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PURPA: Another Subsidy for Intermittent Energies

“PURPA has been the most effective single measure in promoting renewable energy.”

-Union of Concerned Scientists

What if Congress passed a law that forced you to buy intermittent energy for the same price as reliable energy? What if, in an attempt to promote “alternative” energy sources such as wind power, Congress passed a law that enabled wind to crowd out reliable resources? Congress actually passed that law in 1978, the Public Utility Regulatory Policies Act (PURPA). Its role has changed and its scope has narrowed, but “PURPA is still alive and kicking.

Background

President Jimmy Carter, working from the viewpoint that the federal government had to intervene in markets to reduce demand and increase supply, formulated PURPA as part of a five-part National Energy Plan.

Oil and gas were seen as wasting resources relative to plentiful coal, so public policy needed to transfer demand from the former to the latter. (This was before the global warming issue took hold.) Advised by peak-oil (and peak-gas) proponent  James Schlesinger, the first secretary of the Department of Energy, Carter introduced a new energy plan for America. In a cozy fireside chat on national TV, Carter emphasized sacrifice, energy efficiency, and 55-degree thermostats as demand-side strategies to construct a new energy balance.

Other parts of the National Energy Plan included the Energy Tax Act (which introduced the gas-guzzler levy for vehicles), the National Energy Conservation Policy Act, the Power Plant and Industrial Fuel Use Act (repealed in 1987), and the Natural Gas Policy Act. These laws were aimed at reducing consumption of both natural gas and Arab oil.

The repealed Fuel Use Act essentially mandated that coal plants be built in place of natural gas-fired power plants (for nine years it was against the law to build a natural gas-fired power plant, although exemptions were granted). Given the recent surge in production of natural gas from shale formations in the U.S. and elsewhere, the idea of conserving natural gas seems absurd. It also runs contrary to PURPA’s secondary goal to promote fuel diversity.

PURPA can be seen as yet another element of conservation by decree, or conservationism, based on the view that resources are fixed in both the physical sense and the economic sense.  It was an integral part of Carter’s and Congress’ technocratic solution to the “fixity” problem as they saw it.

PURPA was also designed to give independent power producers a foot in the door, a step towards the open-access transmission ideal. Even the critics seem to grant that PURPA’s role in opening up competitive power markets was a resounding success. But in the current context of non-discriminatory open access and abundant, reliable fossil fuels, it is interesting to note that utilities and independent power producers are still waging PURPA wars. As a side note to the legally inclined reader, I should highlight that in 1982 a challenge to PURPA’s constitutionality made it to the Supreme Court, where PURPA was upheld.

PURPA Section 210

The element of PURPA that most directly encourages renewable and alternative energy sources is section 210. Under section 210, utilities are obligated to interconnect with and buy the output of “Qualifying Facilities” or QFs, which fall into two main categories: 1) “small power production” facilities, which generally must have an output of less than 80MW and generate electricity using solar, wind, waste, or geothermal energy as its source, and 2) “cogeneration” facilities, which produce both electricity and “steam or forms of useful energy (such as heat) which are used for industrial, commercial, heating, or cooling purposes.” Definitions are available here, and the original text of PURPA is here.

Congress intended for utilities to pay their “avoided cost” for QF output, which was supposed to keep electric rates just and reasonable. Avoided cost methodology is a contentious issue, however, as outlined from different points of view by utility experts and the Edison Electric Institute. Essentially, FERC established the guidelines for each state utility commission to implement its own avoided cost calculations. States then established different schemes.

EPAct 2005 Amendments

As the Federal Energy Regulatory Commission (FERC) set out to restructure the electricity industry according to the “open access” model, most experts seemed to think PURPA was on its way out. (See the section “A Restructured PURPA: Closing the Renewable Window?” in Rob Bradley’s 1997 landmark policy analysis Renewable Energy: Not Cheap, Not “Green.”) Then, after the restructuring took hold and several Regional Transmission Organizations (RTOs) were well established, the Energy Policy Act of 2005 (EPAct 2005) further removed PURPA’s teeth. Specifically, EPAct 2005 changed section 210 to relieve utilities’ obligation to purchase QF output under “certain market conditions.” As FERC stated in 2006:

Section 210(m)(1) thus relieves an electric utility of its obligation to enter into a new contract or obligation to purchase QF power upon a Commission finding that certain market conditions exist.

FERC laid out the criteria for those “certain market conditions,” which essentially refer to features of RTOs. FERC also explicitly said that the Midwest ISO, PJM Interconnection, ISO New England, and the New York ISO satisfy the section 210(m)(1) criteria. But as this map shows, much of the US electric grid is not organized under the RTO model (particularly the Northwest and Southeast), so PURPA-enabled QF purchases still proliferate in those non-RTO areas. A recent case highlights PURPA’s continued relevance.

Case Study: Idaho Power vs. Idaho Wind

In September 2012, FERC sided with Idaho Wind against Idaho Power in a case that may represent a “teachable moment” in the constantly-evolving battle between utilities and PURPA-enabled power producers (wind farms in this case). Idaho Wind asked FERC to rule against Idaho Power’s proposed curtailment practices, which would allow Idaho Power to “curtail” or refuse to buy Idaho Wind’s output under circumstances where such a purchase would “require [Idaho Power] to dispatch higher cost, less efficient resources to serve system load or to make Base Load Resources unavailable for serving the next anticipated load.”

In justifying its proposal, Idaho Power argued that its system is inundated with wind power that it is required to purchase under PURPA contracts. The contracts in question are 20-year power purchase agreements whose rates were determined and fixed at the time they were entered into.

FERC granted Idaho Wind’s petition and found that Idaho Power would violate section 210 of PURPA if it refused to buy the wind power. Perhaps sensing that its legal challenge was weak, Idaho Power set up a new website to outline “the problem with PURPA” and present its arguments to the layperson. Idaho Power’s main website also states:

The huge influx of industrial wind projects that has been forced onto our system is raising customer rates and threatening the reliability of our electrical grid. Federal law requires us to buy energy from these projects, but we don’t think Idahoans should be required to pay inflated rates for electricity that is often not needed at all. (emphasis added)

The teachable part of this story is that, given FERC’s ruling, utilities should be careful entering into long-term contracts with QFs at fixed avoided cost rates. Because it signed long-term contracts, Idaho Power is forced to deal with the high costs associated with integrating wind. Provisions in FERC Order No. 69 that could have guarded Idaho Power against these difficulties don’t apply in the context of a fixed-rate contract (discussed further in paragraphs 36-40 here).

Idaho Power’s problem of being inundated with wind during periods of low demand may persist for the life of its contracts with Idaho Wind (until 2030). As Idaho Power outlines:

PURPA energy – and especially wind – often peaks when energy demand is at its lowest. During these times, Idaho Power must sell the surplus energy into depressed markets. In effect, our customers are being forced to “buy high” and “sell low.”

Idaho Power adds that “to meet this onrush of wind energy, other resources must be scaled back.” Similar to the again-extended wind production tax credit, PURPA contracts allow unreliable, uneconomic power to reach the grid at all times, whether it’s needed or not. Also, to the extent that Idaho Power passes along to customers the higher costs associated with uneconomic power, the real loser here is the electricity consumer.

Conclusion

PURPA is an old tool, perhaps rusty but still doing damage in non-RTO regions.  As the Idaho Power case shows, this relic of 1970s conservationism can still be used by intermittent and expensive producers to crowd out the reliable and cheap. It’s a familiar story now–wind producers win at the expense of the consumer–although with different details each time.

5 comments

1 ttanton { 01.22.13 at 7:17 am }

Idaho Power could add to their legal challenge the fact that paying wind developers’ “avoided cost’ as calculated is itself in violation of PURPA. IPC is paying way above their own avoided cost by the fact that other costs are imposed on the utility by having to accept the wind–adding to the cost paid, and driving it above the cost IPC would otherwise pay (what they would avoid).

FERC hasn’t been so adamant about contract sanctity in other instances (see case of JPMorgan in California as one glaring example).

2 tfisher { 01.22.13 at 2:39 pm }

Thanks Tom. I think that is part of their argument, particularly on rehearing. Those “avoided cost” payments would be negative at times of low demand and very high supply, but PURPA obligations combined with the way the contracts are structured prevent Idaho Power from curtailing wind supply even in those extreme circumstances.

I’d encourage anyone interested in following this case to visit http://elibrary.ferc.gov and search for Docket No. EL12-74. For the record, I have no direct involvement in this case.

3 ttanton { 01.23.13 at 8:23 am }

Thanks Travis. Seems FERC itself then is violating PURPA, having had to ‘approve’ the contract(s) in the first instance. Surely there is a process for FERC to correct its past error (and do so in a non-discriminatory way.)

4 Mike Giberson { 03.03.13 at 10:38 pm }

A side point on the early history of PURPA. At least as Richard Munson tells the story in “From Edison to Enron,” PURPA wasn’t so much a part of a coordinated Carter plan, though it did get wrapped in as one part of the National Energy Policy Act of 78. While most of the Congressional attention was on other matters, a Northeastern congressman developed PURPA in response to the desire of Wheelabrator to sell power from an incinerator and local utility Boston Edison’s unwillingness to deal with Wheelabrator.

5 tfisher { 03.04.13 at 9:30 am }

Thanks for that, Mike! Munson’s book has been on my reading list for a while — maybe it’s time I finally crack into it.

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