Michigan Advocates Fear Federal Rule Changes Will Shut Out Solar Developers

The federal Public Utility Regulatory Policies Act (PURPA) is under review by state and federal authorities.

A 40-year-old federal law that helped spur an unprecedented wave of proposed solar projects in Michigan is at a crossroads as state and federal officials revisit its role in renewable development.

Michigan’s two largest utilities between 2017 and 2018 were overwhelmed by requests from national solar energy developers to build projects under the federal Public Utility Regulatory Policies Act (PURPA) of 1978.

The flood of requests was spurred by the Michigan Public Service Commission’s plan to update how the state calculates “avoided costs,” which are used to set the prices utilities pay to independent developers for renewable energy. Utilities are required to purchase this power under PURPA. Until recently, avoided costs were based on the price to build new coal power.

In September, the Federal Energy Regulatory Commission announced it, too, was revisiting the 40-year-old law. FERC’s Notice of Proposed Rulemaking has sparked an industry-wide and national dispute over the roles of independent power producers and utilities as renewable energy costs decline.

FERC’s proposal includes lowering the cap from 20 megawatts to 1 MW for projects that qualify for “nondiscriminatory access” to PURPA contracts, and allowing states to use variable, live-market prices to set avoided costs that utilities pay generators.

FERC Chair Neil Chatterjee said in September that the goal is to “modernize” PURPA in the face of renewable energy advancements, more sophisticated competitive electric markets and abundant natural gas supplies. Federal regulators enacted PURPA rules in 1980.

Utilities have largely backed FERC’s proposal, while officials in several states — including Michigan Attorney General Dana Nessel — and clean energy groups say it would roll back opportunities for small-scale renewable energy projects.

‘Death by a thousand cuts’

Clean energy advocates from around the country filed comments this month opposing FERC’s plan, saying reform is needed “in the opposite direction” as the proposal. The comments were filed on behalf of the Environmental Law and Policy Center, the Sierra Club, Vote Solar and the Natural Resources Defense Council, among others.

“We’ve seen PURPA exert a really important competitive pressure on our monopoly utilities in Michigan,” ELPC staff attorney Margrethe Kearney told MiBiz recently. “There’s a concern with the proposed [federal] changes that it’s sort of death by a thousand cuts. A number of small changes would make it very difficult for independent power producers to engage on a level playing field with utilities.”

Among the top complaints is FERC’s proposed use of live market prices to set avoided costs as opposed to fixed prices based on the cost of a new natural gas plant. The change would make it difficult for developers to finance projects, advocates say.

“They’ve proposed a couple of things that essentially render the whole policy toothless and ineffective,” said Rob Gramlich, founder and president of Grid Strategies.

Nessel joined nine other attorneys general this month in filing comments opposing the PURPA proposal. They say PURPA “plays a fundamental role” in state efforts to develop clean energy and modernize the grid.

“FERC could either strengthen PURPA or undermine it,” said Nessel spokesperson Courtney Covington.

In late October, Nessel also co-signed a letter with 10 other attorneys general urging FERC to give states the ability to advance clean energy markets in their state. Covington said an ongoing FERC docket involving resiliency — which clean energy advocates are concerned would prop up fossil fuel plants for reliability purposes — also could limit clean energy projects.

Douglas Jester, principal at Lansing-based consultancy 5 Lakes Energy, said limiting the size of a PURPA qualifying facility — along with a proposal that allows utilities to challenge projects within 10 miles of each other — could “materially impact” solar projects.

“If PURPA projects are effectively limited to under 1 MW, they’re going to have a significantly higher cost per unit of energy produced and therefore be less likely to be built just on economic grounds,” he said.

Out-of-date policy

Steve Transeth, a Michigan-based consultant and former member of the Michigan Public Service Commission, filed FERC comments on behalf of ratepayer groups that also align with utilities’ goals.

“Much of where we’re at with renewables today is in large part due to what we did with PURPA,” Transeth said. “The problem is, PURPA is 40 years old.”

The proposed PURPA changes “track with what both DTE and Consumers would want to see happen,” Transeth added, calling a modernization of PURPA overdue: “I think ratepayers of Michigan are paying more than they need to get renewable energy.”

Transeth said updates should include shortening the duration of PURPA contracts, limiting the size of qualifying projects and revising avoided cost prices.

Utilities have argued that PURPA contracts have led to hundreds of millions of additional costs for ratepayers, and that independent power producers should get contracts based on market forces.

However, Jester argues that the market is distorted. He disputes the argument that PURPA projects currently have “non-discriminatory access” to the wholesale market in grid operator MISO’s territory. Interconnection costs are high, while utility-owned generation is funded through rates instead of the wholesale market.

“If generation were dependent on wholesale market prices in order to be sustained economically, most generation in the Midwest would go bankrupt because it’s not a real market,” he said, calling the arrangement “effectively subsidies” through rates.

“If you then say to a PURPA qualifying facility that you have to live off the market prices, that’s fundamentally discriminatory,” Jester said.

In comments, the environmental groups agree, calling the proposal “a rollback of essential provisions necessary to enable [qualifying facility] development and a capitulation to the anti-competitive desires of incumbent electricity providers.”

Michigan changes underway

Despite proposed federal changes, state regulators will continue to have a strong say in how PURPA is enacted. In Michigan, the state’s largest energy company — Consumers Energy — has proposed moving to a competitive bidding process for new solar projects. The utility expects to build or contract for 5,000 MW of solar by 2030.

Jester called Consumers’ competitive bidding process “workable policy,” but it involves utilities seeking a specific type of generation, such as wind or solar. It could be challenging for developers looking to build, say, landfill gas.

Jester also differentiates between Consumers and DTE. Consumers is shifting to a mostly competitive bidding process, while DTE has said it mostly wants to own its generation.

“If PURPA as a federal policy is weakened, it’s harder for the state to maintain a policy that presses the utilities to take power from independent power producers,” Jester said. “I think it will have an effect on the future of DTE and perhaps other utilities.”

Transeth said PURPA is just one avenue for Michigan’s ongoing clean energy transition. Just as important, he argued, are long-term integrated resources plans being unrolled by the state’s utilities that could dictate their direction.

“We’re leaving fossil fuels, coal primarily, and moving to renewables and clean energy,” he said. “It’s just a matter of how that will happen.”


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