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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


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



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?


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



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



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



Discussion


Compensating Distributed

Generation Customers

TPPA Annual Conference July 22, 2014

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