Create markets and watch clean energy flourish

Probably the biggest barrier to clean energy development is the lack of markets. Utility monopolies traditionally blocked independent generators from competing with their own power plants, even if the utilities’ facilities were more expensive and polluting. Congress tackled this problem in 1978 with the passage of the Public Utility Regulatory Policies Act (PURPA) and many states responded with policies that launched aggressive growth of renewables and cogeneration. The concept was simple – clean energy projects should be able to compete with traditional generators and receive power purchase contracts equal to what a utility would pay to generate and deliver its own electricity.

PURPA’s influence, unfortunately, waned in the 1990s, largely because of continued utility opposition and the growth of wholesale-power suppliers not focused on renewables or cogeneration. Yet the challenge of creating markets for clean power remains. Without such competition, opportunities to cut costs and lower pollution are being lost.

In states that maintained power monopolies, utilities remain opposed to independent developers, preferring to build their own power plants. In many states, the regional transmission operators allow only day-ahead power markets and fail to offer the long-term contracts needed to finance clean-energy projects.

In a little understood recent decision, however, the Federal Energy Regulatory Commission (FERC) declared PURPA is still an effective tool and can be used to provide technology-specific long-term contracts for clean power. (See below for a summary of the decision.)  The case began when California passed legislation to provide standardized contracts (or feed-in tariffs) for efficient cogeneration (sometimes known as combined heat and power or CHP). Utilities fought the legislation and then challenged its implementation before the state regulatory commission and twice before FERC, which instead embraced competition and the state’s ability to set long-term power purchase agreements for cogeneration, renewables, and other specific technologies.

A new report encourages FERC to go further, to build on the California decision and encourage the development of clean and efficient power technologies. Written by Carolyn Elefant and commissioned by the Southern Alliance for Clean Energy, Reviving PURPA calls on FERC to clarify and reform the Byzantine state patchwork that sets unreasonably low prices for electricity from renewable energy and cogeneration.

Reviving PURPA provides a comprehensive review, the first in more than a decade, of the different ways by which state regulators calculate avoided cost rates under PURPA. Based on this review, the report found many alternative-energy developers face complex and difficult -cost ratemakings at the state level. Further complicating the problem, in some states like Florida, utilities are vested with broad latitude to determine the data inputs for PURPA’s calculations, thereby allowing monopolies to control the market and block clean energy projects.

This report concludes PURPA can still serve as an important policy tool for development of renewables and cogeneration. However, states need additional guidance on which avoided cost methodologies are most favorable to clean power producers as well as an understanding of the range of options – such as resource-specific avoided-cost rates and ability to account for avoided environmental costs – available to them in setting PURPA rates. Therefore, this report recommends FERC, as the agency responsible for developing the regulations that states must follow in calculating avoided cost rates, conduct a series of technical conferences on PURPA and, based on input from stakeholders, issue a policy statement to provide additional guidance on how states can allow competition and clean energy development.

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FERC’s California Decision Summary

The Federal Energy Regulatory Commission (FERC) on 21 October 2010 issued an order (Docket Nos: EL10-64-001 and EL10-66-001) clarifying that states can offer feed-in tariffs for cogeneration and other renewable resources.

The California “Waste Heat and Carbon Emissions Reduction Act” (AB 1613) required the state’s investor-owned utilities to offer long-term power purchase contracts to cogenerators that meet certain efficiency and emission standards and do not exceed 20 megawatts of capacity.  The California utilities lobbied against the legislation and then argued to FERC that the law ran counter to the Federal Power Act and the Public Utility Regulatory Policies Act.  The FERC, however, disagreed with the utility arguments and stated state commissions can set avoided cost rates for qualifying facilities.

Overturning a previous decision (SoCal Edison), FERC endorsed multi-tiered avoided cost rate structures.  The Commission specifically stated states “may take into account obligations imposed by the state” (such as AB 1613), thereby directing utilities to purchase energy from particular sources of energy or for a long duration.

FERC also found that if environmental costs “are real costs that would be incurred by utilities” then they “may be accounted for in a determination of avoided cost rates.”

The California decision opens the door to feed-in tariffs and Clean Energy Standard Offer Programs that encourage the development of specific technologies, such a combined heat and power projects or solar collectors and wind turbines.