Over the past several years Arizona has become one of the fastest growing solar markets in the United States due in large part to a strong policy framework coupled with excellent market fundamentals. However, as of February 2013 Arizona's solar incentive program was severely curtailed and uncertainty now surrounds the future prospects of the state's solar industry, leaving many wondering what the impact of these cuts will be.

These incentives, both production-based and up-front, were part of the state’s Renewable Energy Standard and Tariff (RES) which sets out to have the state procure 15% of its electricity from renewable sources by 2025. Utilities in Arizona, which are legally mandated to comply with the RES, succeeded in using these incentives to reach and even exceed their intermediate RES targets.

In February 2013 however, the Arizona Corporation Commission, an executive branch of the state government, suddenly announced drastic cuts to renewable energy incentive programs. Commercial production-based incentives have been eliminated entirely and residential incentives have been reduced to a fraction of their former levels. The Commission also mentioned possible changes to the RES which would have the effect of reducing the long-run targets but that proposal was withdrawn last week.

The Commission recently outlined its views in an op-ed article which expressed concern regarding the “expected ballooning renewable energy budgets in the future, and their impact on ratepayers’ wallets” while also claiming that “the declining costs of solar have brought [Arizona] to a place where the market can nearly sustain itself without them."

Those within the industry have also been quick to unleash comments castigating the Commission’s decision, citing the infeasibility of commercial installations without incentives and predicting adverse consequences for the state’s solar industry.

From an economic perspective, the elimination of incentives will likely reduce the ability of the higher cost players to continue operating profitably while also reducing the attractiveness of solar projects to project owners. For such companies the recent policy developments in Arizona will be devastating. However, ClearSky Advisors’ analysis has shown that as equipment prices continue to fall and as high-cost players leave the industry or become more competitive, the demand for solar, fuelled by the annually-increasing RES targets, is likely to remain strong in Arizona over the next five years.

While the Commission’s decision has introduced a significant degree of uncertainty into the Arizona market, ClearSky Advisors does not anticipate a hard landing for the state’s solar industry as a whole. Instead, ClearSky Advisors expects a gradual levelling off of solar installations between 2013 and 2015 as the market adjusts to the new regulatory environment. Projects previously approved with higher incentive levels will still be built along with large utility-scale projects, but the number of new projects will be reduced over the next several years. To balance this reduced production the utilities will be able to use their banked renewable energy credits which were carried over from surplus years against future years’ deficits. Given these conditions, ClearSky Advisors expects Arizona’s cumulative solar capacity to rise to 1,533 MW by 2015 and to 2,161 MW by 2017.

Even though many have been quick to point out that the incentives may have been removed too soon and that the industry is not yet ready to be left on its own, ClearSky Advisors’ analysis suggests a soft landing for the Arizona solar industry. The risk, however, of the anti-renewable movement seeking further impediments against distributed generation will also need to be watched carefully moving forward.

Outside of their impact on installed capacity, Arizona’s renewable energy policies will also provide industry stakeholders with a unique learning opportunity with regard to the viability of incentive-free solar and the impacts this may have on the state’s industry. By cutting back subsidies in the name of fiscal discipline while simultaneously maintaining a strong RES target with a distributed generation carve-out, Arizona has effectively taken the training wheels off of the solar industry and is now expecting installations to continue with minimal state support. Over the next several years the changes which will occur in the Arizona solar market should be followed closely by the industry as more jurisdictions move towards reduced-incentive programs and as solar becomes an increasingly cost-effective energy option.