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Decades-old green power law is a fresh nuisance to U.S. utilities

[March 29, 2017] By Nichola Groom

(Reuters) - In the last four years, North Carolina has become the second largest solar market in the United States, behind only California.

It has installed more solar energy than Texas, which has nearly three times the population; more than Arizona, which has twice as many sunny days; and more than New York, which has far more aggressive renewable energy targets.

North Carolina’s solar boom is rooted in a federal law enacted four decades ago – one that has only recently had much impact.

The law is now emerging as a boon for many solar developers in select states, but a nuisance to many power companies, including North Carolina’s top utility, Duke Energy Corp.

The federal Public Utility Regulatory Policies Act (PURPA), passed in 1978, requires utilities in many states to buy renewable power from small providers – provided they can sell it at a price comparable to power from fossil fuels, such as coal or natural gas.

Because rates and contract terms are set by state utility regulators, that boom is focused on handful of markets - including North Carolina, South Carolina, Montana and Oregon. Sixty percent of the nation's current PURPA projects are in North Carolina, where state rates and policies favor solar companies.

Nationwide, about 28 percent of U.S. solar projects in development will benefit from PURPA mandates that utilities buy their power, according to industry research firm GTM Research.

For decades, PURPA was essentially irrelevant to the wind and solar industries because their technologies cost far more than power from fossil fuels. But the last decade has brought sharp declines in the cost of solar and wind power, encouraging a surge of renewable power projects from developers who can count on legally mandated contracts with utilities.

“It’s been really important,” said Ben Van de Bunt, Chairman of Cypress Creek Renewables LLC, which has developed more solar projects under PURPA than any other company.

UTILITIES LOSE CONTROL, PROFITS

Utilities aren’t pleased with the development. They say PURPA is upending their ability to plan, control and profit from new electricity generation being added to their territories.

In North Carolina, Duke Energy wants to slow down the breakneck solar expansion.

On sunny days, the utility now has more solar power in some places than the grid needs, overwhelming some circuits and threatening reliability, the company said. The state’s terms for PURPA contracts, Duke said, require it to pay far more for solar energy than if contracts were let competitively.

Duke reported in a state filing that it is paying between $55 and $85 per megawatt-hour for the solar energy it must buy under PURPA. A typical solar contract in the United States falls between $35 and $50, according to GTM Research.

“There is a better way to be proactive in figuring out where to put solar, and better pricing for our customers,” said Rob Caldwell, Duke’s president of renewable energy.

REGULATORY BATTLE GROUND

Duke is now seeking approval from the North Carolina Utilities Commission for shorter-term contracts with solar providers and lower prices for mandated power purchases under PURPA.

Both moves would give solar developers less incentive to build new projects in the state.

The NCUC declined to comment, saying it cannot publicly discuss matters pending before the commission.

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In other states, including Idaho, Oregon, Utah and Montana, utilities such as NorthWestern Corp and Berkshire Hathaway Inc's Pacificorp have made similar pleas for relief in reaction to an influx of requests from solar and wind companies to connect projects to their grids.

Solar advocates argue that slashing contract terms to five years from the current 15 years, as Duke has requested, would eliminate the long-term predictability investors need to finance renewable energy projects. They contend that would undermine clean power development just as PURPA has begun to have the effect its drafters originally intended.

"It wasn't a problem until it worked," said Adam Browning, executive director of the advocacy group Vote Solar, which has lobbied to preserve PURPA contract terms in several states.

The battle in North Carolina will be hard fought because the state has led the way nationally for solar development under PURPA.

Solar power now accounts for about 3 percent of the state's electricity, compared with less than 1 percent nationwide. About 95 percent of the North Carolina's solar projects were developed under PURPA.

Duke has sparred with the solar industry before. Two years ago, solar companies objected when Duke requested shorter contract terms and limitations on the size of projects that would qualify for its standard contract. The state utilities commission denied Duke’s request.

ONE FIRM’S SOLAR BOOM

North Carolina’s boom in PURPA solar projects has been particularly good for one developer - California-based Cypress Creek.

The company started doing business in North Carolina in 2014, buying cheap land close to the grid from farmers and then building projects for a captive customer, Duke. The company owns about a quarter of the state’s solar installations, and has another 2.2 GW in the works.

In January, Cypress filed a complaint with the state utility commission after Duke slashed its contract term for larger PURPA projects to 5 years. That dispute is unresolved, and Duke is separately seeking regulatory approval to lower the fixed contract price for smaller projects.

In a January filing, the NCUC said it would consider whether current economic conditions for utilities justify changes in rates and PURPA implementation.

Cypress Creek’s Van de Bunt says the battle in North Carolina is critical.

"Duke has an extraordinary amount of power in North Carolina,” he said in an interview. “If they continue down a path to making solar development difficult to finance, we'll have a smaller path in North Carolina.”

In another debate that could roll back gains for solar companies, Duke is also working with state lawmakers to introduce a competitive process for purchasing solar power.

Duke says it is committed to solar energy production, but will continue pushing for more control over project locations, power prices and the amount of solar needed overall for the grid.

"We've been growing and growing," said Rob Caldwell, president of renewable power at Duke. "Let's declare success, but let's find a more sustainable, balanced approach going forward."

(Reporting by Nichola Groom)

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