PURPA’s Uncertain Future in Arizona’s Solar Energy Portfolio

By Cory Bernard.

Post-hearing briefs filed last week in a matter before the Arizona Corporation Commission (ACC), plus a recent Federal Energy Regulatory Commission (FERC) Notice of Proposed Rulemaking, highlight fierce debates over a key weapon in solar developers’ arsenal.

The Public Utility Regulatory Policies Act (PURPA) became law in 1978 with goals that included encouraging renewable energy development and reducing consumer energy prices. It established a class of renewable energy producers that could achieve “qualified facility” (QF) status from the Federal Energy Regulatory Commission (FERC) and thus enjoy certain benefits. Chief among these benefits is a QF’s ability to unilaterally force a utility to buy its power at the utility’s “avoided cost,” i.e. the cost the utility would have incurred by generating the power itself or purchasing it elsewhere.

Thanks to modern technology (among other factors) it is financially feasible to sell solar power at avoided costs, so developers are able to use PURPA to enter regulated utility markets where generation would otherwise be controlled by the utility. This is especially relevant in a state like Arizona, which, in addition to being a regulated utility state, has a lower renewable energy target than most of its neighbors. After all, vertically integrated utilities have little incentive to purchase renewable energy beyond what is mandated by law.

Because of this “must take” provision, there is little debate over PURPA’s effectiveness in encouraging development. It should surprise nobody that forcing utilities to purchase power from QFs will result in more QFs. North Carolina is the best example of this: despite lacking the solar resources of states like California and Arizona, North Carolina has the second-most utility-scale solar capacity in the U.S. with approximately 90% of that capacity coming from QFs.

However, PURPA’s goal is more nuanced than just encouraging development—it also seeks to keep consumer costs low. When a QF begins selling power to a utility, energy prices should not budge because avoided cost simply reflects the price of energy to the utility (either at the time the contract was formed or the time the energy was delivered, depending on the state’s rules). But what happens if natural gas prices drop precipitously in year five of a twenty-year QF agreement? Then, the so-called avoided cost may no longer be accurate, because the utility would be paying significantly less for the same power if it wasn’t contractually obligated.

This concern is at the heart of both the ACC matter, in which Arizona Public Service Company (APS) is requesting that QF contracts be limited to two-year terms, and the FERC proposal, which seeks to allow states to mandate price variability in QF contracts (currently, QFs can lock-in rates for the term of an agreement). Intervenors in the ACC matter argue that two-year terms would effectively end new solar growth in Arizona, because the capital-intensive development of solar projects requires lengthy commitments of at least fifteen years to guarantee a return on investment. Likewise, the dissenting commissioner in the FERC proposal said eliminating a QF’s ability to guarantee a fixed price for the duration of an agreement would “effectively gut” PURPA because development would become untenable.

Regardless of the decisions from the ACC and FERC, Arizona may see some renewable energy development even without PURPA. But with a modest target of 15% renewable energy by 2025, plus PURPA’s record of success in other states, expect developers and advocates alike to continue to fight any efforts to roll back QF benefits. The outcomes of those fights will likely shape the immediate future of solar energy in Arizona.