NEW YORK (Dow Jones)--The North Carolina Utilities Commission last week approved Duke Energy Corp.'s (DUK) plan to own 10 megawatts of solar photovoltaic power systems but declined to allow the utility to recover the entire $50 million of the program's cost through rates.
"On this complex issue (of cost recovery) the parties (the commission and Duke) are sharply in disagreement," the commission's ruling stated. Duke will be able to recover the costs based on how much it would have cost to buy the power from third parties.
This is one of the first large-scale programs for utility-ownership of solar, and the way it's handled has implications for other such proposals.
Duke originally proposed to run a 20-MW, $100 million program but halved it after resistance from public advocates and groups including the Vote Solar Initiative, which said that utility ownership is anti-competitive.
In its ruling on Dec. 31, 2008, the commission agreed to let Duke go forward with its 10-MW program. In addition to the plan to own solar, Duke issued a request for proposals in 2007 to buy solar power from third parties. The lowest bidder was SunEdison LLC, with which Duke entered into a power-purchase agreement. The commission is now limiting the amount recoverable by the utility to what it would have cost Duke to get the same amount of solar from the third lowest bidder in its RFP.
The commission noted that there's a "a very large difference" between Duke's program costs and how much it would be to buy the same amount of power from third parties. Duke said the utility would be getting additional benefits from owning solar that it wouldn't have gotten by buying the power from someone else. These benefits include learning from ownership, testing the effect of distributed generation on its grid and establishing direct relationships with solar panel vendors. While the commission allowed that such benefits could exist, it said that Duke did not quantify the costs of these benefits.
Duke can still attempt to recover the costs down the line, the commission noted, if it shows that these were part of research-and-development efforts and were reasonable and prudent.
For now, the commission ruled Duke's solar program in its entirety would exceed the state's mandate for renewable energy generation. Since Duke would spend more money on self-generating than on buying renewable power from third parties, it would spend the state's allotted resources on fewer renewable energy. This would force the utility to get more energy from fossil fuels, which defeats the purpose of the renewable energy mandate, according to the commission. So that, in a hypothetical example, if it spent $50 million on 10 MW of self-generated solar, but would have procured 15 MW for the same money from other resources, the utility would need to source the remaining 5 MW from fossil fuels because the state has a limit on how much can be spent on renewables.
"If Duke is allowed to recover all its program costs through the REPS and REPS EMF riders, this will not only have an adverse environmental effect but be inconsistent with the goal of minimizing utility expenses and keeping rates down," the commission wrote.
Allowing Duke to recover the full costs could also "encourage other utilities to undertake costly projects that are designed not only to comply with the (state's renewable energy mandate), but also to promote other goals, knowing that the entire costs of the program can be recovered," the commission wrote.
Other aspects of the ruling rejected the request by Wal-Mart Stores Inc. (WMT) representatives to force Duke to offer renewable energy credits to lessees of roof space for solar installations. The commission said that Duke doesn't have to purchase renewable energy credits from customer-generators.
-By Yuliya Chernova, Dow Jones Newsletters; 201-938-4281; Yuliya.chernova@dowjones.com