How Much Should Self-Generators Pay For The Grid?

on November 26, 2013 at 2:00 PM

Berlin Presents Alternative Energy Projects

A timely question

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. 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.

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.

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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.

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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.

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.

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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.

Perry Sioshansi is the President of Menlo Energy Economics and Editor & Publisher of EEnergy Informer. He can be reached at [email protected].
His latest two books are Energy Efficiency: Towards the End of Demand Growth and Evolution of Global Electricity Markets, both published in 2013 by Elsevier. Further details & 30% discount available here