Alabama Power Stops Payments to Third-Party Power Producers: Will Solar Be Eliminated?

Alabama Power pays less for power generated by third-party power producers and charges those producers the cost of connecting to its power grid.

The rules were approved by the Alabama Public Utilities Commission (PSC) in March, went into effect in April, and apply to businesses that can generate at least 100 kilowatts of electricity.

Alabama Power said in an emailed statement that rates are updated each year based on fuel costs and inflation to keep prices as low as possible.

More from Alabama Reflector

The company said in a separate statement that the new integration cost is part of the monthly energy fee the company pays to energy suppliers that are not Alabama Power customers.

Critics say the move is intended to eliminate competition in the electricity market, especially for solar providers looking to gain a foothold in the central and southern parts of the state and compete with Alabama Power.

“It’s 100 percent a control issue,” said Steve Cicala, an associate professor of economics at Tufts University whose work focuses on the economics of regulation, particularly as it relates to environmental and energy policy. “It’s a business — and they don’t want competition.”

Daniel Tait, executive director of Energy Alabama, an activist group that hopes to increase renewable energy production in the state, said Alabama Power is “first and foremost trying to protect its monopoly.”

“It doesn’t really matter what the source of the energy is,” he said. “Solar is just the most economical and the most likely to challenge that monopoly, which is why you see the fight for solar.”

The Alabama Public Service Commission (Alabama Public Service Commission) said in a statement that the rate changes are reasonable based on data provided by Alabama Power.

“Costs will vary based on the severity of some generation intermittency, which will require additional operating reserves to maintain the reliability of our system,” Alabama Power said in an email.

Some experts, however, believe that the argument about the sporadic occurrence of the disease is exaggerated.

“We’ve gotten really good at predicting solar and wind power,” said Brendan Pierpont, director of electricity modeling at Energy Innovation, a nonpartisan energy and environmental think tank. “These are big industries in the U.S., and there are many gigawatts of wind and solar power being added every year.”

Both Energy Alabama and the Southern Renewable Energy Association, another group promoting responsible use of alternative energy, sought to challenge the PSC’s decision, but the PSC formally denied their request in a written order dated July 22.

Tait said Energy Alabama has decided not to challenge the court order and will wait until next year if Alabama Power asks the PSC to update rates or change regulations.

The Southern Renewable Energy Association said it is still considering its options.

Solar charging

The latest rule changes limit revenues for larger renewable energy companies that have power plants. They are separate from households and smaller solar companies that also generate electricity.

“Utilities have been lobbying for this for a long time,” said Gilbert Michaud, an assistant professor in the School of Environmental Sustainability at Loyola University Chicago. “Utilities are increasingly competing in their testbed and saying, ‘We really don’t want more distributed solar because people are going to buy less power from us. But we still have to maintain all of our power plants and our grid infrastructure.’”

Brendan Pierpont, director of electricity modeling at Energy Innovation, a nonpartisan energy and environment think tank, said the ruling would discourage third parties from investing in renewable energy projects.

“While each solar project has different economic requirements, reducing the price a solar project receives or adding additional fees likely means fewer projects will be built, less investment in the communities that will host those projects, fewer jobs to build those projects, etc.,” he wrote in an email. “If the price a solar project receives is lower than the cost of operating Alabama Power’s own plants, that is also a missed opportunity for that utility’s electricity customers to save money.”

Net

Alabama Power, the state’s largest utility, has nearly 1.5 million customers and delivers electricity to 57% of all customers in Alabama, according to a 2020 report by the Southeast Energy Efficiency Alliance.

In February, Alabama Power filed a document with the PSC, the state’s energy regulator, proposing to cut the rates paid for third-party generation, known as Contract for Purchased Power (CPE), by as much as 50%. In one category, the price dropped from about 7.33 cents per kilowatt-hour to about 3.65 cents per kilowatt-hour.

These numbers are generated using a model, and the values ​​are estimated. This can be subjective, according to Pierpont of Energy Innovation.

“They’re estimating the low costs they’ve avoided, so they don’t have to pay as much,” Pierpont said. “In the meantime, they’re running coal-fired and gas-fired plants that cost significantly more than the rate they would pay under that type of agreement.”

Pierpont said that across the country, power distribution companies like Alabama Power are trying to lower the amount they pay homeowners who feed electricity into the grid via rooftop solar panels.

In addition to lower payment rates, Alabama Power has introduced a Variable Integration Cost of $0.00193 per kilowatt-hour for third-party companies. This would further reduce the revenue these companies receive for power purchased by Alabama Power.

Pierpont found several examples of utilities that charge an integration fee to connect to the system. One is PacifiCorp, an energy company operating in several Western states, and another is Duke, which is based in the Carolinas.

“This approach appears to be quite rare and limited to regions where there are no competitive electricity markets,” Pierpont wrote in an email.

Significant costs

Energy Alabama published a blog post in June saying the fees, which it called a tax, would total $250,000 a year for an 80-megawatt solar farm in Montgomery.

The updated rates, along with the cost of integration, are separate from the fees Alabama Power charges households that install solar panels to help offset their electricity bills.

In 2012, the PSC approved Alabama Power’s application to impose a $5 per kW reservation fee (CRE) on customers with solar panels, often called a rooftop fee. Typically, households that generate about 5 kW on their solar panels pay about $300 per year, or $9,000 over the 30-year expected life of the system.

That fee has since increased to $5.41.

Power companies in other states, including Arizona, are permitted to impose such fees. Michaud of Loyola University in Chicago estimates that residents of nearly a third of all states in the country must pay such a fee. Michaud said the fees are concentrated “in more conservative states, like the South.”

As a result, it becomes less economical for households to install solar panels on their homes because they cover the initial fixed cost of the system from savings generated on electricity bills and extend the payback period for the installation.

“It basically kills the payback period, or at least extends it,” Michaud said. “I’ll do that in my classes and a lot of students say, ‘Hey, this extends the payback period from 10 to 14 years.’ People are paying for a longer period of time.”

“The Interruptibility of a Certain Generation”

Alabama Power, for its part, said the rate changes for third-party energy providers, also known as CPEs, and newly introduced integration costs are necessary to maintain price stability for customers.

“Rate CPE keeps electricity costs stable for customers by ensuring Alabama Power pays a fair price for energy,” the company said in an emailed statement. “This approach, updated annually, protects customers from unexpected price shocks related to fluctuating energy production costs.”

The company said the variable integration cost is not a fee and is included in the calculations Alabama Power pays to third-party producers who are not Alabama Power customers and who sell all of their production to the company.

“Costs depend on the extent to which certain types of energy, such as solar, are intermittent, which requires additional operating reserves to maintain the reliability of our system,” the company said.

When demand for electricity is high, electricity supplied by external suppliers is very valuable. Energy becomes less valuable very late in the evening or very early in the morning, at a time when people are asleep, not very active, and do not need electricity. Smoothing out supply when demand is uncertain is a difficult question.

Timothy Charles Lieuwen, an engineering professor at Georgia Tech University, found that over time, the prices that power distribution companies were willing to pay to third-party power generators had fallen.

“That’s a really tough question: what is the value of the energy they (third-party energy suppliers) are providing,” he said.

Power distribution companies, including vertically integrated ones like Alabama Power, are less willing to buy power from other companies amid growing uncertainty about when customers will need it.

The Public Service Commission cited Alabama Power in an emailed statement.

“The changes to the CPE (Contract for Purchased Energy) rate were determined to be in the public interest because they accurately reflect Alabama Power Company’s latest projected avoided costs,” the statement reads. “Alabama Power’s projected avoided costs are updated annually. The variable integration fee was approved because it mitigates the costs incurred in integrating the intermittent output of the Qualifying Facilities (QF) into the Southern Company System.”

The Public Service Commission said in a statement that allegations that it gave Alabama Power more control over the electricity generation market were unfounded.

“The matters approved in the Commission’s March 5, 2024, Order in Case U-5213 were intended to accurately establish projected avoided cost rates for CPE and to enable the recovery of costs incurred by Alabama Power in integrating intermittent QF production into Southern Company’s system,” the statement reads.

Tait called Alabama Power’s claims of instability “absurd.”

“Basically, when Alabama Power says something like that, it’s, ‘Our engineers are dumber than everybody else’s engineers and they can’t figure this out,’” Tait said. “Alabama Power engineers are just as smart and just as talented as anybody else.”