Public Utility Regulatory Policies Act of 1978 (PURPA)
The Public Utility Regulatory Policies Act of 1978 (PURPA) was enacted in response to the energy crises of the mid-1970s, particularly following the oil embargo by OPEC. This legislation aimed to enhance the United States' energy security by promoting the development of alternative energy sources and diversifying the energy mix. PURPA enabled nonutility electricity generators, known as qualifying facilities (QFs), to enter the energy market, particularly benefiting small-scale producers and renewable energy sources. It mandated that utilities provide interconnection services to these self-generating plants, allowing them to sell excess electricity back to the grid at a price based on the utility's avoided costs.
This framework encouraged the growth of renewable energy, leading to a significant increase in installed capacity from QFs over the years. However, the act faced challenges, such as the potential for artificially inflated electricity prices and inefficiencies in purchasing requirements. The Energy Policy Act of 2005 introduced revisions to address these issues, allowing for more competitive market dynamics and encouraging ongoing renewable energy development. Overall, PURPA represents a pivotal moment in U.S. energy policy, highlighting the balance between fostering innovation in renewable energy and managing the complexities of market integration.
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Public Utility Regulatory Policies Act of 1978 (PURPA)
Summary: PURPA was passed to promote renewable energy generation in 1978 and obliged utilities to purchase electricity from all qualifying facilities.
The global energy crises in the mid-1970s contributed to reshaping the United States’ energy policy. In 1973, the Organization of Petroleum Exporting Countries (OPEC) placed an oil embargo on the United States, lasting until the following year, which contributed to rising energy prices. As a nation dependent on oil imports, the United States and its energy security were threatened by rising oil prices, and consequently the Public Utility Regulatory Policies Act (PURPA) was enacted in 1978. PURPA supported the development of alternative energy sources, such as renewable energy, as well as the diversification of the energy mix, by opening up the energy market, allowing nonutility electricity generators, or qualifying facilities (QFs), to participate.
In particular, renewable energy generators benefited from the new legislation, which classified nonutility, small-power producers, and cogeneration facilities as QFs. Small-scale power producers were defined as having less than 80 megawatts of generating capacity, whereas eligible facilities that produced power from wind, solar geothermal, hydroelectric, or municipal waste power that met the requirements set forth in the Federal Power Act did not have capacity limitations.
The inclusion of QFs in the power generation market enabled small-scale self-generating plants to connect to the grid. PURPA clearly stated, in Section 111, that “each electric utility shall make available, upon request, interconnection service to any electric consumer that the electric utility serves.” Previously, utilities could refuse grid connection. Thus, self-generating plants were obliged to supply their own power at all times in addition to their redundant backup power systems. PURPA increased energy efficiency, since qualifying facilities were able to sell excess electricity to the utility during times when their supply exceeded demand.
In Section 201, PURPA stipulated that the utilities were obligated to purchase electricity from QFs at a just and reasonable price, equivalent to the avoided cost, defined as “the cost to the electric utility of the electric energy which but for the purchase from such cogenerator or small power producer, such utility would generate or purchase itself from another source.” In other words, the utilities compensated QFs according to the avoided cost for electricity generation rather than according to the actual cost of generation, leading to a favorable price for the new energy generators. The measures set in PURPA initially predicted that 12,000 megawatts of nonhydropower renewable energy would be developed. By 1991, 32,000 megawatts produced by QFs had been added online.
Although PURPA was one of the most effective laws in supporting renewable energy development, it has been marred by several issues. The price determined by the avoided cost was excessively high, since prices were based on forecasts of increasing fuel prices. While fuel prices did not reach the forecasts, utilities were still required to honor the 15- to 20-year fixed contracts, passing on the increased power costs to consumers. QFs artificially increased the electricity price, but contracts persisted for some time, given the utilities’ purchase obligation. Additionally, inefficiencies have arisen, since utilities were forced to purchase electricity from QFs despite having adequate power suppliers through their own facilities or through external sources. At times the QFs offered 10 to 20 times more than the utility’s capacity; thus, competitive bidding was used in the mid-1980s to choose QFs for long-term contracts.
Mandatory grid connection, open access to transmission lines, and the creation of a competitive generation market led to the revision of some measures in PURPA in the Energy Policy Act of 2005 (EPACT 2005). A utility was exempted from purchasing QF-generated power on condition that it was able to prove that QF electricity could be sold in the competitive wholesale market. Not all utilities were able to demonstrate the requirement, and therefore several states were required to continue purchasing from QFs at the avoided costs. EPACT 2005 also encouraged greater development in renewable energy by promoting the continuous assessment of renewable energy resources and stimulated demand by obliging the government to purchase a fixed amount of electricity from renewable energy sources. EPACT also included a clause promoting alternative energy sources, including renewable energy.
Utilities were given two years, until August 8, 2007, to begin considering the additional standards and three years to finalize the consideration to implement or reject the new standards. If the standards were declined, a public statement had to be made in writing. Each state commission and utility was required to make an independent evaluation of the new PURPA standards and was allowed to modify, set standards, and adopt some or all of the standards and set more or less rigorous standards in accordance with the state law. Since each state had varying laws and procedures or may have adopted equivalent standards, the Reference Manual and Procedures for Implementation of the PURPA Standards in the Energy Policy Act of 2005 was created as an information and procedural guide to help with the evaluation process.
The evolution of PURPA since 1978 illustrates that development in renewable energy was stimulated by strong policies, which were not without their shortcomings. Over time, the policies were revised in an attempt to address the issues of artificially high, avoided costs and to streamline the implementation of policies across a diverse range of states.
Bibliography
Graves, Frank C., James A. Read, and Joseph B. Wharton. “Resource Planning and Procurement in Evolving Electricity Markets.” January 31, 2004. http://www.brattle.com/Publications/ReportsPresentations.asp?PublicationID=923.
International Energy Agency. “The Public Utility Regulatory Policies Act (PURPA) Review.” 2007. http://www.iea.org/textbase/pm/?mode=weo&id=1060&action=detail.
McNerney, Rebecca A. “The Federal Statutory Background of the Electric Power Industry.” In The Changing Structure of the Electric Power Industry 2000: An Update. Washington, DC: U.S. Department of Energy, Energy Information Administration, 2000.
Masters, G. M. Renewable and Efficient Electric Power Systems. Hoboken, NJ: John Wiley & Sons, 2004.
Rose, Kenneth, and Karl Meeusen. “2006 Performance Review of Electric Power Markets.” August 27, 2006. http://www.kenrose.us/sitebuildercontent/sitebuilderfiles/2006‗Performance‗Review.pdf.
U.S. Senate Committee on Energy and Natural Resources. “Energy Policy Act of 2005.” August 8, 2005. http://energy.senate.gov/public/index.cfm?FuseAction=EnergyBill.Home.