Back in October 2011, when I released Reviving PURPA’s Purpose , commissioned by the Southern Alliance for Clean Energy, I was hard-pressed to find any scholarly works or FERC decisions discussing methodologies for setting avoided cost rates for qualifying facilities that had been published more recently than five years ago. And no wonder. To paraphrase Thomas Hobbes , the avoided cost ratemaking process is nasty (as in frequently contentious), brutish (as in extremely complicated) and anything but short (except perhaps in those jurisdictions with statutes establishing avoided cost rates as the market price for energy and capacity transactions in regional markets).

Yet, lately, there’s been a small rush of QF activity. Though I’d like to credit my paper for “reviving” discussion on QF ratemaking, in my view, the conversation finds its genesis back in the 2010 California PUC feed-in tariff case. There, FERC determined that the Federal Power Act preempts states from setting feed-in tariffs for wholesale transactions but that states may set avoided cost rates pursuant to PURPA. Subsequently, FERC overruled earlier precedent that required states to base avoided cost rates on all power sources and held that states could establish resource-specific avoided cost rates. In addition, FERC reaffirmed that states may establish QF rates to reflect verifiable costs associated with avoided transmission construction or environmental compliance resulting from the purchase of QF power.

FERC’s California CPUC ruling represents the first step to making PURPA more relevant in today’s markets. Allowing states the ability to set technology-specific rates can help boost QF rates even at a time of declining natural gas prices. Likewise, with utilities now subject to more stringent EPA emissions requirements, environmental compliance costs are verifiable and can be included in QF rates as well. Still, the California CPUC ruling does not force states to revise their avoided cost methodologies but merely provides an option for them to do so.

As summarized below, the most recent quad of FERC orders and pronouncements continue in the same vein — interpreting PURPA in a manner favorable to QFs, but stopping short of interfering with states’ avoided cost practices:

Projects One Mile Apart Are Separate Facilities for QF Certification
Potential New FERC Policy Directive on Avoided Cost for DG
According to this summary, FERC Chairman Jon Wellinghoff announced at a March 2012 ACORE-sponsored webinar that he has directed FERC lawyers and policy experts to research whether QF avoided cost rates should include additional compensation for distributed generation in light of avoided transmission costs and other value provided to consumers.

Chair Wellinghoff’s initiative could possibly boost rates for smaller or newer green technologies that have been left out of carve-out programs. Though some types of DG like solar are the beneficiaries of carve-outs and favorable REC programs, others such as marine hydrokinetics (for which I have a soft spot) are not. Therefore, Chair Wellinghoff’s proposal could potentially boost revenues for new and emerging QF technologies. [click to continue…]