The economic impact of state ordered avoided cost rates for photovoltaic generated electricity

Abstract

The Public Utility Regulatory Policies Act (PURPA) of 1978 requires that electric utilities purchase electricity generated by small power producers (QFs) such as photovoltaic systems at rates that will encourage the development of new energy technologies. The Federal Energy Regulatory Commission's regulations for PURPA require state regulatory authorities to ensure that utilities pay their full "avoided costs" to the QFs for the energy and capacity provided.

This paper examines the various methods the states have devised to implement the federal policy, particularly the methods chosen for setting buy-back rates. The rates ordered by the states were based on the widely accepted method for determining avoided costs, and the states have approached the problem in a number of ways. The paper tries to compare several states' actions with rates estimated using utility expansion and rate-setting models and determines the impact on the potential break-even capital costs of a photovoltaic system using models which calculate photovoltaic worth.

This paper concludes that PURPA has increased the potential for the development of photovoltaics somewhat by guaranteeing the purchase of PY-generated electricity at a minimum price. Much of the benefit comes from guaranteeing utility purchase of photovoltaic power rather than from higher buy-back rates paid by the utility. However, there is little agreement among the states as to the "correct" method for setting avoided-cost buy-back rates. The models and techniques used in this analysis and developed at the M.I.T. Energy Laboratory offer a possible solution for estimating buy-back rates.