February 4, 2010

By Paul Gipe
661 325 9590, 661 472 1657 mobile
pgipe@igc.org, www.wind-works.org

The National Renewable Energy Laboratory (NREL) has issued a long-awaited legal analysis of how states could implement feed-in tariffs and still comply with federal law.

The January 2010 report, Renewable Energy Prices in State-Level Feed-in Tariffs: Federal Law Constraints and Possible Solutions, was written principally by Scott Hempling with the National Regulatory Research Institute (NRRI) under contract to NREL.

Hempling treads ground that others have tread before him, including California's Attorney General, Edmund G. (Jerry) Brown. The Attorney General filed comments on who has jurisdiction to set feed-in tariffs with California's Public Utility Commission in August of 2009 . Brown concluded that the state could set feed-in tariffs sufficient to pay for renewable energy development while complying with federal law.

NRRI's Hempling, like Brown, concludes that states can offer feed-in tariffs, but the programs creating the feed-in tariffs must be structured in a way that meets federal requirements.

There's ample ammunition in the Hempling report to stoke either side in the feed-in tariff debate.

Opponents have long argued that feed-in tariffs are illegal in the US. They will find ample solace in the report that the European or Canadian approach of setting specific tariffs directly won't comply with current federal law or its interpretation. Hempling says, in essence, that states can't set specific tariffs above "avoided cost" under the Public Utility Regulatory Policies Act (PURPA) of 1978.

However, Hempling goes on to chart a path to implementing feed-in tariffs that avoids the regulatory minefield under PURPA and the Federal Power Act. Hempling describes how states can set total payments, or equivalent feed-in tariffs, above avoided cost in compliance with federal law. The path may appear more circuitous, in comparison to that in other countries, but it is, nevertheless, clear.

Feed-in tariff programs work best, that is, they quickly develop a significant amount of renewable energy, when the tariffs are based on the cost of generation plus a reasonable profit. In these programs, there are a suite of tariffs for solar PV, another set for wind energy, and so on. The tariffs for solar PV in these programs are much higher than the "avoided cost" of a conventional natural gas-fired power plant in the US.

California's largely ineffective feed-in tariff introduced at the end of 2008 pays $0.096 USD/kWh for projects installed in 2010. The tariff, there is only one tariff, is based on the Market Price Referent, California's term of art for the avoided cost of a natural gas-fired plant. By mid 2009 the tariff had resulted in only 17 MW of generation. Even with generous federal subsidies, this tariff is insufficient for most technologies, but especially for solar PV, the most expensive of the new renewable energy technologies.

There are two paths to lawful feed-in tariffs argues Hempling: the PURPA path, and the Federal Energy Regulatory Commission (FERC) path.

The PURPA Path

Feed-in tariffs can be lawful under PURPA if the feed-in tariffs are "voluntarily" offered by the utility, or if the tariffs are based on "avoided cost" and any additional payments necessary to make workable tariffs are derived from

• Renewable Energy Credits (or certificates),
• Subsidies (cash grants), or
• Utility tax credits equivalent to the amount of the additional payment (as in Washington State).

These "supplemental" forms of payment fall outside FERC's jurisdiction.

Voluntary Tariffs

Feed-in tariffs, whether above avoided cost or not, are permissible if a utility proposes them "voluntarily" as in Indiana where Indianapolis Power & Light (IP&L) has a suite of proposed tariffs before the state's Utility Regulatory Commission. IP&L has proposed a solar PV tariff for systems from 20 kW to 100 kW of $0.24 USD/kWh-a tariff clearly above the current avoided cost of gas-fired plants.

This provision is less useful than it first appears. In states where earnings are not decoupled from investments in generation, it is not in the self-interest of utilities to offer functional feed-in tariffs that supplant their own generation with non-utility generation.

Additional Payments

Both Hempling's report and Brown's PUC filing argue PURPA stipulates the payment of "avoided cost". This restriction doesn't preclude other forms of payment that "tops up" or adds to the avoided cost. Thus, the total payment, or total tariff, can be based on the cost of generation. These top up payments can come from many sources: Renewable Energy Credits, subsidies or other payments, and state tax credits.

Renewable Energy Credits

In states with Renewable Portfolio Standards (RPS), or renewable energy mandates, utilities are required to produce a certain portion of their generation with renewable energy. Regulators track the amount of renewable energy generated by issuing "credits" for units of renewable energy. These credits can be traded, and the trades establish a value that can be added to the avoided cost. However, it is not necessary to trade the credits to establish their value.

The value of the credits can be established administratively for any of a host of reasons: environmental values, climate change avoidance, distributed benefits, and so on. Thus, the total tariff can include a Renewable Energy Credit designed to reach the total cost of generation plus a reasonable profit when added to the "avoided cost".

Other Payments

Similarly, other forms of payments can be added to the avoided cost. Hempling suggests subsidies or cash grants as the top up payment, but it need not be limited to taxpayer subsidies.

Swiss feed-in tariffs, for example, pay a tariff that is comprised of two parts: the wholesale cost, and a top up payment. In the Swiss system, the top up payment is paid out of a Systems Benefit Charge, a pool of money collected from ratepayers for a public good, in this case the development of renewable energy.

Creating a pool of funds to pay for the portion of tariffs that exceed the avoided cost through a Systems Benefit Charge can work, but the policy must be designed with care. Such charges create a defined and, therefore potentially limited, pool of funds. These pools can, depending upon design, effectively place a monetary cap on renewable energy programs separate from the physical targets in RPS programs. While this defined pool of funds might be appealing to timid politicians wanting to limit the perceived cost of renewable energy, it often leads to a boom and bust cycle so characteristic of US renewable energy policy.

However, successful feed-in tariff programs, such as in Germany, use what is in essence a Systems Benefit Charge. The charge, and hence the size of the pool, is "flexible" and is applied to ratepayers after-the-fact, that is, the pool is sized to pay for the renewables on the system. Unlike pools where the charge is fixed and the pool of funds to pay for renewable generation is limited, Germany's pool adjusts annually to pay for the actual amount of renewable generation. The pool expands as more renewables are added and the charge to ratepayers adjusts accordingly.

The German strategy of flexible or annually adjusted charges make sense because it is not inconceivable that as more renewables are added to the system, and as fossil fuels become more expensive, the charges, or "overcost" as the French call them, will actually decrease.

French bank Caisse des Dépôts examined the overcost of French feed-in tariffs in late 2008. Their findings flew in the face of conventional wisdom: as more renewables were added to the system, especially wind, the overcost declined.

State Utility Tax Credits

Washington State's net-metering policy was built around a top up payment that utilities could offset with state tax credits. The total payments, while attractive, have only been modestly successful because of numerous restrictions on the program to limit the program's cost to the state treasury.

FERC Path

Feed-in tariffs can also be lawful under the Federal Power Act if the tariffs are

• Cost-based, or
• Market-based.

If the tariffs are cost-based, each contract must be reviewed by FERC, says Hempling. Thus, if a homeowner installs a 5 kW solar system and signs a contract with a utility, it must have the contract reviewed by FERC. This is a nightmare scenario for small power producers.

If the tariffs are market-based, such as through an "auction", the "seller" must issue a "market-power" report to FERC every three years. Again, compliance through this route is too cumbersome for widespread adoption.

Less than 20 MW Exemption

However, Hempling notes that these onerous conditions could be superseded if FERC took one of several actions. Most importantly, FERC has granted "exemptions" from PURPA for generators less than 20 MW. These generators can sell at any price without seeking FERC approval. Hempling suggests that state regulatory commissions could ask FERC for a "clarification" that above avoided-cost tariffs would qualify automatically for the less than 20 MW exemptions if they met certain conditions. This is a promising near-term fix that would allow compliance with PURPA and the Federal Power Act without relying on a two-tiered tariff made up of avoided cost and some form of additional payment.

The California Energy Commission in its 2009 Integrated Energy Policy Report recommends that the state seek "clarification of federal law to ensure that states can implement cost-based feed-in tariffs".

Other Exemptions

Hempling notes that Hawaii, Alaska, and most of Texas are exempt from the Federal Power Act.

Long-Term Solutions

While the use of RECs or SBC funds to pay for the portion of feed-in tariffs above avoided cost is administratively more complex and consequently more costly than simply setting a tariff and putting the cost in the rate base, it can be done. Regulatory commissions and the utilities themselves are fully capable of and in fact do administer such funds in several states.

While such a system can work, and in the US legal system since the Civil War, it may be necessary, such an approach treats renewable energy differently than utility-owned conventional generation that is put into the rate base. It treats renewables as a cost to the system and to ratepayers not as an integral part of the utility system as in Ontario and Germany.

That the principle federal law governing renewable energy, PURPA, treats renewable energy in this second-class way shouldn't be surprising, considering that the law passed more than three decades ago. Even then the first major wind farms were not erected in California until several years later when the PUC created the world's first feed-in tariff, California's famous Interim Standard Offer Contract No. 4.

The bigger question of whether US law will continue to treat renewable energy as a burdensome addition to the existing utility system remains. Unless these legal precedents in the US are clarified or revised, the US' competitive position will continue to erode in comparison to such states as China, India, Germany, and Japan that look at renewable energy differently.

Germany confronted just such a question of how to treat renewable energy in the late 1990s and the Bundestag, Germany's parliament, acted. The result is the now famous Renewable Energy Sources Act, also known as the law on granting renewable energy priority access to the grid. In the Act, renewable energy is treated not only as a necessary and integral part of the electricity system, it was given preference and the payments needed to profitably develop renewable energy, even costly solar PV, were deemed desirable and the costs put in the rate base.

While every German consumer pays out of pocket for renewable energy development on their utility bill, study after study has consistently shown that the benefits to both German consumers and German citizens as a whole outweigh the monetary costs. In fact, the monetary benefits of offsetting conventional generation from plants on the margin, the so-called merit-order effect, alone outweighs the full cost of the tariffs, including the payments to Germany's massive development of solar PV.

Congressmen Jay Inslee and his co-sponsors have proposed fixes to PURPA in the Waxman-Markey climate change bill. This may be the best that can be hoped for from the currently dysfunctional US Congress. But even this well-meaning effort falls short of the re-orientation of US renewable policy that is called for.

For now, the Hempling report clarifies for states that want to act how to do so. For those that want to act, it points them in the direction they need to go to meet FERC's constraints. For those states that don't want to act or are afraid of doing so, the report gives them sufficient legal cover to avoid taking the steps necessary.

To paraphrase a 68-page legal opinion: "Yes, we can implement feed-in tariffs in the US under existing law, we just have to do it differently than everywhere else in the world".

The path forward is clear for those states that want to aggressively develop renewable energy in an equitable manner. The choice is theirs to make.