Understanding Today’s PURPA Before Negotiating a Power Purchase Agreement
After many years of waning significance, the Public Utility Regulatory Policies Act of 1978 (“PURPA”) has reignited as a useful tool for renewable energy and cogeneration project developers. Before negotiating a power purchase agreement of any type, developers, lenders, and investors should consider and understand their rights under PURPA, both to identify attractive opportunities, but also to avoid inadvertently waiving rights they may have under PURPA that may provide useful leverage.
As originally implemented, PURPA permitted a qualifying facility (“QF”) to sell its output to an electric utility at the utility’s “avoided cost.” During the 1980s, when many utilities were forecasting high rates for decades to come, developers were able to obtain power purchase agreements (“PPAs”) under PURPA with advantageous rates. In the 1990s, however, wholesale electricity price forecasts dropped, competitive power markets began to form, and PURPA PPAs at avoided cost rates became less favorable. In many regions, that trend continued. Recently, however, circumstances have changed. Dropping project development costs for solar and wind projects, and low natural gas prices ideal for cogeneration development, have made PURPA PPAs, at least in some states, profitable for QF developers.
Although many utility-scale solar and wind projects obtain PPAs without direct help from PURPA, such as through utilities complying with state-mandated renewable portfolio standard (“RPS”) programs, PURPA still serves as a useful tool. It can create an opportunity to obtain a financeable PPA in some states where no other options exist. Even in states with additional PPA options, a QF developer can sometimes rely on its PURPA rights to negotiate better PPA terms and conditions, and provide additional options to consider. Therefore, it is important for the parties involved with a QF to understand their PURPA rights before executing any type of PPA. Understanding these rights can be particularly complex, due in part to PURPA’s status as a federal statute that divides implementation between the Federal Energy Regulatory Commission (FERC) and (for regulated utilities) state utility commissions.
This article identifies and briefly analyzes some of the key issues under PURPA to keep in mind before pursuing a particular project or executing a PPA.