One step toward the value of local energy – an analysis

by Bill Powers

What are the avoided costs for an electrical utility that purchases its electricity from another utility? The Federal Energy Regulatory Commission (FERC) states in Docket No. EL11-39-002 (March 21, 2013) regarding a case brought before the FERC by the Sweckers against Midland Power Cooperative:

“The Sweckers in turn ask that the Commission set up procedures to determine what rate Midland pays its wholesale supplier and to declare that Midland’s avoided-cost rate should be based on what Midland pays its full-requirements wholesale supplier. We find no merit in the Sweckers’ contention that Midland’s avoided cost must be the price at which Midland purchases power from its supplier, rather than supplier’s avoided cost (which Midland states that it is using as its avoided cost). In Order No. 69, the Commission determined that the avoided cost of a full requirements customer is the avoided cost of the full requirements customer’s supplier because it is the supplier that avoids generation when the full requirements customer purchases from a QF. The Commission has consistently followed this approach.”

Consequently, even though roughly half the electricity sold in SD is by electrical utilities that generate none or next to none of its electricity, it is not the cost that they avoid in purchasing electricity from a small power production facility, but the cost avoided by the ultimate electricity generation facility that is relevant when computing avoided costs. This understanding of avoided cost is apparently consistent with the original intentions of PURPA. What this means is that SD cooperatives and municipalities reap disproportionate benefits from small power production facilities (QFs).

For example, consider the case for the twelve members of Missouri River Energy Services (Beresford, Big Stone City, Brookings, Burke, Faith, Flandreau, Fort Pierre, Pickstown, Pierre, Vermillion, Watertown and Winner). Their avoided costs are 2.83 cents/kwh. But Missouri River purchases about two thirds of its energy. Hence, it is not their avoided costs that matter, but the avoided costs of their ultimate electrical providers, mostly that of the Western Area Power Administration. However, the rates that Missouri River’s members pay Missouri River for their electricity is on the order of 5 cents/kwh. It is cheaper for them to purchase electricity from the QF than to purchase it from Missouri River. Why then would such nonregulated electricity utilities not want more small power production facilities to come online?

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