Solar Electricity Sales Regulation

ADAPTED FROM ENERGY LAW AND TRANSACTIONS, David J. Muchow and William A. Mogel, General Editors, 3 Energy Law and Transactions 71.01-71.04

This article explains the regulatory framework under the Public Utility Regulatory Policies Act of 1978 (PURPA)¹ surrounding the sale of electricity by solar utility providers.

THERE IS TWOFOLD REGULATION OF SOLAR ELECTRICITY sales in the United States. At the wholesale level (the sale of electricity by generators to utilities), sales are regulated by the Federal Energy Regulatory Commission (FERC). And, at the retail level (the sale of electricity by utilities to the general public), sales are regulated by state public utility commissions. Especially now that large solar utilities may cross the wholesale and retail divide, it is important for you to understand both tiers of solar electricity sales regulation. This will help you properly represent your solar utility provider clients, and also help you determine whether they qualify for exemptions from regulation.²

PURPA Protects Renewable Energy Generators at the Federal Level

Prior to enactment of PURPA, solar power producers—which often tended to be smaller than traditional utility providers—were at a disadvantage. Utilities were not required to purchase the solar generator’s electric output at market rates. Some even charged solar producers high fees for backup power. And, they were often subject to onerous state and federal regulation, as if they were large utility providers. PURPA changed this by requiring traditional utility providers to provide fair treatment to your solar generation clients.

PURPA’s Protections from Large Utilities

In an effort to promote the efforts of your smaller solar generation clients, the FERC enacted regulations that protected them from predation by larger traditional utilities. Unless they receive a special exemption from the FERC, these regulations require traditional utilities to do the following for the benefit of your solar generation clients:

• Purchase power from your solar generator clients at avoided-cost (or marginal) rates, which are generally set by a state’s utility commission
• Sell power to your solar generator clients at nondiscriminatory rates set by state regulatory authorities
• Interconnect your clients’ solar generation facilities with the wider electric grid to allow the purchase and sale of power

PURPA’s Benefits for Your Qualifying Clients

Additionally, the FERC regulations provide additional benefits for your qualifying solar generation clients:

• Renewable energy facilities under 30 megawatts generating capacity, or your clients’ qualifying solar facilities under 80 megawatts generating capacity, are exempt from the Public Utility Holding Company Act of 1935.
• Your clients’ qualifying solar facilities with 20 megawatts or less of generating capacity are exempt from rate regulation under Sections 205 and 206 of the Federal Power Act.
• Your clients’ qualifying solar facilities with 30 megawatts or less of generating capacity are exempt from all provisions of the Public Utilities Holding Company Act of 2005.
• Your clients’ qualifying solar facilities are exempt from state laws and regulation respecting electric utility rates, financing, and organization.

While these regulations offer your clients substantial benefit, your clients’ facilities must be deemed qualifying under PURPA. Because of the relatively small size of most solar power projects, most of your clients’ solar generation facilities will likely qualify for the PURPA exemptions. However, to qualify, your clients must meet the following criteria:

• Generate electricity primarily through the use of solar power, or some other renewable energy resource
• Have power production capacity that does not exceed 80 megawatts, when combined with all other generation facilities located at the same site
• Meet the FERC’s fuel use standards (for alternate electricity generation during periods without sunlight) set out in the regulations implementing PURPA³

Fuel Use Standards to Qualify for PURPA Protection

The FERC allows your solar production client to use oil, natural gas, or coal to power up to 25% of its facility’s total energy needs. However, the use of these fuels is limited to the minimum amount required to do the following tasks:

• Initiate ignition of the steam plant
• Startup of turbines or boilers
• Testing of equipment
• Flame stabilization and control
• Alleviate or prevent unanticipated outages or emergencies
• Other minor permissible uses, such as improving the efficiency of the facility’s fixed assets

While the FERC has interpreted these rules broadly to encompass other “minor permissible uses” not found in the regulation itself, some courts have pushed back against this broader interpretation of the FERC rules. You should familiarize yourself with this dichotomy before your client comes up with its plan for traditional energy use, as some usage may be disqualifying even if below the 25% threshold.⁴

If your client’s traditional fuel usage will exceed the 25% threshold, it is possible to receive a limited waiver from the FERC—especially in cases of a system-wide emergency. While the specific mechanics of obtaining a waiver are beyond the scope of this article, it is worth noting you need to help your client carefully monitor this usage so it doesn’t lose its PURPA exemptions.⁵

Size Limitations for Your Client

As mentioned above, PURPA limits the megawatt output that your client can produce before it loses its PURPA exemptions. However, the FERC interprets this size limitation in a somewhat restrictive way by considering multiple generating facilities as a single unit in certain situations. Any generating capacity owned by your client, which uses the same energy source and is located at the same site, is counted as one qualifying facility for purposes of PURPA’s size limitations. Facilities are deemed to be located at the same site if they are located within one mile of each other.

Additionally, the FERC looks to the net, rather than nominal, generating capacity of your client’s facility to determine whether it meets PURPA’s size limitations. In the Occidental Geothermal, Inc. case, the FERC set out the generating capacity standard as follows:

[A] facility’s power production capacity is not necessarily determined by the nominal rating of even a key component of the facility . . . . The [FERC] will consider the “power production capacity” of a facility to be the maximum net output of the facility which can be safely and reliably achieved under the most favorable operating conditions likely to occur over a period of several years. The net output of the facility is its send-out after subtraction of the power used to operate auxiliary equipment in the facility necessary for power generation . . . and for other essential electricity uses in the facility from the gross generator output.⁶

So, your client is entitled to subtract out whatever energy is used to operate the facility when determining whether it meets PURPA’s size requirements.

Notice Requirements

Once you’ve helped your client establish that it is planning to build a qualifying facility, your client likely must still file a notice of self-certification with the FERC through a completed Form 556. Unless your client’s facility generates less than one megawatt of electricity, Form 556 must be filed before your client can begin generation activities.

Currently, the FERC regulations require your client’s self-certification to contain the following information:

• The name and address of your client (as applicant) and the location of your client’s facility
• A brief description of your client’s facility, including a statement indicating whether the facility is a small power production facility or a co-generation facility
• The primary energy source used or to be used at your client’s facility
• The power production capacity of the facility
• The percentage of ownership by any electric utility or by any public utility holding company, or by any entity owned by either
• Information about your client’s facility’s location as it relates to any other small power production facility using the same energy source if the other facility is within one mile of your client’s facility
• Information identifying the type and amount of your client’s planned usage of coal, oil, or natural gas to produce electricity⁷

As an alternative to self-certification, the FERC allows your client to submit a request for formal certification from the commission. While time consuming and more costly, you may want to advise your client to request formal certification if there is any doubt whether your client’s facility is deemed a PURPA-qualifying facility. If it is not, and a dispute arises, utility providers do not have to allow interconnection with your client’s proposed facility until the dispute is settled.

The request for formal certification requires the same information as the notice of self-certification but does require a filing fee. It must also include a request that the formal certification be published in the Federal Register.

As part of the review process, the FERC staff may request additional information. If your client’s facility is similar to other facilities previously approved by the FERC, the staff may approve the request without further consideration. If your client’s facility raises an issue of first impression, its application will have to be formally presented to the entire commission for review—a lengthy process.

If your client files a formal request for certification, the FERC has 90 days to act on it—either by denying it, setting it for hearing, or tolling the deadline. If the FERC fails to act within the 90-day window, the application is deemed approved. However, if your client’s application is denied, or you or your client disagree with some portion of the order granting the application, you can request a rehearing from the FERC.

State Regulatory Developments

While there is significant regulation at the federal level for you and your clients to be concerned with, there are also state regulatory concerns you and your client may need to worry about. While covering all state regulatory issues is beyond the scope of this article, the most important are likely these:

• Feed-in tariff programs
• Net metering programs to facilitate solar facility build-out

Feed-in Tariff Programs

As an alternative, or sometimes as a supplement, to renewable portfolio standards programs—where a state mandates that a certain minimum amount of electricity must be generated from renewable sources—some states have adopted feed-in tariff (FIT) programs, where there is a guarantee of premium payments to your renewable energy development clients for all electricity their facility produces. Under these programs, utilities are able to enter into long-term contracts with your renewable energy clients (often 20 years), where your clients are guaranteed the ability to sell electricity often at higher prices. These programs often pass cost along to the ultimate consumer, incentivizing the creation of renewable energy facilities while spreading the cost as widely as possible. These programs may be instituted at the state or local level, so it is important for you to determine eligibility on behalf of your clients before financing proposals are finalized. The ability to achieve a guaranteed return may be critical for your client obtaining the financing necessary to build its solar generating facility.⁸

Net Metering Programs

As part of the Energy Policy Act of 2005, Congress required state regulatory authorities to consider adopting standards where facilities that generated renewable electricity for their own use could sell any excess energy back into the electric grid. Usually, the sale of this self-generated renewable electricity is either credited against your client’s future utility bills or is actually paid for in cash by the utility in question. As of 2014, 43 states and the District of Columbia had adopted these types of policies.

With so many different policies in place, it is not possible to discuss each state’s nuanced plan in detail. However, it is important for you to know that many features are common to all net metering programs, including the following:

• Facility size limits. To be eligible for net metering programs, most states limit the size of your client’s on-site generating facility to between 100 kilowatts to 80 megawatts—a fairly broad range.
• Limits on enrollment. Many states limit the amount of total generating capacity that is eligible for the program, potentially making it impossible for your client to sell all excess electricity into the grid. Sometimes this is done on a utility-by-utility basis, so it is important for you to help your client determine whether there is any space left under state caps.
• Rollover restrictions. Some states allow your client to roll over excess electricity generated in one month to another month where excess electricity was not generated. Some states do not allow this. It is important for you to understand whether this limitation will apply to your client. If it does, excess electricity generated each month will simply be wasted, making the renewable generation facilities less efficient.
• Third-party restrictions. Generally, your client will install its solar generation equipment in one of two ways. It will either lease or purchase the equipment for its own use, or it will have a solar generation equipment company supply discounted or free equipment, in return for your client’s purchase of the electricity generated. While your client is always eligible to participate in net metering programs in the first instance, it may not be eligible to participate in all jurisdictions, where the generation equipment is owned by a third party. If your client plans to install equipment with excess generating capacity, and wants to utilize third-party equipment, you need to carefully research whether it will be eligible to participate in net metering. If not, the entire system may be economically infeasible.

Adapted from content in 3 Energy Law and Transactions 71.01- 71.04.

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Related Content

1. 16 U.S.C.S. § 824. 2. For additional information on PURPA, see U.S. Department of Energy, Public Utility Regulatory Policies Act of 1978 (PURPA). See also U.S. Energy Information Administration, “PURPAqualifying capacity increases, but it’s still a small portion of added renewables.” 3. For more on the standards the FERC considers when determining whether your client’s facility is qualifying under PURPA, see the Commission’s frequently asked questions page. 4. For more on this interpretive clash, compare S. Cal. Edison Co. v. FERC, 195 F.3d 17 (D.C. Cir. 1999) with LUZ Solar Partners, Ltd., 30 F.E.R.C. P61,122 (1985). 5. For more information on obtaining a waiver, see Steven Ferrey, The New Rules: A Guide to Electric Market Regulation, at p. 90 (2000). For more on fuel use criteria, see Robert N. Danziger, Patrick W. Caples, and James R. Huning, The Rules Implementing Sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978: A Regulatory History, available at https://www.osti.gov/servlets/purl/6713387. For the text of these regulations, see 18 C.F.R. § 292.101. 6. Occidental Geothermal, Inc., 17 F.E.R.C. ¶ 61,231 at 61,445 (1986). 7. Instructions for how to complete the FERC Form 556, along with a link to the form itself, can be found at https://www.ferc.gov/industries/electric/gen-info/qual-fac/obtain.asp. 8. For additional information about feed-in programs, see Feed-in tariff: A policy tool encouraging deployment of renewable electricity technologies, a policy whitepaper by the U.S. Energy Information Administration.