Michigan’s PURPA Overhaul – Updating Avoided Cost Calculations And Expanding Standard Offer Contracts

by Stoel Rives LLP
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For the first time in almost 30 years, the Michigan Public Service Commission (MPSC) is overhauling its implementation of PURPA. The last time the MPSC evaluated Consumers Energy Company’s (Consumers) avoided cost methodology, the Midcontinent Independent System Operator (MISO) had not been created and the generation market was vastly different than it is today. The MPSC’s changes to Consumers avoided cost methodology and eligibility for a Standard Offer contract are sparking interest in further renewable development in Michigan.

Just before Thanksgiving, the MPSC issued an order approving new avoided capacity costs (of $117,203/MW-year or $140,505/MISO zonal resource credit (ZRC)-year) for qualifying facilities (QF) selling to Consumers.  In addition, earlier this year, the MPSC found that the appropriate method for calculating Consumers’ QF avoided capacity and energy costs is a hybrid-proxy method based on natural gas costs (a shift from the prior methodology based on a coal proxy).  The MPSC also affirmed that any renewable energy credits produced by the QF belong to the QF (regardless of whether the QF is selling to Consumers under the Standard Offer or a negotiated power purchase agreements).

Importantly, the MPSC has also expanded the eligibility for Consumers’ Standard Offer PURPA contract to QFs with a capacity up to 2 MW (from the previous low threshold of 100 kW). At the election of the QF, the Standard Offer contract has a term up to 20 years. Under the Standard Offer, the QF has the option to receive an energy rate based on an as available rate, a LMP Energy Rate Forecast (with specific rates specified in the tariff), or a Proxy Plant Variable Rate Forecast (with specific rates specified in the tariff). Capacity payments are to be based on the number of ZRCs that the QF can supply to Consumers for the applicable MISO resource planning period (June 1-May 31) – whether or not Consumers actually obtains ZRCs for such QF capacity – multiplied by the applicable capacity rate for such units of capacity (as mentioned above, at the rate of $140,505/ZRC-year). The number of ZRCs are determined based on the project’s nameplate capacity as modified by MISO’s effective load carrying capacity (ELCC) calculations (as described in the relevant MISO Business Practice Manual) which credits capacity based on historic on-peak availability. There is still an open issue regarding the early termination provision in the Standard Offer contract regarding the QF’s obligation to reimburse Consumers for replacement capacity costs and the provision of financial security.

The MPSC also announced that it will next review Consumers’ avoided costs in two years, so it won’t be another 30 years before there are Michigan PURPA updates.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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