Solar + storage: US regulatory issues
Battery storage is the sexy newcomer to the rooftop solar industry. Technology has rapidly improved, while prices consistently decline. Its manageable size makes it a well-suited match for rooftop solar, and it brings out the best in its partner – expanding capacity, extending service into the night, and providing support when the solar unit falters. It also has many admirable characteristics in its own right, as it is able to offer energy, capacity and various ancillary services independently to the grid.
However, adding batteries to rooftop solar systems raises regulatory questions.
The main issue is whether adding a battery could subject the owners of the system — the solar rooftop company and any tax equity investors — to federal regulation.
To understand the regulatory issues, it is first necessary to understand solar as a singleton.
Solar rooftop companies install solar panels on customer roofs and either lease them or use them to sell electricity to the customer. In the latter situation, the company is making retail sales of electricity. The customers may be residential, commercial and industrial, or government agencies, schools and other tax-exempt entities.
The customer will normally consume all of the energy produced by the solar system and draw the remainder of its power needs from the local utility via interconnection with the grid. Customers are, in turn, typically subject to state “net metering” rules that allow the customers in limited circumstances to send any extra power from onsite generation to the local utility.
Most states have adopted net metering rules, but the specific terms vary by state and utility. The basic principle of all net metering programs is the amount of power a customer puts onto the grid from a rooftop system is netted against the amount of power the customer draws from the grid. The customer benefits from the delta between the retail price of energy from the utility and the sum paid under a power purchase agreement governing the sale of energy from the rooftop system or lease of the system. The rest of this article is limited to the popular PPA structure. Leases are subject to a different analysis.
The Federal Energy Regulatory Commission has broad jurisdiction over sales of energy at wholesale in interstate commerce and the transmission of energy in interstate commerce. A solar rooftop company that sells energy to a customer from a rooftop solar system, who then “resells” the electricity to the local utility for net metering credit, could be viewed as making wholesale sales in interstate commerce. This is an issue only if the amount of excess power fed by the customer into the grid in any billing period exceeds the amount of power the customer takes from the grid. It would make the solar rooftop company subject to regulation by the Federal Energy Regulatory Commission. Electricity sellers must get prior authorization from FERC before making wholesale sales.
Confronted with this possibility, in 2009 SunEdison petitioned FERC for a declaratory order that the sales by its affiliates from rooftop solar systems to customers who engage in net metering are not wholesale sales subject to FERC regulatory jurisdiction.
FERC issued a declaratory order, finding that the sales would not subject SunEdison to wholesale sale regulations so long as the customer is a net consumer of electricity from the grid during a billing period. Because the order is an adjudicatory order, rather than a policy statement of general applicability, it is limited to the specific facts presented by SunEdison.
The SunEdison order does not address what happens if the rooftop company or customer is using the system to provide ancillary services or capacity to the grid.
Rooftop solar companies usually qualify for broad exemptions from FERC regulation under a 1978 law called the Public Utility Regulatory Policies Act or PURPA. Most rooftop systems are under 20 megawatts in size, which is one of several dividing lines in the statute.
Generating facilities that are exempted from FERC regulation under PURPA are called “qualifying facilities” or “QFs.” One type of QF is a generating facility whose fuel is at least 75% from biomass, waste, renewable energy or geothermal steam or fluid and is under 80 megawatts in size. There are strict limits on the amount of oil, natural gas and coal that may be used by the facility. Rooftop solar systems easily meet these size and fuel use requirements.
The solar rooftop company may have to file a Form 556 with FERC either “self-certifying” that the rooftop system is a QF or asking FERC to confirm that it is a QF. Such a form must be filed for any rooftop system that is greater than one megawatt in size, alone or in aggregate with affiliated solar systems located within one mile.
Now introduce a battery storage system to rooftop solar.
The first issue is what the battery does to the QF status of the solar system. If the battery increases the total capacity of the solar system, then it might trigger an obligation to file a FERC Form 556 to continue benefiting from regulatory exemptions if it bumps the size of the system over one megawatt.
The next issue is whether the battery may be considered part of the solar QF system so that it benefits from the QF status of the rooftop system or, alternatively, may qualify independently as a QF. There is no definitive precedent to date on whether battery storage satisfies the requirements for QF status, either alone or as part of a solar system. FERC staff has informally provided mixed guidance.
Recall that there are limits on the type of energy or fuel that may be used by a QF. It is likely that a battery that is charged solely by the solar system would be found to meet the fuel use requirements. However, a battery handles electricity produced from sunlight rather than solar energy directly.
A few rooftop companies have self-certified their solar systems plus batteries as QFs.
The relationship between the solar system and the battery becomes more complex to the extent the battery receives any charge from the grid.
If the solar-plus-storage facility is treated as a single QF, there is challenging case law that indicates other equipment associated with QFs, such as interconnection facilities, may only be viewed as part of the QF if its purpose is strictly limited to conveying QF power (with certain limited exceptions). Neither a battery nor an intertie used to carry electricity from the grid to the battery can be definitively said to be used solely to transmit QF power. FERC is still wrestling with whether energy storage should be treated as generating equipment, transmission equipment or a hybrid of the two for broader regulatory purposes.
If the battery will store electricity from the grid, then the fuel use limits may cause issues because the electricity from the grid is not strictly from permitted energy sources. The grid energy might also be used for purposes other than those expressly permitted. This is a problem whether the rooftop company intends the battery be considered part of a single QF with the rooftop system or a QF in its own right.
There are two main options for the owner of a rooftop solar system faced with this situation.
One option is to ask FERC to confirm the QF status of a solar-plus-storage system or the independent status of the battery as a QF. This is done by filing a Form 556 as an “Application for Commission Determination of QF Status” rather than as a “Notice of Self-Certification.” The application requires a filing fee, which is currently $22,050. FERC has 90 days to act on the application. If FERC does not act within 90 days, then the application will have been deemed granted.
Another approach that might provide broader comfort to the industry would be to ask FERC for a declaratory order. The filing fee for a declaratory order is currently $25,640. The drawback of asking for a declaratory order is that there is no statutory time limit for FERC to act.
The Public Utility Holding Company Act or PUHCA may subject upstream owners of battery storage systems to utility regulation. PUHCA is administered by FERC. A full discussion of PUHCA was published in the February 2016 NewsWire.
PUHCA imposes detailed recordkeeping requirements on any entity considered a utility holding company. The books and records must be maintained and retained pursuant to comprehensive FERC regulations, including by conforming to a uniform system of accounts in some circumstances. State regulators also have review authority over them.
PUHCA applies to “[a]ny company that directly or indirectly owns, controls, or holds, with power to vote, 10 percent or more of the outstanding voting securities” of an “electric utility company.”
An “electric utility company” includes any entity that owns or operates facilities for the generation or transmission of electricity for wholesale or retail sale. Entities making sales of electricity to customers from rooftop solar-plus-storage systems are electric utility companies. Therefore, all direct and indirect upstream owners with at least a 10% ownership interest in the facilities, including tax equity investors, are utility holding companies under PUHCA.
All but a select few exempt utility holding companies are required to file a Form 65 “Notice of Holding Company Status” with FERC identifying all affiliates and subsidiaries and their corporate relationship to each other and status under PUHCA.
Utility holding companies are exempted from filing if all they own are QFs (and a couple other types of entities). Therefore, the QF status of the battery is important to PUHCA regulation.
FERC also has authority to review and approve or deny some acquisitions where a utility holding company directly or indirectly acquires another entity that owns or operates facilities that make wholesale sales of electricity or transmits electricity in interstate commerce. However, a utility holding company that only owns QFs has blanket authority to acquire additional interests in QFs. Other parties to the transaction may still require prior approval.
What is the risk of ignoring the potential regulatory issues?
Sanctions for violating FERC regulations are capped at $1 million a day per violation, plus disgorgement of any improper profit.
The executives involved may also be referred to the Department of Justice for criminal penalties, including prison time, upon a finding of criminal intent. Candidly, neither criminal nor significant civil penalties are likely for violations of the regulations discussed in this article absent bad faith, a history of repeat offenses, fraud or willful disobedience.
If FERC were to find in the future that a battery or solar system plus battery does not qualify as a QF and has made sales at wholesale in interstate commerce of electricity, capacity or ancillary services without the required FERC approvals, it may order refunds. FERC usually only orders refunds to the extent there were profits above operating costs. It may be more apt to order refunds for sales of ancillary services and capacity that “pass through” the customer directly to the grid from a system without proper authority.
In egregious circumstances, FERC can limit a company’s ability to engage in regulated activities. This could affect anticipated revenue streams. There is the potential for damage to corporate reputation, and there are possible effects on closed transactions.
The regulations in this area should eventually catch up with technology. In the meantime, it may be prudent to pursue one of the options for gaining greater certainty. As always, it is important to scrutinize regulatory representations and indemnities in relevant transaction documents.