PURPA and the Impact of Existing Avoided Cost Contracts on Hawai'i’s Electricity Sector

by Makena Coffman, UHERO, March 13, 2014

The United States has been trying to reduce its dependence on imported fossil fuel since the 1970s. Domestic fossil fuel supply initially peaked in 1970, and the oil crises of 1973 and 1979 accelerated domestic policy and investments to develop renewable sources of energy (Joskow, 1997). One such policy—passed in 1978 by the U.S. Congress—was the Public Utility Regulatory Policies Act (PURPA).

In this policy brief, we identify the existing PURPA-based contracts in Hawai'i and use a Hawai'i-specific electric sector generation planning model, The Hawai'i Electricity Model (HELM), to estimate the impact that PURPA contracts have on both total system cost and the mix of generation technologies. We study a variety of scenarios under the maintained assumption that the state will achieve the Hawai'i Renewable Portfolio Standard, which requires that 40% of electricity sales are generated using renewable sources by the year 2030.

LINK: Working Paper

Working Paper: Conclusions

In this analysis, we use the Hawai'i Electricity Model to estimate the cost impacts and electricity generation profile on Hawai'i Island of four existing avoided cost contracts. Because the structure of these contracts is not publicly available, we run two “extreme” scenarios – the first where the utility is allowed to minimize electricity generation costs freely (i.e. cannot curtail the generation of electricity from the avoided cost-based IPPs) and the second where the utility is forced to take all generation from the four avoided cost IPPs.

We find that the existing avoided cost contracts are so costly that it can make economic sense to curtail generation from these units and invest in new generation units of the same resource. This includes considerations for payment for new capital. This finding is most prominent for geothermal because the technology is relatively inexpensive and provides a firm, baseload resource for Hawai‘i Island.

We find that the existing four avoided cost contracts raise electricity costs by an estimated 6% in comparison to an optimizing scenario. This would be even greater if contracts are renegotiated rather than building new infrastructure.

The implications of this research are quite intuitive: contracting matters. Although PURPA was well-intended as a policy mechanism to increase the penetration of renewable energy within the U.S., the unintended consequence was that it limited the consumer’s ability to realize lower cost prices from renewable energy sources. This is particularly relevant in Hawai'i, where the cost of generating electricity is relatively high because of dependence on oil. This suggests that the structure of contracts, even long-term fixed-price contracts must be crafted carefully and, ultimately, aim to achieve marginal cost pricing for electricity generation by technology and resource. This is a fruitful area of future research, and will require an understanding of the bidding system for renewable energy projects, as well as issues of risk and market power.

It should also be noted that our results depend heavily on the path of future oil prices. More broadly, it can also vary by the interpretation of what constitutes “avoided cost.” As lower cost energy technologies become available, this reinterpretation of avoided cost may help to lower the payments to existing contracts.

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