First Solar (FSLR) stepped into the net metering fray by supporting Arizona Public Service, Arizona’s dominant utility, against attacks by third-party finance leaders Sunrun and SolarCity. Clean Power Finance followed, arguing solar can benefit utilities.

“The First Solar op-ed defending the APS position on net metering showed the solar industry has matured and is no longer just a scrappy little coalition fighting fossil fuels,” said Clean Power Finance spokesperson Alison Mickey. “But the net metering controversy hides bigger problems with the utilities’ fundamental business model. They have to decide whether they want to reinvent themselves from being providers of a commodity -- electrons -- to providers of services. Solar could be where they take their first steps to becoming service providers.”

Net metering is a key component of the third-party ownership (TPO) business model with which Sunrun, SolarCity (SCTY), Clean Power Finance, NRG (NRG), Sungevity, SunEdison (SUNE), and SunPower (SPWR) have led a boom in distributed solar growth over the last two years.

Net metering supports solar by requiring regulated utilities to reimburse homeowners and businesses at retail rates for the solar-generated electricity they send to the grid. But net metering is increasingly controversial because when solar owners’ utility bills roll back to zero, they escape most of the infrastructure surcharges that are part of other electricity users’ bills.

The TPO companies argue there are quantifiably more benefits than costs to utilities like APS and its customers from adding net-metered solar.

Source: U.S. Residential Solar PV Financing: The Vendor, Installer and Financier Landscape, 2013-2016

A net-metered customer “does not share equally in the overhead costs associated with the grid or other services provided by the utility,” wrote First Solar CEO James Hughes in supporting APS. This results in “a very substantial ‘cross-subsidy’ funded by all other utility customers who must pay proportionately more in rates.”

Arizona regulators and APS “are right to seek the highest volume of solar power at the lowest cost to rate-paying customers,” Hughes wrote. “The rules governing solar installations -- no matter what the size -- need to be fair to everyone.”

First Solar does not do rooftop solar so has little need for net metering. On the other hand, it is based in Arizona, has benefited greatly from approvals by regulators for its utility-scale installations and could lose financial support for the rooftop sector if APS is compelled to sustain net metering.

Some monopoly utilities like APS see distributed solar as a threat because it appears to be a competitor trying to sell power to their captive customers, Mickey explained. They may be especially uncomfortable with companies like Sunrun and SolarCity which directly pursue their customers. SolarCity CEO Lyndon Rive has said his company is an example of "Utility 2.0."

“But distributed solar is here to stay and what makes sense is for the utilities is to revisit their business models and explore new ways of profiting from solar. In the telecom industry, the winners were the ones who saw the writing on the wall and adpated.”

The telecom companies that thrived after wireless technology forced business model changes on them learned to sell a variety of services through differentiated (“unbundled”) rates, and utilities can learn to do the same instead of holding to their electrons-only commodity sales, Mickey added.

Not all utilities are fighting solar, Mickey said. And some are wrestling internally, split between unregulated divisions that see the opportunity and regulated divisions that don't seem ready or able to make the move.

Duke, Dominion Resources, MidAmerican Energy Holdings, NRG Energy and NextEra Energy are among those that GTM has previously reported on that have seen the value in solar and moved toward it in different ways.

One opportunity for utilities is to become equity investors in TPO companies with business models that do not put them in direct competition, Mickey said. Edison International just invested in Clean Power Finance’s most recent equity round. Another is to use their deep pockets to form unregulated subsidiaries and invest through them in their own TPO funds.

Utilities are excellently positioned to understand and work with solar in the increasing number of deregulated markets, Mickey said. “They are electron providers, but they are also service providers. They have billing departments and monitoring departments and fleets of repair trucks.”

Because a traditional power plant is generally a 30-year-payback proposition, twenty-year or 25-year distributed solar contracts do not intimidate utilities, Mickey said. “And solar gives utilities a way to cost-effectively retain customers in deregulated markets,” she added, “where customer churn can be as frequent as every nine months.”

The point is, Mickey said, it is in the interest of the solar industry and utilities to figure out ways to work together.

“The people who are getting in now are going to get the highest rate of return,” Mickey concluded, “because the market is still under-penetrated and a very good investment. But as the market gets saturated with lenders and financiers, the rate of return is going to come down. The solar opportunity is better now than it will be later.”