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February 20, 2018
Brattle Economists Discuss the Resurgence of PURPA in Norton Rose Fulbright's Project Finance NewsWire

Brattle economists have contributed an article to the February 2018 issue of Norton Rose Fulbright’s Project Finance NewsWire that discusses how the Public Utilities Regulatory Policies Act (PURPA) has resurfaced as a prime mover for renewables development in the U.S.

Originated in 1978, PURPA has required utilities to purchase power from small independent electricity generators at the “avoided cost” the utility would spend to generate the electricity itself. Because utility avoided costs are typically based on fossil fuel technologies, PURPA has been largely insignificant for renewables, which have not been viable at avoided cost pricing (even with tax incentives) for much of PURPA’s history; however, the U.S. Energy Information Administration (EIA) reports that the levelized cost of renewables will soon trend below avoided costs nationally. Renewables developers are thus flocking to establish projects as qualifying facilities (QFs) under PURPA and to enter into avoided cost power purchase agreements.

The article notes that renewables’ increasing competitiveness has led to perceived oversaturation of renewable QFs in certain utility systems. The concerns surrounding oversaturation include disruption from stepped up volumes of intermittent resources, requirements for new transmission lines and other upgrades, and over-supply of electricity priced at avoided cost formulations higher than market prices. Not least among the utility concerns is that under current conditions of low load growth, new QFs may now be displacing existing assets (by contrast to the original premise of avoided costs).

The authors discuss how project developers, purchasing utilities, and regulators have negotiated hard over numerous interactive issues, including: 1) QF eligibility criteria, 2) defining avoided costs, and 3) equitable purchase power agreement (PPA) terms. As renewable QFs have become more cost competitive, these issues have only become more acute. The article points out that while avoided costs have never been straightforward to calculate, recent changes in market conditions and the regulatory landscape have made long-run avoided costs much more difficult to compute with an appropriate degree of precision or confidence. Additionally, the rapid penetration of renewable QFs themselves makes both the avoided energy and capacity value much more difficult to forecast.

Because of this, state utility commissions have been on the front lines for developing criteria establishing legally-enforceable obligations, definitions of avoided cost, and minimum PPA terms. The authors note that while it remains to be seen how persistent the proliferation of renewable QFs will be, it has placed a new urgency on resolving old issues raised by PURPA.

The article, “New Technologies and Old Issues under PURPA,” is authored by Brattle Principals Robert Mudge, Metin Celebi, and Marc Chupka, and Senior Research Analyst Peter Cahill. It is available to view on Norton Rose Fulbright’s website.