The oil embargoes of the 1970’s led to national concern over the United State’s dependence of foreign oil. Through enactment of the Public Utility Regulatory Policies Act (PURPA), the government attempted to improve efficiency of energy production, promote alternative sources of energy, and diversify the electric power industry. A key feature of the Act was the creation of Qualifying Facilities (QFs). QFs are either small-scale producers of commercial energy who normally self-generate energy for their own needs but may have occasional or frequent surplus energy, or incidental producers who happen to generate usable electric energy as a byproduct of other activities.
QFs can be cogeneration facilities, which sequentially produce electricity and thermal energy from a single fuel source, or small power production facilities, which use renewable energy sources such as wind, solar, biomass, hydropower, geothermal, or waste. QFs must meet efficiency and size standards and cannot be more than 50 percent owned by an electric utility or a utility holding company. When they need power, electric utilities are required to purchase the output of QFs at their avoided cost. Because they do not directly serve ratebase customers, QFs are exempt from many federal and state regulatory requirements, including federal and state rate regulation and oversight by the Securities and Exchange Commission. QFs are not exempt from environmental regulations.
When a facility of this type meets the Federal Energy Regulatory Commission's requirements for ownership, size and efficiency, utility companies are obliged to purchase energy from these facilities based on a pricing structure referred to as avoided cost rates. These rates tend to be highly favorable to the producer, and are intended to encourage more production of this type of energy as a means of reducing emissions and dependence on other sources of energy.
PURPA has been the most effective single measure in promoting renewable energy. Some credit the law with bringing on line over 12,000 megawatts of non-hydro renewable generation capacity. The biggest beneficiary of PURPA, though, has been natural gas-fired cogeneration plants, where steam is produced along with electricity.
Public Utility Regulatory Policy Act: Background (Union of Concerned Scientists)
Electricity Restructuring Background:The Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 1992 (National Council for Science and the Environment)