An unexpected surge of solar photovoltaic installations at bargain prices has caused Arizona's largest electric utility to seek a reduction in its incentive program.

Rapidly falling costs for solar equipment and installation have prompted more than 110 residential solar PV applications a week recently, Arizona Public Service said in a filing with the Arizona Corporation Commission, the utility's regulator.

To avoid a rush by homeowners to install systems before the rebate is reduced, the utility is asking that the proposed reduction from $3 per installed DC watt to $2.15 per watt be made retroactive to March 31 and be expedited by the commission. It would drop to $1.95 per watt after an additional 4 megawatts of solar production capacity are reserved.

The utility is asking to divide the remaining funds between two funding cycles, one ending Aug. 31 and the other Dec. 31. If money runs out in one cycle, prospective solar buyers would not face a very long wait for the start of the next cycle.

For Arizona solar consumers, the change, if approved, will mean having to shoulder a larger percentage of the cost of installing a solar-electric system. However, recent price declines have offset much if not all of the proposed incentive reduction, meaning solar electricity for many well-situated customers may still remain a bargain.

Despite, or perhaps because of, its relatively low rates for utility electricity and high annual sunshine levels, Arizona has historically been the low-price leader for installed solar PV in the United States.

That trend shows no sign of stopping, or even slowing.

Without a reduction, the incentive fund will be used up before June, Arizona Public Service said.

The utility said in its filing that "customer requests for incentive funding have not dropped following the peak demand observed in the last months of 2009. Sustained demand at this high level was not forecast as part of APS' s 2010 Implementation Plan. In 2010, APS has received an average of over 110 residential applications weekly, at an average DE (distributed energy) incentive cost of $13,200 per reservation, resulting in nearly $1.5 million in reservation commitments weekly."

"As of the date of this filing, APS has committed to customers approximately $32.7 million of the $44.1 million available for residential DE incentives. APS forecasts that at the current pace, residential DE funds will be exhausted before June 2010."

The falling price of solar installations in Arizona may herald similar reductions elsewhere. Industry observers cannot cite any special reason for Arizona prices, excluding incentives, to be significantly lower than elsewhere in the United States, apart from wider consumer awareness of solar pricing and intense competition among installers.

Arizona Public Service told the corporation commission that since the summer of 2009, when its current incentive plan was filed, "important market metrics have shifted. The Company's market research indicates that the average installed cost of residential solar electric systems is currently below $6.00 per installed watt. This is a result of a cost decrease in both the solar modules and their installation as experienced installers gain efficiency. In addition, the number of installers supporting customer demand for DE systems has increased nearly three-fold since 2008. This increased installer participation signifies a healthier marketplace. APS believes it is appropriate to be proactive in response to these market signals and reduce residential incentive levels."

At American Solar Electric Inc. of Scottsdale, a major residential installer in the Phoenix area, sales officials confirmed that prices for routine installations of about 5 or 6 kilowatts of peak capacity – a typical residential system size – have dropped to $5 to $6 per watt. The company's website advertises a residential price as low as $5.02 per watt for a 6.45-kw array.

Lower prices represent "a healthy evolution of things," said Matthew C. Shannon, American Solar Electric's vice president of sales and marketing. Since solar-electric modules were first mass-manufactured for retail markets about 30 years ago, the inflation-adjusted retail price per watt has dropped by as much as 98 percent. The industry is still in its infancy and mass manufacturing at very large scales is just beginning.

Even with a reduction to $2.15 per watt in the Arizona Public Service incentive, solar for many of its customers may remain a bargain.

In the Phoenix area, a south-facing, unshaded 5-kilowatt array might be expected to generate as much as 8,000 kilowatt-hours of electricity annually, according to the National Renewable Energy Laboratory's solar calculator for residential and small-business users, called In My Backyard.

The output of solar-electric modules declines slowly over time, and manufacturers' power production warranties, which typically last 20 or 25 years, are designed to account for this effect. Allowing for an annual power degradation rate of about 1 percent, the 25-year production of an ideally situated 5-kw array in the Phoenix area might amount to as much as 175,000 kwh.

At a price of $5.50 per installed watt, a system rated at 5-kw would cost $27,500. If the APS incentive is reduced to $2.15 per watt, the rebate would amount to $10,750, cutting the system's cost to $16,750. Arizona also offers a personal tax credit of up to $1,000 for the cost of a solar system, reducing the price to $15,750. A federal 30 percent tax credit would amount to $4,725, trimming the total price to $11,025.

The inverters that convert a solar system's DC wattage to the AC used by households and the electricity grid are typically warranted for 10 to 15 years, and a replacement almost certainly would be needed during the modules' power warranty period.  At today's prices, a replacement inverter might cost about $3,500. Although one is unlikely to be needed for years, accounting for the cost today allows a more reasonable estimate of total lifetime costs of a solar-electric system.

Adding a future inverter cost of $3,500 to a total system price of $11,025 after incentives yields an expected 25-year cost of $14,525 for a 5-kw array.

Dividing the estimated 25-year cost of $14,525 by the potential 25-year production of 175,000 kwh yields an electricity price of 8.3 cents per kwh. The average retail price of electricity for residential customers in Arizona in 2009 was about 10 cents per kwh.

The Salt River Project, another large central Arizona utility, currently offers a solar rebate of $2.70 per watt. Similar computations applied to its offer would yield a potential long-term electricity price range of 6.2 to 8.2 cents per kwh for ideally situated arrays installed at gross prices of $5 to $6 per kw of capacity. The project's incentive is scheduled to drop to $2.55 per watt May 1.

Every solar installation is different, and these figures should be considered rough guides only. Utilities and solar-industry trade groups recommend that solar consumers request at least three bids for a system.

The breaching of the $6-per-watt price for installed solar-electric systems is not unique to Arizona. A large utility based in San Antonio, Texas, recently reported that solar installations in its service area have been averaging $5.80 to $6 per watt before any incentives are applied. Initial installed prices around $6 per watt also have been reported in the New York-New Jersey area, Minnesota and California.

Solar electricity at these prices is more competitive with conventional power generation than many realize.

Solar-electric systems generate power only during daylight hours, when power production generally costs utilities more than it does at night. Baseload generation, usually supplied by coal and nuclear power plants, is less costly in part because the massive boilers and turbines run most efficiently when they are operating around the clock.

If this equipment had to be started and stopped to conform to the fluctuating demand from electricity customers during the day, the cost would rise significantly. Utilities often call upon faster-acting natural-gas "peaker" plants to produce electricity as demand rises in the daytime, but the price is higher in part because of the greater wear and tear on boilers, turbines and related equipment, power-plant specialists say.

The arrival of digital "smart" meters in many states, including California, Arizona and Texas, is permitting utilities to offer retail customers "time-of-use" rates that more closely reflect the real-world, time-variant costs of producing electricity. Such rate plans can benefit customers who shift much of their usage to off-peak periods.

Solar owners, and owners of electrified vehicles, can benefit from time-of-use rates. Some may be able to produce more electricity than they use during peak daytime hours, receiving credit for it at relatively high rates. They may be able to shift much of their own use to lower off-peak rates.

In the Salt River Project service area, a residential time-of-use plan charges 18 cents per kwh during peak periods, from 1 to 8 p.m. in the months of May, June, September and October. The off-peak rate is 6.26 cents per kwh. In July and August, the peak rate is 20.03 cents per kwh.

From November to Aril, the peak periods are 5 to 9 a.m. and 5 to 9 p.m., and the peak rate is 8.6 cents per kwh. The off-peak rate is 5.78 to 7.61 cents per kwh, depending on usage amounts.

The retail price of solar electricity is often compared with the wholesale cost of baseload generation from coal and nuclear power plants. A more appropriate comparison is the retail price of peak electricity with the retail price of solar PV electricity.

In the Salt River Project's territory, peak electricity may cost a residential retail consumer 18 to 20 cents per kwh in summer. Peak production from a solar array, although it does not conform precisely to this utility's peak demand times, usually occurs during the on-peak hours. With no incentives, long-term solar electricity prices in Arizona at installed costs of $5 to $6 per watt could range from about 14.3 to 18 cents per kwh for ideally located arrays, competitive with or less than peak utility rates.

The cost of solar electricity has dropped further and faster than many expected. As a result, solar installations this year have "far exceeded" anything seen in the past or anticipated in its forecasts, Arizona Public Service said.