Awaiting expert review. This page covers rules that vary by utility and jurisdiction. It is kept out of search results until a qualified reviewer has checked it; the sources below are dated so you can verify each point.
Quick answer
Avoided Cost is the cost a utility would have paid to generate or buy electricity itself, and does not pay because it buys the power from a small producer instead. Under the federal PURPA rules it is the ceiling on what a utility must pay qualifying facilities.
For home solar it matters because many utilities credit net excess exports, or cash out banked credit, at an avoided-cost rate that is well below the retail price.
Quick facts
The key facts about avoided cost, with sources:
- Federal law
- PURPA §210, 16 U.S.C. §824a-3 (1978) 1
- Who sets the number
- State commissions (and non-regulated utilities) under FERC rules 1
- Includes
- Energy and, where the utility needs it, capacity 2
- Standard rates required for
- Qualifying facilities of 100 kW or less 3
- Typical use in home solar
- Price for annual net excess or a yearly credit cash-out
Key takeaways
- Avoided cost is what the utility saves when it buys your power instead of making or buying it elsewhere.
- It comes from PURPA, a 1978 federal law, and FERC’s rules in 18 CFR Part 292 1 2.
- It covers energy and, if the utility needs it, capacity. It leaves out poles, wires and billing.
- That is why an avoided-cost credit is usually far below your retail rate.
- In home solar, it often prices leftover credit at a yearly cash-out or true-up.
The legal definition
FERC's regulation defines avoided costs as "the incremental costs to an electric utility of electric energy or capacity or both which, but for the purchase from the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another source."
The statute uses almost the same words for the "incremental cost of alternative electric energy" and says no purchase rate may exceed it.
In plain terms: if your solar kWh means the utility can burn a little less gas next hour, or buy a little less power on the wholesale market, the money it saves is its avoided cost.
Because it reflects wholesale costs and not the poles, wires and billing that retail rates also pay for, it is lower than the retail price.
Two words in the definition matter. “Energy” is the kWh itself. “Capacity” is the power plant space a utility must build or rent to meet its peak. A utility that needs no new plants may count little or no capacity value.
Where avoided cost sits in the chain
- Congress → PURPA §210 (1978)
- FERC → 18 CFR Part 292 rules
- State commission or utility board → sets each utility’s avoided-cost rate
- Utility tariff → uses that rate for purchases, cash-outs or excess credit
How an avoided-cost rate gets set
- Congress passed PURPA in 1978, requiring utilities to buy power from qualifying cogeneration and small power production facilities.
- FERC wrote the rules in 18 CFR Part 292: purchase rates must be just and reasonable, must not discriminate against qualifying facilities, and need not exceed avoided cost.
- Each state regulator implements those rules after notice and a public hearing, deciding how to estimate energy and capacity costs for each utility.
- The utility files the resulting rate in its tariff and updates it on the schedule its regulator sets.
A qualifying facility can sell energy as it is available, at the avoided cost when delivered, or under a legally enforceable obligation for a fixed term at rates set at delivery or when the obligation is incurred (18 CFR 292.304(d)).
Types of avoided-cost rates
| Type | What it means | Who uses it |
|---|---|---|
| As-available energy rate | Paid at the avoided cost when the power is delivered | Small sellers with no fixed contract |
| Fixed-term contract rate | Set for the contract term, at delivery or when the deal is signed | Larger projects with a legally enforceable obligation |
| Standard rate | A published rate any small facility can take | Required for facilities of 100 kW or less |
| Locational marginal price (LMP) | The wholesale market price at a grid point | Allowed in organized markets |
| Competitive price | A market hub price or a combined-cycle plant cost | Allowed outside organized markets |
Example: why the cash-out date matters
An illustration with round numbers, not a real tariff. A home banks 600 kWh of surplus by its yearly cash-out. The tariff pays avoided cost at the cash-out. Use your own utility’s figures to redo it.
| Step | Math | Result |
|---|---|---|
| Banked surplus at cash-out | Given | 600 kWh |
| If the avoided-cost rate were 3¢ per kWh (example) | 600 × $0.03 | $18 |
| If the same 600 kWh had offset imports at a 14¢ retail rate (example) | 600 × $0.14 | $84 |
| Value lost by banking too much | $84 − $18 | $66 |
The lesson holds whatever the real rates are. Credit you use against imports is worth retail. Credit left at the cash-out is worth avoided cost. Size the system so little is left over.
Where you meet avoided cost as a homeowner
- A yearly cash-out of banked solar credit, as on Dominion Energy South Carolina’s Solar Choice rider 5.
- The rate for leftover credit at an annual true-up.
- A “buyback” rider that buys all your output at a set rate.
- Rate adjustments on your bill that pass through PURPA purchase costs, such as on Duke Energy Carolinas’ SC schedules 6.
- State commission dockets that update the number every year or two.
Why avoided cost is used, and its downsides for you
Arguments for it
- Pays solar what it saves the utility, so other customers do not pay extra.
- Rests on a clear federal rule that has been in place since 1978.
- Gives a floor of value for surplus that might otherwise earn nothing.
Downsides for a solar owner
- Much lower than the retail rate.
- Can swing with fuel and wholesale prices.
- Hard to check: the math sits in long regulatory filings.
What avoided cost leaves out
Avoided cost is a narrow measure by design. It counts fuel, power purchases and, if needed, plant capacity. Some states choose to count other things too, such as line losses. FERC’s rules list line losses among the factors to weigh 3.
It does not usually count grid wires, billing or customer service. Nor does it count benefits that are hard to price, unless a state adds them. That gap is the core of most fights over solar export rates.
One more limit: FERC’s rules let a utility skip purchases in some low-demand periods, after notice, when buying would cost more than making the power itself 3.
Sources: [3]
What avoided cost means for your payback
Avoided cost does not change what panels cost to install; see our cost guide. It changes what your leftover solar earns.
If your tariff prices only the yearly leftover at avoided cost, the effect is small for a well-sized system. If it prices every export at avoided cost, the effect is large. A home that exports half its output then earns far less from that half.
Ask for the current avoided-cost rate and how often it changes. Use it in the payback calculator as the value of every kWh you expect to export or bank.
How to look up your utility’s avoided cost
- Find your solar rider and search it for “avoided cost.” Note what it applies to.
- If the rider names a rate schedule, such as Dominion SC’s PR-1, open that schedule 5.
- Read the per-kWh energy credit and any season or time-of-day split.
- Note the effective date and the order number behind it.
- Ask your installer to use that rate for banked or exported kWh in the proposal.
Keeping up with a moving number
There is nothing to maintain on your roof here. What needs upkeep is your estimate. Avoided-cost rates are updated on a schedule set by each regulator or utility board.
Put a yearly reminder in your calendar near the update date. Check the new rate and rerun your savings. If the rate drops a lot and you bank a large surplus each year, shifting loads into sunny hours or adding storage may be worth a look.
Warning signs
- Your bank of credit grows every year and is cashed out at avoided cost. The system may be too large for your use.
- A proposal values cash-outs at the retail rate.
- A salesperson says PURPA guarantees you retail-rate credit. It does not.
- No one can name the schedule your utility uses for avoided cost.
The rules: statute, regulation and state role
Statute: PURPA §210, 16 U.S.C. §824a-3, enacted in 1978, requires utilities to buy from qualifying facilities and bars rates above the incremental cost of alternative energy 1.
Regulation: FERC’s 18 CFR Part 292 defines avoided costs (§292.101) and sets purchase-rate rules (§292.304) 2 3. Standard rates must be offered to facilities of 100 kW or less. A state may set a rate below avoided cost for purchases that are not from new capacity, if that still encourages small producers.
State role: State commissions run the rules for the utilities they regulate. Utilities outside state rate regulation apply them themselves.
We read the eCFR text on 8 October 2026 4. Rules can be amended; check the current eCFR before relying on any detail.
Avoided cost vs retail rate vs export credit
| Avoided cost | Retail rate | Export credit | |
|---|---|---|---|
| What it is | Utility’s saved cost of energy and capacity | What you pay per kWh you buy | What your tariff pays per kWh you send out |
| Includes grid costs | No | Yes | Depends on the tariff |
| Set by | Regulator under FERC rules | Regulator or utility board | Your solar tariff |
| Typical size | Lowest | Highest | Between the two, or equal to one of them |
Common misconceptions
- Myth Avoided cost is a fixed national rate.
- Reality It is set utility by utility under state procedures, and changes over time.
- Myth PURPA guarantees home solar owners net metering.
- Reality PURPA covers purchases from qualifying facilities at avoided cost. Net metering at retail comes from state law and utility tariffs.
- Myth Avoided cost equals the wholesale price on one day.
- Reality Regulators can include capacity and other factors, so the rate can differ from spot prices.
Where avoided cost shows up in South Carolina and Virginia
Dominion Energy South Carolina's Solar Choice rider cashes out banked surplus each November at avoided cost, the PR-1 off-peak winter energy credit, and then resets the bank (PSC Order No. 2026-374, retrieved 5 October 2026) 5.
Duke Energy Carolinas' SC rate schedules include an adjustment for the avoided capacity cost of PURPA purchased power 6.
In Virginia, the cooperative net metering statute has excess bought at the Commission-approved tariff rate unless a higher rate is agreed (Va. Code §56-594.01) 7.
For Georgia, we have not verified how current tariffs use avoided cost; check your utility.
When avoided cost matters to you
It matters if your tariff uses it for exports or leftover credit and your system makes more than you use. It barely matters if your system is sized to your use and your credits are netted at retail.
Rule of thumb: if you will bank more than a small share of your output each year, size the system down or plan to use more power in daytime.
Next step: compare net metering and net billing terms on your utility’s rider, then test them in the net billing calculator.
Related guides
Questions about avoided cost
Why is avoided cost lower than my retail rate?
Avoided cost counts only what the utility saves on making or buying power. Your retail rate also pays for transmission, distribution, meters, billing and other fixed costs. Your exports do not remove those costs, utilities argue, so they are not in avoided cost. The gap between the two is often large.
Does PURPA apply to my rooftop solar?
In principle a small solar system can be a qualifying facility under PURPA. In practice most homes are paid through a state net metering or solar tariff instead. Where a tariff pays avoided cost for leftover credit, it is borrowing the same idea. Your interconnection agreement says which rules apply to you.
How often do avoided-cost rates change?
On the schedule the state regulator or utility board sets, which varies by state and utility. Some update yearly, others less often. Fixed-term contracts can lock a rate for their term. Check the effective date on your tariff and the schedule it points to.
Who decides my utility's avoided cost?
For investor-owned utilities, the state commission decides in a formal proceeding. For utilities outside state rate regulation, such as many co-ops and city utilities, the utility applies FERC’s rules itself. FERC sets the federal framework in 18 CFR Part 292.
What is the difference between energy and capacity in avoided cost?
Energy is the kWh of power. Capacity is the ability to supply power at the peak, which means plants the utility must build or rent. Avoided cost includes capacity only where the utility needs more of it. Solar that reliably produces at the utility’s peak can earn more under some rules.
Is avoided cost the same as the wholesale price?
Not always. FERC’s rules let states use the wholesale locational marginal price in organized markets. They can also use other methods that add capacity value or line losses. So the rate can sit above or below the price on a given day.
Can a utility pay me more than avoided cost?
Yes. Federal rules set avoided cost as the most a utility must pay qualifying facilities, not the most it may pay. States can require more, and classic net metering does exactly that by crediting exports at retail. Virginia’s co-op statute also allows a higher agreed rate.
What is a qualifying facility?
A qualifying facility is a small power producer or cogeneration plant that meets FERC’s rules under PURPA. Utilities must buy power from it at rates up to avoided cost. Small solar can qualify. Most homeowners never deal with this status directly because their utility’s solar tariff handles the details.
Sources
- 16 U.S.C. §824a-3, Cogeneration and small power production (PURPA §210), via Cornell LII, retrieved .
- 18 CFR §292.101, Definitions, via Cornell LII, retrieved .
- 18 CFR §292.304, Rates for purchases, via Cornell LII, retrieved .
- eCFR, 18 CFR Part 292 (current text, read 8 October 2026), retrieved .
- Dominion Energy South Carolina, Residential Solar Choice rider (PSC Order No. 2026-374), retrieved .
- Duke Energy Carolinas (SC), Schedule SGS, effective 1 March 2026 (Docket No. 2025-172-E), retrieved .
- Code of Virginia §56-594.01, retrieved .
Expert review
Written by the HyreSolar Research team. Not yet reviewed by an outside expert. We say so rather than imply a review that has not happened; see our editorial policy.
How the numbers were checked: Definitions and rate rules are quoted from 16 U.S.C. §824a-3 and 18 CFR §§292.101 and 292.304 (Cornell LII on 7 October; current eCFR text re-read on 8 October 2026).
State applications are from sc-local/facts.js, the Duke SGS tariff and the VERIFIED Virginia rows. The cash-out example uses labelled example rates, not tariff figures. Held for qualified review before indexing (G-REV).
Suggest a correction. We fix errors and say what changed.