reasons, or for reasons of cost, regulatory
treatment, competitive considerations or otherwise, have proposed other ways to contribute to the solar
value chain. One of these is to provide financing and related services for solar system developers and/or
utility customers installing their own systems.

Recent proposals include shareholder funding of utility solar loans, and treatment of all or part of the loan
funds as regulatory assets (like utility capital investments) to be included in ratebase and earn a return for
utility shareholders. They also include other features designed to create distinct values for different
stakeholders.

This report explores in detail options including:

• Ratebasing Solar Loans and Recovering ‘Lost Revenues’

• Supporting Turnkey Installations and Ratebasing Shareholder Loans
• Supporting a Feed-in Tariff with Solar Revenue Streams and Ratebased Shareholder Loans

Utility Purchase of Solar Output

Apart from owning solar assets itself or financing solar systems owned by others, can a utility create and
capture value for its constituents by buying solar electricity generated by others? Utilities can and do create
value in this way – but the challenge is to capture some share of that for utility owners and non-participating
customers.

IOU regulators normally treat power purchases as expenses, passed through to customers and recovered
through rates, but not usually a profit center for the utility or its shareholders. SEPA’s Working Groups
explored whether there are ways that IOUs can enhance earnings or create other forms of value through
solar energy purchases, and how they might quantify that value in evaluating business models.

POUs are not accountable to shareholders, so their questions were whether and how they could create
value for their communities by purchasing solar output from others; how they should apportion such value
among customers; and whether they might team with customers and third parties to realize local solar
potential.

• This report explores in detail options including: Valuing Solar Purchases to Avoid RPS Noncompliance
• Equalizing Buying and Building
• Achieving Economies and Expanding Solar Access through Community-Scale Systems

CONCLUSIONS

The key conclusions of this project are:.

1. Utility business models must serve the interests of multiple stakeholders with diverse, sometimes
competing interests. A successful model should guide the utility to create distinctive value in the
marketplace, capture a share of that value for its constituents, and sustain the business over time.

2. Utility business models should target ‘win/win/win’ solutions, where multiple stakeholders benefit,
and none are harmed – i.e., net benefits equal or exceed net costs for each stakeholder group.

3. Most existing solar programs are designed to support preferred resource development, but not to
enhance utility earnings or business prospects.

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4. A number of new utility solar business models have emerged in the past 18 months, and most of
these are still in development. Some have elements in common but no two are the same, and no
single approach will make sense for all utilities, all IOUs, or all POUs.

5. Current proposals are constrained by today’s market conditions and regulatory framework. Other
approaches will surely evolve as tax laws change, solar costs decline, solar markets mature, and
regulatory innovation continues.

6. For both IOUs and POUs, Federal tax considerations strongly affect which approaches make sense
for the utility and its customers, and which should appeal to IOU regulators. Other things being
equal, utility-owned solar projects will appear more costly than projects owned by tax-advantaged
investors, making them less attractive to management and regulators, and perhaps less competitive
in solar markets.

7. Various forms of structured financing may enable utilities and their customers to share some of the
benefits of tax-advantaged transactions, and to better align the interests of developers, tax investors
and utility stakeholders. These present challenges, but offer promising paths for future development.

8. With or without tax benefits, utilities can bring other values to the solar table, such as long-term
stability, negotiating strength, economies of scale, volume discounts, expertise in grid integration,
coordination with energy efficiency and green building initiatives, and the ability to leverage ratepayer
funds, reduce risk premiums, and fill market gaps such as financing and ‘one-stop shopping’ needs.
POUs are freer to apply these strengths to pursue community environmental and social goals, and to
reallocate costs and benefits among stakeholders to support solar development in the public interest.

9. Apart from tax issues utilities and IOUs in particular, can benefit from owning solar assets, especially
on the utility side of the meter. Where IOUs can still own generation, they can earn a return of and on
solar investments comparable to other utility investments and in some jurisdictions an incentive return
for utility-owned renewables. Generation on the utility side of the meter (whether on customer premises
or not) avoids the disincentive of reduced revenues from customer-side generation.

10. For utilities, owning solar assets carries different costs, risks and rewards than purchasing power
from others. Regulators may need to revisit the treatment of utility power purchases to remove
disincentives and reward utilities for entering into PPAs that support cost-effective solar expansion.

RECOMMENDED NEXT STEPS

® Track the progress & outcomes of ongoing utility initiatives.

As of May 2008, most of the utility initiatives reviewed in this report are works in progress. These and
others in the pipeline offer invaluable information and experience about how stakeholders and
regulators respond, what works and what doesn’t, and what issues arise as new models are tried.
SEPA should closely track these and other initiatives, and update its members on their progress.

® Build on this project to refine emerging models, develop new ones, and create decision tools
that can be used as a starting point for utility-specific programs.
Systemize the work presented in this report into decision tools to help utility managers, regulators and
solar proponents evaluate which business model attributes are most appropriate for different utility
and regulatory environments and community needs, and provide more information on critical issues.

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® Begin to quantify the benefits and costs to stakeholders of different combinations of solar
technologies, customer- and grid-oriented applications, and incentive structures.
SEPA’s Working Groups have so far focused more on the value that utilities can bring, than on the
costs that they and other stakeholders will incur under various business approaches. Future work
should refine potential business models with enough specificity to be able to quantify their costs and
benefits, and should adapt the screening tools discussed in Chapter 3 to demonstrate promising
scenarios for utility management, stakeholders and regulators.

® Examine competitive implications of alternative solar business strategies for utilities, and ways
to structure them to promote collaboration and minimize anti-competitive concerns.
Utility solar proposals raise critical questions about whether utilities can compete effectively beyond
their core natural monopoly business, consistent with laws and regulatory policies governing their
participation in potentially competitive activities. Issues arise under federal and state antitrust and
anticompetitive laws, and under commission policies governing utility competition with non-regulated
businesses. SEPA can help identify legislative or regulatory changes, or perhaps teaming
arrangements among market participants, needed to minimize challenges to utility solar activities.

® Develop a SEPA ‘SWAT Team’ approach to help member utilities tailor solar business models
to the distinctive business and regulatory circumstances and community conditions they face.
SEPA should assemble a team of its own staff, consultants, and utility personnel with specialized
knowledge or program experience, to work with individual member organizations interested in
developing successful solar businesses that build on others’ experience, avoid others’ mistakes, and
pioneer new directions. This will effectively leverage SEPA and U.S. DOE’s investment in the work
reported here, and will add a valuable service to SEPA’s offerings.

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1. INTRODUCTION
This report describes a collaborative project to explore promising business models for U.S. utility
participation in solar electric generation markets.

The project has been funded through the U.S. Department of Energy’s (DOE) Solar America Initiative,
and sponsored by the Solar Electric Power Association (SEPA). Participating stakeholders include
investor- and publicly-owned utilities throughout the U.S.; solar industry designers, manufacturers,
distributors, integrators, vendors and installers; and clean-energy financial advisors and investment
management firms. DOE and SEPA staff also participated actively in the project.

As first conceived early in 2007, the project’s main objective was to examine approaches that SEPA's
utility members could explore to position themselves for markets in which customer-sited solar
photovoltaic (PV) generation becomes competitive with utility-supplied electricity over the next decade.
In markets with strong incentives in place, commercial PV systems (typically a few hundred kilowatts to
several megawatts) are beginning to approach this ‘grid parity’, through arrangements whereby solar
energy service providers displace grid electricity at long-term fixed contract prices below current utility
rates. So far, this has been limited to large installations in a few states.

However, over the next ten years solar costs are expected to decline dramatically, while grid-supplied
electricity rates increase, significantly expanding markets for distributed solar resources. If that occurs,
the solar services model, combined with on-site storage and energy efficiency, could begin to transform
the economic and technical relationship between customers and utilities. For some utilities, this portends
revenue reductions that could make it difficult to sustain traditional business models under most states’
regulatory regimes.

Beyond the question of future utility revenue losses from customer-sited generation, other factors had
emerged to broaden the project’s focus by the time it got under way in September 2007. First, during
2007 many states were devoting increased attention to, and some were accelerating, Renewable
Portfolio Standards (RPS) that require utilities to increase the percentage of their electricity sales from
renewable resources, sometimes with specific carve-outs or set-asides for solar resources.1 Second,
climate change drew increasing concern from policymakers, utilities and their customers as the
Intergovernmental Panel on Climate Change2 issued three comprehensive reports confirming the urgency
of addressing global warming. And third, a new generation of large-scale solar technologies emerged on
the scene, with strong backing from venture capitalists and new interest from the utility community.3

These recent developments attest that utilities may need to establish their presence in the solar value
chain for reasons beyond protecting against future revenue losses from customer-side installations. Strong
public interest, RPS solar set-asides, and the need for major greenhouse gas reductions sooner rather
than later, all underscore a parallel need for multi-megawatt solar projects on the utility side as well. These
larger projects, which provide bulk power to the grid, do not displace customer retail purchases and do not
present revenue loss concerns for utilities. But they do raise other important business and regulatory

1
2007 has been described as ‘The Year of the RPS’. See Susan Gouchoe, North Carolina Solar Center, Solar Policy News &
Trends; presented at IREC Annual Meeting, Long Beach, CA, September 24, 2007.
www.dsireusa.org/documents/PolicyPublications/Gouchoe_DSIRE_IREC_2007.ppt
2
The IPCC (http://www.ipcc.ch/about/index.htm) is an intergovernmental scientific body established by the World Meteorological
Organization (WMO) and the United Nations Environment Programme (UNEP), consisting of all WMO and UNEP member
governments, and hundreds of scientists around the world who serve as authors, contributors and reviewers.
3
See, e.g., Big Solar’s day in the sun (Todd Woody, Business 2.0 Magazine, June 5, 2007), at
http://money.cnn.com/magazines/business2/business2_archive/2007/06/01/100050990/index.htm
 May 2008

issues that collaborative participants wanted to address, so the project also considered approaches that
can support the development of large-scale solar systems for supplying the grid.

Whether their primary interest is portfolio diversification, hedging against future revenue losses, meeting
regulatory or customer demands for cleaner resources, or responding to climate change concerns, most
utility participants in this project reported that their utilities are just beginning to consider innovative business
models to ensure their place in the solar value chain. Many of their contributions were preliminary and
exploratory, as they and other market participants consider new and untried directions to adapt historical
utility models to 21st century needs. Together, project participants identified many of the issues that will
shape future utility solar activities and some of the more promising approaches emerging today, but all
recognized that stakeholders are still in the early stages of inquiry.

If there was a bias in the workgroup process, it may have been that utility participants were understandably
rooted in familiar utility business and regulatory paradigms, and it was at times challenging to look beyond
existing and RPS requirements or solar cost structures. The workgroups sought to envision both
substantive changes to utility business and regulatory approaches, and future solar markets where the
main barrier is no longer cost, but market development and integration. If anything, working group
discussions tended to focus more on practical, near-term solar business options that might be adopted this
year or next in markets not strikingly different from today’s, than on visions that might be achievable five or
ten years from now under quite different solar market, business and regulatory conditions.

However, the group process, workshops, and research by the contractor, SEPA staff, and other
stakeholders did uncover a number of new and innovative, value-added utility solar programs not
previously described in relation to one another. Some of these programs will be news to even the most
seasoned solar advocates. Indeed, utilities are finding new ways to approach solar electricity, on both the
customer and utility side of the meter, to meet business needs, enhance customer satisfaction, and/or
explore more holistic solutions. Section 2 of this report describes the project and process, while Section 3
discusses business models generally. Section 4 describes emerging utility solar business models more
specifically, and Section 5 offers conclusions and suggests next steps.

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2. PROJECT DESCRIPTION
2.1 Problem Statement
Photovoltaic (PV) and other forms of solar electric generation have shown impressive growth in the U.S. in
recent years, but still comprise a very small fraction of the electricity supplied to meet customer demand.
For most energy users today, PV and other solar generating technologies remain prohibitively expensive,
and well above the cost of conventional, utility-supplied power over the time period that users consider in
making resource choices. This is often the case even where government and utilities substantially defray
solar system costs through customer rebates and other incentives. For this reason, few utilities today are
seriously concerned that customer-generated solar power will displace large quantities of utility-supplied
power, or substantially erode electricity sales revenues in the immediate future.

Yet today’s solar industry and many independent observers predict dramatic cost reductions in solar electric
technologies (both distributed and central) over the next decade. If these reductions occur and customer-sited
solar becomes competitive with grid-supplied power, more utility customers can be expected to supply at least
part of their own electricity requirements, and to reduce their payments to utilities for grid electricity they no
longer consume.4 Reduced customer demand will yield some savings to utilities over time, but because many
utility costs (especially transmission and distribution costs) are fixed in the short run, utility revenues will
decline faster than utility costs, and utility financial health will suffer. Under most regulatory regimes, selling
less electricity because of customer-sited solar generation will not be a sustainable business model for
utilities.

At the same time, recent advances in large-scale, concentrating solar thermal and similar technologies
have captured the attention of utilities in other countries, and in some regions of the U.S. These
technologies typically would not be sited behind customer meters or erode utility revenues. They present
different issues for utilities and regulators, and they suggest another path for productive utility solar
engagement that is much more similar to traditional central station utility investment and operations (and
probably more congruent with utility culture).

As these technologies advance, they promise economies of scale and scope that can accelerate
renewable resource and emissions benefits over those available from distributed solar installations alone.
At this point, however, their costs cannot compete with the (internalized) costs of other utility-scale
resources that supply wholesale power to the grid. For utilities to develop a sustainable business around
these technologies, it will require innovative legal and regulatory approaches that utilities can begin to help
craft, or can take advantage of where supportive policies already exist.

2.2 Project Objectives

This project has had two primary objectives:

1. To explore business approaches that will enable utilities to turn the ‘threat’ of customer-sited solar
generation into an opportunity, by creating new value in the solar value chain; capturing some
share of that value for utility stakeholders; and finding ways to sustain that value over time; and

4
This partial offset from customer-generated electricity theoretically could approach full substitution with increased building
efficiency and cost-effective local back-up and storage.

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2. To explore innovative legal and/or regulatory strategies to help utilities apply their business and
institutional strengths to advance large-scale solar opportunities that address pressing resource
and climate issues.

2.3 Project Approach and Activities

The project was structured as a combination of multi-stakeholder workshops, and collaborative working
groups, organized by SEPA staff and facilitated by SEPA’s consultant over a period of about six months,
illustrated below.

Figure 1. Project Time Table

= Workshops = Utility-Centric Conference Calls = Customer-Centric Conference Calls

SolarPower ‘07 PowerGen

Sept. Oct. Nov. Dec. Jan. Feb. Mar./Apr. May.

Draft Report Final Report
2007 2008

The project began with a pre-conference workshop presented at Solar Power 2007 in Long Beach, California,
on September 24, 2007. Over 170 respondents initially expressed interest in attending the workshop, but
due to space limitations, attendance was limited to about 70 people. To accommodate those who could not
attend, SEPA and its consultant subsequently presented a condensed version of the workshop by conference
call, attended by about 35 individuals. Organizations registered to attend the September workshop are listed
in Table 1 below.

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Table 1. Solar Power 2007 Workshop Confirmed Registrants

Investor-Owned Utilities Publicly-Owned Utilities & Coops Solar Industry

Ameren Fuels and Services Arizona Electric Power Coop Applied Materials
Avista Corp Bryan Texas Utilities 3 Billion
Commonwealth Edison Chelan County PUD BP Solar
Duke Energy City of Ellensburg Cleantech America LLC
Florida Power & Light City of Lompoc Envision Solar
Integrys Energy Group Golden State Power Coop enXco
Nevada/Sierra Pacific Power Lower Colorado River Authority GE Energy
Pacific Gas & Electric Muscatine Power and Water Helios Energy LLC
Portland General Electric New York Power Authority Infinia
Pub. Service of New Hampshire Orlando Utilities Commission North Carolina Solar Center
San Diego Gas & Electric Palo Alto Utilities OptiSolar, Inc.
SEMPRA Generation City of Roseville Oregon SEIA
Southern California Edison Sacramento Municipal Utility District Shell Solar
Southern Company Salt River Project Solar Array Ventures
Tokyo Gas Company Snohomish County PUD Solar Integrated Technologies
WE Energies Sulphur Springs Valley Electric Coop Sunpower
Wisconsin Pub. Service Corp. Utah Associated Municipal Power SunWize Technologies
Xcel Energy West Florida Electric Cooperative Triple Solar Systems

Government Investment Community Other

U.S. Department of Energy CE4 Baker & McKenzie LLP

California Energy Commission Greenrock Capital Boeing
National Renewable Energy Lab Lazard Freres CH2M Hill
Next Energy Group Enco Utility Services
Morgan Lewis
Townley Tech Services
Vermont Energy Investment Corp.

In October, two working groups were formed to exchange ideas and experiences in a series of biweekly
conference calls over several months. Discussions among participants and project organizers led to the
formation of two working groups, one that would focus on ‘utility-centric’ business models, and the other
on ‘customer-centric’ approaches, as defined in Table 2 below.

Table 2. SEPA Working Group Definitions

Utility-Centric Group Customer-Centric Group

System Purpose: primarily bulk system supply (T or D), largely primarily service to one or more defined customers
independent of particular customers or facilities

centralized, sometimes remote; community-scale distributed, near loads served; often but not always
Physical location: systems not dedicated to a specific, geographically- on customer premises; community-scale systems
defined user or set of users; rarely on customer dedicated to a specific, geographically-defined user
premises or set of users

System size: multi-MW; 5–10 MW at a site for smaller utilities, several kW – several MW
tens or hundreds of MW for larger utilities (for larger customers or applications)

Side of meter: typically customer side now, but could also be utility
typically utility side
side in some models

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all solar electric technologies (PV, small concentrat-

Technologies: all technologies suitable for large-scale solar ing, etc.) & all types of installations (rooftop, ground-
(PV, concentrating solar, etc.) mounted, etc.) suitable for these uses; possible
hybrid electric & thermal applications

SEPA’s consultant organized and facilitated conference calls for each working group every other week
from November through January, and sent materials for group members to review before most of the
calls. Each working group included representatives of investor-owned utilities; publicly-owned utilities;
solar industry designers, manufacturers, distributors, integrators, vendors and/or installers; financial
advisors and investment management firms; and DOE and SEPA staff. A number of participants were
active in both working groups. Attendance varied from call to call depending on people’s schedules, but
each working group call typically included about 10-15 people from as many organizations. Organizations
and individuals that participated in SEPA’s working groups are listed in Table 3.

Table 3. Working Group Participants

Investor-Owned Utilities Solar Industry

Ameren Fuels and Services Rich Wright 3 Billion Quincy Holloway

Duke Energy Ollie Frazier Applied Materials Mike Mehawich
Nevada/Sierra Pacific Power John Hargrove Applied Materials Blair Swezey
PG&E Carlos Abreu BP Solar Todd Foley
PG&E Jim Baak BP Solar Bill Rever
PG&E Sandy Burns EPRI Cara Libbey
PG&E Chuck Hornbrook GE Energy Gerald Curtin
PG&E Bill Pietrucha GE Energy Rick Robertson
Portland General Electric Dorothy Sosnowski GE Energy Scott Starr
PSE&G Fred Lynk Sunpower Paul McMillan
Pub. Service of New Hampshire Bruce Fulmer
SDG&E Mike Iammarino
SDG&E Steve Jaffe Investment Community
WE Energies Carl Siegrist
WE Energies J. Thibodo-Johnson CE4 Stephen Hamilton
Wisconsin Pub. Service Corp Tad (Chip) Bircher Greenrock Capital Mark Pyle
Xcel Energy Paul Alvarez Lazard Freres Skip Grow
Xcel Energy Ron Miller
Xcel Energy (MN) Pam Newell
Xcel Energy (MN) Lynette Woolery

Publicly-Owned Utilities Government

Chelan County PUD Jim White U.S. Department of Energy Katie Bolcar
City of Ellensburg Gary Nystedt U.S. Department of Energy Charlie Hemmeline
Roseville Electric Marty Bailey U.S. Department of Energy Charles Jennings
SMUD Jon Bertolino U.S. Department of Energy Tom Kimbis
SMUD Stephen Frantz
SMUD Rachel Huang SEPA
SMUD Grant Nelson
Snohomish County PUD #1 Jeffrey Deren Executive Director Julia Hamm
Snohomish County PUD #1 Adam Lewis Director of Research Mike Taylor
Consultant John Nimmons

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The purpose of both the Utility- and Customer-Centric Working Groups was to explore what innovative
utilities have been doing in the solar arena; what business approaches are emerging and what issues are
shaping them; and what directions they suggest for future utility involvement across solar market
segments. The groups were challenged to think beyond today’s market conditions and regulatory
approaches. They were asked to consider business models that can succeed if – as most observers
expect – conventional resources are increasingly constrained, climate change drivers continue to intensify,
emerging solar technologies and businesses come of age, and solar costs decline significantly over the
next five to ten years. To focus the working groups’ efforts, the first step was to develop some common
understanding of what was meant by a ‘utility business model’.

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 May 2008

3. WHAT IS A BUSINESS MODEL?

3.1 Generally

Leading Harvard Business School scholars quote another writer’s wry observation that “Business model
is one of those terms of art that were central to the internet boom: it glorified all manner of half-baked
plans. All it really meant was how you planned to make money.5

That may be true for some of the entrepreneurial startups that popularized the business model concept.
But for this project, a more helpful description is this one offered by the same Harvard authors:

The business model provides a coherent framework that takes technological characteristics
and potentials as inputs, and converts them through customers and markets into economic
outputs. The business model is thus conceived as a focusing device that mediates between
technology development and economic value creation.6

Figure 1 adapts these authors’ own conceptual illustration to the context of a utility considering how best
to integrate new technologies into its core business.

Figure 2. The Business Model Concept

Technology Inputs Business Model

Economic Outputs
9 resource characteristics ‰ target market (s)
9 pricing & revenues
9 technology characteristics ‰ value proposition 9 value to utility owners
9 environmental attributes ‰ value chain 9 value to utility customers
9 performance ‰ cost & earnings 9 environmental impacts
9 applications ‰ value network 9 regulatory overlay
9 feasibility ‰ competitive strategy 9 value to society

Whether applied to a utility or any other business, the analysis is not linear: it is highly iterative, with
technology inputs, economic outputs and mediating business filters all subject to change until they yield
combinations where the pieces work together to function as a coherent and successful business.

3.2 What’s Different About a Utility Business Model?

Unlike Silicon Valley startups, public utilities are government-sanctioned monopolies, charged by
legislators, regulators and/or management with providing essential services to the public and advancing
broader societal interests. For them, determining how the organization will make money or maintain a
healthy revenue stream is only one element of the inquiry – a necessary but not sufficient condition for a
viable business model. Both commission-regulated investor-owned utilities (IOUs) and self-regulated
publicly-owned utilities (POUs) must measure performance not only in economic terms, but in terms of

5
Chesbrough, H. and Rosenbloom, R.S, The Role of the Business Model in Capturing Value from Innovation, Industrial and Corporate
Change, V.11, No.3; at p. 552, quoting from M. Lewis, The Next New Thing: A Silicon Valley Story. W.W. Norton: New York (2000).
6
Chesbrough and Rosenbloom, id., at p. 531; emphasis added.

8
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service to the customers and communities they serve; equity among customer classes; environmental
and other societal costs and benefits; and compliance with legislative and regulatory mandates.7

This means that to succeed, utility business models must serve the interests of multiple stakeholders with
diverse, sometimes competing interests. In the IOU regulatory context, and from the perspective of POU
management, key stakeholders include the utility’s owners, its customers, and the community or society at
large. For SEPA’s collaborative, important stakeholders also include solar providers, as well as financial and
investment firms committed to solar development. Some stakeholder groups also include subsets with
differing interests. Table 4 shows significant stakeholders whose interests utilities need to consider in
formulating solar models that will gain the support of regulators and politically accountable management.

Table 4. Key Stakeholders Affected by Utility Solar Initiatives

Investor-Owned Publicly-Owned 8

‘Owners’
Investors / security holders Citizens / voters
(beneficial, not
necessarily legal)

• Participants (using solar output or enrolled in a solar program)

Customers • Non-participants (other customers)
• Protected groups (low-income, elderly, handicapped, etc.)
• Customer classes (residential, commercial, industrial, etc.)

Society • Primarily service territory or state inhabitants, • Primarily service territory or community inhabitants,
but may also include broader society but may also include state or broader society

Industry • Solar designers, manufacturers, distributors, integrators, installers

• Solar investment and finance providers, advisors, or managers

Even for businesses with a more homogeneous set of stakeholders, delivering value from new and
disruptive technologies often requires a real paradigm shift. For utilities with long experience operating
under monopolistic conditions, this shift can be especially wrenching. Some types of technological
innovations (large central solar may be one) can succeed with incremental changes to otherwise familiar
utility models. However, those historical models are much less relevant to the technical and market
opportunities presented by distributed and community-scale solar technologies.

To create, capture, deliver and sustain value from these opportunities, SEPA’s collaborators confirmed
that most utilities will need to adopt novel, sometimes pioneering perspectives – not a trivial exercise for
large, complex organizations with a long and successful history of doing a different kind of business. In
the words of the experts, “identifying and executing a new or different business model is an entrepre-
neurial act requiring insight into both the technology and the market”9 – not usually considered the utility
sector’s strong suit. Add to that the fact that much of this sector is pervasively regulated at multiple levels

7
Important differences between IOU and POU priorities, and their flexibility to implement those, did surface in the working groups;
some of these are noted in Section 4.2, and in Chapter 5.
8
Although SEPA members include member-owned cooperatives, none participated in the project working groups so the groups did
not address issues unique to cooperative utilities. In general, much of what is said here for publicly-owned utilities applies similarly
to cooperatives, except that a cooperative’s owners are its members, who may not be coterminous with inhabitants or voters of the
political jurisdictions in which the utility operates. To the extent they differ, cooperative management may be responsible to, and
focus on, a narrower set of interests than would the managers of a municipal or other publicly-owned utility.
9
Chesbrough and Rosenbloom, note 5 supra, at p. 550; emphasis added.

9
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of government, with regulators alert for monopoly abuses and stakeholder inequities, and it places unique
constraints on utilities’ capacity for entrepreneurial innovation.

To meet these challenges, the project focused on the fundamental questions utilities need to answer to
develop promising solar business models:

4. How will the utility create value in the solar marketplace?

5. How can the utility benefit by capturing some share of that value?
6. How can the utility sustain its solar business over time?

As a general framework to guide their collaborative activities, the working groups began with the business
model elements listed in Figure 1 above as building blocks, fleshed out for this project as shown below.

Table 5. Working Group Questions Applied to Business Model Elements

Business Model Element Key Questions

• Will small-scale ‘customer-centric’ systems focus on

Target Market(s)
What market segment(s) will a solar business target?
residential, commercial, institutional and/or industrial
customers? new commercial or residential developments?
urban, suburban, or rural customers? grid-connected or grid-
independent energy users?
• Will larger-scale ‘utility-centric’ systems target wholesale
power markets? RPS compliance? emissions trading? green
power aggregators or customers? some combination?
• Will the utility offer different resource, technology, financing,
ownership or service options for different market segments?

• How will it build on the utility’s strengths, and how can the
Value Proposition utility leverage the strengths of resource providers, project
developers, technology vendors, the finance community, and
What will this business offer that other businesses can’t or other potential partners?
don’t?
• What added values will the business offer for utility customers,
owners, employees, communities served, and/or society?

• As a source of ‘patient capital’ until solar costs come down?

Value Chain
Where does the utility best fit in the solar value chain?
• As buyer or seller of solar electric output and/or RECs?
• As source of engineering or energy marketing skills?
• An aggregator or system integrator?
• Some combination of these?

• Some combination of these? Are there synergies with

Value Network research organizations? Technology or project developers?
the financial community? Land or building owners? Local
Where does the utility’s business fit in the broader market? government entities? Other energy suppliers?

• By capitalizing on familiarity with its service territory, or its

knowledge of energy markets?
Cost & Earnings • By offering the managerial, marketing or engineering
experience of its work force?
Can the utility use its non-monopoly assets to reduce costs &
• By aggregating technology purchases?
increase earnings?
• Can this business earn incentive returns over and above the
utility’s conventional activities?
• Can the business generate sustainable earnings over time?
• Can it do so without unreasonably (or unlawfully) leveraging
Competitive Strategy its monopoly assets to compete unfairly with private non-utility
market participants?

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Can the utility compete effectively beyond its core natural
monopoly business?
• Can it structure teaming or partnering arrangements with
equipment vendors, project developers, financing sources or
others to minimize anticompetitive concerns?
• Can it leverage its own and others’ strengths to add value that
others can’t or haven’t?
• Are legislative or regulatory changes needed to enable the
utility to add value in competitive markets?

These questions were posed to frame the working groups’ discussions, and many of them surfaced often
during the collaboration. However, they were not intended to constrain the discussions or limit the
participants’ contributions, and neither group treated them as a ‘questionnaire’ to be checked off.

3.3 Evaluating Utility Solar Business Models

Beyond these building blocks for discussion, the working groups needed to consider how to evaluate any
business model constructs that surfaced during their discussions. For utilities, a paramount consideration is
‘cost-effectiveness’ as defined by state agencies and regulatory commissions, and measured by both
investor- and publicly-owned utilities (as well as other stakeholders and constituents). The systematic cost-
effectiveness tests noted below developed in the context of energy efficiency and demand reduction
programs. However, some of their components are also relevant in evaluating supply-side investments,
where the basic goal is to achieve the least-cost, best-fit resource, minimizing the present value of the
utility’s revenue requirement relative to competing options.

Cost-effectiveness tests consider the costs and benefits of utility actions from multiple stakeholder
perspectives.10 They recognize one of the central realities of the utility business: that a benefit to one
stakeholder is often a cost to another. In evaluating measures that reduce demand on the grid, utility
regulators and management typically try to balance the impacts of utility programs on (1) the utility’s
owner/investors; (2) its customers who participate directly in the program (‘participants’, such as those
who install solar on their rooftops, enroll in ‘green power’ programs, or install time-of-use meters); (3) the
utility’s other customers (‘nonparticipants’); and (4) society at large, or some subset of it (such as
residents of a state). In evaluating more conventional grid-side utility investments, some of these tests
merge and attention focuses on minimizing the present value of the utility’s revenue requirement. In both
contexts, utility initiatives that benefit one of these groups at the expense of others will be carefully
scrutinized, and at a minimum will be expected to present persuasive policy justification.

This SEPA project was designed to build on a series of previous collaborations11 that focused on ways to
incentivize utilities to support, facilitate, and undertake development of clean distributed resources
(including solar PV, combined cooling, heating and power, biogas, and other resources).12 An important
goal of that work, and of this project, has been to find utility business approaches that are cost-effective
for all stakeholders – i.e., approaches whose net benefits equal or exceed their net costs for each
stakeholder group. In laymen’s terms, the goal is to find ‘win/win/win’ solutions – outcomes where
multiple stakeholders benefit, and none are harmed.

10
See, e.g., California Standard Practice Manual (SPM), Governor’s Office of Planning and Research, July 2002. California’s SPM or
variations of it are now relied upon by many other jurisdictions.
11
Organized by EPRI’s Distributed Resources Public/Private Partnership from 2003-2007, and facilitated by John Nimmons &
Associates, Madison Energy Consultants, Energy & Environmental Economics, and the Regulatory Assistance Project.
12
Organized by EPRI’s Distributed Resources Public/Private Partnership from 2003-2007, and facilitated by John Nimmons &
Associates, Madison Energy Consultants, Energy & Environmental Economics, and the Regulatory Assistance Project.

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In the most recent collaboration in that series, known as the ‘STAC project,’ multi-stakeholder working
groups similar to those formed for this SEPA project defined in some detail a set of possible utility
business scenarios for participation in distributed resource markets.13 These scenarios included
residential and commercial PV installations; combined cooling, heating and power (CCHP) plants; and
biopower projects using digester gas from dairy operations. The PV and CCHP scenarios included both
customer-owned and utility-owned installations on customer premises. Each scenario defined specific
attributes for both the utility’s and the customer’s participation. 14

Based on STAC stakeholder input, Energy and Environmental Economics (E3), a San Francisco
consulting firm, built an economic screening model to incorporate these attributes, along with specific
technology characteristics (size, capital cost, heat rate, etc.), utility parameters (bundled vs. unbundled,
avoided generation and T&D costs, energy and demand charges, etc.), environmental factors (CO2
reduction value, REC credits, etc.), and available state and federal incentives. E3’s model includes values
for some ‘externalities’ for which credible data is available, but not for others that are not yet well-defined
or quantified (e.g., increased reliability for the site host, reduced portfolio risk for the utility, PV job creation,
use of local waste resources for CCHP, etc.)

The outputs of E3’s model for STAC’s Utility-Owned CCHP and Customer-Owned PV base cases are
shown in Figures 3 and 4 below to demonstrate the kind of cost-effectiveness evaluation that the SEPA
working groups have implicitly considered. This phase of the SEPA project (like the early stages of the
STAC project) has been limited to qualitative discussion of utility business options, but these illustrations
suggest how these could be quantified as SEPA stakeholders refine and specify the attributes of other
solar business models.

Figures 3 and 4 graphically compare the benefits and costs accruing to each of three key stakeholder
groups (‘participants’, ‘utility shareholders and nonparticipants’15, and ‘society’) from various combinations
of distributed resource and technology characteristics, environmental attributes, performance
characteristics and applications, all reflecting input assumptions entered to the right of the chart.16 The
charts show how the choice of technology inputs impacts different stakeholders, using pairs of columns
representing benefits (to the left) and costs (to the right) for each stakeholder group. The colored
segments in each column show the contribution of particular benefits and costs (identified in the legend
on the right) to the total benefits and costs for each group.

In these illustrations, Figure 3 (Utility-Owned CCHP) reveals a potential ‘win/win/win’ outcome, because
benefits exceed costs for all three stakeholder groups. Figure 4 (Commercial Customer-Owned PV) shows a
‘win’ for participants, but at the expense of other stakeholders (whose costs exceed their benefits). ‘Participant’

13
State Technologies Advancement Collaborative Utility Distributed Energy Resources Incentive Project; see note
13.
14
For example, in the customer-owned commercial PV case illustrated below, the utility would pay a locational
incentive; facilitate interconnection; manage wholesale market interactions; receive any excess electricity; capture any
capacity value (paying for 50% of it); and forego electricity revenues. The participating customer would pay PV capital
and maintenance costs; receive federal tax credits and any state incentive payments; and reduce its purchases of grid
electricity.
For additional detail, see E. Petrill, D. Thimsen, S. Price, J. Nimmons, J. Torpey, and R. Weston, 2007; Creating
Incentives for Electricity Providers to Integrate Distributed Energy Resources. EPRI, Palo Alto, CA; California Energy
Commission, Sacramento, CA; Massachusetts Division of Energy Resources, Boston, MA; Massachusetts Technology
Collaborative, Westborough, MA; and National Association of State Energy Officials, Alexandria, VA. 1014899. CEC-
500-02-014.
15
Treated as a single group here because regulators allocate the same ‘pot’ of costs and benefits to ratepayers (as rate hikes or
cuts) and to utility shareholders (as increased or reduced earnings).
16
And elsewhere in E3’s spreadsheet calculator; in business model parlance, these are the ‘Technology Inputs’ shown in Figure 1.

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 May 2008

costs and benefits here can include increasingly popular third-party ownership scenarios for commercial solar.
In those cases, the analysis shows that a project may pencil out for the customer and the solar developer, but
only because of incentives paid by the utility and/or society, which make it uneconomic for those stakeholders.

The PV result shown in Figure 4 represents a particular set of base case assumptions vetted by STAC’s
working groups. But it also clearly illustrates the central challenge for utilities (and others) searching for
promising PV business models: that today’s PV capital costs (the cobalt blue segment of the Participant
and Societal cost columns) far exceed the value of electricity saved by the customer (the top, light blue
segment of the Participant benefits column.)17 The working hypotheses of this project are that over time
this delta should shrink or disappear; that larger-scale solar technologies are already poised to achieve
new economies; and that utilities can add unique value and share in the benefits of future solar markets
by creatively planning for these changes now.

Figure 3. STAC Cost/Benefit Results: Utility-Owned CCHP (single installation model18)

Figure 4. STAC Cost/Benefit Results: Commercial Customer-Owned PV (single installation model)

17
The other Participant benefits shown in that column are, from the bottom up, federal tax credits, state solar installation incentives,
REC credits, and a payment for generation capacity avoided by the utility. The calculation does not include values for other, as
yet unquantified ‘externalities’, but studies suggest that these would not approach the value of existing subsidies. See, e.g.,
Borenstein, Severin, The Market Value and Cost of Solar Photovoltaic Electricity Production, University of California Energy
Institute, Center for the Study of Energy Markets Working Paper 176, January 2008. Compare Beach, R.T. and McGuire, P.G.,
Response to Dr. Severin Borenstein’s January 2008 Paper on the Economics of Photovoltaics in California, March 3, 2008, at
http://www.seia.org/itc.php.
18
This model is designed to show the costs and benefits to different stakeholders of a single installation with the characteristics
chosen. A second model developed by E3 for the STAC project aggregates the results of the single installation model to show
impacts on utility earnings and return on equity, participant and non-participant rates and bills, societal emissions benefits, etc.,
for different assumed levels of system penetration.

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 May 2008

This project was not designed to develop this kind of quantitative analysis which, for the breadth of solar
applications considered by the Working Groups, will require additional refinement of technology inputs
and economic and regulatory factors. Instead, the project facilitator and Working Groups developed a
framework to categorize and evaluate innovative utility approaches that offer promising business
solutions for utilities operating in a multi-stakeholder, and often regulated, environment. The next chapter
begins by reviewing typical government and utility solar programs put in place primarily to advance public
policies and enable utilities to respond to increasing demands for greener power, but not necessarily to
enhance utility business opportunities or provide ‘win/win/win’ solutions. The chapter then identifies a
number of emerging solar models beginning to move toward those objectives; categorizes them
according to the primary role played by the utility; and describes their characteristics in the context of the
business model concepts and criteria discussed above.

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 May 2008

4. TYPICAL SOLAR INITIATIVES19

States and utilities increasingly offer support and incentives for customers and third parties to install
and operate solar electric systems, usually as part of broader renewable energy initiatives. These
efforts have been designed to advance solar technology development, expand production, reduce
costs, and stimulate demand, and they’ve made progress in all of these areas. They’ve taken many
forms, both financial and regulatory, but all have been essentially transitional – that is, they reallocate
societal and utility resources over the near term, to create bridges to future renewable markets that will
contribute more to the nation’s energy supply and its climate change response. But these initial
programs generally don’t offer sustainable long-term business solutions for utilities under existing
circumstances.

This project looks toward the longer term. It assumes that solar technologies will become more efficient,
will meet increasing production goals, and will substantially reduce costs. It asks whether, as this occurs,
utilities can bring distinctive value to solar markets, capture some of that value for their constituents, and
sustain their contribution and its rewards as markets mature and equilibrate.

Utilities and others represented in SEPA’s working groups have begun to ask these questions, and some
are actively pursuing innovative programs to start to answer them. Before describing these emerging
models for utility solar engagement, the next section recaps current utility solar activities, as a baseline.
Perhaps not surprisingly, most of the financial incentives and regulatory approaches outlined below are
designed mainly to support solar and other renewable development, not to enhance utility earnings or
business prospects. To the extent that utilities fund these initiatives, their contributions are typically
treated as expenses, reimbursable through rates but not eligible to earn a return for utility shareholders or
contribute to utility earnings.

Until quite recently, U.S. solar development has focused almost entirely on rooftop or ground-mounted PV
on residential and commercial customer sites (typically on the customer side of the meter), and most
utility solar activities outlined below have focused on these as well. In the last few years, there has been a
resurgence of interest in larger, community- or utility-scale plants. Several of these plants using newer
technologies have been built or announced, motivated largely by renewable portfolio standard compliance
requirements, also discussed below.20

19
We gratefully acknowledge the North Carolina Solar Center and its DSIRE database for much of the information reported here,
although any errors are our own. For their regularly updated compilation of solar and other renewable programs and specific
program descriptions, go to http://www.dsireusa.org/summarytables/financial.cfm?&CurrentPageID=7&EE=1&RE=1.
20
Until recently, the only utility-scale solar plants operating in this county were the SEGS plants built by LUZ in California’s Mojave
Desert during the 1980s. These 354 MW parabolic trough projects still supply power to Southern California Edison’s grid near
Barstow, having generated over 11,000 GWh and earned some $2 billion dollars since they began operating. LUZ II has
developed a new Distributed Power Tower technology, which it reports is more efficient and cheaper.
http://www.luz2.com/agallery%20presentation/c5128.php
New large-scale plants include Nevada Power’s Solar One, a 64 MW concentrating solar power (CSP) plant near Las Vegas that
went online in June 2007; its 14 MW PV plant at Nellis Air Force Base completed in December 2007; a planned 500 MW
(expandable to 850 MW) Sterling Dish project northeast of Los Angeles, with a 20-year power purchase agreements signed by
Southern California Edison; another 300 to 900 MW Stirling Dish project in California’s Imperial Valley, whose output is under
contract to San Diego Gas & Electric; and SunEdison’s 8.2 MW PV plant in Alamosa, Colorado supporting substation loads for
Xcel Energy, which will buy the plant’s power and RECs for 20 years.

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4.1 Financial Incentives

Rebates
Rebate programs are the most common mechanism used by states and utilities to incent PV development.
Eligibility requirements vary among programs, but most include residential and commercial installations,
and some include industrial, institutional and/or governmental energy users. Rebates are normally front-
end, capacity-based $/kW cash payments, set in advance by legislators, regulators, or program managers
as a percentage of estimated PV costs or to provide an estimated rate of return to a PV system based on
local market conditions, without regard to utility costs, and they range widely in value. They are typically
funded by all utility ratepayers through a ¢/kWh charge included in general rates, or through a dedicated
public (or ‘system’, or ‘societal’) benefits surcharge earmarked for specific purposes (energy efficiency,
renewables research and development, low-income programs, or other activities that advance state public
policies).

In theory, rebates can be structured to target solar installations that provide locational benefits to the
utility’s grid, conferring additional benefits to the utility. In practice this rarely occurs, and utilities generally
don’t view rebate programs as significant or sustainable solar business opportunities.21

Production Incentives
Many states, utilities, non-profits and coops are beginning to offer production or ‘performance-based’
incentives for solar installations. Like rebates, incentive amounts are typically established in advance by
law or regulation, and not explicitly based on utility costs or savings anticipated from solar generation, but
rather based on providing an estimated rate of return for the PV generator. Unlike rebates, these offer
system owners a ¢/kWh payment based on electricity produced and delivered to the grid. While rebates
target front-end costs and are tied to the generator’s capital investment rather than to its performance,
production incentives offer continuing financial support contingent on actual power deliveries, rewarding
efficient and reliable solar performance. Since these incentives are not available until a project is built and
operating successfully, they may need to be coupled with front-end, low-cost financing options, especially
for installations too small to justify project-based financing.

Production incentives could also be structured to reward performance where and when it has the most
value to utilities, at certain locations on the grid or at certain congested times. However, as noted for
rebates, locational pricing has not been widely adopted at the distribution level – perhaps because
locational values are hard to establish, often hard to capture, usually modest, and typically transient.
Time-of-use pricing for customer solar can benefit some customer-generators, but may not present an
advantageous business opportunity for the utility itself.

Feed-In Tariffs
Feed-in tariffs (FITs) have successfully spurred renewable resource development in Europe, especially
Germany, but only a few U.S. states and utilities have begun to experiment with them.22 FITs are a type

21
In a 2005 presentation to the California Energy Commission, Lawrence Berkeley Laboratory researchers concluded that “Non-
RPS driven solar demand associated with existing renewable energy fund programs (i.e., rebate programs, outside of CA) [was]
unlikely to generate sizable PV demand relative to aggregate impact of solar RPS set-asides”, and their analysis chose to ignore
these programs. See Wiser, R. and Bolinger, M., Projecting the Impact of State Portfolio Standards on Solar Installations,
January 20, 2005.
22
See, e.g., California Public Utilities Code §399.20 for public water and wastewater facilities, CPUC D.07-07-027, issued July 26,
2007, expanding tariff availability to other customers subject to certain limits, and California utility tariffs implementing these
directives; Michigan House Bill 5218, introduced September 5, 2007; and tariffs offered or proposed by Wisconsin utilities WE
Energies, Madison Gas & Electric, and River Falls.

16
 May 2008

of performance-based incentive, but the distinction is often that PBIs are associated with net metering on
the customer side of the meter.

Unlike most other utility tariffs, FITs are paid by utilities to renewable energy generators connected on the
utility side of the meter (although the generator may be on customer property). FITS typically offer a fixed,
long-term (e.g., 10-20 year) price for energy delivered to the utility’s grid at higher than a wholesale rate.
Tariff payments are related to renewable generation production costs; they usually vary by technology;
and they are often higher for generators who come online in earlier years than in later ones. In Germany
alone, prices range from the equivalent of about 9.6¢/kWh for large landfill gas projects, to about
83¢/kWh for building-mounted solar projects.23

Well-designed FITs can offer important benefits to renewable developers compared to PURPA-like
‘avoided-cost’ approaches, or contracts negotiated ad hoc with utilities. The long-term, fixed-price nature
of FITs greatly enhances certainty about a project’s revenue stream, shifting financial risks to others
(normally utility ratepayers), and thereby attracting lower-cost project financing. One of the challenges is
to design FITs compatible with the kind of competitive market structures recently favored in the U.S. For
example, they can be structured to vary inversely with market prices, resulting in a predetermined level of
payments, or to be added to market prices, yielding greater volatility for renewable suppliers. Although
very few U.S. utilities have adopted these tariffs yet, several of SEPA’s working group members have
considered FITs as one possible element of win/win/win business approaches, as discussed later.

Renewable Energy Credits24

Renewable energy credits, or RECs, might be viewed as yet another form of production incentive. RECs
generally represent the environmental25 attributes of electricity generated from renewable resources, and
are traded and sold separately from the commodity electricity itself. Utilities (and other buyers) can
acquire RECs whether or not they have physical access to renewably-generated electricity on their
systems. They are buying the environmental attributes of identifiable units of electricity produced from
renewable power plants, typically valued per MWh of pollutant emissions reduced or avoided by
displacing conventional generation where the plants are located.

REC tracking systems collect meter readings from renewable generators; verify their output; assign unique
identifiers for each REC to avoid double-counting; and issue them into an account for the generator’s benefit.
Such systems are now operating in New England, New Jersey, the mid-Atlantic states, Midwestern states,
Texas, and the Western Interconnection System (covering Washington, Oregon, California, Nevada, Idaho,
Utah, New Mexico, Arizona, Colorado, Wyoming, Montana, Texas, South Dakota, Nebraska, British
Columbia, Alberta and parts of Baja California).

REC trading offers potential benefits for utilities acting as buyers, sellers or intermediaries, and is most often
related to reducing RPS compliance costs by expanding the geographic scope of eligible projects, reducing
market risks for generators, and obviating concerns over intermittent generation and load-matching. Trading
RECs is simpler than trading electricity, and may reduce transmission costs where it helps avoid delivery
over constrained paths. It also improves price signals regarding the value of renewable relative to
conventional generation and among different renewables, and it can simplify tracking for RPS compliance

23
See, e.g., RE Strategies, What Can the U.S. Learn from European Feed-In Tariffs?, IREC phone seminar, May 8, 2007.
24
Sometimes referred to as renewable energy certificates or tradable renewable certificates (TRCs); renewable resource credits
(RRCs); green tags, tickets or certificates; or in the case of solar, solar RECs or SRECs.
25
And sometimes the economic and/or social attributes. Economic attributes might include developing local jobs or businesses or
enhancing energy security, and social attributes could include health benefits, economic justice, technology innovation, etc. These
attributes are seldom quantified, but may enter into REC purchase decisions.

17
 May 2008

purposes. SEPA’s working groups identified utility participation in REC markets as a potentially promising
direction for future solar business models.

Loans
Many state or local governments and utilities offer loan programs, often at below-market interest rates, to
finance solar (and other renewable) equipment purchases and/or installation. Again, eligibility requirements
differ, but loans are available to various combinations of residential, commercial, industrial, institutional, and
nonprofit utility customers. Loan terms vary by project and sometimes by technology. Utility solar loans are
usually funded out of general rates or public benefit surcharges, and treated for ratemaking purposes as
utility expenses – not as capital investment in utility property that would enter the ratebase and earn a return
once the equipment becomes used and useful. Thus, although utility loan financing can expand solar
markets and serve important public policy objectives, it hasn’t historically offered utilities an opportunity to
earn on utility assets26, nor has it been particularly popular with renewable generators, who obviously favor
not having to repay the loan.

Grants and Hybrid Programs

Federal, state, and some local governments, as well as a few utilities, offer grant programs for solar research
and development, to support projects employing emerging solar technologies, and/or to promote public
education and outreach. The utility programs are sometimes available to all customer classes, and
sometimes only to nonprofits or public agencies. Utility grants can range from a few dollars per kW for
residential solar, to as high as $2 million in the case of Xcel Energy’s Renewable Development Fund
(created by statute and funded annually by Xcel Energy’s Minnesota customers).27

A number of utilities offer ‘hybrid’ solar programs consisting, for example, of rebates based on estimated
system performance rather than capacity; or rebates combined with separate solar REC payments; or
rebates for solar but only if certain energy efficiency building standards are met. These incentive
approaches, like most of the others described above, may add value for the utility by diversifying its
resource base, offering customer choice or meeting other customer needs, or advancing policies the
utility supports – but they are not structured to create value that contributes directly to the utility’s earnings
or its financial bottom line.

4.2 Other Regulatory and Policy Initiatives

Public Benefit Funds
These are funds established by states, usually by legislation adopted in the course of state electric utility
restructuring, to ensure continued support for activities favored by public policy but not adequately pro-
vided for by competitive energy markets. As noted earlier, they are often earmarked for, among other
socially favored uses, solar and other renewable energy projects or general incentive programs, and are
most often funded by a surcharge (also called a ‘system’ or ‘societal’ benefit charge, or ‘SBC’) on all
customers’ bills, separate from their cost-based charges for transmission, distribution and other utility
services. Utilities collect these funds from customers and typically either apply them to approved utility
programs, or pass them through to state agencies (such as energy offices or research and development
authorities) designated by law to administer them.

Net Metering

26
But see Section 4.2.2 below, discussing recent proposals to treat utility solar loans as investments entitled to earn a return.
27
See http://www.dsireusa.org/library/includes/summtabsrch.cfm?Incentive_Code=MN11F&Back=fintab&state=MN&type
=Grant&CurrentPageID=7&EE=1&RE=1.

18
 May 2008

For utility customers, net metering permits bi-directional flows of electricity to and from the grid. When
onsite demand exceeds generation, grid power flows to the site. When onsite generation exceeds
demand, excess solar-generated electricity flows to the grid. With net metering, customers are charged
only for the net electricity supplied by the utility as of the end of the billing cycle. Depending on the
jurisdiction, credit for excess electricity produced can be rolled forward to the next period, or lost, or
compensated anywhere between wholesale and retail rates. The grid and the utility accounting system act
as the ‘storage mechanism’ for onsite generation beyond the site’s needs that could occur at different
times of the day or year. Without net metering, excess generation delivered to the grid at certain times
could lose value relative to onsite uses at retail rates.

As originally conceived and widely adopted,28 net metering values electricity flowing into the grid at the
same retail value the utility would have charged for electricity flowing from the grid, not the (usually lower)
wholesale value paid to third-party bulk generators and assigned to any utility-generated power. Some
argue that this can result in subsidies from the utility’s non-participating customers to net metering
customers, or uncompensated revenue loss to the utility. Others observe that that depends on when and
under what system conditions customer generation flows to the grid, and that its value can sometimes
exceed non-time-differentiated retail rates, benefiting other customers and/or utility shareholders. But as
far as we know, neither side contends that net metering in itself offers a financially attractive or sustainable
business opportunity for utilities.

Most programs limit the size of individual net-metered installations at anywhere between 10 kW and 2
MW. They also limit the aggregate amount of net-metered capacity available within a utility’s service
territory, either by number of MW or as a percentage of the utility’s peak electricity demand.29 These limits
are designed to limit the financial impact of net metering on revenues and/or cross-customer rate impacts.
Net metering is generally viewed as an interim policy which, taken to a significant penetration level (10%?
25%? etc.), could undermine utility fixed cost recovery. Today, however, very few utilities are at levels
even beginning to approach 5% of peak capacity; if aggregate limits instead were tied to performance,
even fewer would be approaching potentially significant levels.

Green Pricing
Over 750 U.S. utilities of all types now have voluntary ‘green pricing’ programs that enable customers to
support utility renewables investment by paying a premium on their electricity bills for the electricity
supplied by utility-sourced renewable generation projects.30 These programs differ widely among states
and utilities, but covered renewables typically include some combination of landfill gas, digester gas,
wood, geothermal, hydro, wind and/or solar (typically PV). Ultimately the programs are considered
revenue neutral, as participating customers pay an increment which covers the utility’s energy acquisition
costs. As of 2005, total customer participation in these programs averaged only about 1.5% across all
types of utilities; green energy sales averaged only about .5% of utility electricity sales; and solar had
contributed less than four of the 744 MW of new capacity supplying these programs.31 Given wind
energy’s market position and higher penetration rates, there is likely room for green pricing programs to
blend solar projects into wind portfolios with minimal incremental cost, at locations more flexibly integrated
into the community rather than at remote rural locations. Utilities certainly have advanced public policy,
28
Net metering programs are usually established by state legislation, or sometimes by regulatory commissions or individual utilities.
As of January 2008, net metering programs were available in 42 states and the District of Columbia (see net metering map link at
http://www.dsireusa.org/library/includes/topic.cfm?TopicCategoryID=6&CurrentPageID=10&EE=1&RE=1). Some net metering
schemes now value site exports at less than retail, or at time-of-use rather than flat retail rates.
29
Since revenue concerns are tied to performance, not capacity, a more logical policy would be to set limits on net metered
production (or estimated production) rather than capacity, especially given the lower capacity factors of intermittent generators.
30
U.S. DOE Office of Energy Efficiency and Renewable Energy, at http://www.eere.energy.gov/greenpower/markets/pricing.shtml.
31
L. Bird and E. Brown, Trends in Utility Green Pricing Programs (2005), NREL/TP-640-40777, October 2006; pp. 8, 13, 11.

19
 May 2008

supported renewable (especially wind) development, gained public favor, and created value through
these programs, but again they do not present significant business or earnings opportunities in the longer
term relative to other utility activities.

Decoupling
Unlike the regulatory initiatives just outlined, decoupling mechanisms are intended to address issues of
utility earnings and financial health. These mechanisms – adopted now for gas and/or electricity utilities in
about 10 states and rejected by about the same number – sever the traditional regulatory link between
utility sales and utility revenues, so that customers who reduce their demand do not reduce utility
revenues accordingly. Decoupling mechanisms have been considered mostly in the energy efficiency
context, but they are equally relevant to customer-side distributed generation resources, including solar,
which similarly reduce customer demand for utility-supplied power.

A recent NARUC paper describes decoupling as follows:

In the electricity and gas sectors, “decoupling” (or “revenue decoupling”) is a generic
term for a rate adjustment mechanism that separates (decouples) an electric or gas
utility’s fixed cost recovery from the amount of electricity or gas it sells. Under
decoupling, utilities collect revenues based [on] the regulatory [sic] determined
revenue requirement, most often on a per customer basis. On a periodic basis
revenues are “trued-up” to the predetermined revenue requirement using an
automatic rate adjustment.

“The result is that the actual utility revenues should more closely track its projected
revenue requirements, and should not increase or decrease with changes in sales.
Since utilities will be protected if their sales decline because of efficiency, proponents
of decoupling contend that they are more likely to invest in this resource, or may be
less likely to resist deployment of otherwise economically beneficial efficiency.” 32

Conventional regulation sets rates based on the utility’s costs, and allows utility revenues to rise or fall with
sales volume between rate cases. Decoupling typically sets revenues based on the utility’s costs, and lets
rates rise or fall with utility sales between rate cases. In well-designed decoupling regimes, reduced sales
due to customer displacement of grid purchases with onsite generation should not reduce utility earnings.

It’s worth emphasizing, as the NARUC paper does that, “while it can remove disincentives for utilities to
promote efficiency, decoupling is not designed to create an incentive for energy efficiency” – nor would it do
that for solar or other distributed generation resources.33 In other words, even a well-designed decoupling
mechanism simply neutralizes a disincentive: it does not establish an affirmative incentive for the utility to
embrace PV or other measures that reduce demand for grid-supplied power. Also, decoupling has been
adopted as a utility-wide mechanism, with far-reaching implications for all aspects of the utility’s business.

32
National Association of Regulatory Utility Commissioners, Decoupling For Electric And Gas Utilities: Frequently Asked Questions (FAQ),
September 2007; p.1, emphasis in original, footnotes omitted. Very helpful guidance is also available from numerous publications of The
Regulatory Assistance Project at http://www.raponline.org/Feature.asp?select=78&Submit1=Submit.
33
Id., p. 3. The NARUC paper does suggest (p. 8) that a utility can increase its profitability through decoupling, but only by
increasing its customer base, or improving efficiency and lowering its cost of service without reducing the number of customers.
In the net metering context, it is worth noting that although decoupling would address revenue recovery concerns, it would not
necessarily justify reducing aggregate net metering limits because at significant penetration levels and combined with energy
efficiency, it could induce undesirable rate volatility.

20
 May 2008

As a way to encourage customer-oriented solar businesses today, utilities and commissions might well view
it as the tail wagging the dog.34

Renewable Portfolio Standards

Renewable Portfolio Standards (RPS) are state35 mandates for utilities and other retail energy suppliers
to include a specified percentage of renewable resources in the generation that they own or purchase to
serve retail load. The percentage varies, but is usually stated as an annual percentage of retail sales
(e.g., 1 or 2%) until a target percentage is reached in a specified year (e.g., 20% by 2020). Different
states include different resources in their RPS, but generally include some combination of solar, wind,
geothermal, biomass, digester gas, landfill gas, small hydro, tidal or wave energy, and energy from waste.

Some RPS regimes permit retail suppliers to purchase and trade renewable energy credits (RECs) in
satisfaction of their obligations, instead of building facilities or purchasing renewable energy generated by
others. Some but not all states impose penalties for noncompliance with RPS requirements (e.g., 1-5¢
per kWh deficit, sometimes capped at an annual amount; the lesser of the cost to construct facilities or
purchase renewable credits; etc.). Penalty payments may not be recovered through rates, and may be
earmarked for particular uses (low-income assistance, public facility conservation, REC purchases, etc.).

As of January 2008, about 30 states had adopted some form of RPS or, in a few cases, renewable
portfolio goals. About half of these included solar set-asides (specific solar percentages) or solar
multipliers (some multiple, usually 2-3 times, of the RPS credit available from other eligible resources).36
These solar-requirements states, such as New Jersey and Colorado, have seen significant growth in
customer-sited solar, generally as a result of incentives offered by the state and/or utilities.

In some Western states, non-technology specific RPS mandates have resulted in strong utility interest in
large-scale solar. But so far they haven’t been nearly as effective in bringing forth small-scale customer-
sited solar (in the West or elsewhere), for several reasons. To meet their RPS requirements utilities typically
use competitive solicitations for non-owned resources. To minimize utility transaction costs, many
solicitations specify a minimum size, often at least one megawatt, which is larger than most customer-sited
PV systems today. Responding to these solicitations is expensive, and smaller projects acting
independently can’t justify the transaction costs (although aggregating small projects can sometimes help).
Regardless, RPS solicitations favor least-cost resources, placing today’s small solar at a marked
disadvantage relative to competing renewables.37

* * *

The programs and activities just outlined are not the only ways that utilities engage in solar activities now,
but they are the most common. Together they can help advance important public policies, and enable

34
Short of full decoupling, some jurisdictions have considered ‘net lost revenue’ recovery mechanisms more specifically targeted to
particular sources of revenue reduction. “This mechanism adjusts net changes in revenues only for sales deviations that can be
proven or demonstrated to have resulted from [demand side] programs. Revenues continue to be susceptible to variations in sales
from all other causes. While favored by some observers, this mechanism has also been criticized as being less effective than
decoupling because it does not remove the sales incentive, can require much more sophisticated monitoring and evaluation, and
could allow utilities to recover costs for expenditures on programs that do not result in increased efficiency.” NARUC FAQ paper, p.
4, note 8. PSE&G’s proposed ‘make whole payment’ discussed on page 42 below, is an example of this kind of mechanism.
35
Federal RPS requirements were proposed but not adopted in the energy legislation passed by Congress in December 2007.
36
For specifics , see http://www.dsireusa.org/library/includes/topic.cfm?TopicCategoryID=6&CurrentPageID=10&EE=1&RE=1.
37
For a helpful summary of RPS issues facing small solar, see Wiser, R.H., Lawrence Berkeley National Laboratory, The Treatment
of Solar Electricity in Renewables Portfolio Standards, April 2007 presentation; available at eetd.lbl.gov/EA/EMS/reports/pv-rps-set-
asides-2007.pdf. The presentation also reports U.S. EIA studies of recent federal RPS proposals showing that they would result in
little or no incremental end-use or utility-scale PV, or even solar thermal electric. Reported cost reductions claimed (but not
confirmed) since these studies were done might yield better results for large-scale CSP or even PV, but probably wouldn’t overcome
other RPS negatives for small systems.

21
 May 2008

utilities to respond to increasing regulatory and customer demands for greener power. But except for
some forms of decoupling (perhaps necessary, but not sufficient for utility customer-side solar activities),
none of them provide mechanisms that would motivate utilities, and especially IOUs, to forge ahead with
solar businesses. Some utilities have begun to explore new approaches with this in mind. The next
section describes emerging models considered by SEPA’s working groups.

22
 May 2008

5. EMERGING SOLAR UTILITY MODELS

For discussion purposes, the following sections classify emerging utility approaches into three broad
categories – utility ownership of assets, utility financing, and utility purchases of solar output. In reality,
utility business approaches aren’t always so neatly separated, and some of them combine several of
these elements. Accordingly, we’ve tried to classify them by their predominant characteristic, or by
features that have attracted particular interest among SEPA’s working group participants.38

The two working groups included representatives of both investor-owned and publicly-owned utilities and
group discussions revealed important differences between IOU and POU solar business drivers, whether
they were focusing on retail service or grid supply.

First, and not surprisingly, IOUs were especially interested in regulatory compliance and the impact of any
solar activities on shareholder earnings and the utility’s bottom line. In contrast, POU priorities tended to
center around responsiveness to customer preferences and community environmental concerns.

Second, IOUs faced with adversarial proceedings before their commissions are more constrained in
assigning solar costs among stakeholder groups than are POUs, which report more flexibility to allocate
costs and benefits to pursue broader community goals.

Third, federal income tax considerations remain major drivers for U.S. solar businesses, and changes
being considered in Congress during this project could impact IOUs and POUs quite differently in the
future.

All of these were recurring themes in the working group discussions, and are reflected in the emerging
approaches described below.

5.1 Utility Ownership of Solar Assets

An important finding of the STAC project described earlier was that the distributed generation scenarios
most likely to result in a ‘win/win/win’ outcome for all stakeholders were ones where the utility owned the
distributed assets and, although sited on customer premises, the assets were placed on the utility side of
the meter, supplying the grid instead of the customer. Ownership increased the utility’s benefits, because
it allowed the utility to earn a return on the distributed asset (as it would on other utility asset
investments). Placing generation on the utility side of the meter did not decrease the utility’s revenue,
because its output no longer displaced customer purchases from the grid.

Without these two assumptions, both of the non-solar-resource base cases (CCHP and biogas)
considered by STAC participants would have yielded net losses for the utility, removing any financial
incentive to make the projects happen. With these assumptions, the utility’s benefits increased and its
costs declined enough to make the projects economically viable for all stakeholder groups. Stated in
‘cost-effectiveness’ terms, net benefits exceeded net costs for each group, yielding the elusive

38
Although the Working Groups were structured in response to the participants’ primary interests – i.e., serving retail customers
(‘customer-centric’) or supplying the utility’s grid (‘utility-centric’) – many issues turned out to be similar for both types of business, so
this section classifies emerging models based on the issues presented by the utility’s role, rather than by the type of customer or
market that the utility targets.

23
 May 2008

‘win/win/win’ outcome that is a necessary (though not sufficient) condition for a promising utility business
model.

The same was not true for the customer-sited PV case. Even assuming utility asset ownership on the
utility side of the meter, and assuming typical subsidies and reasonable environmental benefits, today’s
high PV capital costs precluded a ‘win/win/win’ for that case. However, utility ownership and grid-side
operation can help make solar more economic for utility stakeholders as solar costs decline, and can
therefore become important components of utility solar business models.39

Under traditional regulation, IOUs are entitled to earn a return on their investments in utility-owned assets,
but not on power purchased from others (which is treated as an expense and simply reimbursed by
customers). IOUs therefore have an incentive to own the assets that supply power to their customers.
However, since electric industry restructuring some states prohibit utilities from owning or acquiring
generation assets, including solar.40

1. OWNING SOLAR ASSETS WITH THE FEDERAL INVESTMENT TAX CREDIT

Even in states that permit utility-owned generation, utilities generally cannot utilize the federal investment
tax credit (FITC), though the reasons for regulated IOUs and non-regulated POUs are different. 41
“Solar equipment owned by a regulated utility does not qualify for commercial solar
tax credits [because] commercial credits cannot be claimed on ‘public utility
property.’ A solar project is ‘public utility property’ if the rates for the sale of
electricity from the project are regulated on a rate-of-return basis.” 42

“In addition, commercial solar tax credits cannot be claimed on equipment that is
‘used’ by someone who is not subject to US income taxes. Thus, use of the
equipment by a government agency ... or other tax-exempt organization ... will rule
out a credit on the equipment.” 43

In the utility context, formulating successful business models sometimes requires addressing legal and
regulatory constraints embedded in the system, especially where these undermine other pressing
regulatory policies, such as renewables preferences or climate change imperatives.

Eliminating the ‘public utility property’ exclusion from the federal energy tax credit is arguably one of these
cases, and clearly would expand the roles available to utilities (at least IOUs) to support evolving solar
markets. Many utilities and solar proponents pushed hard for this change as part of 2007 federal energy

39
Utility ownership of distributed resources and engagement in potentially competitive activities can raise anticompetitive and
possibly antitrust concerns, which can sometimes be addressed through teaming arrangements, legislation or commission
initiatives. See Nimmons, J.; Starrs, T.; Orans, R.; Swisher, J.; Singer, J., Legal, Regulatory, and Institutional Issues Facing
Distributed Resources Development, National Renewable Energy Laboratory, 1996; NTIS DE96014321; available from
http://nrelpubs.nrel.gov/Webtop/ws/nich/www/anpublic/Record?upp=0&m=1&w=NATIVE%28%27AUTHOR+ph+words+%27%27Ni
mmons%27%27+and+PUBYEAR+%3D+1996%27%29&order=native%28%27pubyear%2FDescend%27%29 .
40
With some exceptions, such as a New Hampshire statute providing that “distribution service companies should not be absolutely
precluded from owning small scale distributed generation resources as part of a strategy for minimizing transmission and distribution
costs.” (New Hampshire RSA §374-F:3-III.)
41
See Solar Energy Industries Association, Guide to Federal Tax Incentives for Solar Energy, version 1.2, May, 2006, prepared by
Chadbourne & Parke, LLP.
42
Id., p.14, referring to Internal Revenue Code §48(a)(3); emphasis added.
43
Id., p. 2; emphasis added. By definition, POUs are government entities and do not pay federal income taxes, so federal tax credits
and accelerated depreciation benefits are not available to them.

24
 May 2008

legislation, but in the end language that would have accomplished this was removed from the bill to avoid a
presidential veto. 44 Efforts continue to reinstate such language in 2008 legislation. If that occurs and utilities
with federal tax exposure are able to take advantage of the changes, some of the approaches discussed
below will become less crucial, or more limited in their application; others may be worth considering whether
or not federal tax benefits are extended to utilities.

Even with federal tax benefits and additional state and utility inducements, solar electric installations are
hard pressed to compete in most U.S. electricity markets at today’s capital costs. Without the federal tax
benefits, they become even less competitive with other resources. Although capital costs are widely
expected to decline and solar advocates are working hard to extend tax benefits, utilities are already
considering and addressing these challenges in a number of ways, discussed below.45

2. OWNING SOLAR ASSETS WITHOUT THE FEDERAL INVESTMENT TAX CREDIT

Absent the FITC, some utilities are pursuing ownership of solar assets in new and interesting ways, some of
which require regulatory justification to pass costs to general ratepayers or provide programs for ratepayers
willing to pay a premium.

Ratebased PV on Commercial Customer Facilities: San Diego Gas & Electric

For several years, San Diego Gas & Electric (SDG&E) has had in place its Sustainable Communities
Program, first approved by the California Public Utilities Commission (CPUC) in the utility’s 2004 rate case.
The program’s long-term goal is to encourage sustainable building practices while advancing the utility’s
delivery system by integrating green building practices with renewable electricity generation on customer
sites.

The program targets non-residential new construction or major renovation, and large multi-family
residential developments. It provides design assistance and cash incentives for sustainable building
projects, and leases roof or other space at these customer facilities for utility-owned PV systems that can
support SDG&E’s distribution system. The utility installs, interconnects, owns and operates these systems
on its side of the meter and feeds their output to its distribution system, with no effect on the host
customer’s bill. SDG&E is allowed to place its PV investment in rate base and earn its authorized return.
The utility believes that this program creates the stakeholder values listed in Table 6:

Table 6. SDG&E Sustainable Communities Program – Value by Stakeholder

Stakeholder Group Value Created

Utility & Shareholders
Financial
Transmission & distribution
Energy & environment
Public relations
Participating Customer
• adds to utility rate base and earns a return
• helps reduce peak demand, defer distribution investment, enhance reliability
• expands energy efficiency and renewables, and reduces emissions
• enhances community reputation, gains program recognition, showcases models

44
Energy Independence and Security Act of 2007 (H.R. 6).
45
This project has focused on ways that the utility itself (whether investor- or publicly-owned) can create, capture and sustain value
in solar markets. It has not addressed solar business models for entities separate from the utility, such as unregulated utility
subsidiaries and independent affiliates in a holding company structure. Such entities comprise some of the leading independent
power producers for both conventional and renewable generation, but they do not operate under the same regulatory, political, or
federal tax constraints faced by utilities, and SEPA’s Working Groups have not considered them as part of this project.

25
 May 2008

Financial (green building)
Financial (solar)
Other
Non-participating Customers
Financial
Other
Other Stakeholders / Society
Local communities
City of San Diego
Local construction industry
U.S. Green Building Council
Affordable housing industry
Vendors & manufacturers
Calif. PUC, Energy Commission
Air Pollution Control District
• reduces infrastructure, equipment, materials, construction and O&M costs
• pays leasing charges to building owner
• enhances occupant comfort, health, and productivity, and building marketability
• potential peak demand reductions, reduced infrastructure costs, enhanced reliability
• utility will develop and lead a coordinated conservation/efficiency/renewable
generation model, leading to more sustainable local development
• more efficient infrastructure preserves resources, supports economic development
• 50 MW solar energy goal contribution
• high profile projects
• promotes LEED
• lower energy bills for low income homeowners
• increased sales, training
• supports State Energy Action Plan
• reduces overall emissions

Ratebased PV on Commercial Customer Facilities: Southern California Edison

On March 27, 2008, after SEPA’s working groups had concluded their work, Southern California Edison
(SCE) filed an application with the CPUC for approval of a program similar to but much more extensive
than SDG&E’s rooftop leasing program.46 If approved, SCE’s program would be by far the largest U.S.
utility program to implement utility ownership of customer-sited solar PV.

SCE’s Application requests CPUC approval for the utility to:

1. install up to 250 MW of utility-owned PV at commercial customer facilities over five

years, possibly expanding to 500 MW if the program is successful;
2. receive rate-base recovery of, and authorized return on, PV capital costs estimated
at $875 million, as well as a 1% incentive return authorized by California law for
certain utility renewables investments; and
3. recover in rates its operation and maintenance expenses, defined to include lease
payments to customers hosting PV systems, other O&M costs, and utility staffing.

Initially, SCE is targeting systems in the 1-2 MW range (although it notes that systems could be larger or
smaller as the program proceeds, depending on roof capacity and circuit loading factors). The utility
emphasized that it chose this size range because:

1. California’s net metering law and California Solar Initiative (CSI)47 incentives do not
apply to PV output over 1 MW, leaving ‘a large solar PV gap’ between small-scale

46
Application of Southern California Edison Company for Authority to Implement and Recover in Rates the Cost of its Proposed
Solar Photovoltaic Program, A. 08-03-015, and Advice Letter 2226-E, Request to Establish the Solar Photovoltaic Program
Memorandum Account.
47
The CSI is one of the world’s largest solar incentive programs, committed to creating 3,000 MW of new solar generation by 2016 at a
cost of up to $3.3 billion. Initiated by the CPUC and the California Energy Commission in 2005 and signed into law on August 21,
2006, CSI provides performance-based incentives for solar, declining to zero by 2017. Systems under 50kW can choose an upfront
rebate based on expected performance or, like systems over 50kW, payments for actual performance over a 5-year period; in January
2008 incentives ranged from $1.55 to $2.50 per Watt. The CPUC administers a $2.17 billion budget, collected from IOU general
ratepayers, to oversee these incentives for commercial, industrial, and agricultural properties and existing homes in IOU service
territories. For 2007, CPUC staff estimated CSI average bill impacts for SCE customers at $10 a year for residential, $19 for
commercial, and $4,089 for industrial. http://www.cpuc.ca.gov/PUC/energy/Solar/061228_csirateimpacts.htm

26
 May 2008

and central utility systems, and a ‘vast untapped resource’ of commercial and
industrial buildings in SCE’s service area; and
2. the program will focus, although not exclusively, on commercial installations which
offer economies of scale but would not benefit from net metering (such as large
warehouses with little onsite load).

In its CPUC Application, SCE argues that California policy strongly supports increased solar use, and
CPUC decisions have explicitly directed utilities to consider owning and operating renewable generation
to advance the State’s renewable and climate change policy goals. The utility maintains that a program of
this scale – targeting 50 MW of PV annually – will improve solar installation methods, increase installation
efficiency and drive down installation costs, and should improve technology and pricing of PV
components. It will also help the utility meet California’s renewable portfolio goals.

SCE asserts that the utility can best develop such a program for the following reasons:48

1. it can use established electric supply arrangements with vendors and commercial
lessors who are also its longstanding customers, and who view the utility as a
stable, competent, reliable business partner (whereas ‘most solar PV developers
have been in business for only a few years’)

2. for SCE’s proposed $875 million investment, it can obtain volume discounts not
available to most PV developers

3. the utility has a strong balance sheet and procurement expertise that enables it to
negotiate effectively with rooftop owners and vendors

4. the utility will refer building owners/developers to its Energy Efficiency group to
identify efficiency opportunities for new structures considering PV

5. utility field personnel can effectively monitor and cost-effectively repair systems

6. the utility can coordinate PV with demand shifts using its existing demand reduction
programs on the same circuit, more fully utilizing distribution assets

7. the utility is uniquely situated to cost-effectively combine PV, customer demand

programs, and advanced circuit design and operation into a unified system

8. SCE involvement substantially increases the chance that 250 MW of PV will

become available to meet State RPS goals

9. SCE will share with other entities in California and elsewhere its experience
concerning PV interface issues, forecasting and scheduling, training and best
practices for 1-2 MW facilities, and streamlining of tariff applications and local and
State codes.

SCE plans to work with ‘a limited number of building owner/developers’ to select appropriate PV
locations, considering the available solar resource, rooftop capacity, and distribution circuit concerns.49

SCE’s Application estimates direct capital costs for the program at $875 million. This reflects an average
cost of $3.50 per installed Watt, which SCE expects to achieve through economies of scale and improved

48
March 27, 2008 Application, supra note 43, at pp. 8 et seq.
49
Id., p. 11.

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 May 2008

technology and efficiency. It requests rate-base recovery of these amounts, subject to reasonableness
review only if its average costs exceed certain $/Watt thresholds in each year.50

The Application does not directly address cost-effectiveness or compare this PV offering with other utility
generation alternatives, but it does argue that:

SCE proposes this program in furtherance of the State's goal to increase the
installation of solar PV technology. Our proposed program will achieve this goal at
lower cost and will further help jump-start the solar industry. The cost to our
customers of the Solar PV Program will be significant, but far less than the cost of
CSI implementation.51

Assuming that the CPUC will require evidentiary hearings and briefings, SCE has proposed a schedule
that would result in a final Commission decision in December 2008. Although its application rests partly
on California-specific factors (such as the relation of its proposal to the state’s RPS and CSI programs,
and previous CPUC directions concerning utility-owned renewables), this proceeding will likely break new
ground for utilities considering solar business initiatives, especially relative to prevailing ‘least-cost best-fit’
tests and the competitive implications of utility-owned, customer-sited renewable generation.

Table 7. Southern California Edison Proposed Solar PV Program – Value by Stakeholder

Stakeholder Group Value Created

Utility & Shareholders
Financial
Transmission & distribution
Energy & environment
Public relations
Participating Customer
Financial
Energy & environment
Non-participating Customers
Financial
• would add to utility rate base and could earn authorized return
• could earn 0.5-1% incentive return for utility-owned renewables
• may yield PV economies of scale, volume discounts through larger-scale projects
• may create RECs or other value streams for the utility
• may reduce demand from the grid during summer peaks, possibly deferring costs
• utility field personnel can monitor & repair, protect distribution system
• helps utility meet RPS requirements, reduces emissions
• may enhance utility reputation
• receive rooftop lease payments
• may benefit from utility coordination of PV with energy efficiency
• potential peak demand reductions, reduced infrastructure costs, enhanced reliability
• could moderate market prices during summer peaks by providing additional capacity
• scale economies and volume discounts could mean more PV at lower cost than CSI

Energy & environment

Other Stakeholders / Society
Society & PV suppliers
PV suppliers
Energy & environment
• coordinating PV with demand shifts can improve distribution asset utilization
• integrating PV with demand reduction and advanced circuits is more cost-effective
• helps achieve state RPS, GHG & efficiency goals
• addresses what may be a gap between small solar and utility-scale solar
• increases sales, information exchange re: interface, scheduling, tariffs, codes, etc.
• increases likelihood of meeting State RPS & GHG goals
• displaces other, scarcer or non-renewable supply resources

50
Id., p. 13.
51
Id., p. 7. SCE requests that, if its customers’ CSI goals become mandatory, the capacity installed under its PV Program be
credited towards its customers and suggests that since its customers will bear both CSI and PV Program costs if the application is
granted, their share of the State's CSI goals and program costs could be reduced.

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Calif. PUC, Energy Commission • supports State renewables policy and Energy Action Plan loading order

Ownership of PV at Substations and Utility Facilities: Pepco and Delmarva

In October 2007, Potomac Electric Power Company (Pepco) and Delmarva Power & Light Company
(Delmarva) each proposed to the Maryland Public Service Commission two new utility solar initiatives.
Under one of these, each utility would purchase and own PV equipment and install it: (1) at its substations
to serve substation load, and (2) on utility-owned and leased properties to serve the facility load. In both
situations, the utilities would provide any PV output exceeding the site loads to its distribution grid.52 They
proposed to recover their PV equipment costs through base distribution rates, and to offset those costs
with reduced electric costs for utility facilities, and with any revenues resulting from net metering those
facilities and selling RECs.

In their regulatory filings (not yet approved as of this writing), the utilities acknowledged that their proposals
would not be cost-effective under any test today. However, they reasoned that the programs would help
achieve Maryland’s aggressive RPS goals and its state agency conservation and efficiency targets; would
provide needed capacity during summer peaks; and would reduce power plant emissions. Maryland
ratepayer advocates have credited the utilities for proposing an innovative solar program, and encouraged
the Commission to consider it further.53

Table 8. Pepco & Delmarva 2007 Utility-Side Ownership Proposals – Value by Stakeholder54

Stakeholder Group Value Created

Utility & Shareholders
Financial
Transmission & distribution
Energy & environment
Public relations
• adds to utility rate base and earns a return
• may yield PV economies of scale through larger-scale projects
• creates other value streams for the utility (RECs, possibly net metering revenues)
• reduces demand from the grid during summer peaks, possibly deferring costs
• helps utility meet RPS requirements, reduces emissions
• enhances utility reputation, showcases utility facilities

Utility Ratepayers
Energy & environment
• helps achieve state RPS & efficiency goals and reduce pollutant emissions
Financial
• could moderate market prices during summer peaks by providing additional capacity

Other Stakeholders / Society

Energy & environment • helps achieve state RPS & efficiency goals and reduce pollutant emissions
• displaces other, scarcer or non-renewable supply resources
•

52
Under the second initiative, discussed later, the utility would arrange for and finance turnkey PV installation and maintenance on
customer property. Pepco and Delmarva Responses to the Energy Efficiency Conservation and Demand Response Plan, filed October
26, 2007, in Case No. 9111, at pp. 28-34 of both filings; available at http://webapp.psc.state.md.us/intranet/Casenum/caseForm.cfm .
53
Comments of the Office of People’s Counsel in Case 9111, November 2, 2007; p.23.
54
The fact that the programs admittedly aren’t cost-effective now under any test means that some of the values shown in the table
are more than offset by costs not shown in the table – presumably high PV capital costs.

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Ownership of Community Solar Equipment: City of Ellensburg

The City of Ellensburg in Washington State is believed to be the first in the nation to develop a
‘community solar’ project, one that the Bonneville Environmental Foundation suggests ‘may represent the
future of renewable energy project finance in the United States.’55 As explained in the project brochure
offered by the city’s municipal utility:

“Historically, there have been several hurdles to widespread adoption of solar

electricity. These hurdles have included aesthetic concerns with solar modules on
private residences, lack of knowledgeable installation companies, high initial
investment, maintenance issues, shading, and a general lack of knowledge regarding
renewable energy. This project has attempted to address these hurdles in order to
make solar electricity available to everyone in our community.”56

Ellensburg has done that by developing a ground-mounted PV system at a community park (sited near a
busy highway for maximum public visibility). A demonstration project intended to promote solar, its initial
capacity is 36 kW, expected to grow in 12 kW increments to 180 kW over about five years. The system’s
electric output flows into the utility’s distribution grid. The utility has paid for and owns the project
infrastructure and PV equipment at the site, but invites local businesses and individuals to contribute to
the cost of the panels in return for a credit on their electricity bill.

At the end of each quarter, the utility reads the output meters on its solar array and multiplies the kWh
output during that period (e.g., 15,000 kWh) by the cost the utility would otherwise pay to the Bonneville
Power Administration for wholesale power (e.g., $.03/kWh). Of that total, each contributing solar customer
receives a credit on his or her electricity bill proportional to each individual’s share of the total solar
subscription contributions.57 The utility believes that its community system creates the stakeholder values
shown in Table 9.

Table 9. Ellensburg Community Solar Electric Project – Value by Stakeholder

Stakeholder Group Value Created

Utility & Community
Energy & environment
Contracting & administration
Community education
Public relations
• makes available the simplest, cleanest locally available resource
• reduces pollution associated with traditional energy production
• utility can deal with a single contractor, instead of one for each customer installation
• promotes renewable energy through a highly visible site, and solar education through
close ties to the local university and school district
• positions the city and its utility as energy and environmental leaders

Participating Customer
Contracting & administration
• no need to assess feasibility, or to find, contract with, or oversee contractors
Aesthetic & operational
• no need to install visible system on their building, or deal with O&M

55
BEF describes the project at http://www.b-e-f.org/renewables/ellensburg.shtm. Gary Nystedt, Resource Manager for Ellensburg
Energy Services Department, was one of the prime movers behind the project, and graciously shared Ellensburg’s experience as a
member of SEPA’s working groups.
56
City of Ellensburg Energy Services Department, Ellensburg’s Solar Electric Project, July 2004.
57
As of February 2008, Ellensburg’s program had enrolled 70 customers whose solar contributions total $113,400, ranging from the
utility’s $250 minimum to as much as $12,000. A second round of marketing is planned for Spring 2008. Personal communication
from Gary Nystedt, Resource Manager, Ellensburg Energy Services Department.

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 May 2008

Financial
Resource & system availability
Energy & environment
• receive solar benefits without paying full capital cost, installation or O&M
• can benefit from solar even if their building wouldn’t be a good PV candidate because of
orientation, shading, etc.; renters who could not install solar can participate
• receive essentially the same benefits they would from PV on their rooftops

Non-participating Customers
Energy & environment
• reduces pollution associated with traditional energy production
Education
• access to visible solar demonstration & education
Choice
• additional choice: opportunity to participate is open to all customers

Other Stakeholders / Society

Energy & environment • reduces pollution associated with traditional energy production
• displaces other, scarcer or non-renewable supply resources

Ownership of Customer Inverters: Chelan Public Utility District

Chelan Public Utility District (Chelan) in Washington State is well known for its SNAP program, since
adopted by a number of other publicly-owned utilities.. In that customer-oriented program the customer,
not the utility, owns the solar assets. However, Chelan is also considering a hybrid program where the
customer would own rooftop panels and the utility would own the inverter. Chelan believes this
arrangement, coupled with a feed-in tariff, could benefit both the utility and the customer in a number of
ways.58

Utilities often prefer not to work on customers’ rooftops, which can lead to trade issues and liability
concerns. For these reasons, Chelan does not foresee utility-owned rooftop systems, at least for small
customer systems. However, it does see potential to separate the inverter, which often includes a meter,59
and to remove it from the rooftop and from the customer side of the system. Utility ownership and
installation of a utility-grade inverter and meter on the customer’s property but off the roof and separate
from the rest of the system, could minimize interconnection and inspection issues, and simplify program
administration. It would also reduce the participating customer’s solar system cost.60 Although today’s
inverters tend to be the least reliable component of PV systems, Chelan believes that’s because they’re
designed for the lowest first-cost, not lowest life-cycle cost, which is how the utility would value and acquire
its own equipment.

Ownership of the inverter would also allow the utility to recover its costs through rates – including, for IOUs,
a fair rate of return. While inverters might not account for a significant portion of utility revenues, the utility
would not risk losing revenues as it might with net metering. With the grid-side connection, power would
flow into the utility’s system, and it would pay the participating customer for kWh delivered under a feed-in

58
The concept described here was developed and presented to the working groups by Dr. Jim White. P.E., Senior Energy Services
Engineer for Chelan County PUD, whom we thank for his contribution.
59
Working group members noted that some manufacturers are now integrating inverters with their panels to reduce costs and ease
installation, and that meter-integrated inverters might be limited to a few kW in size.
60
Working group members estimated customer savings at anywhere from under 15% to as much as 50% of system costs. On the
other hand, current federal tax incentives probably would be unavailable for utility-owned solar components, as might some state
incentives, increasing system costs in some cases.

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tariff (deducting the utility’s amortization and administration costs). Because the PV output would not
displace the customer’s onsite load or reduce its demand, utility revenues would be unaffected.

Table 10. Chelan PUD Inverter Ownership & Feed-in Tariff Scenario – Value by Stakeholder

Stakeholder Group Value Created

Utility & Community
Financial
Transmission & distribution
Energy & environment
Customer relations
• owned equipment eligible for cost recovery and for IOUs, earns a return
• avoids distribution revenue loss by connecting on the utility side of the meter
• avoids risk of reduced revenues from net metering
• may reduce program administration costs
• eliminates interconnection concerns and reduces interconnection cost
• may reduce demand from the grid during summer peaks, possibly deferring costs
• helps utility meet RPS requirements, reduces emissions
• helps more customers afford solar, enables customer choice

Participating Customer
• gains revenues from feed-in tariff
• reduces customers’ equipment and interconnect cost, so more can afford solar
Financial
• can take federal tax benefits on customer-owned components
• can combine with other state or local incentives
• predictable revenue stream reduces risk, enhances certainty and finance-ability
Contracting & administration
• utility is a project partner, simplifying contracting, interconnection, O&M
Non-participating Customers
Energy & environment
• helps achieve state RPS or renewables goals and reduce pollutant emissions
Financial
• could moderate market prices during summer peaks by providing additional capacity

Other Stakeholders / Society

Energy & environment • helps achieve state RPS or renewables goals and reduce pollutant emissions
• displaces other, scarcer or non-renewable supply resources

3. ACQUIRING SOLAR PROJECTS FROM DEVELOPERS

Among the utility ownership options discussed up to this point, only Ellensburg’s system involves a
community system, and none involve large-scale utility installations intended primarily for bulk power
supply to the grid.61 However, a number of utilities are interested in these ‘utility-centric’ systems (defined
by SEPA’s working groups to include centralized, sometimes remote, multi-MW installations not dedicated
to a geographically-defined customer group, using solar technologies suited for large-scale applications).
A number of utilities have included these kinds of systems in their RPS solicitations, or otherwise
supported their development.

a. Options in Utility RPS Solicitations

Some RPS solicitations have included one or more options for utility ownership of part or all of
large-scale solar projects. These options include variations on:

1. turnkey acquisition, or purchase and sale agreement

61
The Pepco/Delmarva proposal for utility-owned PV at distribution substations would primarily serve the substation, providing only
excess output to the grid.

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 May 2008

2. power purchase agreement with buy-out option

3. site for development

Turnkey Acquisition or Purchase and Sale Agreement. Some utilities have invited
renewables developers to enter into ‘Turnkey Acquisition’ or ‘Purchase and Sale’
agreements for generation projects. Under these arrangements, developers would, at
their own cost and risk, develop, permit, finance, build, and test a generation project.
They would then sell the project to the utility once they satisfy agreed conditions, provide
required guarantees, and becomes commercially operational. The sale may be of the
project assets, or of a special-purpose project entity that owns the assets.62

Although utilities have solicited these kinds of arrangements, SEPA’s project participants were
not aware of solar projects that had in fact been offered or developed as a result. Working group
members observed that current federal tax laws appear to make this approach uneconomic. As
long as ‘public utility property’ is ineligible for the 30% energy tax credit and the investors have
not exhausted accelerated depreciation benefits, they suggested that selling the project to a utility
wouldn’t make sense from the investor’s perspective or the utility’s, although we have not
confirmed this with qualified tax counsel. In any case, this could change if renewables advocates
convince Congress to eliminate the public utility property exclusion. However, until that happens,
working group members concluded that turnkey purchase and sale arrangements are not likely to
be attractive elements of ‘win/win/win’ solar business models.

Power Purchase Agreement with Buy-Out Option. Utilities have also invited renewables
developers, at their own cost and risk, to agree to develop, permit, finance, build, and test
generation projects; enter into power purchase agreements (PPA); and offer an option price
for the utility to acquire, own and operate the project at the end of a specified (e.g., 6- or 11-
year) period.63

Working group participants were not aware of any solar proposals responsive to these invitations,
or of any solar buy-out options accepted by a utility. Utility participants reported that their own
RPS solicitations so far have resulted in straight power purchase agreements, without buy-out
arrangements. Other working group contributors reported that investors are amenable to
structured buy-outs, and that these have been used for renewables, including solar, but they were
not able to identify specific utilities which had used them.

Buy-out arrangements are of interest in the current federal tax environment because they offer
potential for the original project developer/owner to capture tax credits and accelerated
depreciation benefits from which utilities have been excluded, reducing project costs in the early
years of the project, while providing the utility an opportunity to later acquire the solar assets once
the tax benefits have been used. At that point, an IOU could likely include the assets in its
ratebase with an opportunity to earn its authorized return. Both IOUs and POUs interested in
owning their own solar assets might also benefit overall from PPA terms in the early years that
reflect the value of tax benefits to the developer, as well as the prospect of acquiring the assets at
considerably less than original cost perhaps 6-7 years into the project (by which time most of the
tax benefits will have been taken).

62
For examples, see Pacific Gas & Electric Company RPS 2007 Solicitation Protocol, March 12, 2007, p. 9 and its Attachment J;
San Diego Gas & Electric Company 2007 Request for Offers for Eligible Renewable Resources, March 12, 2007, p. 4.
63
Id., p. 8 and Attachment I, and p.4, respectively.

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 May 2008

However, working group members raised several concerns about the buy-out approach. First,
prospective buyers often want or need to control risk by negotiating a fixed dollar amount for the
purchase, which will probably occur at least 6-7 years into a solar project. However, participants
reported that in order to preserve the early tax benefits, the IRS requires that any purchase be for
not less than fair market value at the time of the purchase, which at least places a floor under any
fixed-price buy-out and renders its amount uncertain.

IOU participants also noted that an uncertain buy-out price could make it difficult or impossible to
obtain advance regulatory approval for cost recovery, without which the utility might be unwilling
to proceed. Some also mentioned that the real driver for large solar projects is RPS compliance
and meeting the utility’s portfolio needs, so utilities may need to acquire these resources however
they can. If that means acquiring the output through a PPA, but not the resource itself and a
potential return on investment, utilities may need to follow that course even if a buy-out could be
more attractive to their shareholders.

Although buy-out arrangements present challenges and utilities so far have had little experience
with these arrangements for large solar projects, this approach warrants further research and
more focused attention. Even if public utilities become eligible for federal solar tax incentives,
those who cannot benefit from tax credits or depreciation allowances, or who are capital-
constrained, may be able to structure buy-out transactions that create greater value for their
constituents than typical PPAs deliver.

Site for Development. A third utility ownership option contained in some RPS
solicitations invites respondents to submit an offer for consideration of new or existing
project sites with renewable generation potential that they control, with land rights the
utility could acquire. The utility would acquire these sites and any associated permits
or other assets, and would develop, construct, and operate the generation resource.

Utility participants did not report receiving site offers under this option, and SEPA’s working
groups did not consider it. However, it may warrant further investigation as a potential business
model element because land acquired for utility purposes may be included in a regulated utility’s
ratebase and earn a return for some period of time under some circumstances. Although the
groups did not pursue this, there may be ways to combine utility land acquisition with third-party
project development that could create value for multiple stakeholders.

b. Solar ‘Flip’ Transactions

In addition to these options offered in utility RPS solicitations, SEPA’s working groups discussed
another set of options that have been widely used for large wind projects, but much less so to
date for solar, at least in the context of utility ownership. These so-called ‘flip’ transactions could
also be viable for large-scale utility solar projects, and also offer a path to capture the value of
federal tax benefits for projects even if those benefits are not available directly for utility-owned
property under the existing ‘public utility property’ exclusion. If that changes, as noted above for
buy-outs, flip transactions could still be useful to utilities that are capital-constrained, have higher
uses for their capital, or have no need for or ability to take advantage of tax credits or accelerated
depreciation benefits.

For wind as for solar, federal tax benefits typically comprise a significant part of the project value.

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Indeed, ‘investor returns from a wind project often derive as much or more from ... tax benefits
than from cash revenue from the sale of power and renewable energy credits.’64 Like utilities
(although for different reasons), many wind developers cannot use these tax benefits, so the wind
industry has created financing structures such as flips to attract investors who can, and to
allocate tax and other project benefits efficiently among the parties.

Flip transactions take a number of different forms in the wind industry, and continue to evolve as
wind energy markets change.65 In their simplest form, the developer forms a separate project
company to own and operate the project, and brings in tax investors to own a share of the project
company.

The project developer negotiates a percentage ownership share by the [tax investor, and]
the initial funding of project costs and allocations of project cash flows and [tax benefits]
are shared on the same percentage basis, or pro rata, as the respective ownership of the
parties...

[The tax investor] provides almost all of the project equity, and in turn is initially allocated
almost all of the cash and tax benefits. For example ... the tax investor might contribute
funds for up to 99% of the total project cost, while the developer provides the remaining
1%[;] the tax investor and developer are initially allocated the same respective 99% and
1% shares of the distributable cash and tax benefits.66

The ‘flip’ refers to the fact that the parties’ percentage allocations change later in the project, once
the tax investor has achieved an agreed-upon internal rate of return on its investment, usually at
the point where tax benefits have been exhausted. After that point, the flow of project benefits
typically reverses – the developer’s share may approximate the tax investor’s original share, and
vice-versa – and the developer may have an option to purchase the tax investor’s ownership
interest, usually at its then fair market value or greater to satisfy IRS requirements. At that point
the percentage allocation of cash benefits to the tax investor has been reduced and the tax
benefits exhausted, so the option value paid by the developer will be considerably less than the
project’s value at inception.

Although this illustrates basic features of one type of flip structure, flips are negotiated
transactions and differ according to the needs of the developer and the tax investors, their
percentage allocations, and other factors. Like buy-outs discussed previously, flip transactions
were unfamiliar to most SEPA working group members. They do not appear to have been widely
used for solar projects, at least in the utility context, although there are signs that that could
change. In any case, flips are not directly transferable from wind to solar, in part because of the
different kinds of tax benefits available for these resources: wind projects can receive a
production tax credit which accrues as the project produces power, whereas solar projects benefit
from an investment tax credit which accrues when the investment is made. Moreover, working
group members from the investment community cautioned that IRS rules may restrict
transactions in which ownership is flipped to the off-taker of the project’s power, which in this
context would likely be the utility. For these and other reasons, large-scale utility solar may
require different tax-motivated structures than wind does. These considerations were beyond the

64
Id., p. 2.
65
For a helpful and much more comprehensive discussion, see Harper, J, Karcher, K. and Bolinger, M., Wind Project Financing
Structures: A Review and Comparative Analysis; Lawrence Berkeley National Laboratory, September 2007; available at
http://eetd.lbl.gov/ea/emp.
66
Id., p. 18; to generalize the discussion, capitalization has been changed from the original.

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scope of this phase of SEPA’s work, but merit further investigation as utilities and others adapt
existing models to different circumstances.

Summary: Utility Ownership of Solar Assets

Owning solar assets offers potential business advantages for both IOUs and POUs. For IOUs, previous
work has shown that utility ownership can contribute to ‘win/win/win’ outcomes by affording utilities the
opportunity to earn a return on utility solar investment. If this encourages substantial investment and
widespread deployment, it could result in economies of scale, volume discounts, improved coordination
with demand-side and green building programs, and better system integration.

For POUs, asset ownership can afford other opportunities, such as increasing RPS compliance; reducing
solar costs for participating customers; making solar available to new markets; enhancing control over
community energy resources; and strengthening community self-reliance. Community-scale systems like
Ellensburg’s or SMUD’s (see section 4.2.3) can also reduce costs through scale economies, and improve
system integration.

Federal tax benefits today comprise an important element of solar value. These benefits generally are not
available for IOU ownership of solar assets because the Internal Revenue Code excludes ‘public utility
property’, or for POU ownership because government agencies are not subject to federal taxes against
which these benefits can be claimed. Without the tax benefits, solar projects are more expensive for
owners and customers; utilities are disadvantaged relative to other market participants; and regulators
may hesitate to burden utility customers with the additional costs of utility ownership. Financial strategies
such as buy-outs, site acquisition, and flip transactions may be able to help overcome these concerns, but
these are just beginning to emerge in the utility solar context. Regulatory and tax uncertainties remain to
be addressed and, at least initially, transaction costs may limit these strategies to larger or aggregated
projects.

5.2 Utility Financing of Solar Assets

Some utilities that are inclined not to own solar assets at today’s costs, or based on tax, regulatory,
competitive or other considerations, have proposed other ways to contribute to the solar value chain. One
of these is to provide financing and related services for solar system developers and/or utility customers
installing their own systems. Several recent initiatives have proposed shareholder funding of utility solar
loans, and treatment of all or part of the loan funds as regulatory assets (like utility capital investments) to
be included in ratebase and earn a return for utility shareholders. Beyond that, these proposals include
other features designed to create distinct values for different stakeholders, highlighted below.

Solar Loans in Ratebase, Incentive Return, & ‘Lost Revenue’ Recovery: Public Service Electric & Gas

On April 19, 2007, Public Service Electric & Gas Company (PSE&G) petitioned the New Jersey Board of
Public Utilities (BPU) to approve a $100 million distributed solar initiative designed to install PV behind the
meter for all classes of customers throughout the utility’s service area. PSE&G’s primary role would be as
a solar lender. It would provide developers, as well as commercial and industrial customers, with a stable
source of long-term capital to cover 40-50% of solar project costs, while preserving project owners’
opportunity to benefit from the federal investment tax credit (unavailable to utilities but necessary to
minimize overall RPS costs for customers). PSE&G would also review solar loan applications and assess

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project viability; help customers find developers; install new meters on some sites; bill customers on
behalf of third-party PV owners; and test PV performance.67

In its role as lender, the utility would offer 15-year solar loans, repayable with Solar Renewable Energy
Certificates (SRECs). Under New Jersey law, a SREC represents the clean energy attributes of one MWh
of solar-generated electricity, separate from the power itself. SRECs are tradable through the New Jersey
Office of Clean Energy’s website, and are bought by electric suppliers to meet their solar purchase
obligations under the State’s RPS, and by renewable energy marketers, brokers, aggregators, and
others. SREC prices vary with supply and demand, but PSE&G proposed to establish a floor value of
$475 to ensure timely repayment of its solar loans. 68

Solar industry proponents worked with PSE&G to shape its program, and have said that its role as lender
helps overcome a major financing barrier to solar development, adding value for the industry and for utility
customers.69 Under the cost recovery mechanism proposed by PSE&G, the program would also create
value for the utility and its shareholders in several ways:

1. The loan amounts, together with incremental direct costs such as program administration,
advertising, and meter installation, would be treated as regulatory assets, included in the utility’s
ratebase, amortized over the 15-year loan term, and allowed to earn a return for shareholders.
2. The utility has proposed an incentive rate of return on these assets of 100 basis points over its
normal return on equity (or possibly a percent of the loan value, or keyed to installed solar
capacity).
3. PSE&G has asked to recover a ‘foregone electric distribution fixed cost contribution’ or ‘make
whole payment’, which would compensate it for reduced distribution revenues (‘lost revenues’)
resulting from onsite solar generation displacing power the utility would otherwise deliver.70

As proposed, the utility would recover these amounts through the non by-passable Societal Benefits
Charge (SBC) that appears on every electric customer’s bill. PSE&G did not initially request an increase
in the SBC to cover these costs, but it acknowledged that SBC charges were likely to be higher with the
program than without. However, based on some simplifying assumptions, it estimated that a residential
customer’s SBC increase for the first recovery year would be $.000524 per kWh, about 30¢ a month or
$3.65 a year. The proposed program has nevertheless drawn strong opposition from ratepayer
advocates.71

Table 11. PSE&G 2007 Solar Initiative Proposal – Value by Stakeholder

Stakeholder Group Value Created

67
For PSE&G’s detailed program design, see Direct Testimony of Frederick A. Lynk, filed June 1, 2007 in BPU Docket No. EO07040278.
68
For more information on SRECs and New Jersey’s Solar Market Transition, see Frequently Asked Questions at
http://www.njcleanenergy.com/renewable-energy/programs/solar-renewable-energy-certificates-srec/faqs/faqs. If electricity suppliers fall
short of their RPS obligations they must pay Solar Alternative Compliance Payments (SACP), whose value effectively caps SREC prices.
Under a recent BPU decision, SACP values will start at over $700 for 2009 and decline at 3% annually to about $600 by 2016. See
NJBPU Docket No. EOO6100744, Decision and Order Regarding Solar Electric Generation, adopted September 12, 2007, p. 31, and
FAQ: NJ Solar Financing Program (December 17, 2007), p. 3, available at http://www.njcleanenergy.com/renewable-
energy/programs/solar-renewable-energy-certificates-srec/new-jersey-solar-renewable-energy.
69
PSE&G press release, April 19, 2007. http://www.pseg.com/media_center/pressreleases/articles/2007/2007-04-19.jsp
70
This ‘lost revenue’ adjustment mechanism is similar in intent to decoupling, discussed at page 26, but here would be limited to
revenue reductions that result from solar installations under the program, rather than applied to all customer demand reduction
measures.
71
Direct Testimony of Gerald W. Schirra, June 1, 2007, BPU Docket No. EO07040278; p 17. For opposition filings of New Jersey’s
Department of Public Advocate, see
http://search.state.nj.us/query.html?qp=&qt=EO07040278&submit+search.x=23&submit+search.y=3.

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 May 2008

Utility & Shareholders

Financial
Transmission & distribution
Energy & environment
Customer relations
• earns incentive return on solar loans, program costs and meter installations
• made whole for any revenue reductions due to solar behind the meter
• leverages loan funds with developer or customer investment and incentives
• minimizes repayment risk through commission-approved SREC price floor
• may reduce demand from the grid during summer peaks, possibly deferring costs
• provides some control over quality of PV installations and metering
• displaces other, scarcer or non-renewable supply resources
• helps utility reduce emissions
• helps more customers afford solar, enables customer choice

Participating Customers

Financial • may provide easier access to solar financing

Contracting & administration
Non-participating Customers
Energy & environment
Financial
• may provide longer-term financing than otherwise available (patient capital)
•
• preserves develop/customer opportunity to benefit from federal and state incentives
• commission-approved SREC floor values could reduce risk premium and lower
financing cost, if utility interest rates are otherwise competitive
• can streamline access to developers and project billing for some customer/owners
• could help achieve state RPS goals and reduce greenhouse gas emissions
• during summer peaks, additional PV capacity could moderate market prices and
volatility , and increase reliability
• bill impact estimated to be negligible (30¢/month, $3.65/year)

Other Stakeholders / Society

Retail electricity providers
Solar equipment providers
Society at large
• helps achieve state RPS compliance
• may reduce financing obstacles for new projects
• may simplify utility/customer interaction and project development process
• successful program would increase renewable contribution, reduce GHG emissions,
increase solar market activity, and could help reduce prices over time

Turnkey Installation Support, Ratebased Shareholder Loan Financing: Pepco & Delmarva

As noted earlier, Pepco and Delmarva’s October 2007 filings with the Maryland Public Service
Commission each proposed two new utility solar initiatives. In addition to utility ownership of PV at
substations and utility facilities discussed earlier, the utilities proposed a customer installation program,
whereby they would arrange for and finance turnkey, interconnected, net metered PV systems on
customer property, with 15-year maintenance agreements. The intent of this program is to simplify and
streamline the solar process for customers, minimize hassles, and reduce some of the risks. As with the
utility ownership program, however, Pepco and Delmarva acknowledge that as proposed, this customer
installation program would not meet cost-effectiveness tests.

Customers would own the PV systems; receive any available federal and state tax credits, rebates or
other incentives; collect any credits or payments from net metering, capacity markets, or REC sales; and
possibly reduce their monthly energy costs through time-of-use or real-time pricing, if available. The
utilities would certify installers to provide installation services; competitively select local maintenance
vendors; set up interested customers with REC aggregators; and establish a distribution tariff for this
service.

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The utilities would also provide on-bill, 15-year financing through a line item charge on participating
customers’ distribution bills. Solar loans would carry a fixed interest rate, discounted 2% below market
rates for comparable borrowings. Pepco and Delmarva propose to treat the interest rate discount, as well
as program and administrative costs, as regulatory assets, included in ratebase and entitled to earn a
return, paid from the utilities’ DSM surcharge on customer bills.72 Unlike PSE&G, however, they have not
requested an incentive return on these costs; have not proposed to limit the loan to half of the project
costs; and appear to request ratebase treatment only for the interest rate buydown portion of the loans.
The utilities’ program plans remain pending before the Commission and had not received detailed
responses as of mid-February 2007. However, as noted earlier, Maryland ratepayer advocates have
characterized the proposals as ‘innovative’, and asked the Commission to consider them further.73

Table 12. Pepco and Delmarva 2007 Customer Installation Proposals – Value by Stakeholder

Stakeholder Group Value Created

Utility & Shareholders

Financial
Transmission & distribution
Energy & environment
Customer relations
• loan interest buydown and program and administrative costs included in rate base and
can earn authorized return
• helps ensure quality turnkey PV services and systems
• helps ensure proper installation, interconnection and maintenance
• will reduce demand from the grid during summer peaks, possibly deferring costs
• helps utility meet Maryland’s RPS goals and reduce power plant emissions
• helps more customers afford solar, enables customer choice
• simplifies process, minimizes aggravation and reduces solar risk for participants

Participating Customer

• preserves federal and state tax credits and other incentives

Financial
Contracting & administration
Non-participating Customers
• receives below-market interest rate through utility buydown
• reduces transactions costs through streamlined solar process
• reduces installation and maintenance risks, and perhaps costs
• can reduce monthly energy costs, with TOU or real-time pricing, net metering, capacity
payments and REC value
• better access to information and businesses qualified to provide equipment/services
• utility is a project participant, reducing hassle and risk

Financial
Energy & environment
Other Stakeholders / Society
Energy & environment
• during summer peaks, additional PV capacity could moderate market prices and
volatility, and increase reliability
• bill impact estimated to be negligible ($0.000015 and $0.000029/kWh)
• helps achieve state RPS or renewables goals and reduce greenhouse gas emissions
• helps achieve state RPS goals and reduce GHG emissions
• will provide additional capacity during high summer peaks, enhancing reliability and
potentially moderating prices
• displaces other, scarcer or non-renewable supply resources

Feed-in Tariff Funded by Solar Revenue Streams & Shareholder Investment: Pub. Service of New
Hampshire

72
Pepco projects the impact on its customers’ average DSM surcharge rate from 2008-2015 to be $0.000015/kWh, and Delmarva
estimates $0.000029/kWh. Responses to the Energy Efficiency Conservation and Demand Response Plan, filed October 26, 2007,
in Case No. 9111, at p. 34 of both filings; available at http://webapp.psc.state.md.us/intranet/Casenum/caseForm.cfm.
73
Citation at note 26.

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 May 2008

Like other SEPA working group members, the Public Service of New Hampshire (PSNH) is exploring
various solar business scenarios to understand where the utility may be able to add value that could
result in win/win/win solutions. Among other ideas in the early stages of consideration,74 PSNH has
considered a residential PV model in which the utility could reduce the customer’s initial outlay by owning
part of the equipment (such as the meter or interconnection hardware) used for customer-premises
systems. It could help fund the remainder through ongoing production-based credits offered through a
feed-in tariff designed to incorporate other solar revenue streams, as illustrated in Table 12.

Table 13. Production-Based, Shareholder-Funded Credit to Supplement Other Solar Revenue

Streams

Value

Output Production Credit ($/kWh) Comment

Market Purchase Offset/kWh .07 Utility avoided purchase cost passed to customers; varies over time

REC Payment (Avoided ACP)/KWh .16 Utility avoided alternative compliance cost passed to customers; time-variant

ISO Forward Capacity Credit/kWh .03 New England ISO capacity payment; fixed over a defined period

Regional Emissions Credit/kWh – Expected, but methodology and value to be determined

Adder from utility shareholders to supplement other revenue streams; increases or

Utility Loan Fund Credit/kWh .14
decreases to yield constant revenue stream to customer when added to other credits

Total Credits/Feed-In Tariff .40 Utility loan fund credit declines each year until customer breaks even, then stops

As indicated in the table, the utility’s cost for the feed-in tariff that it would pay or credit to customers would
be partially offset by its avoided energy and capacity purchases; by the value of any RPS alternative
compliance payments it could avoid by joining customers in installing PV systems; and by any other credits
available to it (such as New England’s Forward Capacity and planned greenhouse gas emissions credits).
Utility shareholders would make up any difference through the ‘utility loan fund credit’ shown in the table, and
that contribution would be treated as a regulatory asset on which the utility could earn its authorized return. It
could also ratebase and earn a return on any utility-owned metering or interconnection equipment. In this
example, the dollar return on the shareholder loan fund contribution probably would be much larger than on
the utility-owned equipment, but both would help keep the utility whole.

Table 14. Utility Component Ownership & Feed-in Tariff – Value by Stakeholder

Stakeholder Group Value Created

Utility & Shareholders
Financial
Transmission & distribution
Energy & environment
• owned equipment adds to utility rate base and earns a return
• shareholder contribution to feed-in costs adds to rate base and earns a return
• avoids distribution revenue loss by connecting on the utility side of the meter
• overcomes net metering limitations
• may reduce demand from the grid during summer peaks, possibly deferring costs
• eliminates interconnection concerns and reduces interconnection cost
• helps utility meet RPS requirements, reduces emissions

74
SEPA working groups are indebted to PSNH’s Bruce Fulmer for sharing this and other innovative approaches he is investigating.

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Customer relations
Participating Customers
Financial
Contracting & administration
• helps more customers afford solar, enables customer choice
• gains revenues from feed-in tariff
• reduces customers’ equipment and interconnect cost so more can afford solar
• can take federal tax benefits on customer-owned components
• can combine with other state or local incentives
• predictable revenue stream reduces risk, enhances certainty, and lowers financing cost
for customer-owned equipment
• utility is a project partner, simplifying contracting, interconnection, O&M

Non-participating Customers
Energy & environment
Financial
• helps achieve state RPS or renewables goals and reduce greenhouse gas emissions
• during summer peaks, additional PV capacity could moderate market prices and
volatility , and increase reliability

• shareholder contribution leverages rate support for feed-in tariff

Other Stakeholders / Society

Energy & environment • helps achieve state RPS or renewables goals and reduce GHG emissions
• displaces other, scarcer or non-renewable supply resources
•

Summary: Utility Financing of Solar Assets

Some utilities and solar proponents have identified difficulties in financing systems as a significant barrier
to solar development, and have considered or proposed business approaches in which the utility would
act as the lender for part or all of the system cost. The rationale has not been that utilities bring a lower
cost of capital than other lenders (unlikely with typical utility 50/50 debt/equity capital structures). It has
been that they can provide easier access and longer-term financing; reduce transaction costs and risk
premiums; simplify customer access to solar providers; and streamline system installation and
maintenance. Some proposals would discount interest rates to solar borrowers, or apply other solar
production credits available to the utility to reduce the loan funds required.

Recently proposed approaches contemplate shareholder funding of utility solar loans, and treatment of all
or part of the loan funds as regulatory assets (like utility capital investments) to be included in ratebase
and earn a return for utility shareholders. PSE&G’s proposal would also collect an incentive return on
these funds, and would reimburse the utility for any reduced revenues resulting from customer-side solar
installations financed under its program.

5.3 Utility Purchase of Solar Output

Apart from owning solar assets itself or financing solar systems owned by its customers, can a utility
create value in the marketplace and capture some share of that for its constituents, by purchasing solar
electricity generated by others? SEPA working group discussions suggested that utilities can and do
create value by purchasing solar output, but that the challenge lies in capturing a meaningful share of that
value for utility owners and non-participating customers.

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 May 2008

For investor-owned utilities, regulators normally treat power purchases as expenses, passed through to
customers and recovered through rates, but not included in the utility’s ratebase or entitled to earn a
return for utility shareholders. Purchasing power for customers is obviously an important utility function,
but not usually a profit center for IOUs. The question the working groups addressed was whether there
are ways for the utility to enhance its earnings or capture other forms of value by purchasing solar output,
and how that value can be quantified in evaluating business models.

Publicly-owned utilities are accountable not to shareholders but to their communities, so their questions in
this area were somewhat different. Their focus was on whether and how they could create value for their
communities by purchasing solar output from customers or third-party generators; how any such value
should be apportioned between program participants and nonparticipants, and among customer classes;
and what kinds of teaming arrangements they could structure with customers and third parties to realize
local solar potential.

Valuing Solar Purchases to Avoid RPS Noncompliance

As noted earlier, about 30 states have adopted RPS requirements or goals. About half of those have
solar set-asides or multipliers that require or incent electric service providers to acquire solar-generated
power. Some impose substantial penalties for failure to meet their requirements.

In RPS states, utilities take these requirements seriously and are making strenuous efforts to comply.
Often these take the form of Requests for Proposals (RFP) or Requests for Offers (RFO) for eligible
renewable generation. As discussed earlier, some of these solicitations include options for various forms
of utility ownership. However, most often they focus on buying the electric output produced by non-utility
owned projects, through PPAs. Since PPA costs are typically pass-throughs that don’t contribute to utility
earnings, they don’t provide a positive incentive for utilities to buy solar output from others.

The question explored by SEPA’s working groups was whether utilities considering solar business models
assign value to avoiding noncompliance with RPS requirements (especially in states with solar set-
asides) – and if so, how utilities would calculate that value given inherent uncertainty as to whether,
when, and by how much they might fall short of compliance. Even in states like New Jersey with a
published schedule of alternative compliance payments, or California with a 5¢/kWh penalty, these
uncertainties make it difficult to value solar PPAs as a mechanism for avoiding noncompliance.

As it turned out, none of the utility representatives in the working groups were aware of any valuation
methodology developed by their own companies or others that might be factored into solar business models.
Some reported that RPS noncompliance was a potentially serious concern for their utilities, but that they
knew of no systematic effort to value its avoidance. Others reported that their utilities simply did not view
noncompliance as an option, so rather than valuing it, they took pains to ensure viable projects and exceed
annual RPS procurement requirements. Absent examples of utility valuation methodologies, working group
members turned their attention to the opposite side of the question – namely, were there ways to
affirmatively reward utilities for buying solar output rather than building and owning solar facilities, given their
ineligibility to capture value from federal investment credits in utility-owned projects?

Equalizing Buying and Building

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 May 2008

The Oregon Public Utility Commission is considering a similar question for the state’s IOUs.75 In August
2006, the Commission opened Docket UM 1276 to investigate performance-based ratemaking
mechanisms to address a potential utility bias toward utility ownership of new generating resources,
relative to acquiring the output of third party-owned resources under PPAs. Where PPA costs are simply
passed through to utility customers as expenses, rather than treated as utility investments that can earn a
return, how can the utility and its shareholders benefit? What incentives do utilities have or need to
encourage, facilitate or support these projects?

The proceeding has focused primarily on two problems. The first is that credit rating agencies such as
Standard and Poors impute ‘debt equivalency’ to utility PPAs, potentially degrading utility credit ratings
and raising their cost of capital. Some parties proposed that regulators could neutralize this disincentive
by imputing an equal amount of equity for ratemaking purposes, and affirming that PPAs would be subject
to prudence reviews. They argued that this would help reduce the utilities’ bias toward building their own
generation and make them more receptive to PPAs, citing similar approaches in Florida, Colorado, and
Nevada. However, this would only help level the playing field: it would not create affirmative incentives for
utility PPAs.

Accordingly, the second problem addressed in the Oregon proceeding is the one of particular interest
here: to develop regulatory comparability between purchased power and utility-owned resources by
positively rewarding PPAs with some form of earnings potential. As of December 2007, PUC staff had
proposed a 10% adder on the utility’s forecasted PPA costs, excluding any fuel cost, with an annual true-
up. The adder would be available only for new PPAs or renewals selected through competitive bidding,
for resources 25 MW or greater with a delivery term of at least 3 years, and the PPA counter-party would
need to absorb certain development, performance and operational risks. The staff’s rationale was that the
10% adder would recognize the ‘risk mitigation value’ to the utility of PPAs, based on a similar value that
Oregon applies to conservation and DSM to determine cost-effectiveness. Other parties to the proceeding
proposed various modifications to the staff proposal,76 but generally agreed on the importance of
providing an earnings incentive for utility PPAs. Final comments were filed in January 2008, but the
Oregon Commission had not issued a decision in the proceeding by the time of this writing.

Accessibility and Economies through Community-Scale Systems: Sacramento Municipal Utility

District SolarShares Program

The Sacramento Municipal Utility District (SMUD) is developing a pilot 1 MW community solar system
inspired by the City of Ellensburg’s pioneering community system.77 Unlike Ellensburg, however, SMUD
has chosen not to build, own or operate the generating assets. Instead, it has used an RFP process to
select a third-party developer to do that, in return for a 20-year power purchase agreement under which
SMUD will buy all of the system’s output. The utility will resell the power to customers enrolled in its
SolarShares program, who will buy blocks of power at a fixed monthly price to supply a percentage of
their usage. The monthly cost added to their bills will be offset by a credit for avoided system purchases,
and subsidized by other utility customers.

75
The working groups are grateful to Dorothy Sosnowski of Portland General Electric for bringing this proceeding to their attention,
for her conscientious participation in conference calls, and for her many insightful contributions.
76
Including calculating the incentive amount by capitalizing the portion of PPA expenditures attributable to capacity or fixed costs.
See also Mississippi Code, §77-3-93, providing for utilities to earn a return on the capacity portion of PPA payments.
77
Special thanks to Stephen Frantz and Rachel Huang, who designed and are implementing SMUD’s own first-of-its-kind model,
and who have consistently contributed valuable insights to SEPA’s working groups. Much of the information here is adapted from
Stephen’s presentation at SEPA’s Long Beach workshop and subsequent conversations with Stephen and Rachel, but any errors
are entirely the authors’.

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SMUD’s approach is designed to achieve benefits similar to Ellensburg’s, as well as some additional
ones. From the customer perspective, solar power will be available to all SMUD residential customers,
including renters who could not otherwise install solar; owners whose properties are unsuitable for solar;
and people who could not or would not pay the high first costs of their own solar installations, or take on
responsibilities for maintenance and repair. The program offers a convenient way for customers to
support and adopt solar, allows them to tailor the amount they buy to their needs, and lets them continue
in the program if they move to another location in SMUD’s territory (or to sell their block if they leave the
area). It also provides ‘virtual net metering’ and tracks actual system performance to familiarize customers
with seasonal variations that affect solar values.

From the utility’s perspective, SMUD’s approach offers other benefits. As a publicly-owned utility, it is less
driven to increase its revenues, than to meet its own aggressive solar goals and California’s RPS. Its
model reduces the overall cost of solar for SMUD customers by bringing in a nonutility developer who can
secure federal tax benefits for the project (not limited by the current $2,000 residential cap), and by
reducing the developer’s risk and therefore its financing costs through a guaranteed 20-year revenue
stream. The community-scale approach can also achieve economies of scale available from large
systems (which could easily exceed a megawatt if this pilot is successful). And it manages the utility’s risk
through what SMUD calls ‘single-point accountability’ resulting from the PPA structure. In combination,
these enable SMUD to connect more solar to its grid for less utility investment, and to meet its RPS goals
sooner. Finally, for SMUD as for others whose approaches are described here, it establishes the utility as
an innovator and a national leader in renewables and climate change initiatives.

Although SolarShares is still getting started, SMUD has focused on making this a sustainable business
model. First, it provides access to a new and potentially much larger market: renters, and owners who
can’t or won’t install solar because of high first costs or site limitations. Second, it effectively aggregates
this market, simplifying the solar provider’s task and dramatically reducing its marketing costs. Third,
SMUD has priced solar shares so that if the price of installed solar systems declines and utility retail rates
increase, the utility’s customers are better off. Since the participant’s fixed monthly solar cost is offset by
the avoided retail cost, the offset rises as retail costs rise, and the customer’s net monthly cost decreases.
Also, as PV improves and other technologies such as small concentrating solar thermal emerge, solar
costs should decline, and future PPAs should pay less for solar-generated power. This will narrow the
gap between what the utility pays for power and what it sells it for, reducing any non-participant subsidy.

Table 15. SMUD Solar Shares Program – Value by Stakeholder

Stakeholder Group Value Created

Utility & Community

Financial
Contracting & administration
Transmission & distribution
Energy & environment
Customer relations
• connects more solar to the grid at less cost, because the PPA price reflects the
developer’s 30% FITC, long-term revenue stream, and economies of scale
• PPA accountability reduces utility risk
• once established, easier to administer than individual customer systems; utility deals
with a single contractor instead of many to achieve MW-scale solar
• with proper siting, can add summer peaking capacity and/or relieve congestion
• helps utility meet California’s RPS requirement and utility’s own renewable goals
• helps many more customers afford and acquire solar, enables resource choice
• simplifies process, minimizes aggravation and reduces solar risk for participants
• enhances the utility’s position as a renewables leader and solar innovator

Participating Customer

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 May 2008

Financial • indirect benefit from federal tax incentives, long-term PPA and economies of scale
• share solar benefits without paying full capital, installation or O&M costs
Contracting & administration
• don’t need to assess feasibility, or to find, contract with, or oversee contractor
Aesthetic
• don’t need to install visible system on building, or operate and maintain it
Resource & system availability • all residential customers, including renters and owners without suitable solar sites can
support and benefit from solar, and may be able to ‘take it with them’ if they move
Energy & environment • receive essentially the same benefits they would from rooftop PV
Non-participating Customers
Financial • during summer peaks, additional PV capacity could moderate market prices and
volatility , and increase reliability
• provides convenient way to support efficient community solar development
Choice
• additional choice: all residential customers can choose to participate

Other Stakeholders / Society

Energy & environment
• helps achieve state RPS goals and reduce GHG emissions

Solar providers • expands and aggregates hard-to-reach residential market, reduces marketing costs
• guarantees 20-year revenue stream, reduces financing costs
•

Summary: Utility Purchase of Solar Output

Utilities acquire the output of customer and third party-owned solar systems for various reasons. These
include regulatory requirements for net metering and RPS compliance, as well as portfolio diversification,
customer service, cost savings relative to utility-built solar, cost reduction through market aggregation, and
stimulation and expansion of solar markets. Under today’s market and regulatory conditions, however,
utilities do not acquire others’ solar electric output because it is the least-cost resource for utility customers,
or because it contributes to utility earnings.

Utility costs to purchase solar electricity from non-utility-owned generators, like their costs to purchase other
forms of electricity, are usually reimbursed by customers at the utility’s cost. This leaves utilities without a
direct economic incentive to buy solar-generated power and, since solar costs today exceed the costs of
other available resources, an economic disincentive to do so (although other factors just listed may
outweigh this). Beyond the cost disincentive, rating agencies may treat power purchases as debt
equivalents. This means that although utility purchase obligations are not treated as investments that
contribute to earnings, at least part of the obligation may be imputed as debt for ratings purposes,
potentially resulting in downgrading a utility’s credit rating and increasing its cost of capital.

For these reasons, utility purchases of solar output from others do not by themselves offer a promising
avenue for successful business models in the longer term, especially for IOUs. Regulatory mechanisms
that neutralize debt imputation and affirmatively reward utility purchases of solar and other renewably-
generated power could provide an important building block for utility solar business models.

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 May 2008

Table 16. Part 1 of 2. Summary of Stakeholder Values Associated with Emerging Utility Solar
Business Models.

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 May 2008

Table 176. Part 2 of 2. Summary of Stakeholder Values Associated with Emerging Utility Solar
Business Models.

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5. CONCLUSIONS AND NEXT STEPS

Solar technologies are improving rapidly; environmental imperatives are intensifying; and solar policies
are maturing throughout the U.S. and the world. Utilities and solar industry players are increasingly
turning their attention to ways that utilities can contribute productively and profitably to integrating solar
more fully into the larger electricity enterprise, and to deploying solar more widely across regions, states,
utility service areas, and local communities where it can deliver value to multiple stakeholders.

Over a period of about six months, SEPA’s working groups labored conscientiously to identify issues
critical to advancing these goals, and to examine business approaches beginning to emerge from leading
utilities around the country. The working groups included pioneering thinkers from some of the nation’s
most innovative utilities, solar companies, and investment firms, as well as from U.S. DOE, SEPA and
other groups.

Through workshops and conference calls, the groups considered a wide range of technologies (from
rooftop PV, to community-scale systems, to central station power plants); a rich spectrum of utility views
(from some of the nation’s largest IOUs to some of its smallest POUs); a broad sampling of solar industry
perspectives (from manufacturers, to integrators, to vendors, to financial sources, to project developers);
and a complex array of legal, regulatory and business dynamics likely to shape utility solar activities over
the next decade. Some of the central conclusions of this work follow:

1. A useful utility business model can provide a framework for converting solar technology inputs into
economic (sometimes including regulatory) outputs, by focusing first on creating and delivering value
to customers and markets.

2. A successful model should guide the utility to create distinctive value in the marketplace, capture a
share of that value for its constituents, and sustain the business over time.

3. Utility business models must serve the interests of multiple stakeholders with diverse, sometimes
competing interests. Key stakeholders include the utility’s owners, its customers, and the larger
community. For SEPA’s purposes, they also include providers of solar equipment and services.

4. An important goal of this project has been to find ‘win/win/win’ solutions – outcomes where multiple
stakeholders benefit, and none are harmed. In regulatory terms, these approaches are cost-effective
for all stakeholders – i.e., their net benefits equal or exceed their net costs for each stakeholder
group.

5. Many state and utility programs are already in place to support solar, efficiency and/or renewables
development. They include loans, grants, rebates, production incentives, RECs, system benefit
funding, net metering, green pricing, RPS, and various forms of decoupling. Most are designed to
support preferred resource development, but not to enhance utility earnings or business prospects.

6. New utility solar business models have begun to proliferate in the past 18 months. Some have
resulted from intensive public collaboration between utilities and the solar industry; others from
discussions between utility planners and local communities; and others from internal utility processes.

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 May 2008

7. Most approaches are in early stages of development. Few have yet been approved by regulators, or
widely implemented by utility management. Some have been proposed as pilots, or are still conceptual.

8. Some proposals discussed here have received extensive comment from regulators and stakeholders
in formal proceedings; others have received little or none: they await public input, and could change
significantly or fall by the wayside.

9. Current proposals are constrained by today’s market conditions and regulatory framework. This
project assumes that these are likely to change: more solar technologies will soon mature and
compete, the reasons to encourage them will continue to strengthen, and regulatory approaches will
adapt accordingly. That said, current utility proposals reflect the skills, experience and creativity of
dedicated industry pioneers, and offer an invaluable starting point.

10. Some approaches have elements in common. Some are very different. No two are the same, and no
single approach will make sense for all utilities, all IOUs, or all POUs.

11. IOU initiatives have different drivers and different contours than POU programs. IOUs prioritize
earnings and returns to shareholders, along with regulatory compliance and service to customers.
POUs focus on meeting community energy, environmental and social goals, while covering their costs.

12. For both IOUs and POUs, Federal tax considerations strongly influence utility solar initiatives. They
largely determine which approaches make sense for the utility and its customers, and which should
appeal to IOU regulators.

13. Federal tax benefits now comprise a significant value component for solar projects. Utility ineligibility
for, or inability to use, these benefits increases the cost of their solar projects relative to those of non-
utility players who can offset tax benefits against project costs. Other things being equal, utility-owned
solar projects will appear more costly than projects owned by tax-advantaged investors, making them
less attractive to management and regulators, and perhaps less competitive in solar markets.

14. Structured financing may enable utilities and their customers to share some of the benefits of tax-
advantaged transactions. Some utility RPS solicitations have invited offers for buy-outs, and some are
considering flip transactions like those used for wind projects, which align the interests of project
developers, tax investors and utilities. These present challenges, but they offer promising avenues for
utilities that can’t otherwise capture tax benefits. Even if those benefits become available through tax
law changes, structured solar financing can still help utilities that can’t take advantage of the changes.

15. IOUs contend that they bring other values to the solar table (perhaps offsetting foregone tax benefits).
They cite long-term business stability, negotiating strength, economies of scale, volume discounts,
expertise in grid integration, coordination with energy efficiency and green building initiatives, and the
ability to leverage ratepayer funds, reduce risk premiums, and fill market gaps such as financing and
‘one-stop shopping’ needs.

16. POUs can bring many of the same values. They are also freer to pursue community social and
environmental goals that may increase costs to some customers, and more flexible to reallocate costs
among their stakeholders or tolerate cross-subsidies to support solar development. In weighing solar

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costs and benefits to different groups, POUs often strike a different balance than IOUs operating under
the adversarial scrutiny of regulatory agencies and well-organized interest groups.

17. Apart from tax issues utilities and IOUs in particular, can benefit from owning solar assets, especially on
the utility side of the meter. Where IOUs can still own generation (central or distributed), they can earn
a return of and on solar investments comparable to other utility investments, and sometimes a bonus or
incentive return in states that encourage utility-owned renewables. Generation that supplies the grid
and not the customer directly does not reduce utility revenues, unlike customer-side generation.
(Revenue decoupling and ‘lost revenue’ adjustments neutralize revenue loss, but don’t provide utilities
with positive incentives.)

18. For utilities, owning solar assets carries different costs, risks and rewards than purchasing power from
others. If tax considerations, capital constraints or other factors inhibit utility solar ownership, but utilities
can create value and advance renewable and climate change goals through PPAs, then regulators may
need to revisit the treatment of utility power purchases, as Oregon’s Commission is doing, and
incentivize utilities to implement solar PPAs.

* * *

These conclusions reflect the many contributions of SEPA working group members, as well as independent
research into utility solar initiatives. They represent an early step in an ongoing exploration of ways that
utilities and their constituents can do well by creating distinctive value in the solar arena, and that society
can benefit from their actions. Productive next steps that SEPA and its members can take toward
developing viable solar business models include the following:

Next Steps

A. Track the progress & outcomes of ongoing utility initiatives.

As of mid-April 2008, most of the utility initiatives reviewed here are works in progress. New
Jersey regulators have just approved PSE&G’s Solar Loan Initiative, and the program has yet to
launch. SCE has just filed its application for utility-owned commercial PV, and expects CPUC
proceedings to extend through 2008. SDG&E is awaiting regulatory approval to continue and
expand its Sustainable Communities pilot. Pepco and Delmarva’s December 2007 filing is
pending. Oregon’s ‘build versus buy’ proceedings await a Commission decision. The City of
Ellensburg is considering reconfiguring its first-generation community program to take advantage
of newer state and federal incentives. SMUD is just preparing to enroll customers in its new
SolarShares program piloting a second-generation community system. Chelan PUD is exploring
but not yet offering a feed-in tariff coupled with utility ownership of inverters. Other utilities are
considering solar solicitations that would invite structured financing proposals.

All of these initiatives, and others in the pipeline, will offer invaluable information and experience
about how stakeholders and regulators respond, what works and what doesn’t, and what issues
arise as new models are tried. SEPA should closely track all of these and keep its members
apprised of their progress.

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B. Build on this project to refine emerging models, develop new ones, and create decision
tools that can be used as a starting point for utility-specific programs.

This project has taken emerging models, distilled their distinctive characteristics, and highlighted
some of the issues they present. The summary presented in Table 16 is a first step toward
organizing and comparing the values that each approach offers for different stakeholders. A useful
next step will be to expand this kind of analysis into systematic decision tools to help utility
managers, regulators and solar companies evaluate which values or business model attributes are
most important or appropriate for different utility circumstances and different regulatory and
community environments, and what issues need attention for different business approaches to
succeed.

C. Begin to quantify the benefits and costs to stakeholders of different combinations of solar
technologies, customer- and grid-oriented applications, and incentive structures.

This phase of SEPA’s work has been limited to qualitative discussion of utility business model
elements. In particular, we have focused on ‘customer-centric’ and ‘utility-centric’ target markets;
ways that utilities might bring value to those markets; how they might capture and apportion some
share of that value for their constituents; and where utilities might fit in the value chain. The working
groups have focused more on the value that utilities can bring, than on the costs that they and other
stakeholders will incur under various business approaches. Participants have not yet defined
potential business models with enough specificity to be able to quantify their costs and benefits in
the way that the STAC project did for distributed resources generally (including a few specific but
limited solar scenarios).78

That work remains to be done: it will be needed to evaluate the cost-effectiveness of solar business
models and to demonstrate specific ‘win/win/win’ scenarios for consideration by utility management,
stakeholders and regulators.

D. Examine the competitive implications of alternative solar business strategies for utilities,
and ways they can be structured to promote industry collaboration and minimize anti-
competitive concerns.

An important business model element identified but not addressed in this phase of work is the
competitive strategy that a business needs to adopt to succeed in the marketplace. The basic
question here is whether the utility can compete effectively beyond its core natural monopoly
business – whether it has the competence and capabilities it needs, and whether it can exercise
them consistent with laws and regulatory policies that govern utility activities in arguably competitive
arenas. Issues can arise under both federal and state antitrust and anticompetitive laws and under
regulatory commission policies on utility competition with non-regulated businesses.79

78
Illustrated by Figures 3 and 4 at pages 19-20.
79
See the earlier report by this author and others referenced at note 37, supra.

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Legislative or regulatory changes may be needed to insulate utilities from antitrust and
anticompetitive challenges, and utilities may be able to minimize their exposure through even-
handed teaming or partnering arrangements with equipment vendors, project developers, financing
sources and others. These issues can make or break utility solar initiatives, and should be carefully
examined in the next phase of SEPA’s work.

E. Develop a SEPA ‘SWAT Team’ approach to help member utilities tailor solar business models
to the distinctive business and regulatory circumstances and community conditions they face.

This project has demonstrated the value of sharing expertise and experience in an area as complex
as this one. Working group participants have benefitted, we hope significantly, from each others’
pioneering efforts, ideas and insights, and from cross-discipline discussions among planners,
engineers, economists, regulatory specialists, financiers, attorneys, entrepreneurs, and marketers.

The knowledge gained on this project and through future activities outlined above need not be
recreated from scratch by SEPA member utilities. It can be updated, augmented and efficiently
targeted to individual utility needs through a SEPA ‘SWAT team’ that includes some of the same
skill sets that have contributed to this phase of work. SEPA can assemble a team of its own staff,
consultants, and utility personnel with specialized knowledge or program experience, to work with
individual member organizations interested in developing successful solar businesses that build on
others’ experience, avoid others’ mistakes, and pioneer new directions. Concentrating experience
and knowledge in a small team of experts available to SEPA members will effectively leverage
SEPA and U.S. DOE’s investment in this work, and will add a valuable service to SEPA’s offerings.

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