A group of independent power producers are vowing to appeal a recent Michigan Public Service Commission ruling affecting how their facilities are compensated by Consumers Energy for the electricity they produce.
On Nov. 21, the three-member MPSC ruled in a case involving “avoided costs” paid by Jackson-based Consumers Energy (NYSE: CMS) to small, independent power producers. When their existing contracts expire, the new rates would take effect and would lead to lower payments, according to the Independent Power Producers Coalition of Michigan. The group represents biomass, hydroelectric and waste-to-energy facilities across the state.
Under the Public Utility Regulatory Power Act (PURPA) of 1978, utilities are required to purchase independent producers’ electricity if it is equal or below what it would cost the utility to do itself. Nearly 50 facilities across the state are under avoided cost contracts with utilities.
Based on the new formula adopted last month, Kent County’s waste-to-energy facility in Grand Rapids would receive about $2 million less per year in payments from Consumers Energy. That works out to between 6 and 6.5 cents per kilowatt-hour, which is roughly 2 cents less than the facility receives now, according to Darwin Baas, director of the Kent County Department of Public Works.
“Which is disappointing,” Baas said. “It’s a kick to the gut because Kent County waste-to-energy has been providing a very comprehensive solid waste management system.”
Instead of basing avoided costs on the price of electricity from coal plants, the new methodology will be based on the cost of natural gas. In the MPSC order, commissioners wrote that this is a reflection of the changing energy system and could likely favor solar as new qualifying systems rather than hydro, biomass or waste-to-energy. The rates will be revisited again in two years.
“Given the significant reductions in generation costs, coupled with the creation of the (Midcontinent Independent System Operator) market, the avoided costs established almost 30 years ago are no longer defensible under current market conditions,” the MPSC said in its ruling. “Thus, if the Commission were to set avoided costs today to cover the higher costs of some existing generators, it would result in ratepayers subsidizing uneconomic generation and would distort the overall market by providing an excessive payment to any new generation that can produce energy and capacity below that price. This is not consistent with PURPA, and it would not be equitable or reasonable.”
Kent County’s contract with Consumers goes until 2022, Baas said, giving the county “a little breathing room.” If the MPSC ruling were to hold up, Baas said the county would have to raise waste-handling rates from $45 per ton to $55 per ton to maintain 2016-2017 revenues.
“But we’re not done yet,” Baas said, referring to appeal options through state courts and potentially the Federal Energy Regulatory Commission.
Other facilities may not have the luxury of time, however, and may be forced to close as their contracts come to an end.
The Cadillac News reported last month that local officials in Manton just north of Cadillac held an impromptu meeting after the MPSC ruling on what closing a Viking Energy biomass plant would mean, particularly with the loss of badly needed jobs in the area. The McBain plant’s contract with Consumers is set to expire at the end of 2018, according to Viking Energy.
Gary Melow, executive director of Michigan Biomass who spoke on behalf of three members who will be affected by the new rates, called the new formula and methodology “unrealistic” because it doesn’t accurately reflect future natural gas plant costs and undervalues existing plants’ supply. While Michigan Biomass has not taken a formal position on the PURPA ruling, Melow said all three plants are at risk of closing in the coming years, taking with them a $15 million fuel market and a state program that supports scrap tire disposal.
“The thing is, there’s no benefit to anybody by those things going away,” Melow said. “Our belief is that through this entire process, the actions of the utilities and the MPSC are discriminatory under PURPA. We think ultimately the Public Service Commission had a number in mind and they wanted an avoided cost structure that worked for intermittent and baseload generation.”
The Consumers PURPA case comes as other utilities across Michigan, including DTE Energy, will have their methodologies changed.
“The federal law at the center of the PURPA discussion was established to address a national energy crisis nearly 40 years ago,” Consumers spokesperson Katelyn Carey said in a statement. “Since then, the market has changed drastically and adjustments were needed to best meet the energy demands of today’s customers.”
Consumers had reportedly claimed that the cost of buying energy from independent producers was too expensive compared to other, declining costs of energy. The utility reportedly said its customers were subsidizing about $300 million over the past 10 years through avoided cost contracts.
“We just call foul on that,” Baas said, reflecting the opinion of other members of the Independent Power Producers Coalition.
Not all clean energy groups are in opposition to the MPSC’s ruling, however. Particularly, advocates for solar energy say the new methodology — along with federal tax credits — will make solar more appealing for developers to operate under avoided cost contracts. Consumers does not currently have any existing avoided cost contracts for solar.
Even with the potential for tariffs on imported panels, which President Trump is now considering, observers say Michigan is still poised for solar growth.
While independent producers say the MPSC didn’t act in the best interest of ratepayers, advocates at the national level have said Michigan is a model for other states as they revisit the topic, largely because it is forward-thinking about the next types of generation.
Colin Smith, a solar analyst with the Boston-based firm GTM Research, said Consumers Energy’s proposed “green tariffs” that allow corporations to more easily procure renewable energy could also drive avoided cost contracts.
“It’s an interesting platform for utility-scale solar to take off in Michigan,” Smith said. “There are incentives not only for utility-scale solar but projects also built with a single off-taker. That would enable a lot more expansion as well.”
While the new avoided cost method may incentivize wind and solar over the existing facilities, “I don’t think they’ll be left out entirely. In some sense (existing facilities) are competing sources (with solar), but there’s only so many ways for hydro and biomass to be built. They’ve maxed out the ability to do some plants, so it becomes more diverse.”
Still, Smith said the existing facilities will be needed to provide “baseload” renewable energy, meaning it’s not intermittent based on the sun shining or the wind blowing.
“The frustration for us is that solar absolutely has a place and should be part of Michigan’s portfolio for energy production,” Baas said. “But it’s not baseload. We’re sacrificing and putting our baseload generation at risk. Are we going to look back and regret it? I would think so.”
EDITOR’S NOTE: This story has been updated to clarify that Gary Melow was speaking on behalf of three members of Michigan Biomass, not the group itself, which has not taken a formal position on the PURPA ruling, and that PURPA requires utilities to purchase independent producers’ electricity if it is equal or below the cost for the utility to do itself.