An approaching GOP majority at the Federal Energy Regulatory Commission could allow the agency to ease regulations requiring U.S. electric utilities to purchase power from small renewable energy facilities, industry sources told S&P Global Market Intelligence.

Although plants supported by the Public Utility Regulatory Policies Act, or PURPA, make up a small portion of U.S. renewable capacity, the law's supporters fear changes to the mandate could disadvantage small solar power producers.

In 1978, the U.S. Congress passed PURPA to encourage energy production from renewable and alternative sources. To implement the law, FERC established rules requiring utilities to buy power from qualifying facilities — which the commission defined as renewable power plants up to 80 MW of capacity and cogeneration facilities of any size — at the utility's avoided-cost rate.

The Energy Policy Act of 2005 amended PURPA to allow FERC to exempt utilities from the law's mandatory purchase obligations if a qualifying facility, or QF, has nondiscriminatory access to wholesale markets.

Pursuant to the 2005 law, FERC established a rebuttable presumption that QFs larger than 20 MW that operate in regions with auction-based, day-ahead and real‑time markets have the required nondiscriminatory access and, therefore, do not need PURPA's mandatory purchase requirement protections. However, FERC also established a rebuttable presumption that QFs with a net capacity of 20 MW or less do not have access to such markets. But that presumption can, as the name indicates, be rebutted and the mandatory purchase obligation waived.

Despite the changes, large utilities outside areas with competitive markets have complained that PURPA has inhibited their ability to build larger and more economic wind and solar plants and forced customers to pay more for power than they would at prevailing market rates. Critics also say PURPA plant developers have abused the law's "one-mile rule," which specifies that generating facilities located at least one mile apart are separate facilities for eligibility purposes.

More broadly, a swift uptick in renewable energy deployment by large utilities has diminished the share of renewable power from PURPA facilities. Qualifying facilities' share of U.S. renewable capacity is down to around 18% from an average of 45% between 1980 and 2000, the National Association of Regulatory Utility Commissioners, or NARUC, said in an October 2018 report.

Changes may come soon

The growth in renewable power not subject to PURPA and utility complaints against the law have made reforming FERC's PURPA rules a key priority for the agency in recent years. Turnover among commissioners, including the January death of former Chairman Kevin McIntyre, has slowed progress on the initiative. But some sources predict that FERC could issue a notice of proposed rulemaking this autumn that could affect the way states set rates for PURPA facilities, among other changes.

Whether a pending Republican majority at FERC could make such revisions easier is uncertain. Currently, the commission is split between two GOP and two Democratic members, but Democratic Commissioner Cheryl LaFleur is leaving the agency in late August and participated in her last monthly open agency meeting on July 18.

Although FERC could issue a proposed rulemaking before LaFleur's exit, one utility official charged with dealing with PURPA contracts who did not wish to be named said he expects a "more partisan" order after she steps down. But the official cautioned that FERC teed up a PURPA rule change earlier in 2019 that was never voted upon or placed on an agency monthly meeting agenda for discussion.

Other industry sources also expect action soon from FERC. "I would expect that PURPA reform would be one of the very first things a commission that has a 2-1 Republican majority would tackle," said Travis Kavulla, director of energy policy for think tank The R Street Institute and a former Montana utility commissioner and past NARUC president.

Potential updates

To determine compensation for PURPA facilities, states use their own methodologies to calculate utilities' "avoided costs" for buying power from a PURPA plant rather than self-generating that power or obtaining it elsewhere. States such as North Carolina that do not have organized markets operated by independent system operators and regional transmission organizations have sought to align PURPA rates more with market pricing and limit their exposure to higher costs under contracts with qualifying facilities.

To that end, FERC could propose rule changes preventing utilities from having to pay QFs for their full avoided costs, including by not having to compensate PURPA plants for both their energy and capacity, the utility official suggested.

FERC could also attempt to lower the 20 MW threshold for determining nondiscriminatory access to wholesale markets, further restricting the number of facilities that could qualify for PURPA contracts.

"Since FERC has in other proceedings gone to great lengths to ensure resources smaller than 20 megawatts have access to the RTOs' wholesale markets, it seems intellectually inconsistent that the agency would continue to pretend they do not by keeping the threshold intact at 20 megawatts," Kavulla said.

In February, FERC Chairman Neil Chatterjee said the commission could consider ways to introduce more market-driven pricing into PURPA rate determinations or incentivize developers to locate resources where they are most needed. But Chatterjee has not indicated when the agency may act on the PURPA issue, and FERC spokesman Craig Cano said July 15 that he could not speculate on what the commission may or may not do.

In its October 2018 report, NARUC urged FERC to provide a "clear and fair pathway" for utilities outside RTO/ISO markets to qualify for PURPA exemptions. The group said that many non-RTO/ISO states and regions have developed competitive market practices since 2005 and should not have to rely on PURPA's "trial-like administrative proceedings to arrive at the least-cost procurement of resources."

Solar more exposed

Potential changes to PURPA rules would likely have a bigger impact on solar power than other renewable resources. Between 2008 and 2017, PURPA QFs made up 31% of solar photovoltaic capacity installations in the U.S. compared with 5% for onshore wind energy capacity, according to data from the U.S. Energy Information Administration.

Katherine Gensler, vice president of regulatory affairs for the Solar Energy Industries Association, agreed FERC should look at PURPA implementation across the country and ensure the law's goals are being achieved. But she cautioned against changes that could stifle competition in electricity markets and unfairly advantage incumbent generators.

"Any changes FERC makes should bring increased competition and transparency to the process, with increased accountability for states where PURPA is not properly implemented," Gensler said. "We know customers want more solar power; utilities shouldn't stand in their way."

Kavulla said he hoped FERC would update its PURPA regulations in a "balanced way" that allows states "to clear out PURPA's bastardized version of competition and replace it with something more bona fide." But he worried that the commission may do something that "simply entrenches the incumbent utilities in their monopoly positions. That would be a tragic missed opportunity, and probably would not have the political staying power that any reform should have."

Lawmakers in the U.S. Congress have also sought to update PURPA to reduce utilities' purchase obligations, but those bills have never reached the White House. The legislation looks less likely to do so with Democrats now in charge of the U.S. House of Representatives and eager to support renewable and emissions-free energy sources.

Who buys PURPA power

As of July 10, contracts with qualified PURPA facilities nationwide totaled 13,493 MW, according to EIA data compiled by S&P Global Market Intelligence. Of individual companies and utilities, Duke Energy Corp. had the most PURPA capacity under contract at 2,504 MW, followed by Berkshire Hathaway Inc. at 1,718 MW and IDACORP Inc. at 891 MW.

In terms of future PURPA capacity, North Carolina leads U.S. states in qualifying facilities under development at 3,517 MW through 2024, the vast majority of which is solar power. South Carolina is next at 1,528 MW, all of which will be solar generation, with Montana in third at 690 MW of mostly new wind capacity.