Renewable Generators’ Power Sales Rights, Regulatory Exemptions Reduced by US Federal Regulator
A newly released Federal Energy Regulatory Commission (“FERC” or “Commission”) final rule1 imposes substantial changes on renewable electric power production sales and investments. Since 1978, smaller solar, wind, landfill gas, municipal solid waste and other renewable and non-fossil generators holding “qualifying small power production facility” (Small Power QF) status under the Public Utility Regulatory Policies Act of 1978, as amended (PURPA),2 have been eligible to compel certain electricity sales to utilities and for exemptions from certain FERC regulation of corporate, financing and rate regulation under the Federal Power Act, as amended (FPA).3
Tens of thousands4 of Small Power QFs have been developed, ranging in size from less than 1 MW to hundreds of MW but typically limited to a size of 80 MW per Small Power QF.5 The size of a Small Power QF is measured electrically by aggregating together all Small Power QFs that (1) are “affiliated” by means of direct or indirect common ownership of 10 percent or greater, (2) use the same energy input (such as photovoltaic solar) and are (3) located within 1 mile from each other, measured from generating equipment to generating equipment. A Small Power QF that is no larger than 30 MW (including its mileage-aggregated affiliates) is eligible for exemption from FERC corporate, M&A and financial regulation, and a Small Power QF that is no larger than 20 MW (including its mileage-aggregated affiliates) is eligible for exemption from FERC wholesale power sales rate and reporting regulation, including from FERC’s intricate Market-Based Rate application, ongoing disclosure, periodic renewal and periodic and fact-specific reporting requirements.6
Order No. 872 makes a number of significant changes to the entitlements and rights of a Small Power QF, effective as of 120 days from the Federal Register publication of the order (an effective date likely to occur in late November 2020), including the following:
Small Power QF Size Aggregation to Move from 1 Mile to up to 10 Miles
Among the most significant changes to the Small Power QF program in Order No. 872 is that to the definition of Small Power QF. The order provides as follows:
[I]f a small power production facility seeking QF status is located one mile or less from any affiliated small power production QFs that use the same energy resource, it will be irrebuttably presumed to be at the same site as those affiliated small power production QFs. If a small power production facility seeking QF status is located ten miles or more from any affiliated small power production QFs that use the same energy resource, it will be irrebuttably presumed to be at a separate site from those affiliated small power production QFs. If a small power production facility seeking QF status is located more than one mile but less than ten miles from any affiliated small power production QFs that use the same energy resource, it will be rebuttably presumed to be at a separate site from those affiliated small power production QFs.7
By increasing the mileage-aggregation distance that is used to establish the electrical size of a Small Power QF from 1 mile to a rebuttable presumption of 10 miles, it is anticipated that many Small Power QFs that are more than 1 mile but less than 10 miles apart a) will now become 80 MW or larger (when aggregated) and lose Small Power QF status entirely or b) may remain under 80 MW and therefore remain Small Power QFs but will become larger than 20 MW or 30 MW in size and therefore cease to hold exemptions from regulation on which they currently rely.
Residential rooftop Small Power QFs will be subject to slightly more relaxed treatment. A series of prior FERC declaratory orders8 permits a residential rooftop Small Power QF to enjoy exemptions from corporate, M&A, financing and wholesale rate regulation. Order No. 872 largely preserves these exemptions but does so subject to an increase of reporting requirements when the Small Power QF owner acquires or installs additional capacity. However, as to other Small Power QFs, Order No. 872 expressly refuses to grandfather existing facilities either as to status or as to regulatory exemptions.9
Every Small Power QF self-certification will be subject to intervention and protest for a 30-day Federal Register notice period and will have the right to answer protests that may, among other matters, ask that FERC determine that the Small Power QFs be aggregated. Small Power QFs may be able to establish that they are not subject to aggregation by demonstrating that facilities do not share common physical, interconnection, power sales or other characteristics.
Energy Sales Rights to Be Only at Variable (“Time of Delivery”), Not at Fixed Long-Term Rates
The availability of firm, long-term revenue has historically been crucial to financing Small Power QFs—and most other classes of generators. Current FERC regulations allow a Small Power QF to select between pricing established at the time of contracting (the “time of obligation” mechanism) or at the time the power is delivered, with time-of-obligation being strongly preferred by capital providers. Order No. 872 separates capacity payments from energy payments and provides for time-of-delivery payments only for energy in states that elect this option, with capacity remaining subject to time-of-obligation pricing.10 A Small Power QF would continue to be entitled to a contract with avoided capacity costs calculated and fixed at the time-of-obligation. Only the energy rate in the contract or LEO could be required by a state to vary. Existing time-of-obligation contracts would be grandfathered; the variable energy avoided cost provision adopted in Order No. 872 applies only prospectively to new power purchase agreements and obligations.11
Access to Markets
A Small Power QF that is no larger than 20 MW is now presumed to lack access to competitive wholesale power opportunities and is therefore entitled, as of right, to seek PURPA “must buy” avoided cost power sales agreements from utilities. Order No. 872 lowers the rebuttable presumption from 20 MW to 5 MW. A Small Power QF with a net power production capacity at or below 5 MW will be presumed not to have nondiscriminatory access to markets, and, conversely, small power production facilities with a net power production capacity over 5 MW will be presumed to have nondiscriminatory access to markets.12
Proof of Project Viability – Commercial/Financial and Interconnection
Current FERC regulations do not explicitly establish any requirement that, in order to obtain a PURPA “must buy” avoided cost power sales agreement, the Small Power QF demonstrate its commercial viability, including the financial commitment of the Small Power QF’s sponsor(s). Order No. 872 permits each state to establish minimum viability requirements, which may include applying for all required permits, applying for interconnection and paying all permitting and similar fees.13
Order No. 872 does not provide any guidance as to existing power purchase agreements and interconnection agreements that require Small Power QF status, or that rely on Small Power QF regulatory exemptions, when the 10-mile aggregation rule results in an increase in a Small Power QF’s size and causes the loss of Small Power QF status or related regulatory exemptions.
With the release of Order No. 872, FERC is substantially changing the landscape for all but the largest renewable energy projects. Many features of Order No. 872’s implementation are left to the states, but, at press time, not a single state has released any implementation-related rulemaking, and a number of implementation questions remain. Sponsors, lenders, developers and utilities should carefully monitor both state and FERC proceedings, and existing Small Power QF owners should promptly examine whether their facilities are subject to FERC’s new mileage-aggregation risks and resulting losses of legal status and regulatory exemptions.
4 A review of Form 5565 submissions made in the Commission’s e-library system through the end of the 2018-19 Commission fiscal year identified roughly 1,700 new Form 556 Small Power QF self-certifications that were received and docketed by the Commission during that period, and the overwhelming majority of those were for solar Small Power QFs. A similar review of new Form 556 submissions in the 2017-18 Commission fiscal year reveals over 2,000 such filings. A similar review of new Form 556 submissions in the 2016-17 Commission fiscal year reveals over 1,500 such filings (likewise, overwhelmingly for solar Small Power QFs). Given that the Order No. 872 rulemaking was released more than 40 years after the enactment of PURPA created Small Power QFs, it would not be unreasonable to conclude that tens of thousands of solar Small Power QFs have been developed and placed in service. There may be many thousands more Small Power QFs than the Commission’s filing records reflect because QFs of under 1 MW are not required to file notices of self-certification of QF status. 18 C.F.R. § 292.203(d).