John Locke Update / Research Brief

PURPA Rules Change Could Help Electricity Consumers

posted on in Economics & Environment, Energy & Environment, Law & Regulation, Rights & Regulation
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A pending major federal rule change could create a positive change for people’s electricity bills. That could be good news, especially for North Carolinians.

This fall, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking to change how it implements a Carter-era law. This would be the Public Utilities Regulatory Policies Act of 1978, known as PURPA. It’s is the law that requires electric utilities to buy any and all power produced from a qualifying renewable energy facility at a price considerably higher than the market price for power, even if the utility doesn’t need any additional power at that moment.

Way back when, the idea was to get utilities to be more open to interconnecting with small power producers, because we were worried about America being too dependent on foreign energy sources. The oil crises of the 1970s and the now-discredited “Peak Oil” theory were big factors behind the law. The price is supposed to be equivalent to the cost the utility “avoided” incurring by not generating the power itself, which sounds fair but in practice goes well beyond a fair market price.

In the ensuing decades, deregulation, open access, a multitude of state and federal incentives for solar and wind power, and the onset of fracking have dramatically changed the energy scene here. Domestic energy resources are plentiful (the U.S. is a net exporter of natural gas and now even oil), and competitive markets have opened for renewable energy. The problem now is that solar and wind facilities are using PURPA to game the system to their advantage, which is to the distinct disadvantage of consumers.

Environmental science professor David E. Dismukes, director of Louisiana State University’s Center for Energy Studies, called PURPA reform an “urgency” to protect ratepayers. In his conclusion, Dismukes wrote:

The irony is that today, renewable QF [qualifying facilities] generators are abusing the very provisions of PURPA that helped to create today’s competitive electric marketplace. These speculative renewable energy developers are forcing utilities to purchase electricity that is not needed, for contract terms that are beyond what most generators can secure in today’s market, and for contract prices that are far in excess of market costs. The entire financial liability of these abuses are paid for by one party, and one party only – not utilities, but ratepayers.

A major new report examining the additional costs to consumers of electricity rates for solar and wind facilities yielded staggering numbers. The report, produced for the Edison Electric Institute by Emma Nicholson and Michael Kagan of Concentric Energy Advisors, uses proprietary utility data to examine the cost of avoided-cost rates awarded to solar and wind qualifying facilities [QFs] under federal Public Utility Regulatory Policies Act [PURPA] and compares them to competitive-market rates from solar and wind facilities.

To be clear, this report compares solar to solar and wind to wind. It shows the difference in PURPA qualifying facilities’ prices to competitive market prices paid by the same utilities for the same power sources. The only variable is whether the facility can use this federal law to force the utility to buy all its power at the expensive contract price.

Here’s what Nicholson and Kagan concluded:

We found that the avoided cost rates in the sample of solar and wind QF [qualifying facility] contracts we reviewed generally exceeded rates that are realized in competitive markets for solar and wind energy. We also found 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. 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. [Emphasis added.]

This may be news to the rest of the country, but not here. This is the same problem already facing North Carolina ratepayers. See my Spotlight report on Reforming PURPA Energy Contracts for more details, but prior to House Bill 589 in 2017, electricity consumers here faced overpaying by a billion dollars.

FERC gives the states wide latitude in determining avoided-cost prices, which facilities get them, how long those facilities can get those contract prices, and whether the contract prices vary according to the market or are fixed for the entire length of the contract. North Carolina set by far the highest avoided-cost prices in the Southeast and the longest contract terms (originally 15 years, now 10), and at fixed rather than variable rates.

North Carolina’s extremely solar-favorable interpretation of PURPA is, in large part, responsible for this one state having 60 percent of the nation’s PURPA qualifying facilities. (Unfortunately, Governor Roy Cooper undid much of the good for consumers in HB 589 by allegedly “improperly us[ing] the authority and influence of his Office” to force Duke Energy into contracts at the old 15-year length and fixed rates with 240 solar facilities that otherwise would have submitted competitive bids to provide power to the utility.)

FERC’s rule change would, among other things, give states more flexibility to let utilities rates for PURPA qualifying facilities’ energy to vary according to market conditions, lower the size of qualifying facilities, and make it harder for large, sprawling solar and wind facilities that don’t qualify for PURPA avoided-cost rates to pass themselves off as multiple, small qualifying facilities.

It’s an issue that bears watching and, for electricity consumers, hoping.

Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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