Federal court case to determine whether Alabama Power capacity fees hamstring solar customers

by Sydney Cromwell

T.K. Thorne regularly receives emails from her power company, Alabama Power, with tips on energy efficiency. So, she doesn’t understand why she’s charged an extra fee each month for using solar panels to partially supply electricity to her Blount County home.

“They don’t charge me, for example, for putting all new windows in my house, they don’t charge me more for using less electricity, they didn’t charge me for turning off my power when I was working. … They encourage that kind of thing,” Thorne said.

But when it comes to solar power, “they’re punishing you for not using as much power,” she said.

It’s called a capacity reservation charge, and Alabama Power applies this fee to any customer that uses solar or other alternative power sources to replace some of their grid-supplied electricity.

Alabama Power has said the charge is necessary to provide backup power when those customers need it. Renewable-energy advocates, like Energy Alabama and the Southern Environmental Law Center (SELC), say the fee amounts to a “solar tax,” meant to make alternative energy sources less appealing.

“We feel like it’s a real barrier to people adopting solar,” SELC Alabama Office Director Keith Johnston said. “… It’s a direct disincentive.”

Now, the SELC and a group of plaintiffs, including Thorne, are taking Alabama Power and the Alabama Public Service Commission to federal court in an attempt to stop the use of this fee.

WHAT IS A CAPACITY RESERVATION CHARGE?

Every Alabama Power customer with an on-site alternative energy source (most commonly solar panels) is charged $5.41 per kilowatt (kW) of energy they are able to generate. A typical 5kW residential solar array would be charged just over $27 per month.

The capacity reservation charge was enacted in 2013.

Alabama Power declined Southern Science’s interview requests. However, the capacity reservation charge was explained by Alabama Power pricing manager Natalie Dean during testimony to the Alabama Public Service Commission (PSC), as part of the SELC’s complaint filed against the fee in 2018.

According to Dean’s testimony, Alabama Power must “stand ready to provide backup power service whenever the customer requires it,” such as providing extra power when solar panels are not able to generate to their full capability. According to Alabama Power, these kinds of outages could happen in multiple locations across the company’s service area at the same time, putting demand on the system.

The capacity reservation charge is meant to cover the expenses of infrastructure and systems that keep this backup power available at all times, regardless of whether the customer actually needs it during any given month. Without the charge, Dean said, the cost of this additional capacity would be paid by traditional Alabama Power customers who don’t have alternative energy sources.

“There’s so little rooftop solar in the state. You see how effective this charge has been when you look at neighboring states.”

Keith Johnston, Southern Environmental Law Center

Energy consultant Karl Rábago also testified as part of the PSC hearings, on behalf of the SELC and the homeowners complaining against the fee. He said that Alabama Power’s definition of “backup power” was different from the definition used by the Federal Energy Regulatory Commission (FERC). The federal definition of backup power is the electricity supplied during an outage, while Alabama Power defines it merely as the power available to replace energy in an outage, he said.

Rábago also said the company’s calculations of its backup-power expenses were based “on projected revenue deficiencies and not on the cost to serve customers,” according to 2019 AL.com reporting.

In 2020, in the midst of the PSC hearings, Alabama Power reassessed its capacity reservation charge and estimated customer load, increasing the charge from $5.00 to its current rate of $5.41.

The PSC, which also declined an interview request, voted to uphold the capacity reservation charge in October 2020. Based on arguments given during the hearing, the PSC stated that it found both the existence of the capacity reservation charge and Alabama Power’s methods for calculating it to be reasonable.

SOLAR FEES AROUND THE COUNTRY

Georgia Power, Alabama Power’s sister company, does not charge a capacity reservation fee to its customers with alternative energy sources, though such a fee was proposed in 2013 and 2017.

Power companies have proposed or enacted similar standby or grid connection fees for solar customers in other states, including in Arizona, New Mexico, New York, South Carolina, Tennessee, Texas and Virginia. The Tennessee Valley Authority, which provides electricity to parts of northern Alabama, approved a new rate structure in 2021 that would allow local companies buying TVA electricity to add fees for partial-solar customers.

“I think other utility companies will migrate slowly toward the Alabama Power model,” said Ron Holland of Solar Technology Alabama, a solar-array installation company located in Eva.

Holland, a former Alabama Power employee of 20 years, said the existence of the capacity reservation charge “doesn’t give me heartburn at all.”

“Why would they favor customers using something that displaces their revenue?” he said.

Alabama Power currently has one of the highest per-kilowatt solar fees of any power company in the country. However, California is currently considering an $8 per kilowatt “grid participation charge,” and some states charge flat fees that exceed Alabama Power’s charges for an average homeowner’s system.

Johnston said some of these solar charges have been rejected or overturned in court, including in Arizona, New Mexico and Kansas, and a similar lawsuit is ongoing in Wisconsin. Johnston believes the lawsuit against Alabama Power’s capacity reservation charge has the same grounds to be overturned.

“UNREASONABLE, UNJUST AND NOT IN THE PUBLIC INTEREST”

While Alabama Power calls the capacity reservation charge a necessary expense to serve its customers, Energy Alabama Chief Operating Officer Daniel Tait likened it to planting a vegetable garden—and then being charged a fee by Publix for your reduced grocery bill.

As he described the policy: “We’re just going to have to charge you for all the energy you used to use.”

Tait believes this charge effectively creates a new class of Alabama Power customers. Unlike the more typical rate classes, like industrial or residential, Tait said he doesn’t believe partial-solar customers’ electricity needs are distinct enough to justify different treatment.

“It’s well-settled law that utilities and public service commissions, or rate-makers, if you will, cannot discriminate between different classes of customers that have similar characteristics,” he said.

Johnston said he doesn’t agree with the PSC’s findings that the capacity reservation charge is necessary to cover any additional costs caused by providing backup power.

“We feel like this charge is unreasonable, unjust and not in the public interest,” he said.

Tait said the “outsize influence” that Alabama Power has over public policy played a role in the PSC’s decision.

“It takes double the number of years to pay off the system.”

T.K. Thorne, plaintiff in the SELC lawsuit against Alabama Power

After the FERC chose not to take action against the PSC’s decision, Johnston filed in federal court on behalf of four Alabama homeowners and the Greater Birmingham Alliance to Stop Pollution (GASP) in July 2021.

The lawsuit alleges the capacity reservation charge doesn’t meet FERC guidelines for reasonable and non-discriminatory utility rates, as defined in the Public Utility Regulatory Policies Act of 1978 (PURPA).

The FERC chairman and one of its commissioners issued a statement in June that they were concerned Alabama Power “may be violating” the regulations established by PURPA.

The lawsuit is currently before the U.S. District Court for the Middle District of Alabama, Johnston said, and waiting on the court to issue rulings on pending motions.

“We have standing because we have people in Alabama that are aggrieved by this charge, that are suffering monetarily,” he said.

AN EFFECTIVE DISINCENTIVE

Thorne, an author and retired police officer, decided to get a small, 4kW solar array installed at her home in 2015 because she was interested in environmental issues and decreasing her use of fossil fuels.

She said the company that installed the panels, however, told her that Alabama Power didn’t apply the fee to smaller arrays like hers. It was only after her solar system was installed that Thorne realized the situation had been misrepresented.

“So, I was not happy with that,” she said.

Thorne’s solar array covers only a “small fraction” of her electrical needs, saving her around $40 per month. However, about $21 of those savings go back to Alabama Power through the capacity reservation charge.

“Overall what it does is it reduces the savings in half. So it takes double the number of years to pay off the system,” she said.

During his testimony to the PSC, Rábago said the charge would add about 65% to the cost of a rooftop solar system.

The Center for Sustainable Energy estimates that installing a residential solar array costs $3 to $5 per watt, or $12,000–$20,000 for a 4kW system like Thorne’s. She will likely end up paying almost $7,800 in capacity reservation charges over the 30-year lifespan of the system. For the more common 5kW residential systems, those charges will add up to over $9,700.

Knowing what she knows now, Thorne isn’t sure if she would make the same decision to install a solar array. From a financial standpoint alone, she said, “it’s not worth it.” She certainly wouldn’t recommend it to a friend.

“Not in Alabama, how can I? Not if their motivation is to save money,” she said.

And that financial discouragement is the whole point, Johnston says.

“There’s so little rooftop solar in the state. You see how effective this charge has been when you look at neighboring states,” he said.

The Solar Energy Industries Association (SEIA) ranked Alabama last in the nation for solar energy growth in 2020. The state is now ranked 28th, but the vast majority of that growth has been through construction of large-scale arrays for utility companies and commercial use, not rooftop solar arrays.

In terms of individual solar panel systems installed, Alabama lags behind most of the country, outpacing only North Dakota and South Dakota.

Georgia and Florida, meanwhile, are both in the top 10 states for solar energy growth.

Without the capacity reservation charge, “I think the solar industry in Alabama would explode in the way that it has in Georgia and other places that don’t have this fee,” Thorne said.

Main article image courtesy of Raysonho, Wikimedia Commons.