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Essential Energy Insights - June 11, 2020

FERC deals potential blow to renewables with PURPA overhaul cheered by utilities

The Federal Energy Regulatory Commission approved a draft order July 16 that gives states far more leeway in setting the rates that utilities are required to pay under a decades-old law aimed at boosting small renewable and cogenerating facilities.

The draft rule largely reflects a contentious set of changes proposed in September 2019 to how FERC implements the Public Utility Regulatory Policies Act of 1978, or PURPA.

Utilities applauded the final revisions as common-sense reforms that will shield customers from overpaying for electricity while recognizing the falling cost of renewable energy. But clean energy advocates and one partially dissenting commissioner asserted the overhaul runs contrary to congressional intent and will stymie small-scale renewable energy development.

Among its many provisions, PURPA requires utilities to purchase electricity from qualifying facilities, or QFs, at avoided-cost rates reflecting what companies would have to pay to buy that same power from other generators or produce it themselves.

However, the U.S. Congress amended PURPA in 2005 to exempt utilities from the law's purchasing requirements if QFs in their service areas have access to competitive wholesale markets run by independent system operators and regional transmission organizations.

Under FERC's previous implementing rules, utilities were required to give QFs with up to 80 MW of capacity a "contract option" setting a price for energy for the duration of the contract. Alternatively, QFs could also choose to sell as much energy as they wanted at "as-available rates" where the price is calculated at the time of delivery.

While the as-available option mainly benefited industrial cogenerators, the contract option allowed developers to secure crucial project financing for renewable energy facilities designed and built to be certified QFs.

Avoided-cost rates

In a deviation from its September 2019 proposal, FERC's July 16 draft final rule stopped short of completely eliminating the requirement that utilities offer the contract option to QFs. Instead, the draft order allows states to require that the price of QF power vary according to the purchasing utility's avoided costs at the time the energy is delivered. The draft order would also allow states to require that QFs retain their rights to fixed energy rates based on projected energy prices over the duration of the contract.

Moreover, the draft order allows states to set rates at the locational marginal price of electricity, a pricing mechanism determined at energy hubs based on system conditions. It also outlined a process in which states can meet their PURPA obligations through competitive solicitations but does not require them to do so.

FERC's draft order also directed states to develop "objective and reasonable" criteria to determine whether QFs are commercially viable before finding they are entitled to a legally enforceable contract under PURPA.

Echoing earlier comments on the proposed rule, Commissioner Richard Glick criticized the changes in a partial dissent.

"One of PURPA's key requirements is that utilities can't treat QFs differently than they treat their own resources, but today's final rule ignores this," Glick said during the commission's monthly open meeting held virtually. "QFs will no longer be guaranteed an option for a fixed-term contract that makes it easier to finance certain projects. Utilities, when they self-build, certainly aren't subjected to such uncertainty."

Glick also suggested that the commission may have run afoul of the National Environmental Policy Act by failing to analyze potential adverse impacts related to a drop in QF generation.

However, Chairman Neil Chatterjee defended the draft rule as a sensible package of reforms.

"I think that what we've done here today is provide flexibility to the states and I do not share some of the concerns that other commenters have raised," Chatterjee said on a conference call with reporters.

Further changes

For QFs operating within RTOs and ISOs, FERC's draft order also establishes a new rebuttable presumption that QFs with a net capacity at or below 5 MW down from 20 MW lack nondiscriminatory access to organized competitive markets. FERC had previously proposed to lower that threshold to 1 MW. Glick argued the commission still "has no record to support the change," noting that it would apply nationwide while many QFs are still located in regions dominated by vertically integrated utilities.

In a change that Glick does support, the draft order modified FERC's previous "one-mile rule" for determining whether multiple generating facilities should be considered part of a single facility as part of the QF certification process. Under the draft order, interested parties can demonstrate that facilities between one and 10 miles apart are a single facility.

The change is aimed at cracking down on developers who sought to skirt FERC's 80-MW requirement for QFs by building multiple smaller, separate facilities just over one mile apart.

In a change that could increase legal costs for QFs, the draft order allows parties to protest QF self-certifications or recertifications without filing and paying the roughly $30,000 that FERC charges for a petition for a declaratory order. Critics of that change argued that it will undercut the ability of small solar and wind facilities to compete against incumbent utilities.

"Homeowners putting solar panels on their roof, farmers leasing their land to wind turbines, and industrial facilities with efficient on-site power all lose under FERC's rule today," Tom Rutigliano, an advocate in the Natural Resource Defense Council's Sustainable FERC Project, said in a statement.

The Edison Electric Institute, which represents the nation's investor-owned utilities, maintained the changes will protect consumers from paying excessively high rates.

"By updating these rules, FERC has helped to ensure that renewable energy can continue to grow without forcing electricity customers to pay a premium to the developers that learned how to game the system," Edison Electric Institute President Tom Kuhn said. (FERC docket RM19-15)