Was PURPA beneficial to the US electric power system?
PURPA (The Public Utility Regulatory Policies Act) enacted in 1978 as a part of National Energy Act, had a revolutionizing impact on the Electric Power sector, it had created a huge wave of opportunities to produce and sell clean energy at cheaper prices. Technological Stasis, Energy Crisis & Environmentalism were the existing issues in the society which needed to be solved. The primary purpose of PURPA (Section 210) was to encourage the use of Alternative Electricity Generation Resources and to reduce the reliance on imported oil. Although as every coin has two sides, even PURPA had its adverse effects, it had inadvertently created few unfair policies in the Utility business and electric sector which companies took advantage off, and also the number of regulations inflicted by PURPA on the whole Electric Generation & Distribution sector had affected the economy of the system.
PURPA has played a crucial role in quenching the thirst for electricity, especially in rural and remote areas, as a tremendous amount of energy was added and provided to the grid by cogeneration and small Qualifying Facilities(“QF”). Moreover, due to various economic incentives provided to produce clean energy using renewable resources the number of participants increased in Electric Generation sector, and also diversified the usage of various type of fuels. The competition started to flourish in regions where there was no competition before the amendment of this act, it looked like a change of guard from “Franchise Monopoly Industry” to “Competitive Market Industry”. The law provides competitive access to wholesale electricity markets for producers too small to effectively compete with large companies. Cogeneration Capacity increased five folds from 10,538 MW (1979) to 53,293 MW (1996). Renewable energy technologies saw dramatic declines in the price of power produced from them as people got more experienced with them.
Utilities had the “Must Buy Obligation” under which they had to buy electricity from the QF, and also had to make a long-term contract with them, which gave a sense of financial stability to the QF’s and encouraged them to invest in producing electricity. Competitive markets were probably the only way of removing the technological static environment that was attained pre PURPA. “Innovation is driven through competition” this had entailed and helped the Manufactures & Producers a lot to develop the market and shape it in a way that it can be helpful and productive for the present as well as for the future. It can be said that PURPA indirectly contributed to removing the Nation from an economic and political vulnerable state.
On the contrary, there were few downsides as a result of implementing PURPA, few large developers of renewable energy were splitting their projects in such a way that they were able to exploit the benefits given to the QF’s. Under the PURPA act, there was a “One Mile Rule” which stated that the Electric Generation services should be at no more than 1-mile distance from the primary industry like textile mills or paper mills, and the generation size should be no more than 80MW. The developers started to find ways of generating profits by unethical means, they took large renewable projects and subdivided them to be eligible for PURPA contracts. Also, there is no definite set of rules or regulations by the federal government on how should a state tabulate its avoidable cost, it is up to the state regulators to determine their methodology. To add to it many states have a dearth of personnel prowess in PURPA, which then leads to inaccurate and questionable analysis. This impacts the economy of the system negatively and also results in wastage of resources.
Moreover the Utility companies were initially content with the amendment of PURPA, as due to it, they were getting a sense of stability by knowing that in a certain geographical region there will not be any other aggressive generator than themselves, and few of the utility companies started to manipulate the market due to this added security that they got. Enron Corporation and other utilities started to create a hoax of market shortage and worked variations on this manipulating strategy to collect special fees from the California Independent System Operator (ISO). Enron Corp. and other utilities would exploit California’s emergency price caps, buying power at the capped price and then selling it at huge profit out of state, where there were no price caps.
In conclusion, PURPA played a key role in developing a competitive market in an industry which had only seen monopoly until then, a path to slowly and gradually shift towards cleaner and cheaper energy using renewable resources. Although it also had some technical regulations which may have been the cause of PURPA’s downslide, despite its immense potential, the policy was sometimes found to get caught in its structure, trapped between regulatory obstacles and exploiting utilities – it had forced communities across the country to drop some profitable ideas. Hence at a Macrolevel, PURPA was beneficial for the nation but it also had some loopholes which made it less effective than what it was planned for.
Who were the winners and who were the losers under PURPA?
There were a lot of eyebrows raised when PURPA (Section 210) was enacted in 1978, majority of them were by the utility companies as they had to settle for something which was not as comforting as they previously had. Whereas the Small Qualifying Facilities (QF’s) and the Co-Generation Industries had something to bank on and earn some profits from it while also contributing to the society’s need for electric power.
During the 1960s and 1970s, the US was under immense pressure as there was an Oil Embargo, Energy Crisis also happened at that time and everything was happening in a very volatile and rapid manner. The whole ideology behind the Instalment of PURPA was to bring a sense of stability and static environment, with rates cheap enough for the consumers to buy and also generating energy in a clean way which doesn’t tamper with our natural ecosystem. At a large scale, and in terms of priorities PURPA did live up to its expectations, and due to that, several parties were happy, but there were few mourning parties as well.
Due to QF’s and Co-Generation facilities, the states like Montana, Idaho which were not developed in Solar and Wind Energy deployment, also invested in them under PURPA act. Large developers had the whole market to access and sell their electricity, while the smaller projects, who didn’t have the finances to cater for the overhead transmission cost, they needed a catalyst for their proper functioning, and PURPA did it for them. Even today there are economic incentives under this act, and it is still one of the reasons why some of Solar and Wind energy companies are waiting for their approval from PURPA.
No matter what the type of agency, be it a private utility company, or a State Agency including the likes of Municipal & Co-Operatives, everyone has to meet the PURPA requirements, which sort of makes the market a fair place. The Utility companies must sell energy to any QF without any discrimination of rates and the rates should be reasonable and in the public interest, which is beneficiary for the QF’s. As a result of getting constant support from PURPA, Small developers started to split their projects which allowed them to serve the community effectively, as well as connecting it to the low voltage grid helped them to avoid the transmission costs. There is also an added advantage, as it can also be used during peak demands and hence weighs off the burden from the utility companies. All these illustrations are indications of how positively PURPA has impacted on our society, and who all have benefited from it.
While there are multiple beneficiaries from PURPA, there are few organizations who roll their eyes whenever PURPA is mentioned. Heading this list are the utility companies, having to give up on monopoly, power and settling in for fewer profits was very difficult for the utilities to digest. From an era of total dominance, to a state where in-spite of being the aggressor in the production market, they did not have the perks of being the aggressor like they used to have in pre PURPA era. Under the “Must Buy Obligation” the Utility companies always had to buy electricity from the QF’s even if there was no need or demand to buy extra electricity from them.
Splitting small developer projects can sometimes be very subjective, the reason for splitting the projects matter a lot, if there is splitting of projects just to earn more profits under the PURPA act, then it can result in wastage of resources and can also affect the variables which are attached with it. Currently by the federal law “One Mile Separation” between projects is required for them to be distinct and separate. In 2016 in Idaho, a wind energy developer attempted to install 11 Solar and wind projects separately with a combined power of 1,520 MW, and by dividing them in various 80MW projects they can be categorized as QF’s under the PURPA act, which gives them all the economic benefits.
Not updating PUPRA with time has left us with some questionable policies, implementing a 40 years old document without modifications in this current era is an open invitation to social and economic failures. If we want to draw on level terms with the recent technology advancements, now is the right time for the congress to make rapid-dynamic changes to this document, and launch it as an updated PUPRA 2.0 doctrine.
(Chairman FERC) Neil Chatterjee: – “The energy landscape that existed when PURPA was conceived was fundamentally different than it is today…the commission has the discretion to evaluate how it implements the law within the context of our energy evolving markets. One different approach that we need is the One-mile rule for qualifying facilities”
(Former FERC Commissioner) Robert Powelson: – ” PUPRA is a 1978 Vintage Document, it was addressing a scarcity issue back when it was implemented whereas now here, today… leaning towards energy Independence and the generation mix has changed dramatically”
Hence to summarize, PURPA has substantially impacted the electric power sector, and there are subjective repercussions of it as well. Small QF’s and Co-Generation companies count on PURPA as an opportunity to progress and develop. While the utilities look at PURPA as the law which had disrupted their reign of supremacy. Although now due to the lack of updates in PURPA in coherence to the new digital era along with negative effects of deregulation has made the clock ticking faster than ever in need for a revised or an upgraded PURPA 2.0 which will serve the society in a better and efficient way.
- Power Loss: The Origins of Deregulation and Restructuring in the American Electric Utility System- Richard F. Hirsh
- An Analysis of PURPA and Solar Energy- Michael Rice
- Los Angeles Times
- Public Utilities Regulatory Policies Act “Latest Developments for Electric Utilities”-Thompson Coburn LLP
- Utility Dive: https://www.utilitydive.com/