Dive Brief:

• Federal regulators on Thursday issued a final order that will change the way a 1978 law credited with enabling the growth of small-scale solar is implemented.

• The Federal Energy Regulatory Commission, in a 3-1 vote, finalized its updates to the Public Utility Regulatory Policies Act (PURPA), in what the majority called an effort to "preserve competition" and give states more "flexibility" in implementing the federal rule. Changes, first proposed in September, include allowing states to set the rates paid to qualifying facilities (QFs) at a variable wholesale rate rather than a fixed cost, reducing the size of a project that is subject to such rates from 20 MW to 5 MW, and modifying the one-mile rule to prevent aggregation, among other things.

• Supporters of solar were disappointed with the ruling, which they say could hurt the ability of small solar projects to secure the financing they need, while utility groups said the changes would prevent customers from paying excess costs to make up for the utility paying the QFs.

Dive Insight:

FERC's move Thursday is a win for utilities that in some states will have to pay QFs less for the avoided cost of power than they did under the previous rules. Utilities have long decried PURPA as a mechanism that unfairly benefits solar developers, while leaving customers on the hook to pay higher rates than necessary.

"For years, electricity customers have been paying billions of dollars in excess energy costs as a result of PURPA provisions enacted in the 1970s that allowed well-financed big developers to lock in guaranteed long-term, inflexible contracts at the expense of other more-competitive and cost-efficient renewable energy projects," Edison Electric Institute (EEI) President Tom Kuhn said in a joint statement with the American Public Power Association and the National Rural Electric Cooperative Association. 

"By updating these rules, FERC has helped to ensure that renewable energy can continue to grow without forcing electricity customers to pay a premium to the developers that learned how to game the system," said Kuhn.

State regulators have also expressed their frustration with the law in the past — commissioners from Oregon, Idaho and Michigan agreed that QF rates were a problem for their states during a National Association of Regulatory Utilities Commissioners panel in November. 

Project sizing was another potential problem cited by state regulators. FERC initially proposed projects not be able to qualify for PURPA financing rules unless they were below 1 MW, down from the original 20 MW. State regulators and solar advocates mostly agreed the 1 MW threshold was too small and FERC upped it to 5 MW in Thursday's rule.

Another adjustment FERC made was to modify the one-mile rule to prevent facilities 10 miles apart or further from aggregating as one project. The rule also assumes facilities within one mile of each other are one project. Facilities between one and 10 miles apart can make the case either way.

The one-mile rule is one change the sole dissenting vote, Commissioner Richard Glick, sees as "reasonable." But the other changes actively discourage qualifying facilities from being built, he said.

"One of PURPA's requirements is to encourage QFs. ... After I read the draft final rule, I have a hard time seeing how it actually encourages" QF development, he said. "I think it actually discourages QF development."

Implementation of PURPA at the state level has the potential to be most harmful to qualifying facilities if contract lengths are shortened and avoided costs set too low, as has been demonstrated in Montana and elsewhere.

Glick raised concerns that the rule change fundamentally allows QFs to be treated differently than other utility resources through uncertain financing mechanisms and fluctuating prices. 

"States are now permitted to assess avoided costs of energy ... based on locational marginal pricing or some other liquid price, even in regions without sufficiently competitive markets," he said. "Not exactly the same risk of pricing faced by utilities who get guaranteed rate recoveries."

The solar industry, for its part, was especially frustrated by a lack of long-term contract requirements, one of the main tools states use to kill small solar facilities, Katherine Gensler, vice president of regulatory affairs at the Solar Energy Industries Association (SEIA), told Utility Dive.

"One of the key issues that we've raised for several years is the need to have a long-term contract that is a duration that's reasonably financeable. That's basically what the statute says," she noted. But "FERC has sidestepped any discussion of contract length in its reform package" even though SEIA has found it to be one of the main "mechanism[s] by which to essentially eliminate the QF universe."

FERC Chair Neil Chatterjee disputed the notion that the order would negatively impact the renewable energy industry. 

"I am not at all concerned. The renewable energy industry is thriving throughout this country," he told reporters. "Also, regardless of what you think of PURPA and this final rule, most of the renewable energy projects developed these days are done outside of PURPA. That to me is total proof that renewables can compete in our markets. And I do not expect that to change."

But SEIA, as well as other renewable energy and environmental advocates, say the rule will cause undue harm to an industry essential for job growth in a struggling economy.

"In the middle of economic devastation across the country, we're really missing an opportunity," said Gensler. "Qualifying facilities, small independent power projects are built around the country, and oftentimes in rural places where jobs are scarce. And so making QF development harder, making it more challenging to get a contract or to get the right price for your energy really just means less investment and fewer jobs."