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Avoided Cost

Background:

The Public Utility Regulatory Policies Act of 1978 (PURPA) requires utilities to purchase excess energy and capacity produced by qualifying facilities (wind turbine, solar array, etc.) at a rate equal to the utility’s full avoided cost.  Avoided cost is the incremental cost to a utility of generating or purchasing electric energy or capacity, or both, in an amount equal to that purchased from the qualifying facility.  Consistent with FERC precedent, the avoided cost of Central Iowa Power Cooperative’s (CIPCO), all-requirements members is the same as that of CIPCO.

There are a number of different accepted methodologies for determining a utility's avoided cost.  CIPCO’s avoided cost is a market-based calculation using forward energy and capacity pricing.  CIPCO’s Price Schedule C establishes the avoided cost rate annually on June 1 and includes a 5-year forecast.  Schedule C sets the purchase price, based on the avoided cost, for qualifying facilities with design capacity of 100 kW or less.  Purchase prices from qualifying facilities larger than 100 kW may be negotiated on a case-by-case basis, which CIPCO does using the same methodology.

Talking Points:

  • As an electric cooperative, our rate policy strives to maintain fundamental cost fairness among all of our member-consumers as a form of consumer protection.
  • Our metering arrangement is for the member to pay for the kWhs delivered to their property based on a tariffed cost-based rate.  This rate is designed to compensate the cooperative for the costs it incurs to generate and deliver kWhs through the transmission and distribution systems. 
  • PURPA section 210(b) states that purchase price rates must be just and reasonable to the electric consumers of the electric utility and in the public interest; and must not discriminate against cogenerators or small power producers.
  • The cooperative will pay a member generator for the kWhs delivered to the grid at a rate that is developed based on an avoided cost basis, pursuant to federal regulations. 
  • The “avoided cost” is the price the cooperative would have paid to produce the same power itself or purchase it from another source, which is the fair market-based price.
  • Asking the cooperative to pay a higher price for energy produced by a single member than the price we would pay to purchase it elsewhere is not fair to other members and is simply a bad business practice.
  • In essence, any member connected to the grid with access to virtually unlimited electricity on demand must pay a portion of the costs associated with poles, wires, substations, transformers, and operations necessary to deliver reliable electricity to their property in order to reach cost fairness among all members.
  • The avoided cost rate pays members for intermittent electric generation when it’s available while the cooperative’s retail rate covers costs associated with generation, transmission, and distribution of electricity available to members on demand.
  • Basic fairness to utility customers is the rationale for the federal standard being what it is and for the cooperative’s avoided cost rate.
  • PURPA does not require and does not permit states to require payments above full avoided costs.
  • Remember electric cooperatives are not-for-profit, so this is a matter of consumer protection for all members and not about making a profit. 

The diagram below demonstrates how a typical residential member with solar generation still relies on the electric grid 23.99 hours per day.  Because typical solar generation may not match the member’s load curve, the typical member is drawing electricity from the grid or pushing excess electricity onto the grid most of any given day. 
 

Residential Solar Needs chart from Iowa Utilities Board

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