Concentric Energy Advisors study calls QFs’ avoided cost rates ‘dislocated’
The Dec. 3 deadline is fast approaching to submit comments in the Notice of Proposed Rulemaking by the Federal Energy Regulatory Commission (FERC) to update the Public Utility Regulatory Policies Act (PURPA) of 1978.
And there’s likely to be a quick turnaround on FERC’s subsequent final rule, according to FERC Commissioner Richard Glick, who told an audience at this week’s National Association of Regulatory Utility Commissioners (NARUC) 2019 annual conference in San Antonio that he expects a final PURPA rule in early 2020.
A new report, commissioned by the Edison Electric Institute (EEI) and released Nov. 14 by Concentric Energy Advisors Inc., delves into a PURPA topic that most commenters will likely address: avoided cost, which is what it would have cost a utility to generate or contract for the energy and capacity in the absence of a qualifying facility (QF).
Put another way, PURPA permits QFs to interconnect with a utility-controlled grid and requires utilities to purchase the QF’s energy and capacity — a.k.a. a mandatory purchase obligation — at avoided cost.
While the Energy Policy Act of 2005 amended PURPA and removed the mandatory purchase obligation on utilities operating in competitive wholesale markets from most QFs greater than 20 megawatts (MW), the requirement remains status quo for power from generators less than 20 MW.
FERC’s Sept. 19 Notice of Proposed Rulemaking specifically focuses on modernizing PURPA to improve how QFs are integrated with wholesale energy markets.
And according to Concentric’s new report, QFs — which are independent, smaller energy generators that primarily produce renewable energy — currently have avoided cost rates that generally exceed the rates that are realized in competitive markets for solar and wind energy.
“The administratively determined avoided cost rates that QFs receive under PURPA are dislocated from market and cost trends,” report coauthor Emma Nicholson, senior project manager at Concentric Energy Advisors, told Daily Energy Insider on Tuesday. “We found that QFs are paid more for wind and solar energy than non-QF renewable developers.”
Nicholson and coauthor Michael Kagan, senior vice president at Concentric, also concluded in their report, An empirical analysis of avoided cost rates for solar and wind QFs under PURPA, that trends in solar QF contracts did not reflect underlying cost trends because solar installation costs declined “far faster” than the administratively determined QF rates.
“We estimate that utilities and, in the end, customers overpaid in the approximate range of $150.7 million and $216.2 million per year under the QF solar and wind contracts,” Nicholson and Kagan wrote in the report. “Accounting for the full term of the solar and wind QF contracts raises the total overpayment estimate to between $2.7 billion and $3.9 billion, respectively.”
Concentric compared contract rates for solar and wind generation set pursuant to PURPA to contract rates set in the competitive market. Nicholson and Kagan analyzed a sample of 708 solar and wind contracts representing roughly 8,000 MW of generation capacity that utilities in seven states signed with solar and wind QFs.
The firm found that these contract rates consistently exceeded rates in competitively determined purchase power agreements (PPAs) for solar and wind energy executed during the same year.
“This whitepaper was essentially an audit of the methods state public utility commissions (PUCs) use to determine the avoided cost rates utilities pay QFs,” Nicholson wrote in an email.
FERC and the nation’s PUCs share the responsibility for implementing PURPA requirements, with FERC setting the regulatory framework, while the PUCs establish avoided cost rates and set PURPA contract terms.
Because solar prices, for example, have fallen over the last decade, solar electricity now may be delivered for less than a utility’s avoided cost. Therein lies the problem that utilities have with the current avoided cost rates.
Concentric pointed out in its report that “setting QF contract rates administratively without regard to current market conditions, can also result in inefficient investment over time because such rates encourage developers to locate in jurisdictions with the highest avoided cost rates as opposed to areas where solar and wind energy would be most effectively deployed, and therefore valuable to the utility and its customers.”
On the flip side, according to the Solar Energy Industries Association (SEIA), the falling solar prices under PURPA have made the law an attractive option for solar developers because it has served as a meaningful backstop when securing financing for projects that don’t intend to be QFs.
FERC’s Notice of Proposed Rulemaking would give states more discretion in calculating the avoided cost rate for QFs and would provide states more flexibility in how they choose to calculate the energy rates applicable to QFs by allowing the rate to:
1. Vary with the changes in the utility’s avoided cost based on the time the energy is delivered;
2. Be a fixed energy rate based on projected energy prices of anticipated dates of delivery;
3. Use a locational marginal price in organized markets or pricing based off competitive liquid market hubs or natural gas indices in unorganized markets; or
4. Set rates based on competitive bids.
Glick has said that such proposed reforms for PURPA could make it increasingly difficult and in some cases impossible for QFs to obtain project financing.
“Behind-the-meter technologies want to get into the wholesale markets and each side is passionate about their mandates, so we have to keep the lines of communication open to ensure both sides are considered,” he said.
Meanwhile, Nicholson and Kagan noted in their Concentric report that their results corroborate the findings of PUCs “that the avoided cost rates established under PURPA guidelines do not reflect market trends and often exceed market-based metrics.”
They also wrote that both FERC and the PUCs have observed that the administrative methods used by the PUCs to determine avoided cost rates for QF contracts haven’t always tracked the declines seen in competitive markets.
“As a result,” wrote the authors, “state PUCs have identified numerous instances of specific utilities overpaying for renewable QF energy and capacity relative to rates available through market mechanisms, with such overpayments ultimately being borne by utility consumers.”
