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New York's Standby Tariff: Standing in the Way of Distributed Energy?

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  • Jul 2, 2016

AeonSolarcityviewLate last month, New York took a major step toward rethinking utility economics when it issued the “Order Adopting a Ratemaking and Utility Revenue Model Policy Framework” (also known as Track 2 Order). This action aims to better align New York’s electricity system with Reforming the Energy Vision (REV), the state’s initiative to transform the electric grid into a cleaner, more efficient, and affordable system.

But buried in this 180-plus page document is another important development for New York’s clean energy future: Nearly 10 pages are dedicated to re-examining the state’s controversial standby tariff.

Frequently cited as a major obstacle to distributed power generation (e.g. combined heat and power (CHP) systems, rooftop solar panels, energy efficiency, and storage), the standby tariff is a special electricity rate charged to large commercial and industrial customers who produce some of their own electricity but remain connected to the grid. While utilities say they need standby tariffs to recover the costs of maintaining a reliable electric grid, many potential and existing large electricity customers producing their own power see standby tariffs as perversely designed to undermine the business case for distributed generation.

Unless the standby tariff is fixed in a manner that clears the way for investment in customer-owned and sited distributed generation, it will be hard to make REV’s revolutionary vision for a decentralized, competitive electricity market a reality.

The argument for standby tariffs

In their argument for standby tariffs, utilities say they must recover not only their ordinary costs of distributing electricity, but also their incremental costs of maintaining the reserve electricity needed in case customer generators break down and need to draw more electricity from the grid. Additionally, utilities argue the standby tariff protects non-power-generating customers by ensuring reserve-electricity costs are not shifted from the power-generating customers to non-power generating customers. The utilities claim that absent a standby tariff, there would be an unfair subsidy for large customers who choose to generate their own electricity.

But the standby tariff must be viewed in the context of how conventional, regulated utilities have made money for more than 100 years. Unlike just about every industry in our economy, utilities and their investors are guaranteed above-market rates of return on capital investments, such as new power plants, transmission lines, and distribution facilities. Since distributed generation lessens the need for investment in these types of facilities, utilities have scant incentive to encourage its adoption. Hence, the widespread skepticism on the part of large electricity customers producing their own power.

Con Ed’s standby tariff critics

The potential and existing large energy consumers who own and operate distributed generation, notably New York City’s real estate developers and their trade association, the Real Estate Board of New York, have been among the most vocal and persistent critics of Con Ed’s standby tariff.

In fact, the Durst Organization, a prominent New York City real estate developer, announced in January that its Hallets Point residential project slated for development in Astoria, Queens would generate all of its own electricity, and not connect to the grid. This announcement was widely viewed as a reflection of the Durst Organization’s prior disputes with Con Ed over the standby tariff.

At a panel discussion on standby tariffs convened by the Public Service Commission (PSC), New York’s utility regulator, in late January, the concerns voiced by representatives of large energy consumers fell into four broad categories:

  • The standby tariff amounts to an excessive and arbitrary tax on distributed generation;
  • The exemptions that have been inserted on the tariff over the years (e.g. for small scale CHP plants) have stunted growth of distributed generation, as the main goal of project developers has become to keep generators small enough to qualify for exemptions rather than to install bigger generators that could provide cost savings and other benefits to facility owners;
  • The exemptions tend to be time-limited, leading to regulatory uncertainty on whether they will be renewed or extended, which further discourages investment; and
  • The tariff is so complex and difficult to apply that even high-priced energy consultants can only predict its financial impact with great difficulty and many qualifications, creating still another disincentive to investment in distributed generation.

Customer proposals for “fixing” Con Ed’s standby tariff

Short of a Durst Organization-style grid defection, the large energy consumers who own and operate distributed generation (or would be inclined to do so) offer three types of proposals for “fixing” Con Ed’s standby tariff. Some insist that the standby tariff should simply be abolished. Nearly all stress the need for more transparency to make the underlying rationales for divvying up reserve capacity costs among different categories of customers clearer, and to make it easier for power-generating customers to understand the complex tariff formulas that must be applied. Many seek quick and dirty fixes such as modifying particular cost allocation formulas, credits or exemptions.

Much more work must be done to hash out the complexities of the standby tariff and its barriers to clean, distributed energy.

The recent issue of Track 2 Order serves as an important starting point for reforming the standby tariff, and shows that state officials are beginning to work toward comprehensive, long-lasting solutions. But much more work must be done to hash out the complexities of the standby tariff and its barriers to clean, distributed energy. In Part two of this post, I will expand on the large energy consumers’ proposals to fix the standby tariff, show how a course can be charted toward long-term, equitable, and broadly-acceptable solutions that can foster significantly more investment in distributed generation, and propose modifications that will lead to cleaner distributed generation.

This is one of two blogs exploring the standby tariff in New York and how it discourages distributed, on-site, customer-owned and operated power generation. In part two, we’ll explore how a course can be charted to fix it.

By Marc Rauch, EDF’s Senior Specialist, New York Clean Energy Real Estate

Photo source: CUNY

Original Post

Nathan Wilson's picture
Nathan Wilson on Jul 4, 2016

So basically, opponents of the standby tariff are a bunch of free-loaders looking to get free backup power service, courtesy of people that actually buy electricity.

This should be obvious, but the grid costs money. Everyone who wants to use its services should pay their fair share. The oft-repeated claim that “distributed generation lessens the need for investment in these types of facilities…” is yet another wildly exaggerated claim by a dishonest snake oil salesman.

If you want to generate your own electricity, fine. But don’t expect me to subsidize it. If you think your regulated public utility is over-charging you for back-up service, then go off-grid.

If you have a vision for a future where everyone is someday off-grid, then please understand that this future is one in which electricity users (especially the poor) are burdened by needlessly high energy costs, less convenience, less safety, and greater environmental footprint. Because each of these factors will get worse when the economies of scale of large power plants are traded for distributed generation.

Dali Kladar's picture
Dali Kladar on Jul 9, 2016

To realize economic benefits, the energy regulatory conditions should define what “decentralized” means, and introduce a special decentralized green energy tariff to speed up transition from fossil-fuel to green energy . This tariff promotes local, sustainable, competitive, and smarter energy choices.

Decentralized Green Energy Tariff
A wind farm of 100 MW (equivalent to needs of 50,000 households) that is located 100 km away from the energy user could not be named as “decentralized”. However a 1 MW (equivalent to needs of 500 households) renewable energy resource that is located 100 meters away from the energy user can be named “decentralized”.

All “Centralized” and “Decentralized” green energy users should pay the same “delivery” price per 1 km of electrical distance between a generation and a load (user). The “delivery” price could be named as decentralized green energy tariff.

For example, two parties (generator owner & load owner) in Power Purchase Agreement would calculate the value of electrical distance between them. Government regulator would establish the average price per 1 kilometer of electrical distance between generators and loads in whole Interconnected Electrical System (IES). If a user buys the energy from electricity market (it means the electrical distance varies), the user should pay the average price established by regulator.

Microgrid (MG) Definition
A MG is a group of interconnected generators, loads, and/or energy storages within clearly defined electrical boundaries, which act as a single controllable entity with respect to the IES. If desired, a MG can operate in both grid-connected or island-mode. Island-mode means near ZERO electrical distance between generation and loads. It means, reduced pressure on the society to invest in transmission infrastructure.

MGs are a smaller version of the traditional power grid, however they can range from the very complex, with fly wheels, heat storage systems, electrical car chargers etc., and require high level of expertise, to simpler solutions with a small solar, windmill, or squirrel-cage water generator located on a fast moving stream.

Various MG solutions are readily available on the world-market, but only MG bigger than 1MW are profitable according to US DoE, US DoD, US Home Land Security, EPRI and microgrid experts. So, single-house microgrids should be aggregated to 1MW.

No need for policy change
This should not be a “new energy policy”, but rather an argument for the extension of existing cost allocation principles to deal with the new situation.

Whether electricity demands are met through traditional centralized infrastructure (large generation and strong T&D system) or through decentralized system (microgrids) are strategic decisions that require government’s regulation. For society, Decentralized Energy is more viable with green sources due to the lack of local emissions. Investment in microgrids reduces pressure on the society to invest in transmission infrastructure. In essence, government should make IES more decentralized and green. That can be done by monitoring & stimulating reduction of electrical distance between green energy resources.

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