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Prompted by pressure from clean energy advocates, Hawaii and California are quietly working to remove a regulatory obstacle that is slowing a boom in rooftop solar systems in the nation’s leading solar states.

The culprit is an arcane provision in the rules many states have adopted for how utility companies handle “distributed generation,” any system of small-scale power installations, usually solar arrays, that generates electricity at homes or businesses and hooks up with the main electric grid. The regulation requires that once distributed energy reaches 15 percent of peak demand on a local circuit, anyone wanting to add more solar must carry out a lengthy and costly review of the project’s ability to connect with the grid.

Utilities in California and Hawaii pushed for the threshold about a decade ago because they worried that customer-owned solar facilities—which they can’t always control or monitor— would jeopardize the stability of the electric grid, causing widespread blackouts and power surges and damaging equipment.

As the demand for solar has increased, however, renewable energy developers and advocates have begun complaining that the 15 percent threshold is too low and the studies too cumbersome and expensive.

More electrical circuits in Hawaii and California are nearing the 15 percent mark, and more business and homeowners are facing the daunting review process, which can cost tens of thousands of dollars and take more than a year to complete, with no guarantee that the project will pass the utility’s review. To avoid the hassle and expense, many simply abandon their projects.

“The study requirement has been a virtual deal killer,” Isaac Moriwake, a Honolulu-based attorney with Earthjustice, a national environmental law firm, told InsideClimate News.

Late last month, after a year of negotiations between utilities and developers and clean energy advocates, Hawaii’s Public Utilities Commission took the first steps toward easing its distributed generation rules. Projects can now skip the full-blown study on circuits where solar systems account for less than 50 percent of the minimum daytime demand. Instead, utilities will review those projects within 20 days at no cost to the customer.

Moriwake said the agreement will act as a “relief valve” for the hundreds of projects waiting to connect to the grid in Hawaii. Earthjustice represented the Hawaii Solar Energy Association in the settlement talks.

Now, California, which has the most residential solar systems in the country, is considering opening its rules to more projects. Regulators, utilities and developers began talks last summer to at least reduce some of the red tape involved in the project studies.

Any changes made in Hawaii and California could have national implications, experts say, since most other states have adopted the 15 percent rule and the study requirement.

The nation’s total installed capacity of solar photovoltaics (PV)—the technology used in rooftop panels—has grown ten-fold since 2005, according to a recent study from the Solar Energy Industry Association (SEIA) and Boston-based GTM Research. And that growth is expected to continue as falling solar panel and installation costs entice more homeowners and mom-and-pop businesses to install panels.

California Drafts First 15% Policy, Sets National Stage

In 2000, California’s Public Utilities Commission enacted the nation’s first 15 percent threshold, part of a series of interconnection policies, known as Rule 21, on distribution generation.

At the time, small-scale solar systems were coming online en masse in the Golden State, and regulators and utilities were concerned about how the grid might respond to the new additions. The nation’s 20th-century electricity network was built for large centralized power plants that send steady amounts of fossil fuel-fired electricity down transmission lines, passing the electricity to area substations and eventually to local distribution lines.

Distributed generation, by contrast, sends electricity in the reverse direction: first along local power lines, and then up to the substations. The fear was that rooftop solar systems might overload a substation with electricity, triggering rolling power outages and causing circuits to break and explode.

“The existing system was designed to serve load customers and not designed for distributed generation applications,” said Denny Boyles, a spokesperson for Pacific Gas & Electric (PG&E), one of California’s big three utilities.

California regulators saw that some sort of standard was needed to address those concerns, so they set out to determine how much distributed generation a local circuit could handle without requiring further study.

Generally, the minimum amount of electricity on the grid each year is 30 percent of the peak. Regulators figured that if distributed generation were as low as the minimum, it would have a slim chance of overloading the grid. But to be even more cautious, they set the threshold at half the minimum, or 15 percent. Anything beyond that would require extensive study to assess how additional projects would affect stability and safety on the grid.

After California passed its regulations, the 15 percent limit and the study requirement quickly became a rule-of-thumb for distributed generation throughout the nation. And for a while, the system worked well, because the number of small-scale systems in most states was so low that few projects required the rigorous reviews.

Today, however, rooftop solar is so popular that clean energy advocates say the rules have become a barrier in an increasing number of communities. But utilities have been reluctant to relax the regulations, even though their worst fears about distributed generation haven’t materialized.

That’s because the consequences of a grid failure are so grave. “The utility alone bears the responsibility for stability and reliability on the grid, said Darren Pai, a spokesperson for the utility Hawaiian Electric Company, the Oahu subsidiary of Hawaii Electric Industries.

Hawaii Solar Booms After Aggressive State Push

Few states are growing their rooftop solar portfolios faster than Hawaii.

Last year, Hawaii installed more solar power per person than any other state except Nevada, making it the ninth-largest state for solar PV systems, according to a June 2011 report from the Interstate Renewable Energy Council, a nonprofit advocacy group. Hawaii already held the No. 1 spot for solar water heating for several years.

Now, the state has a total of 55 megawatts in installed PV capacity from 7,700 projects throughout the islands.

For Hawaiians, the main attraction of going solar is cost. The state’s electricity is typically more expensive than on the U.S. mainland, largely because Hawaii’s power plants burn imported oil, an expensive fuel that is subject to extreme price swings in the global market.

Retail electricity rates can be as high as 35 cents per kilowatt hour in Hawaii, compared to 29 cents from an average residential solar PV system in a sunny climate, according to SolarBuzz, a solar market research firm.

Homeowners and businesses are saying, “‘I need to get off this [price] escalator, and PV is the way to do it,'” said Mark Duda, president of the Hawaii Solar Energy Association, a 35-year-old industry trade group.

Also driving growth is Hawaii’s aggressive renewables policy, which requires 40 percent of the state’s electricity to be produced by renewable resources by 2030. The state’s one-year-old feed-in tariff is another enticement for residents. It requires utilities to pay above-market prices for energy produced by their customers’ rooftop solar systems, allowing alternative energies to compete with conventional sources.

According to Hawaiian Electric Company’s latest count, 72 of the islands’ more than 700 circuits are at or near the 15 percent threshold, which means that more projects now require the extensive interconnection studies. Duda said it’s impossible to know how many projects have been abandoned because they faced review by utilities. Less than a dozen studies were issued between 2007 and 2010 across the grid, and all of them were for commercial solar projects.

As Hawaii’s solar industry began ramping up, the state joined with local utilities to form the Hawaii Clean Energy Initiative, a partnership with the U.S. Department of Energy to set technical and regulatory standards for meeting Hawaii’s ambitious renewables goals. As part of the initiative, the Public Utilities Commission asked Hawaiian Electric to develop and launch what is now the state’s existing feed-in tariff. Moriwake of Earthjustice said the utility proposed a more modest program than the commission anticipated and raised concerns that that encouraging more solar could jeopardize the grid’s reliability.

The commission then asked the utility to develop reliability standards that could support the clean energy push without putting grid operations at risk. Instead, in February 2010 Hawaiian Electric proposed banning new solar installations on the islands of Hawaii, Maui, Lanai and Molokai.

Green groups immediately objected, and Hawaiian Electric quickly backtracked. But the company also sent a letter to the commission complaining that, among other things, solar PV projects had already caused outages on Hawaii Island’s electric grid.

The commission then opened proceedings to establish standards that addressed Hawaiian Electric’s interconnection concerns as well as the state’s drive to install more clean energy. Last month, regulators approved a “modest but significant” settlement that will eliminate extra costs and excessive red tape for rooftop solar systems in certain areas, Moriwake said.

The agreement doesn’t completely eliminate the 15 percent threshold, but it recognizes that rooftop solar systems are less likely to overload the grid in the daytime, when customer electricity demand is greatest. Projects can now skip the full-blown study on circuits where solar systems account for less than 50 percent of the minimum daytime demand. Instead, utilities will review those projects free of charge and in less than a month’s time.

Hawaiian Electric said it is pleased with the outcome. “Our goal is to add as much clean energy as possible. We were partners in reaching the settlement, and we welcome its approval,” Pai wrote in an email.

After Hawaii, California Next to Rethink Its Rule

In California, utilities are already using a simplified, lower-cost review process for new projects in areas that have reached the 15 percent threshold. But they’ve have been “very discretional” with the process, offering developers little direction about which projects might qualify for the quicker review, or what exactly the review entails, said Kevin Fox, a member of the Interstate Renewable Energy Council.

The council is involved in an ongoing review of the state’s Rule 21, with the goal of updating and adjusting the interconnection standards to accommodate the rising demand for small-scale systems. The mission is increasingly urgent, it says: California wants to install 12,000 megawatts of distributed generation in a decade.

Confidential talks between utilities, developers and clean energy advocates with the California Public Utilities Commission, which regulates privately-owned electric and gas utilities, could wrap up within a couple of months, said Roy Phillips, who chairs the interconnection committee of the California Solar Energy Industries Association and is also involved in the process.

Fox said that participants in the Rule 21 review are considering an approach similar to Hawaii’s – adopting a more streamlined and uniform process for approving distributed generation projects that don’t require an extensive interconnection study.

“We’re not really focused on modifying the 15 percent screen, but instead are taking Hawaii’s lead and looking at opportunities to create an abbreviated study,” he said.

He added that just as other states turned to California initially on the 15 percent rule, they’ll likely look to it for guidance on its evolving interconnection standards.

California is already lending its expertise to a national evaluation of the 15 percent rule and other interconnection regulations. Since August, the Public Utilities Commission has collaborated with the Energy Department’s National Renewable Energy Laboratory, Sandia National Laboratories and SEIA, the solar trade group, to find safe ways to raise the threshold above 15 percent. The team will likely present a white paper early next year.

MIT Study: Smart Grid Solutions Are the Real Key to DG

For solar markets in every state, simplifying the daunting interconnection study process is just the first step in developing more distributed generation. The biggest task will be upgrading a largely 20th-century distribution grid to suit a modern-day electricity landscape, according to a Dec. 5 study by the Massachusetts Institute of Technology.

In 2010, U.S. utilities connected to some 15,000 distributed generation projects below 1 megawatt in size, for a total of nearly 2,000 megawatts in capacity, according to a November report from the U.S. Energy Information Administration. More than one-tenth, or 256 megawatts, came from solar PV projects.

The MIT researchers expect that distributed generation technology will increase substantially over the next few decades, requiring fundamental changes in the way utilities plan and operate the grid.

But they also found that most of the nation’s electric companies “have tended to avoid investments in unfamiliar technologies perceived to have uncertain payoffs.” One way of motiving them to make those investments, the study concluded, is to create new policies that require or incentivize utilities to allow more distributed generation to connect with the grid.

Although Hawaii’s recent settlement is just one small move in that direction, “if we string along a bunch of these steps together, we’ll get to our destination,” Moriwake of Earthjustice said.