By Sarah Brunswick.
Before a chunk of coal or beam of sunlight can charge a phone or brew coffee, electricity must first be made (generation), transported to your area (transmission), and delivered to your home (distribution). Electric utilities make this happen for the smallest of households and the largest of Amazon server farms. Thus, utilities make an ideal target for renewable energy policies.
Renewable portfolio standards (RPSs) have been one of the most successful policies in driving renewable energy development. Renewable portfolio standards set goals, or mandates, for what percentage of electricity sales or production should be renewable by a target date. In states with mandatory RPSs, utilities are forced to diversify their energy sources. In voluntary states, incentives drive utilities to make changes. Thirty-seven states have RPSs. Most states target between 10% and 45%, but a few states have more aggressive goals (e.g., California and Hawaii both are targeting 100% renewable by 2045). A state’s RPS will reflect its unique resources and stakeholders, defining and incentivizing renewable energy slightly differently.
In Arizona, renewable energy has been a core, and highly political, issue for the Arizona Corporation Commission (ACC)—a boring-sounding entity with a surprising amount of power. Arizona’s largest utility company, Arizona Public Service Company (APS), (successfully) spent $10.7 million in 2014 on its preferred candidates. In total, the 2018 election involved well over $19 million in campaign contributions, with significant amounts being spent by APS, as well as out-of-state donors including former presidential candidate Tom Steyer. In the 2020 election, Democratic candidates received millions in funding—including $4 million from another former presidential candidate, Michael Bloomberg. If money talks, utility-driven renewable energy policy is screaming.
UTILITY REGULATION
Historically, utilities were vertically integrated, handling generation, transmission, and distribution. Today, it is possible that a utility might buy electricity (wholesale, or even from its own solar-producing customers) and be responsible for just transmission and distribution. The whole process—transmission and distribution in particular—is prone to a natural monopoly, where a monopoly is not only likely, but the most economically efficient.
Because electricity is such a fundamental need—“clothed with the public interest”—utility providers are regulated, rather than broken up. Utilities are expected to provide service to all customers within their territory and charge reasonable rates. In return, a state will protect the utility’s territory and allow charges and fees that cover expenses and earn reasonable returns.
A state’s legislature will often delegate this authority to a public utility commission. Commissioners are governor-appointed in most states, but are elected in several, including Arizona.
Included in the original Arizona Constitution, the ACC consists of five elected commissioners. It regulates Arizona’s utilities, including APS and Tucson Electric Power (TEP). The ACC has exclusive authority in ratemaking. It also can regulate “for the convenience, comfort, and safety, and the preservation of the health, of . . . [utility customers].” Because of the ACC’s power over utilities, it has been a hub for debates over Arizona’s renewable—or clean—energy future.
A RENEWABLE FUTURE
The ACC adopted the Renewable Energy Standard and Tariff (REST) in 2006. REST requires regulated utilities to use renewable resources for 15% of their energy by 2025, with annual benchmarks. This year, 10% of a utility’s electricity should be renewable. Utility performance is measured by credits—one credit per one unit of renewably-generated electricity. If one utility has excess renewable energy, it can sell it to another utility as a renewable energy credit.
REST defines renewable energy resources as ones “that [are] replaced rapidly by a natural, ongoing process . . . that is not nuclear or fossil fuel.” The fact that nuclear is not included is significant: the Palo Verde Nuclear Generating Station (Palo Verde) currently provides 25.5% of Arizona’s utility-scale generation. REST incentivizes in-state solar development through a credit multiplier system. For example, qualifying solar is worth 1.5 times as much as wind power. REST further mandated that distributed generation—which includes residential solar and other non-centralized power generation—be 30% of its renewable resources (4.5% overall) by 2012. Along with net metering (offsetting energy-producing customers’ utility bills based on what they produce), the mandate helps support consumer-driven projects, which utilities generally oppose.
The standard requires utilities to file annual compliance reports and implementation plans with the ACC. If a utility fails to meet a year’s requirements, it may not be able to recover the cost of becoming compliant through rate increases. The ACC can also impose penalties or take other action against a noncompliant utility.
A CARBON-FREE BUT NUCLEAR-FRIENDLY FUTURE
There has been a push for more aggressive energy standards for years, to no avail. Much of the debate has turned on the difference between “renewable” and “clean” energy. “Clean” is a middle ground between traditional fuel sources and renewables. Perhaps most importantly to Arizona (and APS, the majority owner of Palo Verde), “clean” energy includes nuclear.
In a surprise move, the ACC proposed new standards a week before Election Day. The proposed standards mandated 100% “clean” energy by 2050 and 50% renewable energy by 2035. The timing raised eyebrows. Did the Republican commissioners fear losing their majority? Is the distinction between “renewable” and “clean” understood by voters (probably not)?Ultimately, the reasoning matters little and does not predict the future.
The ACC proved to be a tight race and was too close to call on election night. Lea Márquez Peterson, a Republican who voted for the standards, won reelection. Republican Jim O’Connor and Democrat Anna Tovar replaced Republicans Robert Burns and Boyd Dunn.
Post-election, the ACC passed the standards 4-1—without the 50% renewable standard. Utilities can also seek exemptions if they argue meeting the standards would jeopardize reliability (a common concern with renewables). Justin Olson dissented, citing concern over costs to taxpayers. Come January, the new commission will be responsible for final rulemaking.
ONLY THE ACC KNOWS THE FUTURE—OR DO THEY?
Another wrinkle in developing new energy standards comes from the courts. In July 2020, the Arizona Supreme Court ruled in a case called Johnson Utilities, concluding that the ACC’s permissive authority is non-exclusive. While the case did not involve REST, the ruling justice explicitly criticized a 2011 Court of Appeals decision finding that the standard was an exercise of the ACC’s exclusive rate-making power. The decision invited the state legislature to come “play” in the realm of utility-targeted renewable energy policy. Stances on renewable energy do not fall cleanly along party lines, but Arizona’s majority Republican legislature is unlikely to adopt more aggressive standards.
Even after Johnson Utilities, the ACC has more power over utilities than anyone else in Arizona. It is unlikely the state legislature would step in to interfere with the “clean energy” standard. Still, ACC regulation also isn’t the only hope for a renewable future. Even without a statewide standard, TEP committed to using 70% solar and wind by 2035. APS aims for 45% renewables by 2030. But updating REST could hold their feet to the fire, requiring utilities to seek out renewable energy and allow their customers to do the same. Only time will tell what the new Commission chooses to do.