Jasmin Melvin reports for S&P Global about the net effect of PURPA without a consistent policy of tax credit support for the development of CHP and industrial scale waste heat recovery.
Utilities have complained about the Public Utility Regulatory Policies Act since it was passed in 1978, but both proponents and detractors view current market dynamics as cause to consider reforming the law or the regulations governing its implementation.
Under the Jimmy Carter-era electricity market policy, utilities must purchase power from qualifying facilities, or QFs, which typically are small cogeneration and renewable power plants that receive special rate and regulatory treatment, at the full avoided cost of replacing that power with other generation. FERC implements and enforces PURPA, while states can tailor their own avoided cost rules, providing a limited exception to FERC’s exclusive authority over wholesale power sales.
Speaking on a panel Feb. 13 at the National Association of Regulatory Utility Commissioners’ winter meetings in Washington, D.C., Irene Kowalczyk, on behalf of the Industrial Energy Consumers of America, said, “For manufacturing, PURPA is just as important today as it was back in 1978.”
Kowalczyk, director of global energy at the differentiated paper and packaging solutions company WestRock Company, asserted that PURPA allowed QFs “to break into the utility monopoly on generation development,” and without the policy, building and operating combined heat and power, or CHP, units economically is very difficult. She noted that CHP and waste heat recovery facilities are not privy to the subsidies offered to renewable energy resources.
“Wind and solar still receive production tax credits and investment tax credit incentives, and they’re encouraged by state [renewable portfolio standard] programs, whereas the industrial CHP and [waste heat recovery] facilities rarely receive these incentives,” she said. “The question that we ask is, do wind and solar still need the protections of PURPA when they are really mainstream in utility [integrated resource plans] and utilities issue [requests for proposals] to acquire these resources.”
CHP, renewables need different treatment
Kowalczyk said the IECA supports “establishing different treatment under PURPA for industrial CHP and waste heat recovery QFs that are not in the primary business of selling power,” along with a handful of other changes to ensure the intended purpose of the law is realized.
In 2005, Congress amended PURPA through a provision in the Energy Policy Act that granted FERC authority to terminate a utility’s legally enforceable obligation to buy power from QFs located in competitive regional markets.
The following year, FERC issued a final rule, RM06-10, establishing a rebuttable presumption that QFs with capacities above 20 MW have nondiscriminatory access to competitive wholesale markets, and utilities in those markets should be relieved of their mandatory purchase obligation.
As a result, Kowalczyk said, “I don’t think any new CHP facilities have been installed in those [regional transmission organization] markets, at least larger ones, because they can’t get the financing because [regional transmission organization] markets don’t provide sufficient compensation that is certain to enable those units to get built.”
She added, “What we’ve seen since the passage of the Energy Policy Act of 2005 is significant reduction in the amount of CHP facilities being built in the country. With regard to renewables, they continue to go forward.”
Utilities have long argued that PURPA, enacted in 1978, requires them to overpay for power they don’t even need to meet electricity demand from their customers. In recent years, these arguments have gained traction with Republican lawmakers who have said that given the substantial changes to the markets, including the boom of cheap natural gas supplies and an ongoing transition in the generation mix away from coal, certain aspects of PURPA, including the imposition of mandatory purchase obligations, may no longer be appropriate.
This spurred FERC to hold a technical conference, AD16-16, in 2016 that produced a mix of perspectives. Those representing utilities advocated for a policy shift away from unconditional purchases and toward purchases based on power system needs; state utility regulators looked for guidance to cut down on QF developers’ ability to game the law by segmenting projects; and power producers eyed a minimum set of parameters for PURPA contracts to mitigate roadblocks to project financing that utilities are increasingly introducing into contract negotiations.
“Notwithstanding the complaint about FERC’s one-mile rule, today’s complaints about PURPA are nothing new and echo complaints made 30 years ago when PURPA was initially implemented,” Ari Peskoe, a senior fellow in electricity law at Harvard Law School, said during the NARUC panel.
Courts, Congress have kept PURPA intact
Peskoe contended that arguments that PURPA is burdening utility customers with unnecessary costs have already been rejected by the courts.
“While Title II [of PURPA] requires rates paid to [QFs] be just and reasonable, the U.S. Supreme Court explicitly rejected utilities’ argument that this requires that rates be at the lowest possible reasonable rate,” Peskoe said.
He noted that FERC’s regulations setting rates at utilities’ full avoided costs were written at a time when generation costs were on an upward trajectory, thus “FERC was well aware that this was going to be a generous rate to QFs.”
He added that the Supreme Court, in upholding FERC’s rules on the matter, agreed with the commission that it was “more important that the full avoided cost rate would provide a significant incentive for the development of QFs and that ratepayers and the nation would benefit from decreased reliance on fossil fuels” than it was for consumers to directly reap savings from the rate.
Peskoe asserted that “PURPA implementation has always been uneven,” but said, “Despite the challenges, the statute’s requirements are still relevant today.”
Further, he suggested that Congress, for the most part, also sees the merits of the law.
“Congress has repeatedly, about 10 times since 1992, passed or renewed renewable tax credits, and by 2005 when Congress amended PURPA, about 20 states had renewable portfolio standards on the books,” he said. “Congress certainly could have allowed for exemptions based on those state requirements or based on some metric of renewable energy procurement, or it could have limited PURPA in exchange for extending the tax credits as it did so many times. But Congress never chose to do that.”
With regard to the 2005 amendment to the law, Peskoe said PURPA’s “success in demonstrating that generation could be a competitive business ultimately led Congress to limit its reach.”
Peskoe also posited that utilities’ perceived abundance of capacity from QFs was a problem of utilities’ own doing.
He cited a Lawrence Berkeley National Laboratory study of 12 Western U.S. utilities’ integrated resource plans, which found that “energy consumption growth was overestimated by all but one utility over planning periods beginning in the mid-2000s and ending in 2014. Moreover, peak demand growth was also overestimated in eight of the 11 cases … examined.”
For most of the utilities in the study, their more recent IRPs continued to overestimate demand growth even in the presence of much slower-than-anticipated actual growth. The report released in October 2016 also found that utilities’ acquisition of supply resources generally followed the original planning regardless of observed changes in load.
“When a utility today claims that it has an abundance of QF energy, I suggest it’s worth investigating how the utility’s actions may have contributed to that situation,” Peskoe said.
“To what extent do utilities’ inaccurate load forecasts, failure to account for those mistakes and lack of foresight about the development of renewable energy technologies contribute to their perceived abundance of QF energy? Should utilities be held accountable for these mistakes? How can regulators do so while protecting ratepayers?” Peskoe questioned. “These are obviously not easy questions to answer, but I suggest that they are worth asking.”
FERC ‘agnostic’ to PURPA reforms
Lawrence Greenfield, associate general counsel in FERC’s Office of the General Counsel’s energy markets division, offered during the panel that the commission was “largely agnostic” about changing PURPA.
“Across the commission and certainly among commissioners that I have known, there is very much a strong sense that our job is not to implement the statute people might like or might dislike, but rather to carry out whatever Congress has told us they want to see,” Greenfield said.
“Our view is whatever Congress tells us to do, that’s what the hell we’re going to do, for better or for worse,” he said.
But regarding state utility commissioners’ concerns over avoided cost rates, Greenfield noted that FERC regulations and FERC precedent give the states a lot of discretion.
“I’ve often thought, and this is a personal view, that if the states had a process where on a regular basis they were routinely looking at avoided cost rates, … the states would come up with numbers that are perhaps more representative of the true avoided costs and therefore a better target around which parties could actually negotiate,” he said.
“We’ve given you a skeleton, it’s up to you to flesh it out,” he told state commissioners attending the panel discussion. “Use the skeleton but put the muscle where you want. … I think you’ll come up with a better body of rates.”
Jasmin Melvin is a reporter for S&P Global Platts which, like S&P Global Market Intelligence, is owned by S&P Global Inc.