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KY Proud Ag Energy: Targeted Energy Policy to promote Agribusiness based Energy Production

Updated: Feb 6


Introduction

This article introduces a legislative draft by the Commonwealth Policy Institute, which aims to create a mutual gains solution between farms and utility companies, strategically fostering growth of on-farm and agribusiness driven energy production. This contrasts with present incentives, from federal level availed by solar developers and at state level for smaller scale rooftop solar - neither of which have addressed concerns of optimizing agricultural activity with energy production, or concerns with developer led solar rather than agriculture-based energy production.


In 2019, noting similar challenge Virginia enacted legislation targeted at supporting a class of agricultural energy producers with improved net metering and power purchase agreements while including measures for utilities to avoid market instability. In this extended article, we will delve deeper into the key components of CPI's draft legislation which attempts to further these developments and leverage key tools noted by the National Renewable Energy laboratory to support farmer-driven solar and biogas in Kentucky that both provides guarantees for agricultural energy producers and market flexibility for utility providers.


Net Metering, Power Purchase Agreements (PPAs), and Feed in Tariffs (FITs):

Legislators and analysts new to energy markets should note distinctions between net metering, power purchase agreements (PPAs), and Feed in Tariffs (FITs). Net metering allows energy producers to offset their energy consumption by generating electricity from renewable sources, with excess energy fed back into the grid credited onto the utility bill. Power purchase agreements involve contractual arrangements between farms and utility companies, dictating terms for the sale of generated energy at agreed-upon rates.


Feed in Tariffs are more common in Europe though growing in use in the U.S. , and may function as a tariff on top of a PPA or as their own agreement on the value of energy purchased. These can be tailored to price also for a specific quantity. In general, the tariff is a guaranteed, above-market price for a particular set or type of energy producers feeding into the grid which can allow targeted support to those producers. Variations of the FIT also include the "spot market gap" model which is considered more applicable in the U.S. regulatory context . The spot market gap is effectively a sliding FIT, still providing revenue certainty for the energy producer however the tariff payment only covers the difference between a guaranteed payment level and the average of the moving market price of electricity (an average price which PPAs can determine).


In recent past, most legislative focus in Kentucky has remained on net metering policy of small or home energy producers. In Kentucky in 2019, the General Assembly passed SB100 which made a variety of changes to net metering legislation - requiring utilities to offer net metering to customers generating electricity with photovoltaic (PV), wind, biomass, biogas or hydroelectric systems up to 30 kilowatts (kW), though at a total cap limited up to 1% of a utilities single highest hour peak load. For a new customers this lowered the rate compared to previous net metering, but also guaranteed the prior retail rate for prior customers up to 25 years.


Though striking a balance between utility needs and supporting consumer savings from rooftop solar -- policy measures focused on this type of net metering have not addressed small and medium agricultural energy endeavors from solar or biogas that may serve as a more substantial farm energy demand or regional power source (where an example capacity of "medium" producer may be considered at 5MW). The current state of on-farm agricultural energy, however affording a revenue stream, is not necessarily maximized from an agribusiness perspective which policy support could address.


New measures could better promote farm driven "Agricultural Energy"

After 2019 Kentucky ranked approximately 40th in prior solar development in the U.S., though in years following a number of new industrial solar developments began rapidly emerging across the state through the early 2020's. This was in-part due to the need of supply for new manufacturing and production efforts (where now legislators have informed CPI that projected electricity demand is not aligned with supply). These developments also aligned with new major federal tax credits to solar developers, rather than agribusiness pursuing solar or other power.  Although credits are also available to S and C corporations of which farms are often organized, claims without liability come with additional stipulations. Though agribusinesses and landowners can avail, a predominant trend appears to be solar development companies offering lease agreements then claiming the credit, where developers may then negotiate PPA's with the utility provider with the industrial facility on the grid or else connect directly to industrial facilities in need of the generation where those facilities may have a capacity to throttle-back grid usage. These incentives and industrial developers being first to avail has created a trend of solar developers seeking farm land and offering high-value lease agreements to farmers at prices. These leases have reportedly ranged from $400 to $1200 per acre in Kentucky, according to the University of Kentucky below.


This scenario, however, is not necessarily the most positive cost-benefit compared to farm-produced energy -- in other words, the case where farmer landowners and agribusiness acts as its own energy developer and obtains direct revenue from power purchase agreements with utilities while retaining farmland and management. A cautionary policy brief from the University of Kentucky has highlighted key concerns for responsible planning as industrial developed solar grows. Though options exist for under-panel grazing, supporting avenues for landowners and farmers themselves to engage in agricultural energy production not only with solar but also higher energy-density biogas can offer a solution. This would require a separate form of support than rooftop solar in prior net metering acts, and may solve a myriad of concerns expressed with development by external industry, support local business from power purchasing and eliminating overhead, and allow medium-scale producers to still sell back to the grid to supply industrial needs.


Though often ignored - other examples of agricultural energy production in Kentucky have grown including biogas from distillery and agriculture wasters, with initial developments since the early 2010s as noted in the EPA Ag Star database. These other sources produce a more substantial amount of energy per acre than solar in addition to other coproducts, which if upscaled may marginally increase regional grid productivity, or provide biomethane to eventually supply hydrogen extraction which the EEC and cabinet for economic development hold keen interest in developing. Based on other influential state policy in Massachusetts (though with tax penalty), CPI has developed legislation intended to place a tax incentive on key feedstocks built to grow Kentucky's biogas sector -- though measures to promote on-farm and farmer managed energy in general could afford new opportunity to diversify energy output, reduce on-farm energy cost, and support rural income without concerns that have been noted with external developers.


Therefore, in 2017 with faculty input of the ENVIROME Institute/ KY Institute for Environmental and Sustainable Development at the University of Louisville, colleagues at the KY Resources Council, and legislators on join energy and natural resources committee, CPI began crafting recommendations published in 2020 as a text for legislative bill drafting staff to develop an act supporting improved agricultural power purchasing agreements. This used key measures from a National Renewable Energy Laboratory guidebook for policymakers on feed in tariffs - though applied in this case to PPA's - to develop "smart policy" balancing guranteed floors and caps with market price flexibility to take in account the concerns of utility companies in what rates are guaranteed.


As this legislative measure was developed, in 2019 the Commonwealth of Virginia enacted a very similar policy using similar tools to address the need to support small and medium sized agricultural energy producers-- including power purchasing provisions net metering for farms which are a power generating entity.


Virginia's Policy & Building Further Innovation

Inspired in part by Virginia's 2019 Electric Utility Regulation Act, CPI's draft legislation echoes some of its aspects while introducing unique elements tailored to regional needs. Notably, the inclusion of Small Agricultural Generators aligns with Virginia's focus on encouraging small-scale renewable energy production within agricultural businesses. In addition, Virginia expanded the measure to cover breweries, wineries, and distillers to be covered under the agricultural producer definition. Distillers in Kentucky have also endeavored to partner with renewable biogas facilities or otherwise construct them. In general, these provisions in addition to solar managed for better farmer cost-benefit can support a larger growing bioenergy sector.


The Proposal: Ag-Energy Net Metering & Power Purchasing Act


Policymaker Relevance & Public Benefit: 

The Sustainable Ag-Energy Proposal holds immense practical relevance for public benefit. By encouraging on-farm energy production, the legislation contributes to a more sustainable and resilient energy grid. The three-tier spot market gap model ensures that farmers receive fair compensation for the energy they contribute to the grid, fostering economic stability within the agricultural sector. This not only benefits individual farmers but also strengthens local economies.


Moreover, the emphasis on Small Agricultural Generators ensures that even smaller farms can actively participate in renewable energy production. This inclusivity promotes widespread adoption of sustainable practices, aligning with broader environmental goals and reducing dependence on traditional energy sources.



The National Renewable Energy Lab - Key Tools for Policymakers:

The draft legislation draws upon key policymaker tools identified in the National Renewable Energy Laboratory (NREL) report, such as the sliding premium-price FIT payments and the spot market gap model. These tools are instrumental in providing fair compensation, addressing market dynamics, and ensuring the viability of on-farm energy projects. Policymakers can use a similar approach of applying these tools to better adjust to challenges faced by energy producers, and utility providers, and market intervention to diversify the grid.


These tools were used below to ultimately create an approach that targets support a specific context of agribusiness or "ag-energy" classified energy generation to allow net benefit above current PPA's. Meanwhile, these measures still tailor that support in a balanced way with measures to avoid adverse market impact and allow utility price management to keep utility prices low (for example across peak demand times).


Key "Smart Policy" Components of CPI's Draft Legislation:

Example graph of utility regulated electricity purchase price over time under a monthly PPA, using a "three-tier spot market gap".


The following measures in the recommended act would be promulgated by the KY Public Service Commission:

  1. Establish a Three-Tier Spot Market Gap approach, as the following:

    1. Establish a Total Guaranteed Payment Level: Establishes revenue certainty, providing developers and investors with a minimum assured price for the electricity sold under a monthly PPA through the measures below.

    2. Sliding FIT Payment on top of monthly PPA: Covers the difference between the guaranteed payment level under the PPA, and the average spot market price, ensuring a fair premium aligned with market conditions.

    3. Sliding Cap Mechanism: Introduces a sliding cap (in value and/or equivalent quantity) to prevent substantial overpayment by the utility, also protecting consumers from extreme fluctuations in energy prices should agricultural supply become substantial in certain regions. Generation exceeding the quantity or total value be covered by the cap may see the excess credited at discounted cash rebate below market price.

  2. Incentives and PPA Guarantees for Small/Medium Agricultural Generators: a. Guaranteed Minimum Payments: In addition to a cap, supportive measures to establish a floor can ensure small generators receive a minimum payment, providing financial security. b. Transparent Cost-Sharing: Defines clear cost-sharing mechanisms between generators and utilities, ensuring fairness and transparency in billing processes. c. Clear Billing Processes: Monthly PPA's and implementing a spot-market gap also come with the need to implement transparent billing processes, preventing confusion and disputes between small generators and utilities.

Maximizing the Benefits, Mitigating the Drawbacks:

Empowering Farm Operations: The draft legislation revolutionizes farm operations by creating a new revenue stream through energy production. Small agricultural generators, in particular, are empowered to contribute to renewable energy while benefiting economically.


Fair Treatment of Utility Companies and Market Needs: To address concerns about potentially unfair rates, the legislation incorporates measures to prevent exploitation. Utility companies, even if non-profit, operate within a structured framework ensuring fair compensation for services provided.


Preventing Rate Hikes: The introduction of sliding caps and the spot market gap model serves as a safeguard against unforeseen rate hikes. This strategic approach allows flexibility in accommodating market changes while preventing extremes that could adversely impact consumers.


Conclusion:

In conclusion, the Sustainable Ag-Energy Proposal is presented as one example of a bold strid Kentucky can take towards a sustainable and mutually beneficial energy future, especially by empowering rural and agricultural producers as energy suppliers. By learning from successful policies, tailoring the proposal to regional needs, and integrating legal measures, this legislation opens the door for farms to work directly with utility companies to produce power - promoting economic growth, agricultural stewardship, and energy resilience. Policymakers are welcomed to make free use of this material and CPI's draft legislation, which is published with our partners at the University of Louisville here:


Kessler, Samuel C. and Gabhart, Austin (2022) "Draft State Legislation: Agricultural Energy Net Metering & Power Purchasing," Commonwealth Policy Papers: Vol. 1: Iss. 1, Article 5.


Other Resources:

National Renewable Energy Lab Guide: https://www.nrel.gov/docs/fy10osti/44849.pdf

Commonwealth of Virginia Small Agriculture Producer Net Metering & Power Purchasing Legislation: https://law.lis.virginia.gov/vacode/title56/chapter23/section56-594.2/

Cautionary Policy Analysis for Industrial Solar Development: https://agecon.ca.uky.edu/solar-farming-considerations

Feasibility Analysis of Solar Farms in Kentucky: https://www.mdpi.com/2673-9941/2/4/28

EPA Ag Star Kentucky Biogas Producer Testimonial: https://www.epa.gov/agstar/meet-anaerobic-digester-operator-mac-farms


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