This spring, when South Carolina lawmakers unanimously passed the state's Energy Freedom Act, solar advocates saw the legislation as a welcome sign for future development.
Among many provisions, the law eliminated a cap on net metering, tightened processes around utility integrated resource planning and set a minimum contract length of 10 years for some large-scale solar contracts.
“We thought the future was bright,” wrote the Conservation Voters of South Carolina, in a recent blog post. “After all, the legislature gave clear direction that they wanted more competition and more solar in South Carolina.”
But the optimism that swept through the state’s industry earlier this year has collapsed into concern, after the Public Service Commission last week voted to reduce rates for solar projects offered through the Public Utility Regulatory Policies Act, or PURPA. South Carolina is among the top three states for PURPA-related solar development, with about 700 megawatts operating or in development.
South Carolina's solar growth has come in fits and starts. The state installed 401 megawatts of solar in 2017, a figure that plummeted to 147 megawatts in 2018 as utilities neared a 2 percent cap on net metering. But after the governor signed the Energy Freedom Act in May — signaling concrete and continued governmental support for renewables — analysts at Wood Mackenzie forecasted 431 megawatts of installations in 2019.
Now, the new rates and terms mean a “doomsday scenario” for solar, according to the Conservation Voters of South Carolina.
Duke Energy said it expects rates at about $30 per megawatt-hour, and the Solar Energy Industries Association calculated Dominion Energy rates at $21.43 per megawatt-hour. The commission also set contract lengths at 10 years, stricter than the Energy Freedom Act’s 10-year floor and shorter than the 15- or 20-year power-purchase agreements the solar industry prefers.
The terms are unfavorable for the industry and could imperil some projects. Analysts, however, see the changes in less existential terms while still emphasizing their significance.
“This is a setback,” said Colin Smith, a senior solar analyst at WoodMac. “But we don’t see this as something that will completely end solar development in South Carolina.”
Developers vs. utility?
PURPA has become a significant source of tension between solar companies and the utilities they sell power to. Battles over rates and terms have erupted in states including Montana and Michigan.
Recently, those squabbles popped up at the federal level when the Federal Energy Regulatory Commission filed a notice of proposed rulemaking that suggested significant changes in the implementation of the law. Commissioners proposed reducing the allowable size for PURPA solar facilities and changing calculations for the “avoided costs” they’re paid.
Commissioner Richard Glick, who disagreed with the changes, defined the notice as a “policy debate about the continuing relevance of PURPA.”
Generally, utilities have favored cutting PURPA rates and restricting contract terms. While many utilities are crafting their own solar plans, advocates say they’re continuing to make it more difficult for developers to also add solar onto the grid. Both Dominion and Duke have laid out solar plans of their own while receiving criticism for throwing up blocks to third-party development.
The South Carolina changes are “certainly going to give the utilities more power to set the rates they want in the way they want,” said Smith. “Which effectively means they can prevent PURPA development if they want.”
Duke Energy “largely agrees with the commission’s ruling,” spokesperson Ryan Mosier told Greentech Media in an email. The Energy Freedom Act required regulators to set “commercially reasonable” terms for PURPA facilities, and Mosier said the commission’s decision fits the bill.
“The solar industry continues to expand in the South, and we see no reason why that shouldn’t continue,” Mosier said. “In the past, solar adapted to current market conditions and prospered.”
Though environmentalists have criticized Duke for a near-term reliance on natural gas, the utility in September committed to 100 percent carbon-free power by midcentury and a doubling of renewables by 2025.
Dominion has signed contracts for more than 1 gigawatt of solar capacity in South Carolina, a spokesperson told Greentech Media. The utility declined to comment directly on the commission’s order.
The industry disagrees with the utilities’ unworried outlook.
Hamilton Davis, director of regulatory affairs at South Carolina-based developer Southern Current, said the low rates plus the short contracts mean projects won’t be financeable. Though Duke’s rates are higher than Dominion’s, “they’re both a challenge,” he said.
The ruling is especially troubling, according to Davis, in light of the legislature’s attempts to buoy solar in the wake of the VC Summer fiasco — the state invested $9 billion in a nuclear plant it never finished and canceled back in 2017.
“We’ve gone through this very technical or comprehensive set of proceedings to implement the legislation, and we’ve come out...with a worse situation in South Carolina than we had before the legislation even passed,” said Davis.
Dominion’s rates of close to $20 per megawatt-hour would compete with some of the cheapest PPA prices in the country.
“That’s borderlining on some of the lowest contract prices we’ve seen in the country, and the fact of the matter is that not all regions are equal,” said WoodMac’s Smith.
Data from Lawrence Berkeley Lab shows utility-scale solar power-purchase agreements hovering between $20 and $40 per megawatt-hour in the U.S., but prices in the Southeast in the last several years have been reported between $40 and $60 per megawatt-hour.
“Industrywide, I think it’s going to make PPAs and doing deals in regulated markets harder,” Smith said of the rates. “If we’re starting to see a precedent of utilities pushing PURPA rates as low as possible, it’s going to be harder for developers to get projects going.”
While proceedings like FERC’s notice of proposed rulemaking might suggest that PURPA’s relevance is waning as the solar industry matures, analysts and advocates say that’s not the case in many regions.
In the regulated markets where most PURPA projects are located, the law provides a revenue stream after initial contracts end by requiring a utility to take on power, said Smith. Lower rates could put post-PPA revenue for those projects in a precarious position.
“PURPA standard rate contracts are becoming the de facto merchant price that solar projects are going to get after the lifespan of the PPA,” said Smith. “PURPA is essentially the regulated version of merchant risk.”
Solar advocates like Davis say PURPA provides essential options for utility-scale developers in markets like South Carolina where few other routes to market exist. The state doesn’t allow developers to sell directly to commercial and industrial customers or into a wholesale market.
“PURPA is really the only game in town,” said Davis.
“Certainly, the solar industry in South Carolina and elsewhere is focused on the evolution of the market and recognizes that there are a multitude of ways to bring solar and the benefits of solar to utility customers," he said. "But within these vertically integrated monopoly markets, PURPA is still the safeguard against a utility that is preventing other viable options from materializing.”
Davis said legislators intentionally crafted the Energy Freedom Act to be “PURPA-centric.”
The solar industry can ask the commission to reconsider its decision; regulators are still mulling other issues as part of a larger docket in which this ruling was included. The legislature could also seek to provide a policy remedy, though that’s unlikely.
But even if the current ruling stays in place, Davis said the rates are time-limited because the state has an integrated resource plan process slated for 2020, which could shift rates and terms.
“It doesn’t kill the South Carolina market forever,” said Davis. “It just kills it for the moment.”