Using a generic utility tariff analysis, blending the cost components of the tariff and escalating the kilowatt hour purchase price with exaggerated rate inflation forecasting are leading commercial rate renewable energy projects down a road of significantly increased energy expenditures and a potential web of civil litigation.

While the details in each of these areas are quite complex, it is safe to conclude a grid-tied (interconnected with the Utility and subject to a “NET” energy rider that credits the customer for energy returned to the Utility’s grid) renewable energy co-generation system, requires an extremely detailed analysis to determine the terms and expected cost savings in lieu of purchasing that power from your existing Utility in accordance with your current and future rates. To avoid these pitfalls, a qualified renewable energy expert experienced with your Utility’s programs and procedures should be acquired to ensure your specific interests are considered and protected.

Here are the highlights from two examples evaluated by the State of Arizona’s Auditor General:

District’s solar power system contract unlikely to meet expectations (Report Link)

District entered into 25-year solar power system contract—In August 2010, to help lower its electricity costs, the District entered into a 25-year contract with a vendor to install solar power systems at two of its ten sites. During the contract term, the District is required to purchase all of the solar-generated electricity and at the end of the 25 years, the District can purchase the system at its fair market value. The systems became operational in July 2011.

Contract has high initial rates, and annual price escalators further reduce cost savings’ likelihood—The District pays 9.6 cents per kilowatt hour for solar power at one site and 12 cents per kilowatt hour at the other site. Both of these rates are higher than the 5.7 cents per kilowatt hour that the District was paying for electricity generation before installing its solar power systems, and the 12 cents per kilowatt hour rate is among the higher rates of the 19 solar power agreements from other Arizona school districts we reviewed. In addition, Higley USD’s rate will increase 2 percent each year at one site and 3 percent each year at the other site, reaching 19.51 cents and 19.3 cents, respectively, in the 25th year. Ten of the 19 other contracts did not have cost escalators.

Demand and transmission charges result in unexpected costs— Although at times the solar power systems will provide more than the District’s electricity needs, there will still be other times, such as nights or cloudy days, when the District will need to purchase electricity from its electric utility. The demand and transmission costs for these periods were not accounted for in the District’s initial savings calculations.

District will likely lose money on the sale of excess solar power—In addition, the excess solar power the District has remaining at the end of each hour will be purchased by the District’s electric utility at only about 3 cents per kilowatt hour. Because it currently costs the District 9.6 cents per kilowatt hour at one site and 12 cents at the other site to produce this power, the District will lose money on each excess kilowatt hour sold. For example, from July 2011 through March 2012, the District sold back 65 percent of the kilowatt hours of solar power that it produced, resulting in a loss of over $32,000.

Recommendations—The District should:

1. Work with its solar power system vendor to reduce the amount of excess solar power generated.
2. Monitor its total electricity costs, compare that to what electricity would have cost without solar power, and consider modifying its solar power system contract as necessary.

Questionable savings from solar power contract (Report Link)

District entered into 20-year solar power contract—In April 2010, in an effort to reduce the cost of energy and better control future energy costs, the District entered into a 20-year contract for a solar power system. At the end of the 20 years, the District can purchase the system at its appraised fair market value. The system became operational in December 2010.

Contract has high initial rates, and price escalator reduces likelihood of future cost savings—The District pays the solar power system vendor 13.4 cents per kilowatt hour for the electricity that the solar power system generates. We reviewed 11 other Arizona school districts’ solar power contracts and found that those districts pay between 7 cents to 16 cents per kilowatt hour. In addition, Gila Bend USD’s rate will increase 5 percent each year, reaching 34 cents per kilowatt hour in the 20th year. One district pays only 9 cents per kilowatt hour for the 15-year term of its contract with no rate increase, and 4 other districts have no rate increases. The other 6 districts pay a 2- to 3- percent increase over the terms of their contracts.

Demand and transmission charges result in unexpected costs—Although at times the solar power system will provide more than the District’s electricity needs, there will still be other times, such as during peak demand periods or on cloudy days, when the District will need to purchase electricity from its current energy provider. The demand and transmission costs for these periods are not accounted for in the District’s solar contract and will diminish its savings. For example, in February 2011, the District’s solar power system produced enough electricity to sell 95,000 kilowatt hours to its energy provider, but the District also had to purchase 49,000 kilowatt hours from its provider, costing over $3,000.

District will likely lose money on sale of excess solar power—In addition, the excess electricity the District has remaining at the end of the year will be purchased by the District’s regular energy provider at only 6 cents per kilowatt hour. Because it currently costs the District 13.4 cents per kilowatt hour to produce this electricity according to its solar contract, the District will lose 7.4 cents on each kilowatt hour. For example, as of June 2011, the District had accumulated over 340,000 kilowatt hours in credits from excess solar production. If it has this amount of credits at the end of the year, it will likely lose over $25,000 when it sells them to its regular energy provider. Further, the losses on sales of excess electricity will increase by 5 percent every year thereafter, unless it can adjust its contract to cut back on the solar power it generates, thereby reducing its costs and losses.

Recommendation—Because savings appear unlikely, the District should monitor its total energy cost, compare that to what electricity would have cost without solar power, and consider modifying its solar contract as necessary.

In the end, it is possible as well as encouraged to develop and implement a successful renewable energy project for a commercial tariff rate, but it does require that all stakeholders remain ever diligent in avoiding a result that falls short of its goals.