Independent Power Producers in the USA – among them Apple

In a nutshell: 

At the beginning of August this year, the US energy regulatory authority (Federal Energy Regulatory Commission, FERC) granted Apple Energy, LLC, a subsidiary of Apple, Inc., the permit to act as energy supplier on the US power market. Thus, the company will now be able to sell, among others, excess electricity it generates. This decision is a good occasion to reflect on the last years' trends and the status quo of IPPs in the USA and to assess opportunities for and risks to German enterprises.

Independent Power Producers in the USA 

The news that Apple obtained the permit to act as an IPP on the US market made headlines. Since Apple generates electricity mainly using solar and wind power, the renewable energy industry was particularly happy to hear this news. Because it shows the potential available in the industry. But the Silicon Valley tech heavyweight is not the only and, above all, not the first company from outside the energy industry to take this step. As early as 2010, Google applied for and was granted an authorisation from the US energy regulatory authority certifying that it meets the criteria to act as an IPP. Thus, both companies are authorised to sell excess electricity they generate, provide transmission capacities and offer ancillary services, such as for example the service of monitoring electricity consumption in commercial real properties.

In the light of the latest news about Apple, we wish to give you an overview of IPPs in the USA. In this context, we will also address the regulatory environment and the opportunities for and risks to German enterprises. The comments on the regulatory environment refer to federal law only.

The share of IPPs in the electric power market

According to the information released by the U.S. Energy Information Administration, electric power production by IPPs between 2005 and 2014 developed as follows:

^{Table 1: Electric power production by Independent Power Producers by segment (figures in 1,000 mWh)4}

(Click to enlarge)

Notably, the share of renewable energies almost quadruplicated from 3.6 percent to 13.7 percent and production increased by more than 400 percent in this period.

Regulatory environment

Energy Policy Act of 1992 (EPAct) and § 292 of the Code of Federal Regulations. In response to the oil crisis of 1973/1974, the PURPA put an end to the monopoly of conventional utilities in the USA, which spurred the development of IPPs. In order to help them to withstand competition from these utilities, special regulations were enacted enabling IPPs access to the market and relieving them from certain regulatory burdens. For investors, it is important to know what prerequisites must be met for the regulations to apply in their case.

One of the most important prerequisites is that the planned power production facility must have the status of a Qualifying Facility (QF). This qualifying status is assumed in the following cases:

• The power production facility has a capacity of less than 80 MW and at least 75% of the total energy input is from energy sources such as biomass, waste or renewable energy. The use of fuel may not exceed 25 percent of the total energy input of the facility but, basically, its use should be limited to the minimum amounts of fuel required, e.g. to maintain the supply of power in emergencies.

• The power production facility is a cogeneration facility; one of the essential prerequisites for this type of a power production facility to qualify as a QF is that the use of the facility must be more productive and beneficial than if the power and heat were generated separately. In addition to this prerequisite, other conditions must be met, which however, for lack of space, will not be discussed in this article.

It is also important to know the authorities’ approach as to what they treat as a single facility. For example, several wind turbines can be understood to constitute a single facility if they are arranged at a certain distance from each other. If the capacity of a facility exceeds 1 MW, it must be certified for the qualifying status. This can be done either by filing a notice for self-certification or by applying for FERC certification. The main difference between both options is that Commission certification involves a fee of USD 21,480 to be paid for facilities with a capacity of less than 80 MW and of USD 24,310 to be paid for cogeneration facilities. In both cases the FERC may revoke the qualifying status of a facility if the Commission finds that the facility does not meet the applicable requirements for qualifying facilities (anymore).

Benefits of QF status 

The main benefits can be summarised as follows:

• Purchase obligation of conventional utilities: As a rule, conventional utilities are obliged to purchase energy from certified QFs. However, the utilities can be exempted from this obligation if certain requirements are met. One of the requirements is that QF must be enabled access to a marketplace where energy is traded (the so-called “wholesale markets”). For investors, it is important to know that “wholesale markets” have not been established in all regions of the USA. In regions where no such market exists, negotiations must always be conducted directly with local utilities; this can be difficult because despite the favourable regulations applicable to IPP, in the end it is the rival companies that negotiate with each other.
• Purchase of services from utilities by QFs: QFs are entitled to purchase energy from the large utilities, if needed. However, utilities can seek recourse from the QFs' entitlement and be eligible for exemptions, if they meet certain requirements. QFs are also entitled to connect to the grid of a large utility.
• Relief from significant regulatory burdens for certain QFs:
  - Public Utility Holding Act of 2005
  - Provisions on rates, on organisational and financial aspects of utilities on the state level
  - Individual sections of the Federal Power Act
  
  

Whether regulations are applicable or not depends on the QF category. E.g., power production facilities with a capacity of less than 20 or 30 MW and cogeneration facilities benefit from numerous reliefs. We recommend checking in detail on a case-by-case basis, which regulations apply and which do not.

Opportunities for and risks to German enterprises

Gaining a foothold and keeping your head above water in the U.S. energy market is a challenge. Given the trend in renewable energies seen in last years and the trend to be expected in the future, enterprises that operate as IPPs or are project developers or distributors and cooperate with IPPs should no longer ignore the potential of the US market. This statement holds true despite some setbacks, including an increased use of natural gas. From the German point of view, E.ON AG and Baywa AG are examples of enterprises that have successfully gained a foothold on the U.S. market. German enterprises are exposed to risks specifically in the areas of siting, financing and certification of facilities. Yet with careful planning, these challenges can be overcome.

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¹  among others blast-furnace gas, fumes.                  
² without conventional hydropower.
³ among others garbage incineration, batteries, sulphur, hydrogen.