QF "Avoided Cost” May Be Based on the Cost of Renewable Generation Only

The FERC “clarifying” order in California Public Utilities Commission, 133 FERC ¶ 61,059 (2010), has significant implications for avoided costs calculations across the country.  For the many states with statutory renewable energy portfolio standards, FERC has opened the door to potentially substantial avoided cost schemes to compensate qualifying facilities (“QFs”) for the development of renewable resources based solely on the cost of the renewable resources.

A. Avoided Costs May Be Calculated Based on a Limited Subset of Resources Available to Sell to the Utility.

In the order, FERC clarified its previous Southern California Edison Co. decision so as to give states more flexibility in determining avoided costs for QFs under PURPA.  Although FERC has not prescribed a specific methodology for the states’ calculations of avoided cost, it was generally understood after the Southern California Edison Co. decision that FERC required avoided costs to be determined by a market-based approach considering bids from all sources, regardless of the generator’s characteristics.

In this rehearing and clarification order, FERC “clarified” that if only certain resources are available to sell to the utility, such as renewable resources, then avoided cost may be determined based solely on the cost of that subset of resources.  For example, if a state requires a utility to procure a certain percentage of energy from generators with certain characteristics (e.g., 10 percent from renewable resources), the utility’s calculation of avoided cost in connection with meeting the renewable energy requirement may be based only on generators with those characteristics.

FERC’s clarification clears the way for the California Public Utilities Commission to implement a multi-tiered avoided cost rate structure.  For instance, QFs that are combined heat and power (“CHP”) generating facilities could receive compensation based on higher, long-run avoided cost rates reflecting more stringent efficiency standards, non-CHP QFs could receive compensation based on lower short-run avoided costs, and renewable resources could receive compensation for the costs of avoided renewable resources.

B. Avoided Costs May Include Only Costs That Are Actually Avoided, And May Not Include Bonuses or Adders.

In addition, FERC reiterated its position that avoided cost cannot include a bonus or adder above the calculated full avoided cost.  However, FERC clarified that if a state’s avoided cost calculation is based on additional actual costs that are avoided, such as the expected costs of upgrades to the transmission or distribution system that the QFs will permit the purchasing utility to avoid, such an adder or bonus would constitute an actual avoided cost that is permissible under PURPA and FERC’s regulations.

With respect to environmental externalities, FERC also commented that states may separately provide additional compensation to QFs outside of the context of PURPA through the creation of renewable energy credits (“RECs”).

To access FERC's order in California Public Utilities Commission, 133 FERC ¶ 61,059 (2010), please click here.

For more information, please contact Toni Frost at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or Joe Fina at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 202-296-1500.