compensating,distributed...

Engineering,  Architecture,  Construction,  Environmental,  and  Consulting  Solutions  

Compensating  Distributed  

Generation  Customers  

Ted  Kelly,  Principal  &  Business  Development  Manager    

TPPA  Annual  Conference  July  22,  2014  

Today’s  Agenda  

Defining  Distributed  Generation  

Fair  Compensation  for  Distributed  Generation  

Evaluating  Retail  Rates  for  Distributed  Generation  

Key  Points  to  Designing  Distributed  Generation  Rates  

Discussion    

Engineering,  Architecture,  Construction,  Environmental,  and  Consulting  Solutions  

Compensating  Distributed  Generation  Customers  

Defining  Distributed  Generation  

What  is  Distributed  Generation  

• Generally  non-­‐centralized  sources  of  electric  

generation  

• Wind  • Photovoltaic  • Combined  heat  and  power  • Fuel  cells  • Micro  turbines  

Benefits  of  Distributed  Generation  

• Benefits  to  customers  and  utilities  

• Reduced  transmission  and  distribution  costs  

• Reduced  environmental  impacts  

• Enhanced  reliability    

Possible  Pitfalls  of  Distributed  

Generation  

• Benefits  dependent  on  installation  and  operation  

• Policies  to  encourage  need  to  provide  flexibility  

• Can  needs  to  be  taken  avoid  subsidies    

Keys  to  Successful  Distributed  

Generation  

• Flexibility  in  selecting  right  technology  

• Flexibility  in  structuring  deals  to  meet  needs  

• Balance  needs  of  customers  and  utility    

Distributed  Generation  

Applications  

• Continuous  power  

• Combined  heat  and  power  

• Peaking  power  

• Green  power  

• Premium  power  

• Transmission  and  distribution  deferral  

• Ancillary  service  power  

• Remote  power  

Engineering,  Architecture,  Construction,  Environmental,  and  Consulting  Solutions  

Compensating  Distributed  Generation  Customers  

Fair  Compensation  for    

Distributed  Generation  

Industry  Transition  

• Technology  is  making  customer  resources  less  

expensive    

• Technology  and  costs  are  enabling  customer  

resource  development  and  participation    

• What  constitutes  fair  compensation  in  this  time  of  

transition?  

Engineering,  Architecture,  Construction,  Environmental,  and  Consulting  Solutions  

Strategies  for  Managing  a  Shrinking  Budget  

Evaluating  Retail  Rates  for    Distributed  

Generation  

Rates  to  Accommodate  DG  

• Utilities  exist  to  provide  electric  service  to  

customers  

• Traditionally  rates  designed  to  recover  

costs,  minimize  cost  shifting,  and  are  

simple  and  understandable  

• Traditional  rates  no  longer  meet  needs  

Rates  May  Not  Recover    

Fixed  Costs  

• Traditional  rates  typically  include  fixed  

charge  and  variable  charge  

• Customer  charge  set  considerable  below  

actual  fixed  costs  

• Large  portion  of  fixed  costs  recovered  

through  variable  energy  charge  

• Energy  charge  typically  set  to  recover  fixed  

and  variable  costs  based  on  projected  sales  

• If  customers  generate  energy,  lowers  sales  

and  utility’s  costs  not  recovered  

Rates  May  Shift  Costs  from  DG  

Customers  to  Other  Customers  

• Energy  charges  set  at  level  to  recover  fair  

share  of  fixed  costs  from  each  customer  

• If  some  customers  install  generation,  they  

will  not  contribute  fair  share  of  fixed  costs  

• Cost  shifts  more  pronounced  if  utility  

forced  to  raise  rates  to  recover  revenue  

requirement  

Recovering  Fixed  Costs  with    

Fixed  Charges  

• A  rate  design  that  recovers  costs  in  same  way  

as  costs  incurred  can  mitigate  risk  

• Fixed  costs  recovered  through  fixed  charges  

• Variable  costs  recovered  through  variable  

charges  

• Rebalancing  rates  protects  financial  stability  

of  utility  

• Eliminates  cross  subsidies  caused  by  

interaction  between  traditional  rate  designs  

and  DG  

Rate  Rebalancing  Provides  More  

Accurate  Price  Signals  

• Rates  should  send  accurate  price  signals  

• Traditional  rate  designs  give  inaccurate  

price  signal  

• Rates  designs  to  recover  costs  as  incurred  

provide  more  accurate  signal  

• Distributed  generation  proponents  are  

concerned  that  rate  design  changes  may  

reduce  incentives  

• Subsidizing  distributed  generation  with  

poor  rate  design  is  unsustainable  

Fixed  Charge  Cost  Recovery  Can  

Benefit  Low  Income  Customers  

• Low  income  customers  are  not  necessarily  

low  usage  customers  

• In  many  systems  lower  income  customer  

live  in  the  oldest  and  least  energy  

efficient  homes  

• Lower  income  customers  are  often  least  

likely  to  invest  in  distributed  generation  

• These  customers  most  likely  to  bear  cost  

of  subsidizing  distributed  generation  

investment  

Straight-­‐Fixed  Variable  Rates    

Are  One  Option  

• Remember  the  goal  is  to  provide  safe,  

reliable,  affordable  power  

• Many  ways  to  accomplish  this  

• Straight-­‐fixed  variable  rates  are  one  

option  

• Other  approaches  include:  

• Three  part  rates  for  residential  customers  • Traditional  rates  with  include  stand  by  

charges  or  other  specific  charges  for  distributed  generation  customers  

Engineering,  Architecture,  Construction,  Environmental,  and  Consulting  Solutions  

Compensating  Distributed  Generation  Customers  

Key  Points  to  Designing  Distributed  

Generation  Rates  

Key  Points  for  Distributed    

Generation  Rates  

• Value  is  a  two  way  street  

• Consider  all  relevant  sources  of  benefit  

and  cost  over  the  long  term  

• Select  and  implement  a  valuation  method  

• Cross  subsidies  may  flow  either  way  

Key  Points  (continued)  

• Extrapolating  from  extreme  situations  is  

misleading  

• Rules  matter  (e.g.  interconnection)  

• Keep  as  simple  as  possible  

• Support  innovative  business  models  

Key  Points  (continued)  

• Keep  incentive  decision  separate  from  rate  design  

• Keep  decoupling  decision  separate  from  rate  

design  

• Consider  mechanisms  for  “have  nots”  

Consider  Many  Possible  Alternative  or  

Supplemental  Rate  Policies  

• Fixed  charges  

• Demand  charges  

• Time-­‐based  rates  

• Bi-­‐directional  distribution  rates  

• Minimum  monthly  bills  

• Standby  rates  

• Value  of  solar  tariff  

• Separate  PV  customer  class  

Engineering,  Architecture,  Construction,  Environmental,  and  Consulting  Solutions  

Compensating  Distributed  Generation  Customers  

Closing  Thoughts  

In  Closing  

• The  electric  grid  is  important  to  all  customers  

and  grid  costs  should  be  fairly  recovered  from  all  

• A  DG  customer  provides  value  to  all  customers  

and  that  value  should  be  compensated  fairly  

• Rates  for  DG  can  be  designed  well  to  provide  fair  

compensation  

In  Closing  

• Rates  typically  based  on  average  embedded  

costs,  new  resources  are  paid  based  on  marginal  

costs  so  the  “rate”  may  be  >,  <  or  =  “price  paid  to  

an  incremental  resource  

• Rate  design  should  provide  for  fair  

compensation  without  harming  small  users  

• Administrative  simplicity  matters  

Engineering,  Architecture,  Construction,  Environmental,  and  Consulting  Solutions  

Compensating  Distributed  Generation  Customers  

Discussion  

Engineering,  Architecture,  Construction,  Environmental,  and  Consulting  Solutions  

Compensating  Distributed  

Generation  Customers    

TPPA  Annual  Conference  July  22,  2014