The Arizona Corporation Commission approved significant changes to the state’s distributed solar policies late Tuesday evening, which include lowering the credit residential solar customers receive for excess energy sent back to the grid and limiting how long customers can keep their rates.

The decision replaces Arizona’s current retail-rate net metering policy with export credits based on short-term valuation methods, which solar advocates say will undermine customer choice and could hurt solar jobs in the state.

Arizona regulators voted 4-1 in favor of a proposal to compensate distributed solar exports based on a five-year average of utility-scale solar PPA pricing. The "Resource Comparison Proxy" (RCP) methodology will be used to calculate the distributed energy export rate in all utility rate cases currently before the commission.

In future rate cases, export rates will either be determined by the RCP, or by an avoided-cost methodology that uses five-year forecasting to evaluate the costs and values of energy, capacity and other services delivered to the grid from distributed generation.

According to an amendment filed by Chairman Doug Little, opting for the RCP in the near term will give stakeholders time to further develop the implementation parameters of the alternative avoided-cost methodology. Regulators can opt to employ either methodology in future rate cases, or use a combination of the two.

The Tuesday decision also establishes rooftop solar customers as a separate rate class, and eliminates the "netting" or "banking" of solar power credits to offset usage in later months.

In addition, regulators approved keeping current distributed solar customers on their current rate plans for up to 20 years from their interconnection date. However, customers who interconnect after the RCP is applied will only have their rates guaranteed for up to 10 years.

While there’s still more work to do, yesterday’s vote closes a chapter in a contentious yearlong value-of-solar proceeding (E-00000J-14-0023) that culminated with hours of public testimony over the course of a two-day hearing. Arizona has one of the most robust residential solar markets in the country, but it’s also home to vicious solar policy battles that the proceeding sought to end.

Over the past two years, Arizona’s three investor-owned utilities -- Arizona Public Service (APS), Tucson Electric Power and UNS Electric -- have each filed proposals to raise rates on distributed solar customers in order to address the “cost shift” that utilities claim net metering creates. Regulators chose to delay ruling on these proposals until the overarching value-of-solar docket (that was triggered by APS last fall) came to a close.

The Arizona Corporation Commission will now collect utility data to determine the value of the RCP based on large-scale solar pricing in each utility territory, and apply the results to each rate case, likely by mid-2017.

According to earlier commission staff research, compensation for distributed solar exports using the RCP methodology would remain around 11 cents per kilowatt-hour for most customers, which is nearly on par with the current retail-rate net metering credit. However, updated assessments that include the latest utility-solar pricing could put the actual RCP credit rate significantly lower.

“There are a lot of 20-year utility-scale PPA’s signed that offer price certainty to utility-scale projects,” said Briana Kobor, program director for distributed energy policy at Vote Solar, in a phone interview. “Here we have a decision that benchmarks residential solar to utility-scale pricing, but without similar terms.”

The five-year timeframe applied to both the RCP and the avoided-cost methodology “inherently undervalues solar generation,” she added.

“Customers choose to make the investment for the 20+ year lifetime of their system, so it’s appropriate to analyze the impacts of solar over the amount of time it impacts the utility grid,” said Kobor. “Limiting the analysis to five years just doesn’t give you the full picture.”

Kim Malfacini, spokesperson for The Alliance for Solar Choice, said the solar advocacy group is “deeply disappointed” with the Arizona decision. Regulators not only disregarded the full, long-term value that residential solar brings to the state, but also created long-term uncertainty for potential solar customers by limiting rate stability to a 10-year period -- which could severely dampen consumer interest in making a solar investment.

But Malfacini indicated that the debate isn’t entirely over yet. “We will continue to advocate for rates and policies that fairly compensate solar customers in Arizona,” she said.

While solar advocates are opposed to the outcome, APS, the state’s largest investor-owned utility, believes the commission’s decision is good for solar in the state.

“It makes solar fairer because all customers will begin to share more appropriately in the cost of the electrical grid,” according to a written statement from the utility. “It also enables solar to flourish and grow in Arizona, partly because it balances the economic benefits of grid-scale solar -- which provides clean power to all of our customers at far less cost -- with the desire of some customers to install solar on their rooftops.”

But even with yesterday’s decision, “subsidies and a cost shift still exist,” according to the utility. To properly address inequities between electricity customers, APS has proposed implementing mandatory residential demand charges on all customers as part of its current rate case.

As Arizona brings an end to net metering, other states, such as New York and California, have opted to retain the policy in the near term, while developing more granular ways to assess the value of distributed solar. Policymakers in Illinois, Louisiana and elsewhere have also acted to preserve and even enhance net metering this year.

More than a dozen states have conducted studies on the costs and benefits of distributed solar, and did not find evidence of a net negative impact on non-solar customers. However, utilities and regulators continue to re-evaluate their distributed energy solar policies as adoption rates increase. In the third quarter of 2016 alone, 22 states considered or enacted changes to their net metering policies, according to the N.C. Clean Energy Technology Center.

As a top U.S. solar market, Arizona's rate change is likely to set a worrisome tone for residential solar advocates heading into 2017 -- particularly the country's leading solar leasing companies that have driven the most market growth to date. 

"Over the past year, we've seen a wave of more complex net energy metering and rate reform proceedings reassess rooftop solar policies. With this decision, however, Arizona's residential solar market is at risk of falling out of the top 5 state markets," said Cory Honeyman, associate director for U.S. solar at GTM Research. "Valuing residential PV exports primarily based on utility solar PPA pricing is the definition of an apples-to-oranges comparison. Full retail rate net metering has always been a band aid policy solution, but this reform sends a clear signal that the future of residential solar growth in Arizona will rest on optimizing self-consumption and pivoting towards a solar-plus-storage solution sooner rather than later."

Joy Seitz, president and CEO of local Arizona installer American Solar and Roofing, said the commission's decision won't put an end to rooftop solar in the state. But it will require solar companies to adapt.

"This change sends a signal that future residential solar offerings will require complementary technologies that maximize self consumption, such asstorageand load management," said Seitz. "When these technologies are implemented in conjunction with optimally sited solar, all ratepayers will benefit from peak demand reduction."

Managing this transition will require appealing to both the solar customer and the broader group of ratepayers, she added. "To the extent that local integrators or national leasing companies can accommodate both, it will be to their advantage."

Following the election of Donald Trump, who has been critical of renewables, others see the Arizona decision in more dire terms. “It’s now up to the states to make greater advancements toward clean energy,” said Earthjustice attorney Michael Hiatt, in a statement. “Unfortunately, Arizona has numbered the days left for people to participate in a successful solar program. This decision casts serious doubts on the long-term viability of rooftop solar in Arizona.”

Check out these stories for more on Arizona's value-of-solar proceeding: