Independent power producers say recent rulings by Michigan regulators provide short-term development opportunities but also more uncertainty in the coming years as they negotiate contracts with a major utility.
On October 5, the Michigan Public Service Commission issued multiple orders related to the prices Consumers Energy pays to independent producers under federal Public Utility Regulatory Policies Act (PURPA) contracts.
One ruling allows for up to 150 megawatts worth of projects to qualify for PURPA contracts at rates that advocates say are more favorable for developers. The rates had been on hold for months as regulators settled questions around avoided costs and contract terms. Avoided costs are the rates paid by law to independent producers based on the price of the utility building the generation itself.
However, it’s unclear how long those terms will stay in place or how much opportunity there will be in the future. In the coming months, the MPSC may allow Consumers to restructure those rates and contract terms in ways that developers say would stifle PURPA contracts. While the most recent rulings apply to Consumers, DTE Energy’s avoided costs are also under consideration.
Clean energy advocates and independent power producers have been closely following the cases for more than two years as PURPA rules could determine the level of third-party solar development in the state. The debate over PURPA and solar development has played out in multiple states in recent years.
Last month, Consumers said not being able to revisit the current avoided cost rates would jeopardize the company’s Integrated Resource Plan, which calls for 5,000 megawatts of solar by 2040. The MPSC disagreed with a judge’s recommendation to exclude Consumers’ PURPA contract requests from its IRP, meaning the avoided-cost rate will be revisited in the utility’s long-term plan.
Consumers is requesting smaller project caps, shorter contract lengths and a shorter capacity planning horizon that some solar developers say would be uneconomic.
Christian Dick, senior director of project development for TerraNavigator, said his company does not have projects within the 150 MW cap that qualify for full avoided costs. He called the rulings a “positive development,” though several questions remain.
“The looming question is, by it being pushing to the IRP, we can’t tell how that’s going to functionally work,” he said, adding that there are ongoing questions about Consumers’ capacity need in the next decade. The IRP will now determine yearly capacity needs. By not showing a need, Consumers would not be obligated to pay full avoided costs.
“If that’s the case, there’s no market,” Dick said. “At the same time, Consumers’ IRP says PURPA (contracts) will have to go through a competitive (bidding) mechanism. That’s literally all we have.”
The closing of aging coal plants and the declining cost of solar has created interest in Michigan for solar developers. Consumers’ long-term IRP, which was widely praised by clean energy groups, shows at least one major utility here is showing a significant interest in renewables.
“It’s very forward-thinking of the utility to recognize that’s the best solution to customers,” said Sean Gallagher, vice president of state affairs with the Solar Energy Industries Association. “We have some bones to pick about how they get there.”
Short-term solar win
While Gallagher called the MPSC rulings a “mixed bag,” regulators put into effect more favorable avoided cost rates that had been on hold for months.
“There are developers who stand ready to go and provide solar power to Michigan customers that costs less than or equal to what they can on the market,” Gallagher said.
Ongoing questions about when projects technically qualify for a standard PURPA contract — known as a “legally enforceable obligation” — will be decided in future cases.
“It’s our view that we can move forward and develop projects for Consumers. At least for future projects we’re not opposed to looking at other ways to calculate avoided costs,” Gallagher said.
Consumers spokesperson Katelyn Carey said avoided costs and PURPA contracts need to be adjusted “to best meet the demands of today’s customers. … Consumers Energy looks forward to working with all interested stakeholders to reach a solution that is best for Michigan. We remain committed to developing cost-effective solar and other renewable energy projects, enabling us to continue to provide safe, affordable, reliable and increasingly clean energy to our customers.”
Margrethe Kearney, staff attorney with the Environmental Law and Policy Center, which intervened in Consumers’ rate cases, said the rulings effectively delay certainty over PURPA contracts by pushing them into Consumers’ IRP, which won’t be finalized for another six months.
“That undercurrent is a troubling,” Kearney said. “Do we really want a commission that isn’t making timely decisions and bouncing issues from one contested case to another?”
If the MPSC doesn’t agree with Consumers’ proposed avoided costs and contract terms, the company still has the ability to withdraw its IRP, while granting the utility’s request could harm developers, Kearney said.
“They’ve suggested that if any part of their plan is not approved, they could pull the whole thing,” Kearney said. “The change in the contract terms would strike a huge blow to independent power producers.”
Laura Chappelle, an attorney representing the Independent Power Producers Coalition of Michigan that includes hydroelectric, biomass and waste-to-energy companies, echoed the cautious optimism of others.
“We certainly have mixed reactions to the Commission’s orders on PURPA,” Chappelle said, adding that the group’s members have been “operating under either expired or expiring contracts for some time now, resulting in significant operational and financial uncertainty. Hopefully the order will result in renewed contracts for these existing (Qualifying Facilities) at fair and nondiscriminatory rates.”
Consumers’ case is being closely followed by solar developers in part because the utility is not calling for new natural gas plants, but rather thousands of megawatts of solar at a time when costs are steadily declining. Multiple companies have shown interest in developing hundreds of megawatts of solar in Consumers’ territory.
In one of its rulings, the MPSC cites the recent decline in renewable energy prices and Consumers’ “unprecedented” plan as key reasons to further study PURPA contracts. When the MPSC began studying avoided costs in 2016, comprehensive energy laws were still being developed, leaving some of the “primary evidence to the avoided cost of power … woefully out of date,” the October 5 order says.
“Now, two-and-a-half years later, the Commission is confronted for the first time with a proposal by a large utility to procure all of its capacity needs until 2040 through competitive bidding, with a focus on solar. This is unprecedented,” the MPSC wrote. “In today’s evolving energy environment, prolonged proceedings are in danger of becoming outdated before they are final.”
With DTE’s IRP due in March, it’s still unclear how PURPA contracts will fill utilities’ generation needs elsewhere in the state. Consumers’ reliance on solar, though, has sent a market signal that large amounts of clean energy is feasible.
“That’s a game-changer,” Gallagher said of Consumers’ plan. “I think you’ll see other utilities try to dig into that — future plans can rely primarily on renewables.”