FERC Ruling Paves Way for Increased Local Renewable Energy Generation
December 26, 2016 by Alison Holm
In June 2016 the Federal Energy Regulatory Commission (FERC) issued a ruling that paves the way for municipal and cooperative utilities to procure additional, local renewable energy generating capacity.
Municipal and cooperative utilities often handle only the final distribution phase of delivering power to customers, entering into contractual agreements with generation and transmission (G&T) providers that both produce and transmit the electricity to the distribution network. These contracts between G&T providers (or wholesale power providers) and member utilities typically require member utilities to purchase the majority of their distribution load directly from their G&T provider, usually with a small carve-out for sourcing electricity from other entities. A good illustration of this is the arrangement between Delta Montrose Electric Association (Delta Montrose) and Tri-State Generation and Transmission Association (Tri-State), which lies at the heart of the recent FERC ruling: Delta Montrose, a rural electric-cooperative in Colorado, is party to a wholesale power agreement with Tri-State which requires it to purchase 95% of its power requirements directly from Tri-State, capping outside purchases at 5%. However, in an effort to support local renewable energy development, Delta Montrose sought to exceed the 5% cap on locally-sourced power, arguing that the utility’s obligation to purchase power from Qualifying Facilities (QFs) under the Public Utility Regulatory Policies Act (PURPA) (see below) trumps the limit imposed by Tri-State.
Enter FERC. In what was essentially a two-part decision, FERC determined (1) that member utilities’ obligation to purchase power from QFs under PURPA does indeed supersede any power supply agreement with a wholesale power provider; and (2) that the wholesale power provider may not impose cost-recovery mechanisms that would, in effect, limit member utilities’ ability to procure power at negotiated rates from QFs. Sound complex? PURPA, QFs, and a timeline of the FERC decisions are broken down in more detail below.
The Public Utility Regulatory Policies Act of 1978 (PURPA) is a federal policy designed to, among other things, conserve electric energy, enhance utility-sector energy efficiency, and promote equitable retail rates. PURPA established a class of qualified facilities (QFs) that are treated differently for rate and regulatory purposes. There are two categories of QFs:
- Small power production facilities that generate renewable energy (e.g. hydro, wind, solar, biomass, waste, or geothermal) and are 80 megawatts (MW) or less in capacity.
- Cogeneration facilities which produce both electricity and thermal energy, with no associated capacity limit.
Tri-State Generation and Transmission Association, Inc. (Tri-State), is a wholesale power provider collectively owned by 44 power distribution cooperatives in Colorado, Nebraska, New Mexico, and Wyoming. Under a wholesale power supply agreement, Tri-State requires member co-ops to purchase at least 95% of their electricity needs from Tri-State, with the option of sourcing up to 5% from other entities.
FERC Decision Timeline
- February 2015: Delta Montrose Electric Association (Delta-Montrose), one of Tri-State’s 44 member co-ops, petitioned that the requirement to purchase power from QFs under PURPA takes precedence over Delta-Montrose’s agreement with Tri-State to self-supply no more than 5% of their distribution load.
- June 2015: In the Delta-Montrose ruling, FERC found that Delta-Montrose, under PURPA, is required to purchase power from QFs and that they can negotiate the rates.
- February 2016: Tri-State petitioned FERC for a declaratory order approving a cost-recovery strategy that would require member co-ops to compensate Tri-State for unrecovered fixed costs related to power purchased from QFs beyond the 5%. This proposed fee would be calculated as the difference between Tri-State’s wholesale and avoided cost rates and would be applied to every kilowatt hour (kWh) of energy purchased from a QF beyond the 5% allotment.
- June 2016: FERC issues a decision finding that Tri-State’s proposed cost-recovery mechanism undermines the Commission’s ruling in the Delta-Montrose decision and that “imposing financial burdens” would negatively impact both Delta-Montrose’s ability to purchase power from QFs (as required under PURPA), and the co-op’s ability to sell the power output at negotiated rates.
FERC’s decision presents substantial opportunities for growing local renewable power generation, though the precise market impact remains to be seen. The Rocky Mountain Institute (RMI) estimates that the ruling, combined with decreasing renewable power prices, could result in as much as 400 Gigawatts (GW) of renewable energy development potential. RMI acknowledges that integrating 400 GW of renewable power would be challenging absent energy storage mechanisms; and utilities’ energy procurement decisions will continue to be driven by individual costs. However, removing the cap on locally-sourced renewable power (at least for renewable energy facilities up to 80 MW) for the country’s 2,890 municipal and cooperative utilities could result in a significant uptick in renewable power generation. Municipal and cooperative utilities collectively serve approximately 27% of the U.S. utility customer base (or around 40.3 million people) – that represents a large market for renewable energy development, and especially for community-scale renewable power projects (like community solar), which are already gaining traction among rural electric cooperatives as a cost-competitive alternative to wholesale power purchases.