Rooftop solar poses credit risk for utilities

When it comes to creditworthiness, electric utilities generally enjoy investment-grade ratings that make financing easier for these capital-intensive companies.

But the popularity of residential rooftop solar systems is threatening to eventually put those favorable ratings at risk.

So warns Fitch, one of the three major ratings agencies.

In a new report, Fitch sees the potential for a “downward spiral” for investor-owned utilities in which installations of photovoltaic panels on homes and in community solar gardens continue to increase, leaving their non-solar customers with more of the costs of operating the grid.

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“In this scenario, there would be fewer customers left to absorb fixed, system-wide costs, resulting in higher monthly bills for the remaining customer base,” Fitch said. “The higher monthly customer bills would incentivize some of the remaining customers to leave the grid for alternative suppliers, leading to an unsustainable cycle of customer departures and higher monthly bills for remaining ratepayers on the grid.”

Ultimately, utilities could face more political resistance to rate increases, lower earnings and the potential for downgrades in their credit ratings.

The topic has become more worrisome for utilities as they watch the proliferation of residential solar installations, which Fitch said rose by 71% in 2015. Under net-metering policies in many states, utilities are required to compensate owners of such systems for the excess electricity that they generate with credits equivalent to the retail price of power.

Across the U.S., utilities have maintained that such payments are disproportionate and don’t take into account the cost of keeping solar-system owners connected to the grid.

The solar energy industry, on the other hand, disputes such claims. The Solar Energy Industries Association, for example, says only 20% to 40% of a solar system’s output ever goes into the grid, and when it does, it helps meet the needs of other utility customers.

Philip Smyth, a Fitch analyst who wrote the report, said the credit-rating agency isn’t taking sides in the debate over rooftop solar, but simply reflecting the long-term risks for utilities.

“It’s a relatively small part of the overall fuel mix,” Smyth said in an interview, referring to solar energy’s minuscule portion of U.S. electric-generating capacity. “But going forward, the concern is that rapid growth in rooftop solar encouraged by mechanisms that allow the rooftop solar customer to export (power) at the fully loaded retail rate will become problematic over time.”

All told, solar energy accounted for just 1% of U.S. electricity generation in 2015, and most of that involved utility-scale projects. That figure is inching up, however, as the U.S. Energy Information Administration forecasts that utility solar projects will be the single-biggest source of new generating capacity in the country this year.

Fitch considers the residential solar situation “manageable” for utilities if states adopt regulatory changes to ensure that self-generating customers pay their “fair share” of the costs of transmission, distribution and other fixed costs.

Some states have already instituted reforms seen as favorable to utilities, such as Hawaii and Nevada.

Smyth called them “very constructive” for local power companies.

In Hawaii and Nevada, state regulators reduced the credits that utilities are required to pay for excess electricity, touching off fierce political battles between utilities and the solar industry. Arizona, another hotbed for rooftop solar, is considering similar actions.

“I’m not dismissing rooftop solar as not having benefits for the system. I think that it does,” Smyth said. “But it also presents big challenges to the way power flows and other things. In the end, the answer may be somewhere in the middle.”

Bill Loveless —@bill_loveless on Twitter — is a veteran energy journalist and podcast host in Washington. He is the former anchor of the TV program Platts Energy Week.