FERC’s New PURPA Rule Undermines Clean Energy Projects, Advocates Say

The Federal Energy Regulatory Commission has changed the rules for a federal law that allows independent energy projects to secure utility contracts for their power. Utility groups say the changes will reduce costs for customers, but clean-energy groups and independent power developers say they’ll stifle open competition. FERC’s new rule for the Public Utilities Regulatory Policies Act (PURPA), which closely matches its proposal from last year , passed by a 3-1 vote Thursday over the objections of the commission’s sole Democrat, Richard Glick. In FERC’s Thursday meeting, Chairman Neil Chatterjee said the new rule represents a “wide-ranging and comprehensive set of reforms” to how the 1978 federal law is implemented. Under PURPA, utilities in states without wholesale energy markets must contract with independent power projects, known as qualifying facilities (QFs), if they can produce electricity at less than the utility’s avoided cost of generation.
But Glick echoed criticisms from clean-energy and environmental advocacy groups that FERC’s new rule fails to reform key problems in how PURPA has been implemented on a state-by-state basis over the past decade. He also cited new changes that could undermine PURPA’s goal of creating a level playing field for independent energy developers in regions where vertically integrated utilities hold monopoly power. “One of PURPA’s requirements is to encourage QFs,” he said at the meeting. But after reading the draft final rule, which has not yet been publicly released, he added, “I have a hard time seeing how it encourages it. I think it actually discourages QF development.”

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Fixed contract terms still up in the air

FERC’s new rule doesn’t change a status quo that has given state regulators wide latitude in how to ensure that utilities offer long-term fixed prices to QFs, according to Glick. Independent power producers say these long-term contracts have been critical to ensuring that their projects can obtain financing.

But in recent years, utilities have sought changes to state regulations on the length and pricing of these contracts that have led to significant reductions in PURPA-driven development.

For example, PURPA compliance efforts catapulted North Carolina to the leading spot in U.S. solar development earlier this decade. But a 2017 law shortened the required fixed contract length from 15 to 10 years, along with project sizing and pricing changes that have stifled development since then. Utilities in other states have sought to shorten PURPA contracts to as little as two years, an effort that succeeded in Idaho but failed in Arizona. “Two years is not an appropriate contract term,” Katherine Gensler, vice president of regulatory affairs for the Solar Energy Industries Association, said in a Thursday interview. “Neither the proposed rule [nor] the final rule has addressed one of the biggest hurdles to QF deployment recently, which is states choosing to severely restrict the term of the PURPA contract.”

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PURPA-driven solar development peaked in 2016, when it represented nearly one-third of U.S. utility-scale solar projects, according to Colin Smith, senior solar analyst at Wood Mackenzie. But PURPA also led to overcrowding of interconnection queues and complaints from utilities that it was forcing them to buy expensive power that raised ratepayer costs. The utility trade groups Edison Electric Institute, the American Public Power Association and the National Association of Rural Electric Cooperatives praised FERC’s new rule in a joint statement Thursday. “FERC has helped to ensure that renewable energy can continue to grow without forcing electricity customers to pay a premium to the developers that learned how to game the system,” EEI President Tom Kuhn said.
While some states have enacted increasingly restrictive terms for PURPA developers, others have seen utilities and energy developers align to use it to meet clean-energy goals. Last year, Michigan utility Consumers Energy reached a settlement with state solar industry groups to use PURPA to develop hundreds of megawatts of new solar.

"Avoided-cost" changes and transparency issues

Glick also criticized the new rule’s changes to how states can calculate “avoided costs,” a vital measure of what prices PURPA-enabled projects can secure for their power.

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For example, the rule would allow states to use calculations derived from “liquid market hubs” or “a formula based on natural gas price indices and heat rates” to set “as-available” rates that could change from hour to hour at different locations on utilities’ power grids.

But these methods lack the transparency provided by wholesale markets to allow independent energy producers to assess whether or not their projects will be competitive against utility-owned alternatives, Glick said. This violates PURPA’s directive that “utilities can’t treat QFs differently than they treat their own facilities,” which can earn guaranteed rates of return for their capital costs.

Rob Rains, an analyst with Washington Analysis, noted that the location and time-varying rates that states can develop under this rule are “likely to be substantially lower than the fixed-cost contracts that have been the standard for the industry.” The sum of FERC’s changes “are unlikely to affect states with aggressive renewable standards; however, they introduce more uncertainty and risk for smaller developers that, in totality, may chill adoptions in states that lack aggressive clean energy mandates.”

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FERC Commissioner Bernard McNamee disagreed, saying the rule changes “protect customers from paying excessive rates by ensuring they are not paying more under PURPA contracts than if they obtained power from the utility or the market.” “We do not dictate any approach,” he said. “States will have flexibility to set QF rates under a variety of methods and to allow such rates to fluctuate to match cost of power at the time energy is delivered.” While the final rule has yet to be published, one change highlighted in FERC’s Thursday presentation may offer more transparency in how PURPA contracts are priced, the Solar Energy Industries Association​​​​​​’s Gensler said. That’s a pledge to “allow states to set energy and capacity rates based on competitive solicitations conducted pursuant to transparent and non-discriminatory procedures,” which resembles proposals that the industry group submitted, she said.

“There are lots of solicitations and RFPs where the utilities craft all the requirements, and then, magically, they are the only ones that can meet the requirements,” she said. The final rule, which will go into effect in 120 days, appears to order states to pursue ways to “modernize PURPA that rely on the results of competitive price discovery in order to set these prices — but it has to be done in a way that’s both transparent and non-discriminatory.”