North Carolina Modifies Eligibility for PURPA Contracts

Consistent with a new state law passed this summer, and echoing a trend seen in several other states, the North Carolina Utilities Commission (NCUC) has reset the parameters by which small power producers can qualify to sell their output to electric utilities using so-called avoided-cost pricing.

The commission said that the two most significant changes it made were to reduce the maximum capacity of an eligible qualifying facility (QF) from five megawatts to just one megawatt and to also reduce the maximum term of a standard offer contract from 15 years to 10 years. The precept of avoided-cost pricing had been set forth in the federally promulgated Public Utility Regulatory Policies Act of 1978 (PURPA). The primary objective of the PURPA legislation was to promote alternatives to fossil fuel-fired electric generation.

With a focus on the development of cogeneration and renewable energy, PURPA required utilities to enter into long-term agreements to purchase the power produced by QFs at a price guided by the utility’s avoided costs. Thus, avoided-cost rates reflected the expense the utility was projected to incur over the contract period if it had to generate the power itself from a conventional generating facility. In enacting PURPA in response to the 1970s energy crisis, Congress had reasoned that by virtue of having long-term, guaranteed sales arrangements in place, QF developers would be more inclined to invest in plant using renewable energy or cogeneration technologies, thus relieving pressure on traditional power plants that relied mostly on coal and fuel oil at the time.

But despite the fact that PURPA has been around for almost 40 years now, it is only in the last decade or so that renewable energy projects have really taken off. As growth in solar and wind projects soared during the last few years, many utilities began to complain that

• they do not need or cannot accommodate the increasing QF production, and
• the long-term contract requirement was unfair, because the pricing terms were being locked in for too long a period of time, making purchases from QFs far above prevailing market prices by the end of the contract term.

That is, the utilities claimed, the requirement that power purchase agreements (PPAs) span two decades or more inevitably leads to overestimations of avoided costs in the last years of the contracts. Several states in the Pacific Northwest began responding to the utilities’ PPA concerns a couple of years ago. In particular, Idaho, Montana, and Oregon have all addressed the issue, with all three concluding that the duration of standard offer contracts between utilities and QFs should be shortened and that it was reasonable to place certain capacity limits on a QF’s eligibility for avoided-cost rates. North Carolina joined their ranks this summer when the state legislature passed House Bill 589, titled “Competitive Energy Solutions for NC.”

In implementing new rules and regulations designed to effectuate the law, the NCUC observed that North Carolina has seen a tremendous influx of solar development. It commented that the state is currently rated as second in the country for total solar-powered generation. Consequently, the commission held, it was necessary to take a fresh look at how PPAs with solar QFs are priced and executed.

Given the proliferation of solar projects in the state, the commission agreed with North Carolina’s largest electric utilities that it would be inequitable and costly to continue to impose PURPA requirements on the utilities as presently constructed. At the same time, though, the NCUC asserted that the state remains supportive of solar initiatives in general. According to the commission, House Bill 589 struck just the right balance between consumer, utility, and solar power interests.

The commission related that while the new law called for reductions in both PPA duration and the maximum capacity threshold for QF eligibility for standard offer contracts, it simultaneously opened up new avenues for larger solar project participation in energy markets, by establishing a competitive solicitation process for obtaining solar power. The commission stated that House Bill 589 explicitly instructs North Carolina utilities to issue requests for proposals for the procurement of 2,660 megawatts of renewable energy over the next 45 months.

Notably, however, the commission pointed out that the new law allows utilities themselves to participate in the auctions by either purchasing existing renewable energy projects from third parties or investing in and constructing their own solar facilities. The NCUC stressed that any such utility-owned facilities would be limited to 30% of the total amount of competitively procured renewable energy. The commission emphasized as well that the solicitation process would be overseen by an independent monitor.

Besides modifying the maximum PPA terms and lowering the capacity ceiling for QF eligibility, the commission also looked at actual avoidedcost rates, finding that the last approved rate should be decreased. Noting that it reviews avoided-cost pricing standards every two years, the NCUC explained that the cost of natural gas is the primary driver behind its avoided-cost calculations. In light of natural gas commodity prices remaining low and being subject to little volatility, the commission concluded that the avoided-cost rates set forth in standard offer contracts should be reduced.

While the new lower term for PPAs and the one-megawatt (MW) cap on QF size would pertain to most small power producers, the commission highlighted an exception for certain non-solar and non-wind projects. It stated that the maximum contract term would not apply to swine and poultry waste facilities; landfill, sewer, sludge, or manure digester gas projects; or hydroelectric projects up to five megawatts. The commission said that such facilities would still be able to enter into longer fixed-term contracts if such can be successfully negotiated with the purchasing utility.

Finally, the commission discussed a somewhat controversial aspect of House Bill 589, which was the introduction of a moratorium on further wind development in the state through the end of 2018. The commission acknowledged that wind power has not been pursued to any significant degree in the state, with only one installation currently in commercial operation and just two others proposed.

Nevertheless, because questions had arisen about the possible adverse effects posed by wind turbines to military facilities in the state, the commission said it was appropriate to pause additional wind power development until such time as those impacts can be properly assessed and analyzed. Re Biennial Determination of Avoided Cost Rates for Electric Utility Purchases from Qualifying Facilities – 2016, Docket No. E-100, Sub 148, Oct. 11, 2017 (N.C.U.C.).