New rules enacted by the Florida Public Service Commission (“PSC” or the “Commission”) should make it easier for developers of renewable electricity generating plants to obtain long-term purchase power agreements at favorable terms that will support project financing.

On January 9, 2007, the Florida PSC enacted a comprehensive set of rules aimed at removing regulatory and financial barriers to the deployment of electric plants powered by solar energy, biomass, geothermal energy, wind power and other renewable sources. The rules build on state legislation enacted in 2005 that required Florida’s five investor-owned utilities to maintain a standing offer to purchase capacity and energy from renewable energy sources at the full “avoided cost” rate, for a minimum contract term of 10 years.

Avoided cost is defined as the marginal cost at which the utility would generate or purchase the next unit of electricity. The new PSC rules clarify and reemphasize that avoided cost should include, where quantifiable in dollar terms, the entire value to the utility of deferring acquisition of additional power, including such benefits as fuel diversity and price stability. This formulation of avoided cost affords extra recognition to the value of renewable fuel sources, which are not subject to the price spikes associated with petroleum and natural gas.

The regulations also formalize the understanding that tradeable Renewable Energy Credits, or RECs, that accompany the production of renewable energy remain the property of the power producer and do not automatically transfer to the utility with the purchase of power. This understanding is consistent with federal policy enunciated by the Federal Energy Regulatory Commission, and it leaves the power producer with a valuable asset that can be sold in the emerging REC marketplace to help utilities satisfy fuel diversity quotas.

Key provisions of the new regulations include:

  • Renewable generators can demand fixed rather than variable energy payments, so as to lock in a dependable revenue stream to support project financing – an option that, the Commission found, would also provide a measure of price stability to the purchasing utility and its customers.
  • Renewable power producers may demand the contract duration of their choosing, from a minimum of 10 years up to the useful life of the facility.
  • Either party to a purchase power agreement must be allowed to renegotiate price terms if new environmental regulations change the economics of their performance. This provision was enacted in contemplation that restrictions on greenhouse gas emissions may drive up the cost of fossil-fuel generation and make renewable energy alternatives substantially more valuable.
  • A utility can no longer automatically reduce capacity payments to independent power producers to offset for the purported impact on the utility’s ability to raise capital attributable to carrying a long-term Purchase Power Agreement on the utility’s books. Rather, any offset to capacity payments will have to be justified to the PSC and supported by evidence.

Significantly, the Commission considered – but rejected – a cap on the amount of energy that any utility could be compelled to purchase from renewable sources. Rather, the rules provide that, if a utility finds that its standard-offer contracts are becoming over-subscribed, the utility can petition the Commission for relief from the purchase obligation.

The Commission also stopped short of imposing a minimum “renewable portfolio standard” that would require each utility to meet a specified percentage of its generating needs from renewable resources. The Commission instead directed each investor-owned power company, municipal utility and rural electric cooperative to report annually on its progress in securing renewable generating capacity. The Commission will be closely monitoring whether the rules result in increased fuel diversification, so it will be valuable for those in the industry to monitor and seek input into future Commission proceedings.