Moody’s warns of cost shifting tied to Calif. home solar rules

Recent standards adopted by the California Energy Commission that will require solar photovoltaic systems on newly constructed residential buildings in the state starting in 2020 would be credit negative for California’s utilities, according to a report by Moody’s. It also said that increased solar rooftop penetration rates will hike prices for non-solar customers so that utilities can maintain revenue.

California recently became the first state in the nation to require solar panels on all new houses when the CEC voted unanimously in favor of revisions to the state’s building energy code. The revised code requires all new houses that obtain permits after Jan. 1, 2020, to include solar panels.

California is the largest residential solar market in the U.S., Moody’s noted in its May 14 report.

According to Moody’s, the California Solar and Storage Association estimates roughly 150,000 solar system installations on homes in California annually. “If the standards had been implemented at the beginning of 2017, given the state’s single-family housing starts of around 60,000, new installations would have increased 30% after accounting for solar systems installed on roughly 20% of new homes in the state,” the rating agency said.

The CEC expects the new standards to cut energy use in new homes by more than 50% and as a result, the new solar systems will likely be smaller, approximately three kilowatts compared with six kilowatts today, Moody’s said.

Assuming a new home with around a three-kilowatt system and a forecast for single-family home starts of around 90,000 in 2020, the report from Moody’s estimates incremental installations of more than 200 megawatts in 2020, taking into account Moody’s 20 percent assumption.

Cost structure challenge

Moody’s said that the move toward solar-powered homes creates a cost structure challenge for California utilities and their customers. “Because of the way utilities recover transmission and distribution costs, customers who self-generate power contribute less to the utility’s fixed costs, shifting those costs to customers who do not self-generate,” it said.

New homes make up less than 1% of California’s total housing stock, but increased solar rooftop penetration rates will raise prices for non-solar customers so that utilities can maintain revenue, Moody’s said. “Continually shifting costs to balance out revenue is ultimately unsustainable for utilities’ business models. We expect that utilities will rely on regulators to monitor the credit customers receive through net energy metering and continue to modify that policy to help utilities navigate the energy shift.” California is set to revisit its current net metering policy in 2019, the report noted.

Moody’s said that California’s new standards are further evidence of states implementing carbon policies of their own even in the absence of federal regulations.

CEC standards positive for securitizations

While Moody’s sees the CEC standards as credit negative for utilities, the standards would be positive for securitizations backed by solar leases and power purchase agreements, the rating agency said.

The report said that the likelihood of developers failing to perform their obligations as a transaction manager in securitizations backed by solar leases and PPAs will fall, a credit positive for the deals. Why? Because increased solar system installations will strengthen solar developers’ cash flows and increase their operations and maintenance portfolios.