This week, JLF’s Jon Sanders wrote a research brief on the pending changes to the Public Utilities Regulatory Policies Act of 1978 (PURPA). According to Sanders:
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…
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.
The program was supposed to benefit small solar farms and gave states plenty of wiggle room to set their own terms. North Carolina was very generous with its terms, allowing for (1) larger solar farms to participate, (2) long contracts, (3) at fixed rates. Sanders explains:
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.
These fixed rates meant the price did not fluctuate with the market, which often led to utilities paying more for solar than the would-be market price. Sanders quotes a study on the financial effects of PURPA, which concluded:
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 change should be welcomed by ratepayers, as it could lead to lower energy costs. Sanders writes:
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.