The Public Utility Regulatory Policies Act of 1978 (PURPA) was implemented to encourage, among other things, the development of renewable energy sources. Under PURPA, electric utilities are required to purchase power from certain small renewable energy generators such as solar, generally 20MW and smaller, known as qualifying facilities (QFs). The purchase price is set at a rate equivalent to the cost the utility avoids from an alternative purchase such as building a new power plant. This rate is known as the ‘avoided cost rate.’
State-level interpretation of PURPA can be a large driver of solar in a given market. Take North Carolina which catapulted to #2 in installed solar capacity in 2014, for example. North Carolina utilities comply with PURPA by entering into 15-year PPAs with solar producers for any project 5MW or smaller at a set tariff rate equaling about $0.068/kWh. The combination of an investment grade off-take, fixed PPA rate, 15-year contract term, and the state tax credit has been critical to attracting investment to the Tar Heel State.
As North Carolina developers and investors look to diversify, why not look to other QF states? Oregon and Utah are two examples of states with solar-friendly interpretations of PURPA, but still underwhelming solar markets – ranked #24 and #22 respectively. Both states have ample land for larger utility-scale projects, affordable build costs, and relatively inexpensive interconnection if sited well. Like North Carolina, Utah and Oregon utilities provide long-term contracts, and even better than North Carolina, they are 20 years in length. Utah caps its QF contracts at 3MW (with only 25MW total available through the program), and Oregon’s are capped at 10MW.
As incentives shrink in other markets and the cost of solar comes down, we expect more solar developers to submit their projects for QF tariff rates and finance deals with these long-term contracts. Even with smaller profit margins and a lack of state incentives, projects in these markets can pencil, especially for tax equity investors and YieldCos.
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