Recently, the Michigan Public Service Commission (“MPSC”) approved a final order to the approach the Consumers Energy Company (“Consumers Energy”) determines the avoided cost under the federal Public Utility Regulatory Policies Act (“PURPA”). Consumers Energy is a public utility providing power to 6.7 million of the Michigan’s 11 million residents. Michigan’s utilities were still utilizing old methodologies that had not been reviewed for the past 20 years, despite significant changes in the energy industry during that time, namely the emergence of natural gas as a cheaper alternative to coal. The new methodology applying only to Consumers Energy would be available for projects with a nameplate capacity of 2MW, an increase from 100kW through a 20-year power purchase agreement (“PPA”) term. The order is expected to create a significant number of solar development opportunities in Michigan.
Back Up: What’s PURPA?
In 1978, Congress enacted PURPA with the purpose to promote the development of alternative electric energy sources while reducing dependency on fossil fuels. PURPA requires utilities to purchase energy from qualifying facilities (“QFs”) within their service territories. PURPA allows small QFs to sell electricity to utilities at an avoided cost, which is the cost the utility would have incurred if the utilities had bought power from fossil fuels such as coal. Under PURPA, state commissions are tasked with determining the avoided cost rate for the utilities within their jurisdiction. In Michigan, this was initially done in the context of Case No. U-6798 and related proceedings, in which orders were issued from the early 1980’s into the 1990’s. These orders determined the avoided cost rate based on the rates of a proxy coal plant.
Given that PURPA contracts in Michigan were approaching their initial expiration dates, new QFs were inquiring about avoided costs rates, and significant changes in the energy sector have taken place in the last 20 years, MPSC convened a working group to research and analyze the pricing and structure that will be applied to QFs agreements with utilities. Moreover, with expected capacity shortages in Michigan, solar was thought of as a way to fill that gap.
The working group provided a report to MPSC which invited various parties including utilities to file testimonies on how the avoided cost rates could be estimated. The comments recommended using a new methodology to estimate the avoided cost, one that relied on the levelized cost of a natural gas combined plant instead of a coal plant. The methodology would apply to QFs with a nameplate capacity of 2MW or less because small developers do not have experience and resources to negotiate individual contracts as larger developers. The comments also recommended the standard power purchase agreement (“PPA”) term to be extended from five years to fifteen or twenty years. As a five-year PPA term is considered unfinanceable for solar projects, while fifteen or twenty-year terms are standard across other QF territories. Long contract rates like the ones seen in Oregon and North Carolina have allowed solar to flourish, while other states with short contracts terms like Arkansas have not seen much solar since generation of assets are unfinanceable. With 20 years, Michigan could be a strong market.
On May 31, 2017, MPSC issued the order that includes changes on avoided cost rate methodology and standard offer methodology for Consumers Energy. The approved methodology would be based on the cost to produce power with natural gas as opposed to coal. This methodology applies to small QFs sized at 2MW or less and will have a 20-year standard offer contract. The size of the QFs would be revisited in the next PURPA review and the avoided costs will be reviewed every two years but will not affect PURPA contracts already in existence. The specific avoided cost rate for the QFs is not yet available to determine if it is high enough to make projects financeable but MPSC will release the specific rate in mid-July. All parties involved during the initial comments submitted in mid-June their inputs on developing the avoided cost rate.
Solar Development in Michigan Outside of PURPA
Moreover, there are other programs that are expected to create a significant number of solar development opportunities in Michigan. Wolverine Power Cooperative (“WPC”), a member-owned electric company, created a buy-all sell-all (“BASA”) program. BASA allows for distributed solar customers to sell 100 percent of the electricity generated back to the utility. Solar customers install up to 1MW of solar, and then sell all the electricity back to the utility at a rate $0.10 per kWh through a 20-year standard agreement.
Meanwhile, Consumers Energy, is launching a separate program “green energy rider tariff” to benefit small projects in its service territory. The new program proposal submitted to MPSC will provide special PPAs for large businesses that are interested in purchasing 100 percent of their electricity from renewable energy. Other utilities such as DTE Energy Co., a Detroit based utility, are also interested in the green energy rider tariff. DTE is also expected to submit a similar proposal for its planned community solar projects up to 100MW.
The Future of Solar in Michigan is Bright
In summary, these new programs and the MPSC order will allow developers to attract financing for small QFs of 2 MW and less. Now, the new Michigan Renewable Standard Portfolio (“RPS”) requires utilities to produce 15 percent of energy, an increase from 10 percent, from renewable sources by 2021. With such changes in the RPS, the new programs and the MPSC order will help Michigan meet their RPS target by increasing solar development opportunities. Without a doubt, Michigan will be a market to watch over the coming years.
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