By Jonathan Coumes*
Michigan’s renewable energy future may turn on an issue now before the Michigan Public Service Commission (MPSC). The MPSC is setting the amount of renewable energy that one of the state’s largest energy producers will have to buy from third parties.If the decision tips one way, Michigan ratepayers could be facing increases in payments and delay in the growth of renewables. If the other, Michiganders could be looking at an immediate increase in the state’s portfolio of solar electricity, consumer savings, and a blow struck against the monopoly power of Michigan’s energy suppliers.
A federal law called PURPA, the Public Utility Regulatory Powers Act, passed during the energy crisis brought on by the oil embargo, has been forcing American power companies to pay for renewable electricity since the 1970s.The third-party power companies covered by PURPA are known as qualifying facilities, or QFs. If a QF in a given market can produce renewable electricity at less than the avoided cost of the regional giant—the cost for that company of producing one more megawatt of electricity—then PURPA forces the big company to buy from the smaller one instead.In Michigan, the large utilities and the QFs signed the last set of long-term power purchase agreements (PPAs) around 20 years ago. Those agreements are coming due, and in the interim the energy landscape in the state has seen a sea change. The cost of solar energy has plummeted, but so have the big producers’ avoided costs—natural gas electricity is up to 2.65 times cheaper than coal.The way PURPA will work in Michigan has been the subject of two cases that have been ticking away at the MPSC for more than two years.
Those cases are U-18090 and U-20165, which govern the future of Consumers Energy its relationship to PURPA. Consumers serves electricity to 67% of Michigan residents and is by far the largest producer in the state.The major sticking point in front of the MPSC is how many megawatts Consumers will have to take on from the QFs. That question got more pressing after the passage of Public Act 341 in December 2016.341 mandates that Michigan power companies move 12.5% of their portfolios into renewables by 2019 and 15% by 2021, a 50 percent increase over the previous mandate under Public Act 295 of 2008.For Consumers, that’s nearly 300 additional megawatts over the next three years.Under PA 341, Consumers also has to come up with an Integrated Resource Plan, an IRP, which lays out how much and what kind of new capacity it will develop over the next ten years, including how much of that capacity it will purchase from QFs under PURPA.
The thing is, while we’re waiting for the finalization of Consumers’ IRP, the company has already announced that it has zero need for extra capacity from QFs under PURPA over the next ten years.If Consumers is right that it requires no additional power from the QFs, then QFs would have to reduce their prices substantially to force a contract under PURPA. All parties agree that this would preclude any new contracts with QFs.Plenty of QFs are already lined up in Consumers’ PPA queue,and the pre-IRP announcement is aimed at keeping Consumers from having to sign any new PURPA-obligated contracts before its IRP comes out—if the company is right about needing no capacity—and closing the doors on those QFs for the next ten years.
Consumers made the no capacity announcement back in 2017, and in a December ruling that year, the MPSC limited the number of new PPAs Consumers would have to sign to 150MW worth of capacity, well below what it will need to meet its renewable requirements by 2021, but more than what it will need by 2019. The QFs mounted a challenge to the 150 MW figure early in 2018.Consumers’ response was that any objections would be moot after it released its plans for its IRP in a July MPSC hearing, but that hearing also got mired down in additional litigation.
The MPSC’s ruling on 5 October of this year let the 150 MW figure stand, notwithstanding the motions for rehearing filed against it.The MPSC has said that the Consumers cases will function as a test case for how other Michigan utilities will operate under PA 341 and PURPA, so the future of the state’s renewables and what that transition will cost rate-payers all depend on two factors. First, whether Consumers will suffer itself to enter into 150MW of PPAs before it publishes its IRP, and second, whether the MPSC will allow Consumers to claim the right in that IRP to build nearly 300MW of renewable generation from scratch when there are QFs beating down the door to generate that power immediately.
The stakes for Consumers, its stockholders, and Michigan’s ratepayers are as high as for the QFs. Each state allows its monopolistic power utilities to make a specified profit—their return on equity, or ROE. In Michigan, it’s around ten percent.The ROE is based on all Consumers’ infrastructure investments combined, so while it can never make more than ten percent, if it increases its total infrastructure investments, it increases its total profits.And that means that if Consumers constructs all 300MW of new capacity itself, it’s allowed to charge rate-payers that much more. But if PURPA forces Consumers to pass energy from extant QFs to its customers, its total investments and its ROE stay the same, and ratepayers pay no more. Instead of allowing Consumers to build new solar plants, forcing Michiganders to foot the bill, and passing the profits to its shareholders, PURPA would force Consumers to supply more renewable energy at no extra cost.
Once the MPSC approves Consumers’ IRP, if that plan still holds that the company needs no additional capacity from QFs, then there’s one more issue to litigate. PA 341 mandates that the plan has to be the most “reasonable and prudent” means of achieving the company’s capacity needs.Since two factors the MPSC will have to weigh in approving the IRP are “competitive pricing” and the “diversity of generation supply,” it will be an open question whether Consumers’ attempt to cut new PURPA contracts out of its plan will pass muster.
While all parties are concerned with getting electricity to Michigan households and all want to make money doing it, only Consumers is necessarily incentivized to charge ratepayers more year after year. The QFs, bound by the avoided cost rate, are not.
Jonathan Coumes is a Junior Editor on MJEAL, he can be reached at firstname.lastname@example.org
The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.
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Public Utility Regulatory Policy Act, 16 U.S.C §§ 2601-2645 (2010).
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Mich. Comp. Laws § 460 (2018)
Mich. Comp. Laws § 460.1028 (2018)
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Mich. Comp. Laws § 460.6t (2018)
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Mich. Comp. Laws § 460.8(a) (2018)
Mich. Comp. Laws § 460.8(a)(iii)-(iv) (2018)