Rate Structures for Customers With Onsite Generation: Practice and Innovation

Abstract

Executive SummaryIn the late 1990s, widespread publicity surrounded the commercial introduction of microturbines, and new market developments appeared likely to vastly increase the deployment of distributed generation (DG). In this environment, state and federal policymakers began to address the challenges that were preventing DG from becoming an integral part of the traditional transmission and distribution grid. The expectation was that more and more commercial and industrial users of electricity would use onsite generation, often in combined heat and power configurations. Although the actual scale of DG deployment has not met these hopes-and current natural gas prices are making the future more uncertain-there have been significant increases in DG installations in the past decade.Customers with onsite generation typically remain connected with the grid to meet electrical needs that exceed the capacity of their DG facilities and to ensure, through diversity of supply, the reliability of their electric service in the event that their units are not available because of maintenance or some other reason. Grid-supplied service to these "partial requirements" customers comes in many forms-standby (or backup), scheduled maintenance, and supplemental-and, as the deployment of DG systems has increased, the urgency of resolving the difficult questions about their rates and rate structures has become more acute. 1What does it cost the electric system to provide standby service for partial-requirements customers, and how should these costs be recovered? What are the benefits of DG to the system? How should standby rates be designed to reflect these benefits and encourage customers to maximize the value of DG for themselves and the system? The decisions made today will have long-term strategic consequences.California and a handful of other states have begun, as part of broader efforts to diversify and improve the efficiency and environmental performance of their electric systems, to develop ratemaking policies for standby service for customers with onsite DG. Recognizing that innovation and good public policy do not always proclaim themselves, Synapse Energy Economics and the Regulatory Assistance Project, under a contract with the California Energy Commission (CEC) and the National Renewable Energy Laboratory (NREL), undertook a survey of state policies on rates for partial-requirements customers. Historically, customer-sited generation was usually big enough to warrant special regulatory consideration (rules or tariffs for multi-megawatt cogeneration or "qualifying facilities" under the Public Utilities Regulatory Policy Act proceedings) or special contracts (sometimes combined with economic development rates), or alternatively, it was small and rare enough to be ignored. However, technological advances have begun to change the markets for DG and, as the potential for deployment grows, the DG industry, customers, and regulators are looking for new policy tools to facilitate this transformation.iii The survey investigated...

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