With the ongoing decline of solar energy costs and now a favorable ruling by Michigan regulators recognizing its ability to produce valuable energy during peak times, advocates say the sector is poised for growth here.
Moreover, solar advocates at the national level have said Michigan could be a model for other states considering changes to “avoided cost” rates that utilities must pay independent power companies for their generation.
On November 21, the Michigan Public Service Commission (MPSC) issued a final order in a case setting avoided cost rates for Consumers Energy, one of two major investor-owned utilities in the state. These are rates utilities pay independent power producers under the federal Public Utility Regulatory Policies Act (PURPA) of 1978, which was passed to encourage domestic renewable energy and keep costs low for ratepayers.
The commission first opened the case in May 2016, and could set the tone for other utilities’ avoided cost proceedings, including DTE Energy.
The MPSC’s ruling marks a significant transition in the way utilities procure energy and capacity from independent producers, which was traditionally based on the cost of new coal plants and favored sources like hydro, biomass and landfill gas. With the first update in decades, avoided costs are now based on the price of natural gas and, in the case of Michigan, recognize the value of solar during peak times like hot summer afternoons.
In its ruling, the commissioners said: “This is indicative of a broader trend in the electric industry, in which the cost of new generation is declining and is more economical than the embedded cost of existing generation.”
The commission also increased the maximum size of projects that qualify for PURPA contracts, from 100 kilowatts (kW) to 2 megawatts (MW), with the ability for companies (or “Qualifying Facilities”) to set 20-year contracts, giving them additional certainty.
“This really marks that in Michigan, solar is now competitive with the costs of other forms of large-scale generation, and its cost is continuing to go down,” said Douglas Jester, a consultant with 5 Lakes Energy who provided testimony throughout the case. “From here on out we see solar as not only a viable but a vibrant alternative to traditional generation, and should see steady development of solar on that basis.”
While rates for each facility vary, Jester said avoided costs were broadly set at 6 cents per kilowatt-hour for hydro and biomass facilities and roughly 9.5 cents per kilowatt-hour for solar. While the MPSC hadn’t changed avoided costs since the 1980s, Jester said this marks a significant departure in the way solar is valued.
Effectively, existing facilities will get more money per their nameplate capacity but “a good deal less” on a kilowatt-hour basis compared to solar, Jester said.
“The existing Qualifying Facilities … are not irrelevant now. They’re going to struggle a bit with the economics of low natural gas prices,” he said.
Margrethe Kearney, a Michigan-based staff attorney with the Environmental Law and Policy Center that also joined the case, agreed.
“At the end of the month, (solar) producers would get less in absolute dollars, but that’s always the case for solar and intermittent technology,” she said. “But when they’re producing — when the capacity is very valuable to a utility — it works out so that when that value is accurately measured like we believe it is here, there’s the avoided cost rate high enough that solar is a viable option.”
Kearney and Jester said even potential tariffs on imported solar panels — a proposal under consideration by President Trump — may not hobble solar’s anticipated growth here.
“It will raise the cost of developing a facility, thereby reduce the profitability given this avoided cost rate,” Jester said. “But because there are economies of scale on a solar array, the right way to think of this is that an increase in the tariff increases the minimum size of an array that can be profitable.”
While some clean energy advocates support the MPSC’s decision, the case is being challenged by a coalition of existing independent power producers, mostly owners of hydro and biomass facilities. They say the lower avoided cost rate will decrease their operating revenue, and some may be forced to close.
In a statement, the Independent Power Producers Coalition said the MPSC order could reduce some avoided cost rates by up to 40 percent.
“In comparison, Consumers Energy’s average price charged to customers continues to climb,” the group said. “In this case, the Commission used a model based on an unrealistic mashup of two different technologies that have not been built, resulting in unsustainable low rates that will force many small power generators to close.”
The group maintains that the MPSC decision discriminates against small power producers, and that it will appeal the decision.
In its order, the MPSC said “given the significant reductions in generation costs, coupled with the creation of the MISO market, the avoided costs established almost 30 years ago are no longer defensible under current market conditions. Thus, if the Commission were to set avoided costs today to cover the higher costs of some existing generators, it would result in ratepayers subsidizing uneconomic generation and would distort the overall market by providing an excessive payment to any new generation that can produce energy and capacity below that price.”
Jester said the impacts will likely vary by the type of facility when their contracts come up for renewal.
“Hydro power doesn’t have that much of an operating cost, so in most cases I think the hydro facilities can continue to operate at least until some significant new investment is required — at that point we’ll have to see,” Jester said. “The biomass plants have a higher ongoing operating cost because of the cost of acquiring the fuel. I think the effect on them will be more quick.”
Kearney said the MPSC’s decision is “looking forward in terms of what companies can do and to spur development. It’s a better situation than Qualifying Facilities operating for years and years and having a price point they have to hit to stay in business.”
Kearney added that the decision still doesn’t fully reflect all of the avoided costs for a utility, such as line losses or hedging against natural gas prices with renewable contracts. However, she is supportive of the MPSC’s decision to revisit those issues in two years.
The three commissioners, who are appointed by the governor, recognized in the order that the energy transition is underway, and that some existing facilities “may compete effectively under the new avoided cost rate; others may not be able to remain financially viable, and others may require changes to their revenue or cost structure.”