In the context of electricity generation, the costs a utility would otherwise incur to generate electricity if it did not purchase the electricity from another source, such as a qualifying facility (QF). To promote energy conservation and the rational pricing of electricity, Congress enacted the Public Utilities Regulatory Policies Act of 1978 (PURPA), which required utilities to buy power from non-utility producers if the cost of doing so was less than the utility's avoided cost rate to the consumer.

This was intended to force utilities to buy electricity from small power producers at a price that would keep them in business and provide cost savings to consumers. However, following the deregulation of the electricity industry, the avoided costs calculation is no longer as relevant. This is because:

Where the avoided cost calculation applies, it is determined by the applicable state utilities commission.

For more information on avoided costs, see Practice Note, Understanding Renewable Energy: Solar.