Alabama Power plans to discontinue third-party power fee

Alabama Power plans to discontinue a fee on third-party power projects that critics said would discourage the development of renewable power.

The utility, the largest producer of electricity in the state, said in a Friday filing with the Alabama Public Service Commission that it planned to end the $0.00193 per kilowatt hour fee charged to third-party companies, otherwise known as a variable integration cost.

“The decision to do so stems from the results of an updated Southern system study (included with this filing) and updated assumptions reflecting the penetration rate of variable resources,” representatives for Alabama Power wrote in the filing.

Messages seeking comment were left with Alabama Power on Monday and Tuesday. The PSC must still approve the request in the filing the company submitted.

“I think it is great news,” said Daniel Tait, executive director of Energy Alabama, an organization that advocates for more renewable energy use in the state. “It is a big win for clean energy in Alabama, that is for sure. The previous integration cost was quite a large fee on projects in Alabama, so the removal of this fee is, first, welcome news for the industry for improving the economics for projects, so I am hopeful it will help make more good things happen in the state.”

The utility first sought to impose the fee in February 2024. The Public Service Commission approved the request in April. Alabama Power said in the filing that it had not applied the integration cost to any project this year, but said it would reserve the right to reintroduce  the charge in the future should the need arise.

At the same time that it sought to impose the integration fee, Alabama Power requested and was granted the power to cut the rate it paid for third-party energy generation, known as contract for purchased energy (CPE) by roughly 50%, going from about 7.33 cents per kilowatt hour to about 3.65 cents per kilowatt hour.

Alabama Power said in its Friday filing it planned to increase that payment to 3.94 cents per kilowatt hour, an increase of about 8%.

“We still have concerns with the way the CPE is calculated that it is undervaluing renewable energy, and for that matter battery storage to help meet winter peak,” Tait said. “We definitely still think there is an issue there with the valuation in CPE.”

The move does not apply to fees the utility charges to residential customers who install solar panels on the roofs of their homes. That fee, imposed in 2012, is a $5 per kW capacity reservation that, for households that generate 5kW, will pay about $300 per year.

Some utility companies like Alabama Power are vertically integrated, which means they operate power plants that produce electricity and maintain the electric grid.

The same companies also purchase electricity from other private producers who contribute power to the grid they maintain and oversee, some of which are renewable energy companies such as solar providers.

An integration cost would be charged to third party providers to transfer power they produce to the grid that is owned and maintained by Alabama Power. The fee, one that integrated power companies in the industry largely do not assess, imposes an additional expense borne by energy producers besides their operating expenses and startup costs.

Alabama Power representatives said the integration fee would stabilize the electricity prices and help maintain reserves amid the intermittent nature that energy producers provide electricity to the grid.

That electricity from third party producers is most useful during the day when demand is at its peak and when solar energy is available from the sun. That power becomes more of a burden at night, when consumption is lower and there is no sun to draw power, according to energy experts.

Renewable energy advocates such as Energy Alabama disapprove of such measures because they reduce the return that investors receive for investing in renewable energy projects, reducing the construction of such projects and dampening the adoption of renewable energy in the state.

Alabama continues to lag behind in terms of renewable energy adoption. According to the U.S. Energy Information Administration, renewable energy in the state increased to roughly 11% in the state in May 2024 from 10% in 2022.

Most of that, about 70%, is from hydroelectric power.

“The removal of this anticompetitive fee makes private projects more competitive, allows private industry to compete on a more level footing,” Tait said.

The Alabama Reflector provided questions to Alabama Power in its request for comment related to the study and the updated assumptions the engineers and analysts made in the company’s filing submitted Friday.

“It is a big win for clean energy and economic development,” Tait said. “It doesn’t solve all our problems because the rate is still a little bit too low, and we are going to have to deal with that at some point. But, taking the fee, taking the tax off the top, that was a total dealbreaker for most cases for almost any project.”