Three Trends in State PURPA Implementation
By: DSIRE Insight Team
Our team recently announced the launch of two new research offerings through DSIRE Insight related to the Public Utility Regulatory Policies Act, or PURPA, and investor-owned utility avoided cost rates. PURPA has been a key policy for renewable energy development in the U.S., requiring utilities to purchase electricity from small renewable or cogeneration facilities (termed Qualifying Facilities, or QFs) at the utility’s avoided cost of electricity. While PURPA is a federal law, states have a large role in PURPA implementation; states are largely responsible for determining how avoided costs are calculated and setting PURPA contract terms. Differences in PURPA policies can have a large effect on patterns of renewable development across states.
States Considering Changes to PURPA Implementation, Jan. – Aug. 2019
Our team tracks changes to PURPA and changes to state implementation of PURPA under consideration across the country and identified three recent trends among states:
1) States Moving Toward Competitive Procurement Mechanisms
Several states are adopting competitive procurement methods for determining avoided costs under PURPA. Traditionally, avoided costs have been determined through a regulatory process using utility cost data. With a competitive procurement process, QFs instead submit bids to supply a certain amount of generation and/or capacity, with avoided costs being determined by the winning bids. Competitive procurement processes rely on there being a set amount of capacity to be supplied by QFs, which can conflict with PURPA’s requirement for utilities to purchase all capacity offered by QFs. However, states have a number of policy options available to induce QFs to participate in quantity-limited competitive procurements even with PURPA “must-buy” provisions still in effect.
One approach, taken by North Carolina through H.B. 589 of 2017, is to make contract terms more favorable for contracts entered into through competitive procurement. In North Carolina, traditional PURPA contracts using standard avoided costs are now only available for a maximum term of 5 years, while competitively-bid contracts can last 20 years. As longer terms are considered more favorable, developers have an incentive to participate in the competitive procurement process despite the generally lower purchase prices.
Another approach is to set avoided costs for all PURPA contracts using the results of a competitive procurement process. Michigan adopted this process for Consumers Energy in June 2019. With avoided costs being determined by the competitive process, developers have an incentive to bid, as they otherwise risk being undercut by other developers who do participate.
Colorado has used a competitive bid process to set PURPA avoided costs for decades. Unlike Michigan and North Carolina, Colorado has until recently not allowed QFs to enter into contracts with utilities without using the competitive bid process. Due to concerns that these rules conflict with PURPA requirements, Colorado regulators are considering rules that would establish alternative means for at least some QFs to enter into PURPA contracts, although these methods may still use market-based mechanisms.
2) States Considering Standard Offer System Size Limit Changes
PURPA requires the use of avoided costs only in standard contracts, which are available for QFs up to a certain system size limit (based on generation capacity). QFs above this size limit must negotiate purchase rates with utilities even in states without competitive procurement processes. States can set the system size limit for standard contracts anywhere from a minimum of 100 kW to a maximum of 80 MW. Some states are considering changes to their standard contract size limit.
Washington regulators recently adopted rules increasing the standard offer size limit from 2 MW to 5 MW. The Missouri Public Service Commission is considering draft rules that would increase the standard contract size limit to 1 MW from the current 100 kW. The rates for standard contracts above 100 kW would be different than those offered to smaller QFs.
North Carolina, on the other hand, lowered the state’s standard offer size limit from 5 MW to 1 MW in 2017, with a further decrease to 100 kW to occur when a total of 100 MW of projects have been awarded the standard offer. A Michigan utility has proposed to lower the standard offer size limit to 150 kW from the current 2 MW, but state regulators have not yet approved this change; the Michigan Public Service Commission increased the standard offer size limit to 2 MW in 2017.
3) States Examining Treatment of QF + Storage Pairings
As energy storage has grown as part of the electricity system, questions about how PURPA applies to combinations of renewable generation and storage have emerged. The Federal Energy Regulatory Commission (FERC) was considering many of these issues in a case concerning Montana wind projects where the developer proposed to add battery storage while maintaining the projects’ status as QFs. The total capacity of the projects would exceed 80 MW, the maximum for QFs, if the storage capacity counted towards the total capacity, but not if only generation capacity was counted. The matter was withdrawn before any substantive ruling was made. In the meantime, it is not clear whether storage that is added to an existing QF has to register as a separate QF, or whether the storage capacity counts in determining the total capacity of the QF.
In the absence of FERC rulings, a few states have been considering how to treat energy storage under PURPA. North Carolina regulators are in the process of determining what will happen when QFs with existing PURPA contracts add energy storage, with utilities proposing that the addition of storage should require the QF to enter into a new contract using current avoided cost rates. South Carolina’s major energy legislation passed in 2019 contains provisions on PURPA requiring new avoided cost methodologies be developed that consider the costs and benefits of energy storage. The Oregon Public Utility Commission is also conducting a regulatory proceeding examining the prices to be paid to renewable QFs paired with storage.
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Learn more about PURPA changes under consideration or current investor-owned utility avoided cost rates through our new DSIRE Insight offerings. For more information or to request a sample, email us at email@example.com.