by Julian Spector
January 28, 2020

It’s happening: Arizona Public Service doesn’t want to use fossil fuels anymore.

The utility that two years ago planned on gigawatts' worth of new gas capacity decided last week it would achieve 45 percent renewable power by 2030, exit coal power by 2031 and stop emitting carbon altogether by 2050.

That’s especially notable in a state where political leaders have not enacted any aggressive climate change policies. Arizona’s Republican politics differentiates it from states where clean energy legislation spurred utilities to commit to decarbonization — the Hawaiis and Californias and Washingtons of the world. It points to something inherent in the value of low-carbon power sources that transcends a particular policy apparatus.

And since this is an energy storage column, I’m obliged to mention that energy storage made this outcome possible, more than any other technology.

APS leadership has long voiced skepticism over the value of additional standalone solar, which would dump excess power onto the grid during the same sunny hours as already-existing plants. The rooftop solar industry is still smarting from the loss of net metering, which lowered returns for its customers.

But the utility realized it could turn those pesky solar plants into very valuable assets indeed; it just needed to add batteries. Early pilots actually grew into commercial applications, and APS transformed itself into a leading utility adopter of battery storage for grid infrastructure deferral and bulk shifting of solar generation into the more valuable evening hours. A fire and explosion at one of the early battery plants put plans on hold, but the company affirmed its long-term commitment to a storage build-out.

This week on Storage Plus, we’ll dig into what the APS pledge means for the storage industry both within the state and in other state markets.

The Arizona opportunity

The 100 percent commitment won’t kick up a flurry of new storage development in the near term because APS had already committed to an 850-megawatt build-out in the next five years.

The goal of that program is to turn the utility’s solar fleet into a dispatchable peak power asset. Construction has frozen pending the outcomes of the investigation into the explosion at a battery facility last April. The likely outcome will be an enhanced, potentially nation-leading set of safety standards that govern future battery construction.

Where things get interesting is beyond the five-year horizon. APS promised to dump coal by 2031, and that means getting rid of 1,540 megawatts of baseload power from the Four Corners plant in New Mexico.

When I spoke with new CEO Jeff Guldner, he made clear that reliability and cost-effectiveness come first; the default scenario would be relying on gas to fill that gap, unless other resources offer a better deal.

"If you don’t want to do natural gas, do we have other alternative resources that can provide that and do it in an affordable way?" Guldner asked.

It is incumbent upon the energy storage industry to offer that better deal.

Developers already proved that desert solar paired with increasingly affordable lithium-ion batteries beat gas on price for peak capacity. First Solar won on those grounds back in 2018. But that was just 50 megawatts, to be delivered for five hours in the summer evenings. In theory, 30 more plants like that could replace the capacity of the Four Corners stake, but the sticking point will be duration.

No utility has implemented a wholesale swap-out of fossil capacity for battery capacity at this scale before. Banking on capacity from batteries, with their finite tank of energy, requires a different style of planning than do fossil plants that can run indefinitely.

This 2030 horizon could become an early market for long-duration storage; Guldner was clear that he’s looking for innovation in that sector to help meet the long-term obligations. But another variable here is the demand side of the equation.

Role for customer-sited energy?

APS already attributes 16 percent of its load to demand-side management; ramping these programs could go a long way toward lowering the summer peaks that drive peaker plant build-outs. There could also be a bigger role for solar and storage in homes and businesses.

“Historically, APS has tried to fight off any advancement into renewables that they do not own,” said Brandon Cheshire, president of state solar industry group AriSEIA.

Most climactically, APS succeeded in removing net metering in a decision that pegged solar exports to a lower rate locked in for 10 years; the rate for new customers declines each year.

For Cheshire, who also runs a rooftop solar business, APS’ new commitment validates what the solar industry has been saying for years about the potential to grow clean generation in the sunny desert state. But he doesn’t think the goals are possible without policy changes to unleash behind-the-meter installations.

“We feel that it has to be part of the process to incorporate [distributed generation], specifically non-utility-owned DG,” he said. “There’s not a comprehensive way that you can really do this without incorporating DG in this timeframe.”

That argument is far from settled. APS could counter that utility-scale solar costs a lot less than rooftop solar due to economies of scale; it’s also easier to monitor and control. The utility typically does not have the ability to curtail rooftop solar if too much of it surges onto the wires, whereas it can curtail its central solar plants. In previous planning cycles, APS kept utility-scale solar additions low to accommodate the expected surge in distributed solar, which is driven by individual customers’ choices rather than utility decisions.

If the two sides can agree on anything, it’s that they’d like to see more storage paired with new solar additions. Cheshire would like to see regulators approve a new rate designed for customers who have solar and storage; such a rate could incentivize time-shifting solar to the hours when the utility wants it delivered. He’d also like to see programs to aggregate battery capacity from homes and communities and turn it into a larger grid asset.

Lessons for other markets

1. Pilot, expand, deploy

APS committed to 100 percent carbon-free because it became sufficiently confident in its ability to accelerate solar deployment and integrate it using energy storage. It arrived at that point by starting small, testing storage technology in a scoped and scientific way, and liking the results. This is exactly how utility pilots are supposed to work.

Back in 2016, APS finalized a pilot whereby it would stick two 2-megawatt batteries, supplied by AES Energy Storage, onto feeders with ample rooftop solar. They would use the batteries to balance the power quality. Experience with those batteries helped APS move ahead with its first commercial application: the Punkin Center project, in which the battery offset a traditional wires upgrade to a remote but growing community; the battery cost less than half what the conventional solution would have, saving ratepayer dollars.

From there, APS awarded the First Solar peaker, then followed up with 850 megawatts in desired additions.

The takeaway here is that utility pilots needn’t be a dead end; if done right, they can lead to a massive adoption within just a few years. Ideally, subsequent utility pilots can benefit from the work APS and others have already done.

2. Leadership matters

It’s not a coincidence that the big breakthrough happened two months into the reign of new CEO Guldner. These sorts of paradigm-shifting corporate commitments take a lot of convincing internally, and Guldner brought a new perspective and fresh energy to that task.

He also promised to refrain from funding campaigns to elect utility regulators. APS spent millions of dollars on statewide regulator races in 2014 and 2016. Though not strictly illegal — the Supreme Court has ruled that corporations are people, with all the same rights to political speech that personhood entails — this influence campaign did not look good, and it ultimately justified public skepticism about Arizona's utility regulatory compact. If the monopoly picks its regulators, how regulated is it?

On this point and the renewables goals, Guldner has reset the conversation. But he still has to prove to the community that he can follow through.

3. Push the conversation, even if it seems out of reach

APS did not arrive here on its own. Clean energy plans of varying ambition have been swirling around Arizona for years.

An important early entry came in 2017, when Republican utility regulator Andrew Tobin proposed an 80 percent clean energy standard by 2050, which included a clean peak component to encourage storage adoption. APS didn’t leap at the opportunity, although in hindsight it would have been easier than the blueprint the company itself has now adopted.

Without a clear consensus, the Arizona Corporation Commission kept deliberating, and Tobin moved to a different role in state politics last summer, before his vision won approval.

In the 2018 midterms, Tom Steyer funded a push for a constitutional amendment to raise the renewables rate in the state to 50 percent by 2030. APS and the other utilities successfully fought that one off. Now APS has promised to achieve a target slightly lower than the one it opposed two years ago.

The ACC has also mulled opening up retail choice, which would break the monopoly status of the state’s regulated utilities. This would be a complex and lengthy undertaking, but having that option on the table gives utilities extra incentive to make their customers happy with the status quo.

Any ambitious clean energy plan is a fiction until it isn’t. Notions that seemed unrealistic a couple years ago have now entered a major utility’s plan of action. That’s worth remembering for policy discussions in other states: Even if an idea fails to pass, like Steyer’s ballot initiative, it can push the conversation forward.

If anything is certain, it’s that the old boundaries of what constitutes reasonable grid planning have evaporated with remarkable speed.