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Defining "Avoided Energy Cost"

As is the case with many other states following federal mandates, Georgia law requires utilities and Electric Membership Cooperatives (EMCs) to pay solar producers like me "avoided energy cost" for the electricity that my array feeds into my EMC's grid.  It does so with a "net metering" law.  What is net metering?  Watch this "net metering" video, which incorporates a Feed-In-Tariff  (I feed my solar array's electricity into the local grid and by published Tariff my EMC declares what it's paying me for it). Then check out this page on Net Metering.

The "avoided cost" concept is expressed in O.C.G.A. § 46-3-56, which is titled: "Requirement to purchase energy from customer generator; safety standards and regulations."  Subprovision (a) says:

An electric service provider will only be required to purchase energy . . . from an eligible customer generator on a first-come, first-served basis until the cumulative generating capacity of all renewable energy sources equals 0.2 percent of the utility's annual peak demand in the previous year; provided, however, that no electric service provider will be required to purchase such energy at a price above avoided energy cost unless that amount of energy has been subscribed under any renewable energy program.

(Emphasis added).  I am the "first-served" (and only) Solar PV customer for my EMC.  Others may join me until the electricity that we feed into that EMC's grid "equals 0.2 percent of the utility's annual peak demand in the previous year. . . ."  But the EMC need not pay us more than "avoided energy cost."

But that code section, which Georgia was required to enact by compulsion of federal law (more on this below), does not define what "avoided energy cost" means -- a point discussed here, and also in my comments here.  Read, too, this piece on value and cost. Some might argue that it should be "wholesale."  Hence, if my EMC can buy electricity from a gas or coal or nuclear (brown powered) plant for, say, $.04/KWH, then that's what it should pay me -- because my Solar PV-generated electricity, once fed into my EMC's grid, helps it "avoid" paying that "brown" power producer that $.04/KWH.

Others would argue that my EMC should pay me more because
my array uses no water and spews no pollution into our environment when it produces electricity.  Hence, they would insinuate some sort of "carbon tax" into the process (e.g., assign a $.04/KWH "pollution value" to the "brown power" and then make my EMC pay me $.08/KWH to "level the playing field" and thus encourage more green power like mine).  Also, I'm saving my EMC various components of long and short term, base-through-peak-load capacity and generation costs, etc., so I should, this argument goes, also be compensated for that.  Too, the brown-power sellers are subsidized (yes, "politics"), which enables them to artificially lower their prices to green power's disadvantage (sidenote: my free web-book, Free Market Solar Power argues against any subsidies to either brown or green power).

But who even decides the what is an "avoided cost" and how much it should be?  federal or state officials?  Should there be 50 sets of cost-formulas, thus FITs?  This paper discusses that, and no one seems to know the definitive answer.  Federal regulation, by the way, flows from the Federal Energy Regulatory Commission (FERC), while state regulation is expressed through State statutes and State Public Utility Commissions (PSCs) or Public Utility Commissions (PUCs).  Here's the Los Angeles, California Feed-In-Tariff announced in June, 2013.

An argument over whether states can require utilities to pay greenies like me more than "avoided cost" was captured in a 2-Justice dissent from a 1985 U.S. Supreme Court decision not to review
Consol. Edison Co. of N.Y. v. Pub. Serv. Comm'n of State of N.Y., 472 N.E.2d 981 (N.Y. Ct. App. 1984) (state cannot set a purchase price for "green" power above the purchasing utility's avoided cost), appeal dismissed, 470 U.S. 1075 (1985); see also Midwest Power Sys., Inc., 78 FERC ¶ 61,067, at 61,246-48 (1997) (same); Cal. Pub. Utils. Comm'n, 132 FERC ¶ 61,047, at P 64-66 (2010) (same).

A recent decision, noted below, is sending legal ripples across the nation, and perhaps could influence Georgia FITs, which can vary because Georgia allows utilities and EMC's to "negotiate" and set different net-meter rates (Georgia Power's been paying $.17/KWH hour, while my EMC's  been paying me only $.07/KWH).

But to better understand that development, pause briefly for a little more background.  As noted, the Georgia code section excerpted above was compelled by federal law -- the Federal Power Act (FPA), 16 U.S.C. § 791a - 825r. (1935), and the Public Utilities Regulatory Policies Act of 1978 (“PURPA”), Pub. L. No. 95-617, 92 Stat. 3117 (codified as amended in scattered sections of the U.S.C.).  In that regard,

Congress enacted [PURPA] to reduce the dependence of electric utilities on foreign oil and natural gas, in part by encouraging development of alternative energy sources. Power Res. Grp. v. Pub. Util. Comm'n of Tex., 422 F.3d 231, 233 (5th Cir. 2005). PURPA sought to promote cogeneration and small power production facilities, including renewable energy providers such as wind and solar generators. 16 U.S.C. § 796(17)(A) (defining “small power production facility”). These types of facilities are known as “qualifying facilities” or “QFs.” 18 C.F.R. § 292.101(b)(1) (defining “qualifying facility”). Congress also required the rates paid for this electricity “be just and reasonable to the electric consumers of the electric utility and in the public interest.” 16 U.S.C. § 824a-3(b)(1). Thus, rates paid by electric utilities to QFs may not exceed the incremental cost of the utility's alternatives to the QF power. 16 U.S.C. § 824a-3(d) (defining “incremental cost of alternative electric energy” as “the cost to the electric utility of the electric energy which, but for the purchase from such [QF], such utility would generate or purchase from another source.” This is also known as “avoided cost.”).

JD Wind 1, LLC v. Smitherman, 2010 WL 3703119 at * 1 (W.D.Tex.  Sep. 14, 2010); see also Clearing the (Jurisdictional) Air on Feed-in Tariffs, 42 NO. 2 ABA Trends 7, 7 (2010). 

My reading of federal law and regulations fetches me a clear definition of a "Qualifying Facility" (QF). My Gillis Springs, Georgia farm's Solar Photovoltaic
array constitutes a QF under PURPA. 18 C.F.R. § 292.204 (2010).

But nothing clearly defines what can figure into, if not be excluded from, "avoided costs."

Complicating the matter further, the Californians cut a new groove in this area (as in, setting a higher "avoided cost" rate):

The California Public Utility Commission has been considering a feed-in tariff and recently sought comment about the scope of its authority to set rates.

Southern California Edison asserted in response that California's authority to establish a FIT is limited to a rate that would reflect “avoided cost,” citing Midwest Power Systems, Inc. and Southern California Edison Co.

The California Attorney General's Office argued in response that the state has significant discretion in determining what constitutes avoided cost and that, among other things, a state like California with a strong policy to address climate change can consider the cost of obtaining renewable energy in calculating avoided cost. The Attorney General also asserted that state renewable portfolio standards should be considered in the avoided cost calculation. Thus, if a state has a 30% RPS, the Commission could (perhaps must) assess avoided cost in light of the perhaps higher overall cost of generation given the RPS requirement.

FERC's initial order addressing the proposed California feed-in tariff for Combined Heat and Power (“CHP”) facilities issued in July 2010 reaffirmed FERC's earlier decision by limiting feed-in tariffs to a rate no higher than the avoided cost of the purchasing utility. However, on October 21, 2010 issued an order clarifying its July order that appears to provide new latitude for states to more broadly interpret what constitutes avoided cost. In the October order FERC stated that avoided cost rates must reflect prices available from all sources “able to sell to the Utility.” Thus, the costs of power acquisition in the context of state laws such as renewable portfolio standards must be considered in calculating avoided costs. FERC also allowed states to include a limited number of “adders” or “bonuses” that reflect the actual cost of energy generation including the costs of transmissions upgrades or environmental remediation costs. Thus, although state feed-in tariffs are still limited to rates that do not exceed avoided cost under FERC decisions, states appear to have new room to calculate avoided costs in a way that will likely allow higher rates in a number of cases, especially in states with high renewable portfolio standards such as those adopted by California (33% by 2020), Minnesota (25% by 2025), and Colorado (30% by 2020).

The Role of Feed-in Tariffs in Supporting the Expansion of Solar Energy Production, 41 U. Tol. L. Rev. 943, 965-66 (2010) (footnotes omitted; emphasis added). 

That FERC decision is also explained here, and figures into this Order Instituting Rulemaking on the Commission's Own Motion into Combined Heat and Power Pursuant to Assembly Bill 1613., 2011 WL 1589687, *1589687+ (Cal.P.U.C. Apr 14, 2011), and Order Granting Limited Rehearing of Decision (D.) 10-12-055, on the Issue of Ghg Compliance Costs, Modifying Decision, Denying Rehearing of Decision, as Modified, and Denying Motion to Stay (Decision 11-04-033 April 14, 2011).

The area is complicated by the fact that administrative decisions are laden with power industry jargon, along with the fact that it's unclear where state and federal jurisdiction begins and ends.  "FERC under the FPA regulates wholesale sales of electricity to ensure that the rates charged are reasonable and just. States have some authority under the [PURPA] to require utilities to purchase energy from qualified renewable energy facilities at rates that do not exceed [the] avoided cost that would otherwise be incurred in acquiring additional capacity. States have authority to regulate retail rates for electricity. This complicated regulatory structure makes it more difficult to establish feed-in tariffs in the United States in comparison to countries where the national government has more direct authority over utility price structures."  Legal Framework for Solar Energy at 33.  Even a description of one state's regulatory scheme, apart from the federal overlay, can be exhausting.

What all this means is that that it's unclear how one would litigate or legislate clarity, much less a higher reverse-meter (FIT) payment for a QF like mine.  But good arguments can be made to liberally construe "avoided energy cost" when resolving the net meter rate that my local EMC pays me (currently $.07/KWH).  Of course, it's a monopoly, so the more it pays me the higher the de facto tax on me and my fellow ratepayers. 

My book argues for a fair and reasonable avoided cost rate, one that would emerge if the electricity market was de-subsidized, analogous to what happened to air fares and telephone usage rates following de-regulation of those market sectors.  With excessive subsidization, even of green power, the free market is not free to sort out what is the best product (will the i-Pad, produced from an unsubsidized company -- Apple -- be knocked off anytime soon?  If so, will  it be because HP or Google will have come up with a truly better product or because the U.S. Government "bribed us with our own money" -- what happens with tax credits and other forms of subsidies -- to buy it?).

Meanwhile, there's another side of the "avoided cost" equation: What about what my EMC can charge me in terms of fees, such as any claimed "administrative costs?" for connecting my array into its grid?  That's just as important since what my EMC can give me with one hand it can take away with another.  Federal regulation authorizes only justifiable "administrative" costs:

(7) Interconnection costs means the reasonable costs of connection, switching, metering, transmission, distribution, safety provisions and administrative costs incurred by the electric utility directly related to the installation and maintenance of the physical facilities necessary to permit interconnected operations with a qualifying facility, to the extent such costs are in excess of the corresponding costs which the electric utility would have incurred if it had not engaged in interconnected operations, but instead generated an equivalent amount of electric energy itself or purchased an equivalent amount of electric energy or capacity from other sources. Interconnection costs do not include any costs included in the calculation of avoided costs.

18 C.F.R. § 292.101(b)(7) (emphasis added).

How is that calculated?  Am I privy to see what my EMC's used to calculate it, including documentation?  See Whitehall Wind, LLC v. Montana Public Service Com'n, 223 P.3d 907 (Mont. 2010) (
Evidence that electricity provider had not submitted avoided cost data to Public Service Commission (PSC) within the past two years, and the lack of evidence that would have allowed district court to determine whether PSC failed to require provider to produce current avoided cost data before computing standard avoided cost tariff, was sufficient to support district court's grant of electricity producer's request to augment the record with evidence of provider's more current avoided costs, where producer predicated its motion for augmentation on the basis of an alleged procedural irregularity). 

MY EMC says it spent $350 on a bidirectional meter for me, and that it doesn't "trust" its RF signal, so it must send a meter reader out each month.  This justifies, it contends, nicking me an "administrative fee," but I don't see it on my bill (is it hidden?).

Meanwhile, note how funky accounting by utilities to shortchange producers like me.  And note how on May 1, 2011, my EMC altered its tariff (with me still its only Solar PV customer) to quietly (it didn't tell me) slip in the right to charge me a "Facilities Charge" that it is "based on the total incremental cost of all facilities installed by the Cooperative, including additional metering equipment, transformers, protective devices, controls and monitoring equipment times the Cooperative's monthly Fixed Charge Rate [that it charges every member]."  5/1/11 Tariff at page 1

San Diego Gas & Electric wanted to charge solar power producers a special fee for “equipment and maintenance impacts due to reverse power flow, equipment and maintenance impacts due to operational voltage regulation, voltage fluctuations due to intermittent generation export to the system, and distribution system capacity impacts."  It kicked up a lot of controversy, and in fact has been declared illegal. 

Here is a complex power point presentation on Avoided Costs, and here's a real smart friend's 8/28/12 response to it (I'd asked him to analyze it for me because it went over my head):

That's a very interesting power point. The guy is basically breaking down the old-school mechanics of power dispatching. My boss used to use tables and such to do that sort of math on the power system he ran. An economic dispatch model like the one described in that power point only captures the generation cost portion of the total costs of generating electricity.  The location of the power is neglected.

1a. Imagine if three factories were competing for a delivery contract. The factory gate price at two of the factories may be lower than the third but if the third is located next to the customer it could win the contract overall because it has lower delivery charges. 

1b. But electricity is a 24 hour commodity that's immediately perishable. You have to take a step back and think about how delivery charges can change throughout the day. Delivery charges change due to traffic on the lines. The third factory in my example above may be able to deliver electricity cheaper during the day because it can bypass congested roads but at night when the highways are clear the first two factories may have better economics. 

With electricity you have to imagine the co-optimization of the generation costs and the delivery costs. 

Here's the tricky part...  If I have a generator in my city and I'm supplying power to local load you have to think about how that lowers the amount of power that needs to be shipped into the city from the suburbs. This is a non-linear effect. By this I mean if my local generator generates 100 units of electricity it actually displaces 106 units of electricity that would have be generated and shipped into the city from remote plants. The extra 6 units of electricity are called line-losses. 

Now, if I'm thinking of co-optimizing generation costs and delivery costs I can decide to spend a little less on transmission lines in favor of slightly more expensive generation assets. I can do this because the peak traffic on the transmission lines between the suburbs and the city is lower in a case where I have a local generation asset. This means I can build a two lane power-line highway rather than a three-lane highway. 

I find it helpful to think in terms of car traffic and highways. City planners want to make cities livable so the need to build large people moving highways is mitigated. The planners pass rent controls and allow for high density building in specific areas to accomplish this goal. 

When you talk about finding a price for solar you have to think about the costs of the roads that you don't need to build if you price solar correctly. The analysis is tres complicated and is best left to experts. I'm probably not doing it much justice here. 

Austin Energy recently came out with a Residential Solar Rate that does this. It's a 5 to 10 part analysis that looks at the incumbent generation costs (natural gas, coal) and how those generation costs evolve over time, line losses, capacity values, environmental benefits and so on. Austin came up with a value of solar of around 12 cents/kWh. That's pretty reasonable for a new power source. 

Hope this helps. 
In thinking about pricing electricity, and in response to my question whether he believed a free market could efficiently price it, he (on 8/28/12) wrote this:

I'd warn you there's really no pure market in electricity. The people who trade electricity are the same types who trade stocks - I deal with [name deleted] traders at work. They have no problem with using inside information and so on. These guys have flexible ethics. Remember my example about traffic and highways. Well... A standard tactic of energy traders is to try to create traffic on their competitor's highways so they can deliver product on theirs. I think I've mentioned this to you before.

I'm a reliability side guy. Operators like me used to take care of the economics but deregulation took that out of our control. Eventually we may go back to this model.

I'd argue that the "market" is a effervescent concept when it comes to electricity. If you look at things from one angle it's there but from another it's gone. In my home town we had a farmers market every Thursday. There'd be produce, nuts, honey, street meat vendors, back massages and all the standard stuff. All the city had to do to set up this market was rent out booth space, cordon off the streets and redirect traffic. The market sprung up from there. This is a prototypical traditional market... Electricity markets don't work this way. Electricity markets have to be built and run, to some degree, like the machines that supply the market.

In many ways electricity markets are socialistic constructs just as highways are. I say we should build the market however we want to serve our needs. What's better... letting the energy traders control the market or spreading out control?  I think the latter is better but I wouldn't describe it as free - again, I'd describe it as built and controlled.

Freedom is a slippery idea with electricity. Should we be free to buy cheaper electricity today if it means we're screwing ourselves next year? Some would say yes... Others no... I think you'd want to buy cheap electricity today but also hedge a bit to ensure you have reasonable electricity in the future. How do you build this incentive to hedge into the market? One way is to put in a car-pool lane for solar, wind or whatever other favored generator.

Here's something you should look into...  Find out what the electricity from the new nuke plant in Georgia is expected to cost. It's going to be a tricky number to find and you'll probably get some BS answers but it will be worth your effort. I think what you'll find is that the plant there is getting a gigantic car-pool lane. We read about all these subsidies that wind and solar get. That one plant in Georgia is getting about 2 years worth of aggregate federal solar/wind subsidies - about $6 billion I'd guess. Why are they getting away with it? Crony capitalism is part of it but hedging is another... At a high level there's something to be said for maintaining some minimum level of nuclear acumen. Like I've said before though... you don't need to build 2500 MW to do that - 800 would have been enough in my mind.

But I think we should just give solar the same sort of carpool lane and see how that works. If that nuke plant is going to get 10 cents/kWh then solar deserves at least the same and maybe a little more... The plus more part has to do with the reduced line losses, reduced need for transmission and so on.

The utility is going to argue that solar deserves less than the nuke because of the intermittency... They don't want to release control. It's all tricky tricky...

Meanwhile, read the cost debate in this guy's blog and my response (final comment):

A pleasure learning about improvements in brown power (coal, etc.) energy production.

When you get down to it, Donn, we’re arguing about Big Government distorting the free market (I join in your aversion to that) and, frankly, cost. That is, the cost of power generation.

A lot goes into the word “cost.”

Look at the “avoided cost” term as defined by utilities, for example:

Consider also the embedded energy and pollution cost of making solar panels (some say 1-2 year payback on the energy consumed in making them; also, there is hazardous and other waste generated in solar panel and BOS manufacturing process).

Compare that to coal extraction, processing, transportation, burning and overall pollution costs. Ditto for other brown power (natural gas, liquid fuel, nukes, etc.) costs.

Plus, thanks to politics, we must also factor in and out the subsidies each gets, and the costs of those subsidies in dollar and political (corruption-breeding) terms (see Solyndra, Fisker Automotic, Range Fuels).

It’s very complicated.

And many omit various cost factors to pump the numbers behind the particular energy source that they favor.

Some say add some pluses for solar because it avoids pollution costs, and minuses for brown power (anything that pollutes — coal, nat-gas, nukes). Some (like you) not.

In fact, guys like you say Solar must be “charged” some grid-reconfiguration costs. At the same time, you’re silent about charging brown power for pollutants (yes, coal’s gotten better, but it still craps on us, right? And it still involves a lot of strip mining and other land-degenerating costs, yeah?).

So yes, we must study “cost” down to meticulous detail, so that we may perform an intelligent cost-benefit analysis.

That, in turn, drives debates like this.

To that end, look at the unmistakable bias running through your entire analysis: You want to charge solar with grid-reconfiguration and other collateral costs, but you don’t want to charge brown with collateral pollution costs, much less land-disturbance costs like destroying mountains and leaving strip-mine gashings behind.

That’s a political argument, no? I mean, we bespeak politics when we talk about whether to use the power of the state (via regulation, taxation, etc.) to impose a cost on a particular form of energy production (e.g., a fee for every square meter of radioactive waste to be buried under a mountain somewhere) and whether to de-subsidize (which affects net cost) a particular energy-production process.

And it’s far too simplistic to say hey, let “market forces” decide when in fact huge portions of the energy market have NEVER been free-market driven. For both of my homes I’m stuck with monopolists who dictate what I must pay, and my PSC does not ban political contributions from them to PSC candidates; nor does Georgia law prevent brown power interests from greasing state legislatures on state energy policy, nor does Congress ban their bribologists from infecting that branch of government. New energy competitors thus face more than a free market in which to compete — they must lobby (bribe) their way past turf-protecting regulations and tax preferences.

Politics. It’s a potent game. I encourage you to be more up front about yours and the way in influences your perception of cost, then your analysis of it. I say the same to greenies, many of whom seek to obscure renewable energy’s collateral and hidden costs (many, I find, are completely oblivious to grid-reconfiguration costs, which is why guys like you are especially valuable).

That gets me back to my appreciation for your blog posts. You provide an enormous benefit with posts like this by elucidating a “cost” — green energy’s variability and grid-stress costs, of which I’ve collected research (including this very post) here.

Through discussions like yours I learn a lot. You’ve inclined me to agree with you, for example, about whether many will adopt what sounds like costly demand-side-management techniques like ice-based devices. But I’m betting (Photomofo’s working on this) most will welcome “Smart Appliance” software, for maybe a dollar or more in cost, that enables things like Time of Use pricing-optimized operation (hence, my dishswasher runs, after I’ve pushed the button, at that precise time of the night when electricity prices are at their lowest).

I invite my readers to email me their "avoided cost" and "administrative expense" research to me at freemarketsolar@juno.com  Meanwhile, check out this map on grid-parity pricing.