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Utility Rates for Reverse-Metered Electricity: A Key Obstacle to Renewable Energy Technology Adoption?

With its substantial wind and agricultural resources, Minnesota is well-positioned to develop renewable sources of energy. Advances in the science and engineering of renewable energy technologies continue to increase efficiency ratings and reduce capital costs. However, the transition to a renewable energy economy ultimately depends on well-designed competitive and regulatory structures that allow renewable and nonrenewable energy sources to compete on a level playing field. The 1978 Public Utility Regulatory Policy Act (PURPA) provided an important step in this direction. The act requires utilities to buy back electric power from certain qualifying utilities (primarily nonutility energy generators using renewable energy technologies), providing direct access to the electric grid. It also requires utilities to pay these facilities for “avoided costs”—that is, all costs that the qualifying facilities’ electricity production enabled the utility to avoid. Unfortunately, avoided costs are easy to obfuscate, and a clear inventive exists for utilities to underreport these costs. To the extent that utilities’ offer-rates to buy back electricity are based on calculations that understate the true avoided costs, the renewable energy industry is placed at a decided disadvantage. The forestalled transition to renewable energy sources, therefore, might be traceable to a poorly designed regulatory structure rather than a failure in the economics of renewable energy per se. Arne Kildegaard (Economics and Management, University of Minnesota at Morris) will analyze how Minnesota utilities calculate avoided costs in practice and how these costs should be calculated as a matter of fair managerial accounting practice (considering capital costs, peak demand costs, congestion, and distribution costs). Based on these analyses, Kildegaard will assess the potential economic viability of renewable energy technologies, and provide recommendations regarding the level of fair pricing in Minnesota. Sources of information will include interviews with community partners from the renewable energy research and advocacy community, regulatory personnel from the Minnesota Public Utilities Commission, and marketing and engineering personnel from Minnesota utility companies.

Project Award Date: 
2005-06-30
Reports and related files
Sponsoring CURA Program: 
CURA Contact: 
Edward Goetz Director, CURA (612) 624-8737