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How Much Should Self-Generators Pay For The Grid?

November 1st, 2013 by Fereidoon Sioshansi, EEnergy Informer

That is among the questions being asked not just in the US but nearly in any country where self-generation, in one form or another, already is or is likely to become cost-effective. It is also a key question in the context of the net energy metering (NEM) debate in the US or generous feed-in-tariffs (FiTs) that are being scaled back in the EU and Australia.

Until the day arrives – and some say this may not be too far – when self-generators can cut the cord entirely and go off-grid, they rely on the “grid” for a range of services that are virtually priceless. In most cases, self-generators’ production is variable and intermittent, as in the case of solar PVs, which means that they rely on the “grid” to balance their local consumption against variable generation (see the graph below). The grid, in other words, acts as a free battery, absorbing the surplus generation while making up the shortfalls. Most current NEM laws do not address such nuances, which explains why regulators in many jurisdictions are revisiting such schemes.

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In an IEE brief, Lisa Wood and Robert Borlick examine the value of the grid to a hypothetical distributed generation (DG) or micro-grid consumer who may be producing sufficient amount of juice to be virtually self-sufficient in aggregate terms while relying on the grid for balancing and reliability services. Not surprisingly, they conclude what nearly everyone acknowledges to be true, namely such customers are essentially free-riding on critical services provided by the grid. Yet, if the prevailing tariffs are based on net volumetric consumption, they end up paying virtually nothing for grid’s vital services.

Wood & Borlick argue, as have many others have, that collecting revenues on a net volumetric basis, as is currently the case in many jurisdictions, is unfair and inequitable, assertions heard from many utilities these days. The accompanying table illustrates the non-energy – i.e., fixed – costs of serving a typical residential US consumer, who on average uses approximately 1,000 kWhrs/month.

Using data from the Energy Information Administration (EIA), more than half of the avg. monthly residential US electricity bill of about $110 may be attributed to fixed, not energy-related, charges. It does not take rocket science to conclude that if such typical customers self-generate some or all of their 1,000 kWh monthly allotment, and if the prevailing tariffs are mostly or totally based on net volumetric usage, that the resulting bill will be essentially zero. The $60 dollars of fixed charges that are needed for the maintenance and upgrading of the “grid” are no longer recovered. In other words, we have a missing money problem.
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In the case of the simple example illustrated here, the self-sufficient – volumetrically defined – DG customers avoid paying $720 towards the upkeep of the “grid” per annum. Under current regulations prevailing in many jurisdictions, the “utility” will have to raise its rates to recover an extra $720 per annum from the remaining non-DG customers.

The authors suggest 3 basic ways to address this missing money problem and offer suggestions on how one might proceed – our words below, not theirs:

• Redesign retail tariffs to make them more cost-reflective – for example by recovering a significant portion of the fixed costs through non-by-passable demand or fixed fees;
• Charge DG customers for their gross consumption under prevailing tariffs and separately compensate them for their gross generation; and
• Impose standby transmission & distribution (T&D) charges for DG customers.

What follows has little to do with what is in the original IEE brief, consider it this editor’s commentary on the subject.

The first approach is what many utilities in the US currently favor. This may address some of the immediate issues, but will not fundamentally resolve the DG problem. So long as retail tariffs remain relatively high and/or are rising and as long as the cost of DG remains flat or continues to fall, consumers in high tariff jurisdictions will find it cost-effective to use less – through energy efficiency investments – and generate more.

If fixed rates are raised substantially – Arizona Public Service Company (APS), for example, has proposed quadrupling current fixed charges for PV customers only – it may have the effect of pushing DG customers to go off-grid, cutting the cord, so to speak.

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This may be more equitable to remaining customers but not necessarily a growth strategy for utilities as hordes of heavy users may eventually leave the network, leaving it less valuable to all. Everyone knows that a network, whether telecommunication, social media, website, or electric grid, is more valuable when it reaches a larger audience.

The second approach may be preferable to the first if the redesigned tariff fundamentally addresses the value of self-generation and consumption, both of which vary based on time of use/generation. With smart meters in place, it is in principle, easy to reward self-generation for its true value to the network and charge usage according to its cost incidence on the same network.

The final approach may be the best, especially if it encourages consumers to self-select how much “grid” services they need/want and are willing to pay for. Given the opportunity to rely on the existing grid for all the wonderful services it offers at a reasonable price should be a no brainer for most, if not all, DG customers. Getting the details right, however, will not be easy.

F.P. Shioshansi

This post is extracted from EEnergy Informer, November 2013 issue.

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2 Responses to “How Much Should Self-Generators Pay For The Grid?”

  1. Nuno Bento Says:

    Interesting article. It deals with the problem of allocating the fixe costs.
    Most of these costs are with the grid, and after the unbundling in Europe this is a matter for system operators (DSO or TSO) and not utilities!
    Event though your suggestion make a case for the investment in smart meters and smart grids that I generally agree, I think it raises an idea that can be dangerous for sustainability.
    For many reasons, the investment in decentralized generation is not so bad (security of supply, efficiency – less investments needed in the centralized grid and power plants, environment, etc.).
    One of the reasons for people to invest in DG is particularly the independence against being trapped with some “monopolistic” behavior of power companies (or even the state). If people think they will have to pay for the energy they produce, it may have a drastic effect in the acquisition of decentralized equipment, with the effect in the sector and for sustainability. Spain did recently a similar move in that direction and it would be interesting to check the results in some months from now.
    In conclusion, it may exist a better way to charge the fixed costs of the system in a more transparent (and fair) way without discourage decentralized investments that have several positive externalities for the community.

  2. Marion Bonnet Says:

    Distributed generation (DG) include all small-scale power generation technologies used to provide an alternative to conventional power plants. Some advocates of distributed generation state that there is no benefit for a DG customer from being connected to the utility’s distribution system. But everyone knows that even a DG or a micro-grid consumer who produces the exact amount of energy it consumes cannot be totally self-sufficient and independent of the grid. Indeed, a DG customer uses external grid services on a continuous basis, and thus, should pay for the fixed costs associated with ancillary, balancing, transmission, distribution and generation capacity services.
    Thus, the question at stake is : what is the value of the grid to DG customers? How much DG customers are willing to pay for using the grid, yet unconsciously?

    As explained in this article, about half of the monthly energy bill of a household is covered by non-energy charges, corresponding to services provided by the grid. For a non-DG customer, retail rates are designed to recover most of these fixed costs, through kWh charges. On the contrary, a DG customer with on-site net metered generation will avoid paying some (or all) of the fixed costs of grid services (depending on the amount of his electricity generation and consumption). As a consequence, retail customers will suffer from the perverse effect caused by this “missing money” problem : the fixed costs of the grid, that DG customers do not pay, will be shifted to other retail customers. Based on an average household consumption of 1,000 kWh per month, the average monthly bill rises to $110, of which $60 are fixed charges. In more concrete terms, assuming that one third of the residential customers in a given utility service territory have DG systems, these fixed charges will be shared between the two-thirds of non-DG customers, who could experience bill increases of up to 27%, from $110 per month to $140 per month. Therefore this cost shift raises serious fairness concerns.

    But one could be driven to think about the following issue: why a DG customer could not be able to self-provide the grid services – and thus going totally off-grid – through energy storage, smart grids or thermal generation systems? The simple reason is that an off-the-grid DG customer cannot provide at reasonable cost (less than $60 per month), the same quality of service as a large power system do. Moreover, the grid provides voltage and frequency control, and AC waveform quality that would be additional costs for an off-grid DG customer. So, it does not make any economic sense for a DG customer to try self-providing the grid services, and thus, DG customers should remain connected to the grid and pay their fair share of services, as retail customers do through retail tariffs.

    The main concern raised by this article is that net metering enables DG customers not to pay for the grid services. Although net-metering was convenient to launch the DG market, pricing rules need to be reformed in order to tackle the issue of missing money. One way to address this problem, introduced in the article, is the “feed-in tariff approach” that ensures that the costs of the grid services are recovered from DG customers. Indeed, by treating on-site generation and consumption separately with two different power meters, DG customers are charged for their consumption (under current retail tariffs, which include fixed costs of grid use), and they are rewarded for their energy generation. In the future, if the net-metering approach was still effective, the only way to charge DG customers for the grid services would be to impose standby transmission and distribution (T&D) charges per kW. Dominion, one of the leading providers of electricity, natural gas and related services to customers in the energy-intensive Midwest, Mid-Atlantic and Northeast regions of the US, has already implemented this new pricing approach. It has been effective since 2012 : $1.40 /kW/month for transmission; $2.80/kW/month distribution. Thus, a DG customer that owns a solar rooftop system of 10kW (around 100m²) will have to pay $42/month for the T&D services, which is about the amount a retail customer is charged each month for the same grid service.

    Regarding the US solar market, as an alternative to net-metering, a novel approach called “Value Of Solar” (VOS) was adopted in Minnesota in 2013. VOS tariffs are feed-in tariffs that assess the per kWh benefit of distributed solar energy as it is placed on the grid and takes into account technical, environmental and societal benefits to the utility infrastructure. VOS is a buy-all, sell-all approach to solar interconnection. According to Minnesota’s VOS legislation, solar customers will be billed for all usage under their existing applicable tariff, and will receive a VOS credit for their gross solar energy production. Contrary to net-metering, energy derived from the PV systems will not be used to offset usage prior to calculating charges. Indeed, solar customers would sell 100 percent of the energy they produce back to the utility, rather than use it to power their homes, which they could do with net-metering, and the money a DG customer earns when selling solar power is considered taxable revenue.

    Separating energy usage from energy production ensures that utility infrastructure costs will be recovered by the utilities as designed in the applicable retail tariff. With a VOS tariff, the utility sets the rate at which it purchases the generated power. Minnesota law requires that the VOS tariff remain at or above retail rate for the first three years. But after this initial three-year period, utilities can recalculate the rate annually. The question is : how long will utilities allow the VOS tariff to be higher than retail? Thus, what we are likely to see in Minnesota is a boom-bust scenario: growth in the solar industry for the first three years with an above-retail VOS tariff, and then an immediate bust following the utilities’ recalculation of the tariff. Although VOS seems to be a means of ending the cost shifting that is occurring with net-metering policies, from DG customers to retail customers, it is not the path to success. Actually, VOS is an unstable market that will probably not be able to support the long-term growth that solar is poised to achieve with net-metering in place in 43 states of the US. VOS tariffs create hidden taxes for consumers, give utilities control over solar customers by taking away their right to use the power they generate, and create market uncertainty that can hurt solar businesses.

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