Renewable Electricity Purchases: History and Recent Developments
February 1, 1999
Introduction
Numerous proposals at both Federal and State levels to
allow competition in the sale of electricity have sparked
interest in the cost of renewable-based electricity.
Most
of these proposals attempt to "set aside" a share of the
electricity market for renewables,
recognizing that
renewable electricity generation (except for hydropower)
is more costly than conventionally generated electricity.
Environmental concerns about emissions from fossil
fuels have also stimulated increased interest in renewable
energy. Thus, for a variety of reasons, there is a
compelling need to know how much the United States is
paying for renewable electricity, both in aggregate and
on a cost per kilowatthour basis, compared to electricity
from other sources. By analyzing the prices utilities have
paid nonutilities to purchase renewable-based electricity,
this chapter provides some basis for addressing that
question.
This chapter presents an overview of renewable purchased power prices with an explanation of the role of the Public Utility Regulatory Policies Act of 1978 (PURPA). Beginning in the 1980s, PURPA stimulated renewable-based generation. It also created the "qualifying facility" status for renewables a designation that guarantees those facilities the right to sell electricity generated to a utility at favorable prices. Prices which utilities paid for power purchases from "nonutilities" are given by facility qualifying status, fuel type, State or region, and Standard Industrial Classification (SIC) Code. Although the analysis used to develop them made maximum use of available data, there are significant limitations on interpreting these prices. These limitations are discussed in Appendix A. It is also essential to point out that this chapter contains information on the price that utilities have paid to purchase renewable electricity not on the cost that nonutilities incurred to produce that electricity.
Overview
Nonutilities
provided 13 percent of total utility power
purchases in 1995, almost 25 percent of which was
renewable-based. Thus, renewable energy provided
only a small fraction (3 percent) of U.S. utility power
purchases.
However, this market is the major outlet for
nonutility renewable power, as utilities purchased 53
percent of renewable electricity generated by nonutilities
in 1995. Historically, this electricity was sold at much
higher prices than the national average electricity price
per kilowatthour.
In 1995, U.S. retail prices (i.e., the
priced paid by the end-use customer) averaged 6.89
cents/kilowatt hour. By comparison, utility
purchases from other utilities,
which are made on a
competitive basis and may be regarded as reflecting
"wholesale" prices, averaged 3.53 cents/kilowatthour.
The average price utilities paid nonutilities was significantly
higher, averaging 6.31 cents/kilowatthour
nationwide. Higher still was the price utilities paid
nonutilities for renewable-based electricity.
The average purchase price of electricity from nonutility
qualifying facilities
using renewable energy was 9.05 cents/kilowatthour some 31 percent higher than the
average U.S. retail price.
California accounts for 39 percent of the purchases from renewable nonutility facilities. California’s significant role is due to the availability of renewable resources and extensive support traditionally offered to renewable energy. Although utility purchases of nonutility renewable-based power represent just 15 percent of California’s total, they are important because of the high "wholesale" price paid for them 8.04 cents/kilowatthour compared with other purchases. This price, however, must be put into perspective. California has expensive electricity in general when compared with the rest of the Nation: 9.91 cents/kilowatthour in 1995, versus the U.S. average of 6.89 cents/kilowatthour.
A look at renewable nonutility purchases shows striking differences as well. California utilities paid an average of 12.79 cents/kilowatthour to nonutility qualifying facilities using renewable energy, but only 3.33 cents/kilowatthour to nonqualifying renewable nonutilities, which were entirely hydroelectric facilities.
Although no precise measure of the incentives provided to renewable energy is available, analysis of price data in this chapter suggests one order of magnitude of the incentive subject to nontrivial data limitations. In some cases, such as California, the incentive seems large for electricity from particular renewables when prices utilities paid to those facilities were compared to those paid to non-renewable facilities. The reason high prices were paid to renewable-based nonutilities is that in the 1980s when many utilities signed long-term (10 year) PURPA-based contracts, it was presumed that natural gas prices would rise to much higher levels than they are today.This raised the utilities’estimatesof avoided costs.