APS proves competitive market need

The announcement by Arizona Public Service that it will transition to providing 100% carbon-free power by 2050 should cinch the argument about Arizona adopting competitive electricity markets.

APS says that it currently gets roughly 50% of its generation from fossil fuel sources — half of that from coal and half from natural gas.

So, at a minimum, the company says that it will replace half its existing generating assets in just 30 years. That’s a monumental undertaking.

But this actually understates the scope of the task. APS includes in its calculations generation it doesn’t actually produce, electricity from rooftop solar systems within its service territory. Fossil fuels are an even bigger component of what APS produces on its own.

Moreover, APS acknowledges that going carbon-free requires technological innovations that don’t currently exist, in all likelihood massive improvements in batteries that store solar energy during the day to be used at night when the sun isn’t shining.

Now, a continued transition from coal to natural gas makes economic and environmental sense. APS’ current Integrated Resource Plan already included that.

And someday in Arizona, the need to backstop solar with natural gas for reliability and nighttime service will abate.

But whether that day will come in the next 30 years is unknowable. Captive ratepayers shouldn’t be required to cover APS’ bet that it will. Competitors should be allowed to step in if APS’ bet turns out to be a loser.

APS’ announcement was a political play, not a sober, prudent resource allocation decision based upon minimizing risks and costs to captive ratepayers. No one knows if and when solar will overcome its intermittency limitations, or what the relative price of solar and natural gas will be in 30 years.

The company was ambiguous as to what it was actually announcing. APS’ statements variously describe being carbon-free by 2050 as a “commitment,” a “goal,” and an “aspirational goal.” An Associated Press story quotes APS head honcho Jeff Guldner as saying that it’s “not just a symbolic commitment.”

Here’s a translation: APS will spend as much on solar, and take as much risk in so doing, as the Arizona Corporation Commission will allow it to recover and make a profit on from captive ratepayers.

This is where the changed relationship between the commission and electric utilities poorly serves captive ratepayers.

Regulated electric utilities are supposed to make their own investment decisions, including how much generating capacity to build or purchase, and from what sources.

The commission is then supposed to independently review those decisions to determine if they were reasonable and prudent. If so, they become part of the rate base, to be recovered, with a reasonable rate of return, from captive ratepayers.

This traditional regulatory relationship included the possibility that the commission would find some expenditures not reasonable and prudent, and thus excluded from the rate base. In that way, shareholders in regulated utilities were at least somewhat at risk. And management had to proceed with at least some degree of caution.

For renewables, this traditional regulatory relationship has been turned on its head. The commission has ordered electric utilities to produce a certain percentage of their power from them.

If the commission has approved investments in renewable energy in advance, either directly or implicitly, it can hardly, in rate-setting, disapprove those investments as not reasonable or prudent.

APS wants the solar future to be utility-scale, which it controls, rather than rooftop, which it doesn’t. Its announcement really amounts to an invitation to the commission to order it to make commitments to more utility-scale solar.

As with so much regarding solar power, the optimal mix between large solar plants generating power to the grid and rooftop systems generating power directly to the buildings is unknowable. But large solar plants represent the larger economic risk to captive ratepayers, particularly if the commission has effectively approved the investment in advance.

The answer is to emancipate the captive ratepayers by allowing competitors. There’s enough experience with competitive electricity markets, around the world and in this country, that it’s no longer a wild experiment.

They can work. And they would protect consumers in APS’ service territory if the virtue-signaling, by APS and the politicians on the commission, goes astray.