February 4, 2010

Feed-in tariffs legal in U.S. when certain conditions met

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 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.

Opponents have long argued that feed-in tariffs are illegal in the U.S. 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.

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.

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.

The bigger question of whether U.S. law will continue to treat renewable energy as a burdensome addition to the existing utility system remains. Unless these legal precedents in the U.S. are clarified or revised, the competitive position of the U.S. 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.
To paraphrase a 68-page legal opinion: “Yes, we can implement feed-in tariffs in the U.S. 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.

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