The Regulation of Third Party Solar PPAs

The United States commercial power industry started on a small scale in the late 1800’s with Thomas Edison’s work leading to the first commercial power plant in 1882.[1] Early in the Twentieth Century, users of electricity often generated their own power, but as the need for electricity grew, the need for the economies of scale that could be provided by utility generation and distribution became more important, and the first utilities were created.[2] To avoid the overbuilding of infrastructure, utilities were recognized as natural monopolies and regulated by state agencies.[3] The goals of utility regulation are to (1) avoid overbuilding generation and transmission capacity, (2) protect consumers, (3) ensure access to electricity to all consumers in the service area, and (4) ensure the reliability of the grid.

More recently, distributed solar power generation, where power is generated on the same site where it is consumed, has become more popular.  At first, distributed solar power generation equipment was owned or leased by the owner of the land or building on which it was installed, but around 2003 a novel contractual arrangement called a solar power purchase agreement (solar PPA) was created.  In a solar PPA, “the site host neither owns nor leases the solar array; but instead agrees to buy all of the electricity generated by the system for a specified term.”[4] The project developer may either own or lease the solar panels, installs the solar panels on the host site, and operates and maintains the solar array throughout the entire term of the solar PPA.[5] As the owner of the solar array, the project developer becomes the owner of the renewable energy credits that are created as the solar array generates power, unless the solar PPA contract says otherwise[6].  Additionally, the developer receives the tax benefits that come with ownership of the solar array[7].  The benefits of a solar PPA to the site host are quite attractive:  there are no upfront costs, the ongoing payments that are similar or slightly less than what the host would have been paying the utility, and there is no need to worry about claiming the tax benefit.  “In short, the [solar] PPA model effectively provides the site host what it presumable really wants – solar power at an affordable price, rather than solar equipment that it must operate and maintain.”[8] Since its introduction by SunEdison around 2003, the solar PPA model has come to be the dominant means to finance large commercial distributed solar power arrays.[9] Solar PPA systems operate within a net metering scheme such that when the solar panel generates more energy than is required by the customer load, the meter in effect runs backwards as the left-over electricity flows from the on-site generation facility to the electrical grid.[10] As the meter runs backwards, the electricity that goes on to the grid is recorded to offset the customer’s bill at the end of the billing period.[11]

Recently, however, the solar PPA model has faced a number of legal hurdles as states grapple with the question of whether to regulate solar PPA providers as public utilities.  To date, six states (Colorado, Hawaii, Massachusetts, New Mexico, Nevada, and Oregon) have used PUC decisions and regulations to determine that solar PPA are legal and five of those six are unequivocal in stating that solar PPA developers are not to be regulated as utilities.[12] Five states (California, Colorado, Michigan, New Jersey, and New York) have statutes that explicitly exempt solar PPA developers from regulation as public utilities.[13] In addition to the states that are unclear or silent on the issue of the legality and regulatory treatment of solar PPAs, at least two states-Florida[14] and Texas[15]-have legal roadblocks in place that will prevent the solar PPA from being used in that state.

Solar PPA developers should not be considered public utilities because the solar PPA concept is vastly different from the traditional public utility model and public utility regulations are a poor fit for solar PPA.  The most important difference between the solar PPA industry and the naturally monopolistic public utility industry is the competitive nature of the solar PPA industry.[16] The solar PPA model will likewise not interfere with universal coverage because it merely supplements or offsets the host site’s grid use.  Lastly, there is no need to ensure reliability because the host site will only pay the developer for the energy generated by the solar array and the host can always fall back on grid power.  Furthermore, treating solar PPA providers as utilities will lead to an absurd result because of the outage reporting requirements of most states.[17] The sun sets every day, so solar PPA providers would have to log and report each daily “outage,” creating a burdensome amount of unnecessary paperwork.  States should continue to follow the example of California and Colorado in allowing solar PPAs to operate without the unnecessary burden of utility regulation.

-Geoff Heaven, Notes Editor


[1] National Academy of Engineering, Electrification History 1 – Early Years (last visited Jan. 28, 2010).

[2] Energy Information Administration, The Changing Structure of the Electric Power Industry 2000: An Update 5 (2000), available at http://www.eia.doe.gov/cneaf/electricity/chg_stru_update/update2000.pdf.

[3] Id.

[4] Mark Bolinger, Financing Non-Residential Photovoltaic Projects: Options and Implications 17 (2009) (emphasis in original).

[5] Id..

[6] Id.

[7] Id.

[8] Id. at 18 (emphasis in original).

[9] Id..

[10] Stephanie Watson, How Net Metering Works, http://science.howstuffworks.com/net-metering.htm (last visited Apr. 12, 2010).

[11] Id.

[12] See eg. Decision No. C07-0676, In the Matter of the Application of Public Service Company of Colorado for Approval of Its 2007 Renewable Energy Standard Compliance Plan and for Waiver of Rule 3661(F)(I), Colorado Public Utilities Commission Docket No. 06A-478E, 26-33 (August 9, 2007) [hereinafter Colorado Decision].

[13] See e.g. Cal. Pub. Util. Code § 218, 2868; and N.J. Stat. § 48:3-51.

[14] PW Ventures, Inc. v. Nichols, 533 So. 2d. 281, 283 (Fla. 1988) (holding that the phrase “to the public” in the Florida definition of “public utility” includes two party consumption-based PPAs and that PPA providers are regulated as public utilities).

[15] Interstate Renewable Energy Council, Texas Adopts Phase Two Net Metering Rule, http://irecusa.org/2009/01/texas-adopts-phase-two-net-metering-rule/ (last visited Apr. 12, 2010).

[16] Bolinger, supra note 47, at 18 (“Besides SunEdison, other developers pursuing the PPA model include MMA Renewable Ventures, SunPower, Regenesis, Solar Power Partners, Tioga Energy, Recurrent Energy, Soltage, MP2, Chevron Energy Solutions, EI Solutions, Helio Micro Utility, and others.”).

[17] See 4 Colo. Code Regs. § 723-3(3250)-(3253) (2009).

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