In April 2014, the South Carolina legislature unanimously passed a bill to create a voluntary Distributed Energy Resource Program. In March 2015, the public utilities commission approved a comprehensive settlement agreement reached among electricity stakeholders in South Carolina that was designed to jumpstart the state’s solar market.
As part of the settlement, utilities agreed to offer net energy metering at the full retail rate, and agreed not to impose new charges or fees upon customer generators until the agreement expires on January 1, 2021. Utilities also introduced rebate programs to meet new solar deployment targets required by the legislation.
But barely two years later, and debates could soon strike up again as rebates run out and utilities begin to approach their net metering caps.
On October 5, SolarCity announced it had entered South Carolina’s nascent solar market with plans to open an office in the Charleston area. But could the company already be too late?
“The legislation says that solar systems can be installed and remain eligible for retail-rate net metering until 2021, unless those utilities actually hit their caps,” said Austin Perea, solar analyst at GTM Research. “The way things are going right now, all of those utilities are expected to hit their caps somewhere within the 2017-2018 time frame.”
Act 236 set a target for 2 percent of each utility’s five-year average peak retail demand to come from renewable energy sources by 2021. Utilities are permitted to recoup costs connected to meeting that goal. Large-scale solar projects, sized between 1 megawatt and 10 megawatts, are to make up 1 percent of the target, while customer-scale facilities under 1 megawatt are to make up the other 1 percent. To ensure residential solar gets a piece of the action, the law requires that 25 percent of facilities under 1 megawatt to be less than 20 kilowatts.
Overall, this amounts to nearly 200 megawatts of new solar capacity, half of which must be customer-sited. That amounts to 42 megawatts for South Carolina Electric & Gas (SCE&G), 40 megawatts for Duke Energy Carolinas (DEC) and 13 megawatts for Duke Energy Progress (DEP). Small-scale solar requirements are 10.5 megawatts, 10 megawatts and 3 megawatts for SCE&G, DEC and DEP, respectively.
“They are pretty ambitious targets,” said Perea. “South Carolina wasn’t installing any residential solar even a year ago.”
In early 2014, a total of a little more than 3 megawatts of solar had been installed across the state. Now at least that much is coming on-line each month.
“I don’t think the legislation anticipated this level of growth,” Perea said.
Residential solar incentives snatched up
Under the settlement terms, all customer-generators are eligible to receive a retail-rate net metering credit for the excess solar power they produce, up to 2 percent of a utility's five-year average peak demand -- or until the expiration of the agreement in 2021, whichever comes first.
To encourage solar adoption, the settlement also directed utilities to create incentive programs for residential and non-residential generators until the customer-scale requirement is achieved -- at 1 percent of a utility’s five-year average peak retail demand, with a 0.25 percent carve-out for small-scale projects -- or until the agreement expires. (Program descriptions are available here for SCE&G Docket 2015-54-E, DEC Docket 2015-55-E and DEP Docket 2015-53-E.)
The two Duke Energy utilities in South Carolina offer an attractive rebate of $1 per watt (DC). In September, not even a full year from the program launch, Duke announced that its South Carolina solar customers had received almost $5 million in rebates since the program’s inception.
"The response to the rebate program has been fantastic," said Duke Energy's South Carolina State President Clark Gillespy, in a statement. "This shows our customers want options to help them participate in a sustainable solar energy marketplace."
More than 750 residential and 35 business customers have applied for Duke Energy rebates -- offered by both DEC and DEP. With the $1-per-watt rebate, the website Solar Power Rocks calculates the price of a 5-kilowatt residential solar system would drop from $20,000 to just $15,000. Factoring in the 30 percent federal tax credit and South Carolina’s pre-existing 25 percent state tax credit (up to $3,500 for each facility or 50 percent of the taxpayer's tax liability for that taxable year, whichever is less), the system cost would drop to well below $10,000.
The Duke rebate is available to qualified residential customers who purchase and install systems up to 20 kilowatts and business customers that install systems up to 1 megawatt. With more than 30 megawatts of solar power already in the pipeline, Duke Energy is more than halfway toward meeting its combined 53-megawatt goal for customer-sited projects.
Instead of a rebate, SCE&G went a different route and offered residential customer-generators performance payments based on the number of kilowatt-hours produced. For SCE&G customers, the payment is 4 cents per kilowatt-hour, or about $250 per year for a typical 5-kilowatt solar system.
The payment amounts are designed to step down based on total installed capacity. The program is open to new net-metered customers until December 31, 2020, or until the utility reaches 9 megawatts of cumulative capacity.
- 0 to 2.5 MW cumulative capacity: 4 cents per kilowatt-hour
- 2.5 to 5 MW cumulative capacity: 3 cents per kilowatt-hour
- 5 to 7 MW cumulative capacity: 2 cents per kilowatt-hour
- 7 to 9 MW cumulative capacity: 1 cent per kilowatt-hour
For non-residential projects both below 20 kilowatts and up to 1 megawatt, SCE&G offers bill credit agreements.
While Duke is South Carolina’s largest utility and is offering a very appealing rebate, SCE&G’s residential program has actually seen even faster uptake. According to Perea, SCE&G’s residential incentive cap appears to have been hit sometime in March. While slower, Duke isn’t far behind. Duke’s two utilities have to collectively bring on-line 13 megawatts of small-scale solar under Act 236. Energy Information Agency data shows that Duke has added 8 megawatts of residential solar so far this year.
This means that by early 2017, all incentives for residential solar in South Carolina could be snatched up. On the one hand, this is a positive indication for SolarCity, Vivint and other residential companies working in the state; it shows that solar development will boom with the right mix of policies. But it also creates concern that the boom could soon end.
The residential solar market hasn’t died yet. According to GTM Research, 6.2 megawatts of residential solar power came on-line in South Carolina in the second quarter. That represents strong growth, despite SCE&G meeting its incentive limit, which suggests that the projects are still attractive with net metering and without the rebate.
“Even though the rebate itself has been exhausted, the retail rate economics itself seems to be enough to sustain the market,” said Perea.
The next question is how much longer the retail rate credit will last.
Will NEM be extended?
Incentives for net metering customers are capped at 2 percent of a utility’s South Carolina five-year peak demand. With incentives still available for commercial solar projects, GTM Research expects that segment to see strong growth. And because those projects are larger, South Carolina utilities could quickly run into their 2 percent net metering caps.
“It’s kind of a battle between residential and commercial systems now,” said Perea. The faster commercial systems come on-line, the quicker the net metering cap will be filled, which could happen before the settlement agreement expires and a new agreement is put in place. That could make the economics especially difficult for residential projects, which rely heavily on retail-rate net metering.
If the cap is reached, “It's going to be up to the regulators to extend it,” said Perea. “They’re not supposed to address it until 2020, but clearly there's some pretty significant growth going on. If that cap isn't adjusted, then newly installed systems will go in under the avoided-cost rate, and the economics under that rate aren't very tenable.”
Solar companies have lobbied hard to keep retail-rate net metering in place in Arizona, Nevada, California and other states. Now that South Carolina’s solar market is on a roll, solar companies will likely want to see net metering stay.
And there is a strong case to be made. According to the Solar Energy Industries Association, there are currently 54 solar installers operating in South Carolina employing nearly 1,800 people. Sunrun has added more than 200 jobs statewide since entering the market in June 2015. Hundreds more jobs are expected to be created by 2018.
“Now that [policymakers] have seen that there is a thriving rooftop solar market, even outside of the incentive program, I think there is probably going to be more of an interest in extending those caps,” said Perea.
Worth taking the risk
SolarCity is banking on a robust South Carolina solar market that will persist for years to come. The leading installer announced plans last month to open an office in the state and anticipates seeing strong uptake of its new solar loan product. SolarCity will also provide and install Nest thermostats at no additional cost for qualifying customers.
“The reason we went into South Carolina is we see a bright future there,” said Toba Pearlman, director of policy and electricity markets for SolarCity. “There’s always going to be some policy risks and concerns…but we think what South Carolina has done with Act 236 and settlements that came after that are really positive and a positive blueprint to jump-start the industry.”
“Looking forward to the net metering cap…same with incentives, there’s always a risk that with such positive growth, it may come up sooner rather than later,” she added. “I think what we want to do is enter the market and help people...see where it goes after that.”
Other companies appear to taking a similar approach. Vivint Solar announced in August that it is making solar purchases and financing available in South Carolina, where it had an existing presence. Sunrun also continues to expand its presence in the state, opening an office in Columbia, South Carolina in April.
“This goes in line with our underlying thesis about the residential market on a national level, which is that we're seeing some pretty significant deceleration in major state markets in the Northeast, as well as California,” said Perea. “When we're looking at the next two to five years of growth within the national market, we see deceleration across those major state markets, but then some pretty significant signs of upward movement from markets such as Texas, Utah and South Carolina offsetting some of that deceleration in major state markets to an extent.”
This year and next year are likely to be the peak of the wave for South Carolina, he added. Once the net metering caps are hit, which could happen as soon as 2018, the market might crater unless a new policy is put in place.