Prop 127's Dramatic Ramp-Up of Clean Energy Mandate Poses Challenge

It’s November 7, the day after the 2018 election. Arizonans just approved Proposition 127, a constitutional amendment that requires utilities to generate 50 percent of their electricity from renewable sources like solar and wind by 2030.

What happens now?

As of today, that future question can't be fully answered. There are a ton of unknowns surrounding Prop 127 and its potential impact on Arizona's energy infrastructure. But if the measure succeeds, over the next few years, steadily increasing renewable energy requirements will pose financial and logistical hurdles for the affected utilities. Utilities say they will be forced to raise rates as a result.

One of the lesser-known elements of Prop 127 is that the renewable energy mandates outlined in the constitutional amendment do not snap into place a distant 12 years from now. They ramp up sharply, beginning in 2020, when a requirement for utilities to get 12 percent of their annual retail electricity sales from renewable energy kicks in.

The mandate increases to 14 percent in 2021, 16 percent in 2022, 20 percent in 2023, and so on.

Also contained in the constitutional amendment is a requirement for utilities to generate more electricity from distributed renewable energy resources. These are power sources that are close-to-home, such as solar panels on the roof of a house or business, as opposed to far-away, industrial-sized solar arrays or power plants.

This distributed energy mandate starts in 2020 with 3 percent of the utility’s annual retail electricity sales, and increases to 10 percent by 2030.

Under the current, much-lower requirements put in place by the Arizona Corporation Commission in 2006, utilities must generate 15 percent of their electricity from renewable resources by 2025.

In a recent fiscal analysis of Proposition 127, the Arizona Joint Legislative Budget Committee refrained from giving a concrete prediction of the mandate’s financial impact over the 12 next years, based on the many unknown factors.

The JLBC's impact assessment largely deferred to other studies, with the committee writing that the proposition’s “fiscal impact is difficult to quantify in advance, especially since it would not be fully implemented until 2030.”

That’s not exactly true, at least from the perspective of the utilities, because each year's new and higher standard under Prop 127 would need to be fully implemented in that year.

Take Tucson Electric Power, for example. According to spokesperson Joseph Barrios, the southern Arizona utility currently gets about 14 percent of its electricity from renewable energy sources. That puts the utility at the required threshold through 2021.

But Barrios explained that as of today, the utility doesn’t have enough distributed renewable energy resources to satisfy the distributed-energy part of the mandate. TEP would be short of the 2020 mandate by more than 130 gigawatt hours, he said — the equivalent of adding more than 10,600 new residential systems in the first year alone under the constitutional amendment.

The utility would need to make up the difference using renewable energy credits (RECs) — or, essentially, purchasing renewable energy from other distributed-energy sources, he said. Complicating the situation further, however, is that TEP no longer offers up-front incentives for distributed solar resources in exchange for RECs.

It's a mess. And Barrios acknowledged that TEP, which formally opposes Prop 127, might not meet the terms of the constitutional amendment, should voters approve it.

“So while we certainly would try to satisfy the requirements of the mandate, it is unclear if we would be able to achieve that,” Barrios wrote in an email.

If the utility even wants to come close to reaching the mandate, TEP will have to acquire distributed solar resources from more expensive private rooftop arrays in order to hit the 10 percent threshold by 2030, he said; these rooftop systems are less cost-effective than community-scale solar.

“The requirements certainly would contribute to higher costs for customers,” Barrios wrote. “We would need to increase spending significantly on expanding not just renewable resources, but also on energy storage systems and other technologies to maintain reliability.”

This chart from the JLBC shows how the renewable energy standard in Prop 27 increases significantly each year until 2030.
This chart from the JLBC shows how the renewable energy standard in Prop 27 increases significantly each year until 2030.
Joint Legislative Budget Committee

The same argument is often used by Arizona’s largest utility company, Arizona Public Service — a political heavyweight aching to kill Prop 127. The most recent campaign finance disclosures released this week revealed that an opposition committee funded by APS’ parent company, Pinnacle West, has splashed out nearly $22 million so far to defeat the ballot measure.

APS says that its renewable energy mix is currently 14 percent of sales — excluding nuclear power derived from the Palo Verde Generating Station — which also satisfies Prop 127’s requirement through 2021.

Nuclear power is excluded from the renewable energy mandate, and APS maintains that the mandate could force the closure of the Palo Verde nuclear plant.

An APS spokesperson, Hal Pittman, wrote that the “aggressive and rigid” ramp-up to the 50 percent mandate will lead to higher bills for customers.

“Annual cost increases are expected because the mandate will force a significant and rapid infrastructure build-out — not only from renewables additions, but also from the need to add other new resources including batteries, natural gas plants, and other infrastructure to maintain system reliability,” Pittman wrote in an email.

Unlike TEP and APS, Salt River Project (SRP) is a quasi-municipality. That status exempts the utility from Prop 127’s mandates.

The ballot measure campaign committee, Clean Energy for a Healthy Arizona, has so far spent $17.6 million. The organization behind the measure is NextGen America, a progressive political action group founded by Democratic mega-donor Tom Steyer.

Proponents argue that transitioning to cleaner, more efficient sources of energy under Prop 127 will reduce utility bills in the long run under the mandate.

"You just can’t get around it: Solar is cheaper today than gas," said D.J. Quinlan, a Democratic political consultant who represents the Clean Energy campaign. "So why is a ramp-up over 12 years to something that’s cheaper dramatic?"

Far from a disruptive force, Quinlan said that Arizona needs new energy infrastructure, and the direction of the country is clearly moving away from fossil fuels and toward renewables.

Prop 127's goals enjoy broad popular support, he said. "Unfortunately, people are getting tens of millions of dollars of lies from the utility company," Quinlan said.

Both sides have spent a jaw-dropping amount of money, but Pinnacle West's drive to discredit Prop 127 appears to be winning.

A poll by Suffolk University and the Arizona Republic  conducted in late September showed that 46.6 percent of likely voters oppose the clean energy amendment, compared to 33.6 percent who support it. However, almost 20 percent of voters were still undecided.

Should the proposition succeed, it’s possible that solar companies could experience a windfall as utilities rush to increase their photovoltaic capacity. Tempe-based solar company First Solar declined to comment when asked if they anticipate increased business as a result of the ballot measure, but next week the company will discuss the market outlook during a quarterly earnings call.

Then again, the impact of Prop 127 might be negligible, thanks to the Arizona Legislature.

In a preemptive strike on the ballot measure at the urging of APS, the Legislature passed H.B. 2005, which reduces financial penalties to as little as $100 for utilities that violate clean-energy provisions in the Constitution. Governor Doug Ducey signed the bill in March.

The Clean Energy campaign has said that they do not expect the law to withstand a legal challenge.

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