Avoided Cost Pricing: Making the Right Choice

Avoided Cost Pricing: Making the Right Choice
16 October 2015

One unique feature of utility regulation is that monopoly utilities are required to purchase electricity from small, independent renewable energy (and cogeneration) facilities. It’s true!—and based on a federal law passed in 1978 to reduce the nation’s reliance on fossil fuels. When a developer builds a power plant and sells that electricity to the utility, the utility doesn't have to increase its own generation by building new energy resources — thus benefiting from the avoided cost. The prices paid to small power producers cannot be more than the price the utility would spend to make (or purchase) its own energy. But how do you compare the cost of 20+ years of fuel-free, emissions-free renewable energy with the cost of 20 years of price-volatile natural gas?

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