Recent rulings in a five-year regulatory battle over solar energy policy in Arkansas leave two conclusions as sure as the sun rising in the east: More solar arrays are coming, and the fight over who will build them goes on.
Solar energy has evolved into the cheapest sort of electricity to create globally, a dozen industry executives and experts told Arkansas Business last week, but consensus breaks down on how to best capture its savings for customers.
Investor-owned Entergy Arkansas has the state’s four largest solar power plants in operation or development, and the Arkansas Public Service Commission ruled this month that it can sell a limited amount of that power to local government and nonprofit organizations.
Private solar installation companies gained the ability last year to partner with those same nontaxed entities and build smaller local solar arrays. Schools, municipalities, hospitals and water districts jumped aboard. These entities reap lower-cost power while the private developers, known as third-party providers, take advantage of federal solar investment tax incentives.
Private contractors also prevailed before the PSC in a fierce debate over rates in Arkansas’ net metering system, which gives utilities’ solar customers a retail-rate credit for the power they push onto the grid. “The first intent of the legislation [Act 464] was to allow for the monetization of federal tax credits,” said Matt Bell, a partner in Entegrity of Little Rock, an energy efficiency and solar contractor largely serving the public sector. “The utilities keep litigating matters that the PSC has decided,” resisting an inevitable renewables revolution, he said.
“The industry trend these days is three D’s: decarbonization, digitalization and decentralization. Renewable energy is the future, and there’s not going to be a slowdown. Smart meters like the ones Entergy is putting in will make a difference, and more distributed generation can’t be stopped.”
The PSC, which regulates public utilities in Arkansas, has rejected dual pricing for net-metered customers, requiring utilities to credit solar customers at the same rate that they charge for retail power. Utilities say that ratio shortchanges other electric ratepayers by letting solar customers shirk their share of infrastructure costs.
Entergy Arkansas, the state’s largest electric utility serving 700,000 homes and businesses, is pursuing adding a grid charge to offset any proven cost shifts, something the commission signaled it would allow if utilities prove their case.
Many states have enacted incentives for renewable power, but balancing competing interests is difficult, said Daniel Matisoff, a Georgia Tech professor and expert in energy policy. “Solar electricity is clearly desirable. It’s renewable, does not produce air pollution, and offsets coal or natural gas generation that contributes to climate change.”
The PSC’s string of solar rulings from June 1 through Sept. 18, along with reverberations from the 2019 law, offered industry leaders a framework for reflecting on how the state is promoting renewable power, and whether its development incentives are appropriate.
“I’m not sure it’s a case of the PSC incentivizing renewable power as much as one of them trying to balance a transition of technology while protecting customers and the regulated utilities, like Entergy,” said William Ball, CEO of Stellar Sun, a Little Rock solar developer and author of the original state Renewable Energy Development Act of 2001. “Most interpretations of Act 464 agree that it was intended to direct the PSC to protect regulated utilities while providing new opportunities for renewable energy development. In my opinion the PSC has acted responsibly in their mandate to address the very contentious arguments … dealing with how we move forward with development efforts.”
PSC Chairman Speaks
Ted Thomas, the PSC chairman, said Arkansas is fortunate to have low rates (less than 10 cents per kilowatt hour retail compared with a national average of 13.2 cents) under existing policy. “The challenge is to maintain low rates if the technology and federal policy changes. … I want to provide new options to consumers so that families and businesses in Arkansas can manage the risk and opportunities of new technology and possible policy changes without causing an unreasonable impact on nonparticipating customers. Market-based innovation to empower consumers is how we can accomplish the optimal outcome.”
That market-based innovation includes Entergy’s solar power purchase option, SEPO-B, which gained PSC approval this month to offer half of the solar power from the state’s largest operational array, Entergy’s Stuttgart Solar, built by NextEra Energy of Juno Beach, Florida. The 475-acre facility’s 350,000 solar panels generate 81 megawatts, and “basically half of that existing solar capacity will be available for that purchase option,” said David Palmer, Entergy director of regulatory affairs.
“A lot of our customers reached out to say they preferred that sort of option to the risks they would take in some third-party deals,” Palmer said. “We would have liked to have been approved for more than 40.5 megawatts, but we’re going to be able to serve a pretty significant portion of them.”
The wattage limit was a compromise letting Entergy sell some solar power at a discount without crippling the third-party market, said Ball, who was seconded by Arkansas solar entrepreneur Douglas Hutchings. Hutchings is CEO of Picasolar of Fayetteville, which develops advanced solar panels, and a founding partner in Delta Solar (formerly Delta SunEnergy), a Little Rock solar developer.
“Both supporters and detractors of the SEPO-B issue believe that setting a half-of-capacity limit [on the amount of solar power Entergy can sell to nontaxed entities] is half right,” Ball said. “Entergy thinks it’s too little by half and solar developers think it is too much by half.”
Ball doesn’t question whether utilities should be able to sell solar power to nontaxed clients, who have been heavily courted by third-parties. But he noted that the PSC’s approval of Entergy’s big solar plants — including a 100-megawatt Chicot County project expected to come online soon — could make it tougher for third-party developers to compete. In April, the PSC approved plans for another 100-megawatt Entergy solar plant, along with 10 megawatts of battery storage, in Searcy. The Stuttgart plant has been in operation since 2018.
The Chicot and Searcy projects will be the state’s largest solar arrays when they arrive, and Entergy has also announced plans for Walnut Bend Solar, a 100-megawatt array in Lee County near Brinkley. Pending PSC approval, the array is being designed and built by privately held Invenergy Renewables LLC of Chicago.
Palmer said economies of scale and other factors make solar super-generators like Entergy’s the most economical to build. “We’ve identified 380 megawatts of vetted power proven to be economically beneficial for all of our customers,” he said. “At the price we’re paying for it, the commission has agreed that it’s going to produce benefits for our customers. If natural gas prices stay where they are today, these projects will produce hundreds of millions of dollars in savings.”
Much of the nation’s generation mix has shifted from coal to cheaper natural gas since the fracking revolution unleashed a glut in the gas market. But Hutchings, of Delta Solar, said that utilities have shifted their arguments away from solar’s benefits for all customers, turning instead to warnings that more third-party solar and net metering will shift grid costs to non-solar customers.
“I definitely think those arguments evolved,” Hutchings said. “The cost trend in solar has come down so much that we’ve gotten away from initial arguments against solar for cost-related reasons, and suddenly they’re moving towards these cost-shifting arguments.”
Entergy Arkansas derives well over 70% of its power from Arkansas Nuclear One near Russellville, which also doesn’t pollute the air, but renewable power has been growing in its resource mix, and the utility expects to seek more bids for sun projects. Entergy has also pledged to stop burning coal at its White Bluff and Independence County power plants by 2028 and 2030, respectively, and that capacity will most likely be made up from renewable or gas-fired generation.
“Regulated utilities tend to be opposed to direct incentives that move toward a more distributed grid because that has the potential to erode their rate base,” Professor Matisoff said. “They fear something that they call ‘the death spiral’ where the rate base erodes and prices go up, driving more people to install solar or disconnect from the grid.” Mattisoff described those fears as overblown. Distributed generation refers to power plants built near where the energy will be used.
Ball, of Stellar Sun, said in an email that Entergy’s bid to break out a portion of its solar generation for select customers “does not add any more renewable energy resources for Arkansas.” He said Entergy “made its deal”’ under the argument that solar plants would benefit all ratepayers, “so why should they now be allowed to break that deal in order to compete with private solar contractors? If they are allowed to break out and sell solar power separately, will we see them selling power exclusively generated by coal, natural gas or nuclear sources?”
John Bethel, Entergy’s director of public affairs and a former executive director of the Public Service Commission, said Entergy doesn’t “want to frustrate customers wanting to invest in their own solar facilities, on site, but we want to make sure that third-party customers are paying their fair share of the cost of service and infrastructure.”
Ball expects Entergy’s big solar projects to “diminish private contractors’ ability to compete,” but if the competition is fair and doesn’t leverage ratepayer dollars to subsidize the solar pricing, “private contractors should be fine.”
But, he said, there’s a complicating factor: “Utilities own or control all of the transmission and distribution infrastructure, and acquiring access points of interconnection is becoming more of a challenge. Entergy is currently refusing to process two applications that I sent them. For the first time in my career I have filed a complaint with the PSC.”
Bell, the Entegrity partner, said interconnection fees lack transparency, running from $25,000 up to millions of dollars. Solar power still represents far less than 1% of power generated in Arkansas, but the stakes for all parties will rise as that percentage increases, he predicted.
“Those costs are wildly variable from initial assessment to final assessment from a utility,” Bell said. “We need to standardize the process to provide clarity for clients in estimating project costs.” Entergy’s Palmer said that interconnection costs vary depending on the size and attributes of the solar systems connecting to the grid, noting the importance of having compatible safety systems on both sides of the interconnection.
Both Bell and Bill Halter, the former Arkansas lieutenant governor who is now CEO of Scenic Hill Solar of North Little Rock, said utilities benefit from being regulated monopolies, guaranteed to receive a set rate of return. Bell also said that the state Legislature should resist any pressure to reverse state statutes advancing renewable energy.
“That would be a short-sighted approach to what’s inevitable,” Bell said. “I would encourage the state to look at what’s in the benefit of all Arkansans, and support businesses aiding the economy as opposed to a few utilities that have enjoyed a monopoly status for 100 years and have a guaranteed rate of return of 9% to 11%.”
Halter said the goal should be to spur the state’s economy while improving the environment. “Now and for the foreseeable future, the state should continue to encourage competition in provision of electricity,” he said. “Third-party solar, by offering competition, will provide customers with reduced costs of electricity, cost certainty for budgeting purposes, local economic development and jobs, future property tax revenues for schools and local governments,” and better grid reliability. “For decades, these benefits were not provided because monopoly electricity providers are only incented to maximize profits at the expense of Arkansas ratepayers.”
Another issue on the horizon is a declining federal tax break for solar investors, which went from 30% of project price to a 26% writeoff on Jan. 1 and will decline to 22% at the end of this year. By 2023, it will fall drastically, to 10%.
“I strongly believe costs will continue to come down, probably enough to offset the reduction in the tax credit,” said Hutchings, who said Delta Solar focuses on cutting “soft costs” like analyzing clients’ electric bills, doing all the modeling and simulation and assuring utility approval and interconnection.
“Historically, from the install side, some of that tax credit has traditionally ended up as a margin for the installer,” Hutchings said, foreseeing some industry belt-tightening. “I think as the credit decreases, installers have to become leaner and leaner, if they want to stay competitive.”