In 1978, the U.S. Congress passed the Public Utility Regulatory Policies Act (PURPA), which contained measures to encourage more efficient use of energy resources. Among these provisions was a requirement that utilities buy the output of qualifying facilities (QFs) at the host utility’s avoided cost rate, which is the cost the utility would pay to generate replacement power if the QF did not exist.
Pursuant to PURPA, the Federal Energy Regulatory Commission (FERC) set forth criteria for determining which facilities could receive QF status. PURPA created two categories of QFs:
- Small power production facilities with capacity of 80 MW or less whose primary energy source is renewable (hydro, wind, or solar), biomass, waste, or geothermal resources.
- Qualifying cogeneration facilities that sequentially produce electricity and another form of useful thermal energy (such as heat or steam) in a way that is more efficient than the separate production of both forms of energy. For example, in addition to the production of electricity, large cogeneration facilities might provide steam for industrial uses such as food processing, refineries, and wood processing, or for HVAC applications in commercial or residential buildings. Smaller cogeneration facilities might provide hot water for domestic heating or other useful applications. In order to be considered a qualifying cogeneration facility, a facility must meet certain requirements for operation, efficiency and use of energy output, and be certified. There is no size limitation for qualifying cogeneration facilities. Many qualifying cogeneration facilities use natural gas as their primary fuel although they may use other fuels such as biomass or coal.
Since investor-owned utilities are regulated by the states, FERC left it to the states to define the avoided cost rate. Some states such as California initially set attractive QF rates resulting in significant development of cogeneration facilities (as much as 16% of the California ISO’s supply comes from cogenerators), while other states set much lower rates and did not see much in the way of cogeneration development. The Energy Policy Act of 2005 resulted in changes in rules for new QFs so that in competitive markets they will no longer receive regulatory-set pricing.
Any facility wishing to become a QF must go through a certification process at FERC. Becoming certified as a QF creates certain benefits for the owner including the right to sell energy or capacity to a utility, the right to purchase certain services from utilities such as back-up power at a reasonable rate, and relief from certain regulatory burdens such as the Public Utilities Holding Company Act of 2005 (PUHCA) and certain state utility regulation.