Federal Regulator
Blasts Open Door to Differentiated Feed-in Tariffs in USA
By Paul Gipe, Contributor | October 25, 2010
FERC decision clears the way for multi-tiered state FITs.
The ruling affects state policies that order utilities
to pay for a certain percentage of generation from a particular
technology, in this specific case, the state of California's policy on
Combined Heat and Power.
FERC's action should put to rest claims that differentiated feed-in
tariffs based on the cost of generation, as found in Germany, France,
Switzerland and a host of other countries, are prohibited for much of
the continental US.
The federal decision also casts doubt on the justification for the
much-hyped Renewable Auction Mechanism proposed in California. The
auction--or bidding system--is predicated on the necessity of complying
with federal law. Bidding systems for developing renewable energy have
been widely abandoned in Europe in favor of feed-in tariffs in part to
better control costs and the pace of development.
Feed-in tariffs (FITs) had become the most recent battleground in the
thorny relationship between the rights of states to enact laws governing
state policy, and the federal government's constitutional role in
regulating interstate commerce.
Opponents of feed-in tariffs had charged that the federal government
"pre-empted" states from setting feed-in tariffs other than one rate
based on the "avoided cost" of conventional generation. If true, states
could not set tariffs that varied from one technology to another or from
one application to another.
The "pre-emption" claim arises from the 1978 National Energy Act in the
Jimmy Carter-era and one of its provisions: PURPA (The Public Utility
Regulatory Policies Act). PURPA was extensively litigated in the 1980s
and 1990s by utilities opposed to developing renewable energy and
especially to opening their markets to independent power producers.
PURPA, and the subsequent legal decisions, limits what state regulatory
commissions can order utilities to pay for renewable energy to the
"avoided cost", that is, the cost of generation the utility would have
otherwise avoided but for the renewable generation. States, such as
California, have often determined that the "avoided cost" is that of
generation from a conventional gas-fired power plant.
Proponents of feed-in tariffs have sometimes characterized them as
"PURPA on steroids" because programs such as those in Ontario specify
tariffs that are based on the cost of generation from each technology in
each of several different sizes and sometimes in different applications.
Ontario, for example, offers specific tariffs for both wind energy on
land as well as offshore.
Feed-in tariff advocates had speculated that PURPA may permit states to
order utilities to buy generation from specified renewable technologies
and, thus, the "avoided cost" is the renewable generation that the
utility would have "avoided" purchasing itself. However, until FERC's
order clarifying its July 15th 2010 decision in the CPUC case, such an
approach was mere conjecture.
The California Public Utility Commission (CPUC) had gone to FERC to
clarify the earlier decision and ask FERC specifically how to meet
federal requirements. The CPUC's action resulted from FERC's ruling that
appeared to bar the state from implementing AB 1613, the California
Waste Heat and Carbon Emissions Reduction Act. In response to AB 1613,
the CPUC had ordered utilities to offer fixed price contracts for
Combined Heat and Power projects less than 20 MW.
In the
Order Granting
Clarification and Dismissing Rehearing, FERC explained its
decision in more detail. In doing so, FERC explicitly states, ". . . a
state may appropriately recognize procurement segmentation by making
separate avoided cost calculations." Moreover, FERC says ". . . the
concept of a multi-tiered avoided cost rate structure is consistent with
the avoided cost requirements set forth in section 210 of PURPA" and in
FERC regulations.
Though expressed in the awkward legal language of the federal
bureaucracy, the significance of these statements cannot be
overemphasized. The following passages from the FERC order clarify the
principle further.
". . . Avoided cost rates may also 'differentiate among qualifying
facilities using various technologies on the basis of the supply
characteristics of the different technologies'. . .
". . . We find that the concept of a multi-tiered avoided cost rate
structure can be consistent with the avoided cost rate requirements set
forth in PURPA and our regulations. Both section 210 of PURPA and our
regulations define avoided costs in terms of costs that the electric
utility avoids by virtue of purchasing from the QF. The question, then,
is what costs the electric utility is avoiding. Under the Commission's
regulations, a state may determine that capacity is being avoided, and
so may rely on the cost of such avoided capacity to determine the
avoided cost rate. Further, in determining the avoided cost rate, just
as a state may take into account the cost of the next marginal unit of
generation, so as well the state may take into account obligations
imposed by the state that, for example, utilities purchase energy from
particular sources of energy or for a long duration.51 Therefore, the
CPUC may take into account actual procurement requirements, and
resulting costs, imposed on utilities in California. . .
". . . permitting states to set a utility's avoided costs based on all
sources able to sell to that utility means that where a state requires a
utility to procure a certain percentage of energy from generators with
certain characteristics, generators with those characteristics
constitute the sources that are relevant to the determination of the
utility's avoided cost for that procurement requirement. . ."
What the order says, in effect, is that states can order utilities to
buy a certain amount of renewable energy from each of several specific
technologies. Thus, a feed-in tariff program under this ruling will
differ from those in Ontario or in Europe because the amount of
generation will also have to be specified.
For example, Ontario offers six different feed-in tariff tranches for
solar photovoltaics. Ontario only specifies the price that will be paid
for each tranche.
Under this ruling, an American state could offer a tariff for the same
six tranches. However, the American state would also specify the amount
of MW or TWh that would be purchased in each tranche.
In the following example, the state would order purchases of up to 60
TWh per year of generation from a mix of solar PV of various sizes in
both rooftop and groundmounted applications. For scale, California
consumes about 300 TWh per year and 60 TWh per year represents 20% of
consumption.
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Jennifer Gleason of the Environmental Law Alliance
notes that FERC's decision "creates another way for states to design
strong feed-in tariff programs" while complying with federal law. "If
these avoided cost rates will not themselves be enough to create a
strong FIT program, FERC made it perfectly clear that 'a state may
separately provide additional compensation for environmental
externalities . . in addition to the PURPA avoided cost rate, through
the creation of renewable energy credits (RECs)'."
"This ruling is a huge victory for clean energy as it provides states
with clearly defined flexibility in implementing comprehensive Feed-In
Tariffs," says Craig Lewis of the [California] FIT Coalition. "We've
long argued that states have significant flexibility in setting avoided
costs and pricing bundled RECs to support Feed-In Tariff design at the
state and local levels."
According to Sue Kateley, Executive Director of the California Solar
Energy Industries Association (CalSEIA), "The FERC decision clears the
way for State utility regulatory commissions to implement FITs and we
look forward to working with California utilities to implement FITs in a
responsible way that creates local jobs and clean renewable generation."
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