At a June 29, 2016, conference, the Federal Energy Regulatory Commission (“FERC”) considered whether changes should be made to the Public Utility Regulatory Policies Act of 1978 (“PURPA”). PURPA aimed to increase generation capacity and change the generation mix by ending the dominance of highly regulated, vertically-integrated utilities and encouraging the development of fuel-efficient qualifying facilities (“QFs”). PURPA required utilities to purchase QF output irrespective of actual need at prices set by state regulators based on the utility’s “avoided costs.” The conference focused on both the mandatory purchase obligation and the method for calculating avoided costs.

Participants opposed to mandatory purchase obligations cite open-access tariffs, standardized interconnection procedures, robust energy markets, state renewable portfolio standards and environmental regulations as factors that created a strong market for renewable generation. Many utilities argue that with renewables accounting for over 60 percent of new capacity, a mandatory purchase obligation is no longer needed. Those supporting a mandatory purchase obligation, particularly for generators of 20 MW or less, contend that while market changes benefited large generators, smaller generators still face interconnection obstacles, pancaked rates, operational limitations and administrative cost burdens. Further, the intermittent nature of many renewable generators makes them unattractive to utilities without mandatory purchase obligations.

Utilities claim that an avoided cost regime often forces them to pay above market prices for QF-generated energy. This problem is exacerbated by the long-term nature of many power purchase agreements, the drop in natural gas prices lowering the cost of conventional generation, decreasing renewable generation costs and mandatory purchase obligations, which can lead to curtailment of less costly generation. In contrast, renewable generators warn that without long-term power purchase agreements and predictable cash flow, financing for new generation could become cost prohibitive. They also contend that avoided costs reflect what a utility would pay to develop new generation and as renewable generation becomes increasingly competitive, cost differences with conventional generation will lessen.

FERC will need to continue to strike a balance between encouraging renewable generation, both large and small, while providing conditions to ensure a functioning, efficient and competitive market for all generations.