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New Ruling Opens Up 400 GW Renewables Market

Delta-Montrose Electric Authority (DMEA) is not only responsible for keeping the lights on and the books in the black. As a member-owned rural electric cooperative in southwest Colorado, DMEA is also responsible for living up to the seven cooperative principles, including principle 7: concern for community.

So when hundreds of Delta County residents were laid off in a series of coal-mine closures, DMEA staff and leadership were looking for ways to meet their fiduciary responsibilities while also staving off an economic downturn. One obvious source of economic development was local renewable power. Nestled at the base of the Rocky Mountains on Colorado’s Western slope, Delta and Montrose counties are blessed with abundant sunshine and swift streams, rivers, and irrigation canals.

The majority of DMEA’s power comes from Tri-State, a Denver-based cooperative that provides generation and transmission services to 44 distribution co-ops in five states. The long-term contract with Tri-State allows DMEA to self-generate up to, but no more than, 5 percent of the co-op’s annual electricity use. In 2015, DMEA already sourced just under 5 percent of its electricity from local hydroelectric and solar, and therefore, when DMEA wanted to green its energy supply, reduce energy spend, and promote local economic development, the co-op was constrained in its options.

DMEA took the matter to the Federal Energy Regulatory Commission (FERC), which confirmed last Thursday that DMEA can source local and renewable electricity beyond its 5 percent self-generation limit by signing power purchase agreements with independent power producers. The ruling has major implications for the nation’s 905 electric cooperatives and 830 municipal utilities as well as the for-profit and nonprofit generation and transmission providers that serve those co-ops.

TRI-STATE VS. DMEA FERC CASE

In 2015, DMEA filed a petition with FERC requesting the ability to sign power purchase agreements with independent power producers under the Public Utility Regulatory Policies Act of 1978 (PURPA). PURPA requires utilities to purchase electricity from any distributed and renewable qualified facilities (QFs) that can provide power at a price equal to or slightly above the avoided cost for electricity. DMEA argued that PURPA trumps their all-in contract with Tri-State, and that DMEA should be allowed to purchase power from cost-competitive qualified facilities. In June 2015, FERC ruled in DMEA’s favor.

In response to the FERC ruling, Tri-State created a tariff that would have penalized Tri-State-member distribution co-ops for purchasing power from QFs. Tri-State argued that it should be able to recover lost revenue from distribution co-ops through this penalty. Tri-State filed a petition to FERC requesting approval of this cost-recovery mechanism.

FERC’s Thursday ruling clearly rejected Tri-State’s petition, stating:

Tri-State’s petition would effectively undo Delta-Montrose’s statutory obligation to purchase from QFs and correspondingly limit QFs from selling power to Delta-Montrose at negotiated rates.
—FERC, June 2016 Commission Meeting Summaries

IMPLICATIONS FOR RURAL ELECTRIC COOPERATIVES AND MUNICIPAL UTILITIES

This ruling has two significant implications for rural electric cooperatives (co-ops), municipal utilities (munis), and the generation and transmission providers that serve those utilities (G&Ts).

1. Distribution co-ops and municipal utilities are no longer constrained in their ability to source cost-competitive local power

Most distribution co-ops and small municipal utilities are party to an all-in contract with a generation and transmission provider such as Tri-State. Typically those contracts include a clause that allows local utilities to self-generate up to around 5 percent of annual electricity use.

In recent years more distribution utilities are sourcing electricity from local clean power. Co-ops and munis are sourcing local renewable electricity to meet member demands for clean energy, hedge against fossil-fuel price increases, promote economic development, and save money.

In recent years as renewable energy costs have plummeted, these local distributed projects have become an opportunity for co-ops and munis to save money. For example, RMI’s Shine Initiative recently procured solar power on behalf of Kit Carson and Springer electric cooperatives (New Mexico), showing that distribution co-ops can procure solar at prices below all-in power prices charged by G&T providers. Now that renewable energy prices rival those of wholesale power, the co-op and muni renewable electricity market is poised to explode.

One particularly popular segment with munis and co-ops is community-scale solar. Community-scale solar is distribution-grid-connected solar PV sized between 0.5 MW and 5 MW. RMI predicts that the total co-op and muni markets for community-scale solar could exceed 10 GW through 2020.

Rural electric co-operatives and municipal utilities sell 987 TWh (million MWh) per year. Twenty gigawatts of solar would serve 5 percent of that consumption. Now that self-generation caps have effectively been lifted, the continuing decline of renewable power prices could open up a 400 GW potential market.

Clearly it would be a huge challenge to integrate 400 GW of solar into co-op and muni systems, but recent decreases in the price of battery storage are helping to overcome integration challenges. The FERC ruling effectively removes a policy barrier that has substantially constrained solar build-out. This means that the co-op and muni community-scale solar markets could be even larger than previously predicted.

2. G&Ts need to embrace a distributed energy future

Whereas distribution co-ops and municipal utilities can greatly benefit from the FERC ruling, it could be disruptive to generation and transmission providers (G&Ts). G&Ts make significant investments in transmission and generation infrastructure, and they depend on long-term revenue from member utilities to recover those costs. If G&Ts don’t coordinate with their member co-ops and munis, they could be left with billions of dollars of stranded assets.

This FERC ruling is a clear sign that generation and transmission providers will need to work collaboratively with member co-ops toward a cleaner, more distributed energy future. Models are emerging for this type of partnership, such as Dairyland Power, which is working with member co-ops to develop a portfolio of 15 MW community-scale solar.

G&Ts are natural aggregators and in most cases they have good, trusting relationships with their members. They are, therefore, well positioned to facilitate a transition to a low-cost distributed energy future. It remains to be seen if G&Ts will update their business models to keep up with evolving market realities.

Co-ops and munis nationwide can glean insights from the New York REV process in which multiple stakeholders are coming together to proactively address the transition to a distributed energy future.

GROWING THE MARKET

The FERC ruling has opened up a huge potential distributed renewable energy market. Renewable energy buyers and sellers both have a role to play in enabling this market to achieve its full potential.

  • Co-Ops and munis need to educate themselves on their options: Many co-ops and munis have great opportunities to competitively procure low-cost distributed renewables. They should educate themselves on current prices for solar and wind, third-party ownership options (e.g., PPA), self-generation laws, and policies at the G&T, state, and national levels. Now that renewables can be procured cost competitively, co-op staff and boards have an obligation to their members to educate themselves on renewable energy options.
  • Developers need to offer straightforward prices and system packages: Often developers contribute to buyer confusion by offering opaque or confusing prices for community-scale renewable resources. Developers can grow revenue, decrease customer acquisition costs, and better access the market by creating standardized packages and pricing options.
  • Developers and buyers together need to come together to minimize system cost: Buyers and sellers both play a role in decreasing the total cost of community-scale solar. They share cost-reduction levers and can effectively come together to reduce cost through things like effective contracting, rational delineation of development activities, volume aggregation, and lean system design.

RMI’s Shine Initiative is helping to accelerate solar procurement in the community-scale market. Practically, RMI is supporting community-scale buyers with procurement, helping developers better access this market, and spreading the word on emerging insights. RMI and Delta County–based Solar Energy International (SEI) are planning a buyers’ boot camp this fall to assist motivated rural electric cooperatives that wish to procure community-scale solar. RMI and SEI are recruiting co-op participants for this event.

Back on Colorado’s Western Slope, DMEA is preparing for more local electricity. According to DMEA renewable energy engineer Jim Henneghan, DMEA plans to comply with PURPA and purchase power from QFs. A 2.4 MW small hydro project on an irrigation canal is approaching completion, and DMEA has published avoided cost-data on its website for other interested QFs.

This new local power can promote local economic development and help DMEA save its members money. Thanks to a 38-year-old law, DMEA is now better able to live up to its mission to serve its members and serve its community.

Image courtesy of iStock.