by Paul Gipe
The
National Renewable Energy Laboratory (NREL) has issued a long-awaited legal
analysis of how states could implement feed-in tariffs and still comply with
federal law.
The January 2010 report, “Renewable Energy Prices in State-Level Feed-in Tariffs: Federal
Law Constraints and Possible Solutions,” was written principally by
Scott Hempling with the National Regulatory Research Institute (NRRI) under
contract to NREL.
Hempling treads ground that others have tread before him, including
California’s Attorney General, Edmund G. (Jerry) Brown. The Attorney General
filed comments on who has jurisdiction to set feed-in tariffs
with California’s Public Utility Commission in August of 2009. Brown concluded
that the state could set feed-in tariffs sufficient to pay for renewable energy
development while complying with federal law.
NRRI’s Hempling, like Brown, concludes that states can offer feed-in tariffs,
but the programs creating the feed-in tariffs must be structured in a way that
meets federal requirements.
There’s ample ammunition in the Hempling report to stoke either side in the
feed-in tariff debate.
Opponents have long argued that feed-in tariffs are illegal in the U.S. They
will find ample solace in the report that the European or Canadian approach of
setting specific tariffs directly won’t comply with current federal law or its
interpretation. Hempling says, in essence, that states can’t set specific
tariffs above “avoided cost” under the Public Utility Regulatory
Policies Act (PURPA) of 1978.
However, Hempling goes on to chart a path to implementing feed-in tariffs that
avoids the regulatory minefield under PURPA and the Federal Power Act. Hempling
describes how states can set total payments, or equivalent feed-in tariffs,
above avoided cost in compliance with federal law. The path may appear more
circuitous, in comparison to that in other countries, but it is, nevertheless,
clear.
Feed-in tariff programs work best, that is, they quickly develop a significant
amount of renewable energy, when the tariffs are based on the cost of
generation plus a reasonable profit. In these programs, there are a suite of
tariffs for solar PV, another set for wind energy, and so on. The tariffs for
solar PV in these programs are much higher than the “avoided cost” of
a conventional natural gas-fired power plant in the U.S.
California’s largely ineffective feed-in tariff introduced at the end of 2008
pays $0.096 USD/kWh for projects installed in 2010. The tariff—there is only
one tariff—is based on the Market Price Referent, California’s term of art for
the avoided cost of a natural gas-fired plant. By mid 2009 the tariff had
resulted in only 17 MW of generation. Even with generous federal subsidies,
this tariff is insufficient for most technologies, but especially for solar PV,
the most expensive of the new renewable energy technologies.
There are two paths to lawful feed-in tariffs argues Hempling: the PURPA path
and the Federal Energy Regulatory Commission (FERC) path.
The PURPA path
Feed-in
tariffs can be lawful under PURPA if the feed-in tariffs are
“voluntarily” offered by the utility, or if the tariffs are based on
“avoided cost” and any additional payments necessary to make workable
tariffs are derived from:
Renewable Energy Credits (or certificates),
Subsidies (cash grants), or
Utility tax credits equivalent to the amount of the
additional payment (as in Washington State).
These “supplemental” forms of payment fall outside FERC’s
jurisdiction.
Voluntary tariffs
Feed-in
tariffs, whether above avoided cost or not, are permissible if a utility
proposes them “voluntarily” as in Indiana where Indianapolis Power
& Light (IP&L) has a suite of proposed tariffs before the state’s
Utility Regulatory Commission. IP&L has proposed a solar PV tariff for
systems from 20 kW to 100 kW of $0.24 USD/kWh—a tariff clearly above the current
avoided cost of gas-fired plants.
This provision is less useful than it first appears. In states where earnings
are not decoupled from investments in generation, it is not in the
self-interest of utilities to offer functional feed-in tariffs that supplant
their own generation with non-utility generation.
Additional payments
Both
Hempling’s report and Brown’s PUC filing argue PURPA stipulates the payment of
“avoided cost.” This restriction doesn’t preclude other forms of
payment that “tops up” or adds to the avoided cost. Thus, the total
payment, or total tariff, can be based on the cost of generation. These top up
payments can come from many sources: Renewable Energy Credits, subsidies or
other payments, and state tax credits.
Renewable Energy Credits
In states with Renewable Portfolio Standards (RPS), or renewable energy
mandates, utilities are required to produce a certain portion of their
generation with renewable energy. Regulators track the amount of renewable
energy generated by issuing “credits” for units of renewable energy.
These credits can be traded, and the trades establish a value that can be added
to the avoided cost. However, it is not necessary to trade the credits to
establish their value.
The value of the credits can be established administratively for any of a host
of reasons: environmental values, climate change avoidance, distributed
benefits, and so on. Thus, the total tariff can include a Renewable Energy
Credit designed to reach the total cost of generation plus a reasonable profit
when added to the “avoided cost”.
Other payments
Similarly, other forms of payments can be added to the avoided cost. Hempling
suggests subsidies or cash grants as the top up payment, but it need not be
limited to taxpayer subsidies.
Swiss feed-in tariffs, for example, pay a tariff that is comprised of two
parts: the wholesale cost, and a top up payment. In the Swiss system, the top
up payment is paid out of a Systems Benefit Charge, a pool of money collected
from ratepayers for a public good, in this case the development of renewable
energy.
Creating a pool of funds to pay for the portion of tariffs that exceed the
avoided cost through a Systems Benefit Charge can work, but the policy must be
designed with care. Such charges create a defined and, therefore potentially
limited, pool of funds. These pools can, depending upon design, effectively
place a monetary cap on renewable energy programs separate from the physical
targets in RPS programs. While this defined pool of funds might be appealing to
timid politicians wanting to limit the perceived cost of renewable energy, it
often leads to a boom and bust cycle so characteristic of U.S. renewable energy
policy.
However, successful feed-in tariff programs, such as in Germany, use what is in
essence a Systems Benefit Charge. The charge, and hence the size of the pool,
is “flexible” and is applied to ratepayers after-the-fact, that is,
the pool is sized to pay for the renewables on the system. Unlike pools where
the charge is fixed and the pool of funds to pay for renewable generation is
limited, Germany’s pool adjusts annually to pay for the actual amount of
renewable generation. The pool expands as more renewables are added and the
charge to ratepayers adjusts accordingly.
The German strategy of flexible or annually adjusted charges make sense because
it is not inconceivable that as more renewables are added to the system, and as
fossil fuels becomes more expensive, the charges, or “overcost” as the
French call them, will actually decrease.
French bank Caisse des Dépôts examined the overcost of French feed-in tariffs in late 2008. Their
findings flew in the face of conventional wisdom: as more renewables were added
to the system, especially wind, the overcost declined.
State utility tax credits
Washington state’s net-metering policy was built around a top up payment that
utilities could offset with state tax credits. The total payments, while
attractive, have only been modestly successful because of numerous restrictions
on the program to limit the program’s cost to the state treasury.
FERC path
Feed-in
tariffs can also be lawful under the Federal Power Act if the tariffs are
Cost-based, or
Market-based.
If the tariffs are cost-based, each contract must be reviewed by FERC, says
Hempling. Thus, if a homeowner installs a 5 kW solar system and signs a
contract with a utility, it must have the contract reviewed by FERC. This is a
nightmare scenario for small power producers.
If the tariffs are market-based, such as through an “auction,” the
“seller” must issue a “market-power” report to FERC every
three years. Again, compliance through this route is too cumbersome for
widespread adoption.
Less
than 20 MW exemption
However,
Hempling notes that these onerous conditions could be superseded if FERC took
one of several actions. Most importantly, FERC has granted
“exemptions” from PURPA for generators less than 20 MW. These
generators can sell at any price without seeking FERC approval. Hempling
suggests that state regulatory commissions could ask FERC for a
“clarification” that above avoided-cost tariffs would qualify
automatically for the less than 20 MW exemptions if they met certain conditions.
This is a promising near-term fix that would allow compliance with PURPA and
the Federal Power Act without relying on a two-tiered tariff made up of avoided
cost and some form of additional payment.
The California Energy Commission in its 2009 Integrated Energy Policy Report recommends that
the state seek “clarification of federal law to ensure that states can
implement cost-based feed-in tariffs.”
Other exemptions
Hempling
notes that Hawaii, Alaska, and most of Texas are exempt from the Federal Power
Act.
Long-term solutions
While
the use of RECs or SBC funds to pay for the portion of feed-in tariffs above
avoided cost is administratively more complex and consequently more costly than
simply setting a tariff and putting the cost in the rate base, it can be done.
Regulatory commissions and the utilities themselves are fully capable of, and in
fact do, administer such funds in several states.
While such a system can work, and in the U.S. legal system since the Civil War,
it may be necessary, such an approach treats renewable energy differently than
utility-owned conventional generation that is put into the rate base. It treats
renewables as a cost to the system and to ratepayers not as an integral part of
the utility system as in Ontario and Germany.
That the principle federal law governing renewable energy, PURPA, treats
renewable energy in this second-class way shouldn’t be surprising, considering
that the law passed more than three decades ago. Even then the first major wind
farms were not erected in California until several years later when the PUC
created the world’s first feed-in tariff, California’s famous Interim Standard
Offer Contract No. 4.
The bigger question of whether U.S. law will continue to treat renewable energy
as a burdensome addition to the existing utility system remains. Unless these
legal precedents in the U.S. are clarified or revised, the competitive
position of the U.S. will continue to erode in comparison to such states as China, India,
Germany, and Japan that look at renewable energy differently.
Germany confronted just such a question of how to treat renewable energy in the
late 1990s and the Bundestag, Germany’s parliament, acted. The result is the
now famous Renewable Energy Sources Act, also known as the law on granting
renewable energy priority access to the grid. In the Act, renewable energy is
treated not only as a necessary and integral part of the electricity system, it
was given preference and the payments needed to profitably develop renewable
energy, even costly solar PV, were deemed desirable and the costs put in the
rate base.
While every German consumer pays out of pocket for renewable energy development
on their utility bill, study after study has consistently shown that the
benefits to both German consumers and German citizens as a whole outweigh the
monetary costs. In fact, the monetary benefits of offsetting conventional
generation from plants on the margin, the so-called merit-order effect, alone
outweighs the full cost of the tariffs, including the payments to Germany’s
massive development of solar PV.
Congressmen Jay Inslee and his co-sponsors have proposed fixes to PURPA in the
Waxman-Markey climate change bill. This may be the best that can be hoped for
from the currently dysfunctional U.S. Congress. But even this well-meaning effort
falls short of the re-orientation of U.S. renewable policy that is called for.
For now, the Hempling report clarifies for states that want to act how to do
so. For those that want to act, it points them in the direction they need to go
to meet FERC’s constraints. For those states that don’t want to act or are
afraid of doing so, the report gives them sufficient legal cover to avoid
taking the steps necessary.
To paraphrase a 68-page legal opinion: “Yes, we can implement feed-in
tariffs in the U.S. under existing law, we just have to do it differently than
everywhere else in the world.”
The path forward is clear for those states that want to aggressively develop
renewable energy in an equitable manner. The choice is theirs to make.
Related Links:
Supreme Court ruling increases importance of local energy
Study shows transmission costs for big wind are low!
British engineers slam home wind turbines as ‘eco-bling’
