Any way you slice it, dealing with power consumption, generation and their related costs in Alaska is a tricky business. Especially in winter, as natural light wanes, electricity demand can change rapidly throughout the course of the day, necessitating major shifts in the sources of power supplying the grid — and therefore the cost of producing that energy. In light of that reality, the recent ruling requiring power companies to make energy purchasing decisions on a closer-to-real-time basis is a good one — it will require that the companies be nimble in sourcing their power and increase potential opportunities for independent power producers.
The decision, made last week by the Regulatory Commission of Alaska, would cause a substantial shift in the way power companies do their accounting on the cost of power. Until now, utilities have used an annual avoided cost model to determine the price they would pay potential independent energy producers for power. Over the course of an entire year, that average cost of power trends relatively low, thanks to low-cost energy sources such as coal (or, in Southcentral Alaska, natural gas) that provide a substantial percentage of the utilities’ power. That means when negotiating with potential independent power suppliers, the utilities can say that annual average is what they’re willing to pay for power.
Under the RCA’s new ruling, which will go into effect in April 2016, utilities will have to use a different metric for determining what they will pay for power — “incremental avoided cost,” which in layman’s terms means they will have to purchase power from independent producers not just if the proposed cost is cheaper than their annual average, but if it is lower than the average cost of power for the utility at the hour it is being generated. In other words, if power from a source such as the Delta Wind Farm could offset a higher-cost form of energy, such as oil being burned to satisfy a temporary spike in electric load, then a utility such as Golden Valley Electric Association would have to do so.
The potential negative from the ruling would be if utilities paying for power at any rate cheaper than their moment-to-moment average were to drive up the overall cost of power, since that moment-to-moment average might well be higher than the annual power cost average. But in practice, utilities tend to not purchase from independent power producers at all under the current arrangement, making it hard for projects such as the Delta Wind Farm or the Fire Island wind project near Anchorage to start up or expand. And under the new ruling, utilities will have to make a financial case to the RCA in the event of rate disputes with power producers, ensuring an objective look at power purchasing costs and decisions.
The regulatory commission’s ruling may yet be appealed, but if it stands it will be a step forward for independent power producers — particularly those seeking to provide electricity from alternative and renewable sources. Reducing the barriers to participating in Alaska’s energy production marketplace should be a win for the state’s renewable energy goals and cost-conscious power consumers alike.
— Fairbanks Daily News-Miner,