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Developing electric rates for solar power and other distributed energy resources

Russ Hissom's picture
Owner Utility Accounting Education Specialists -

Russ is the owner of Utility Accounting Education Specialists a firm that provides power utilities consulting services and online/on-demand courses on accounting, finance, FERC best-practices,...

  • Member since 2021
  • 105 items added with 30,442 views
  • Sep 17, 2021

Executive Summary

  1. Distributed Energy Resources (DER) have the potential to become part of an electric provider’s resource planning
  2. Regulator bodies – the Federal Energy Regulatory Commission and the National Association of Regulatory Utility Commissioners provide guidance on the inclusion of Distributed Energy Resources and rate structures that can be charged and compensation paid to DERs
  3. Adoption of rate and compensation structures is occurring in electric co-ops and utilities, but there is a wide-range of electric providers yet to develop the approaches

Distributed Energy Resources and paths to developing DER rates


Distributed energy resources (DERs) are a variety of energy resources, including customer solar installations, (residential home solar as an example), wind farms, private solar installations, bio-energy, battery storage, and micro-grids. The formal definition is that distributed energy resources are power resources that are generally not considered in forecasting the activities involved in maintaining the reliability of the bulk electric system (BES).

A question that electric co-ops and utilities wrestle with is “how do we charge and also compensate our customers that have distributed energy resources that are part of our power supply mix?” DER customers ask that same question, too, only in reverse.   


The power supplier’s transaction with a DER customer

The power supplier (electric co-op or utility) has give-and-take transactions with a distributed energy resource customer. There are times (usually during daylight hours) the DER customers can send their excess generated power to the electric provider (the compensation transaction). Then, generally at night, the DER cannot generate its own power requirements and needs power from the electric provider (the rate transaction).  


Electric regulators provide comments and a roadmap

Regulatory bodies have weighed in on the rate and compensation questions and provided guidance on directions to take in developing rates and compensation. 


In 2020, FERC issued Order No. 2222 on opening wholesale power markets to distributed energy resources. This order requires grid operators to revise electric rate tariffs to accommodate distributed energy resources and to coordinate these efforts with other stakeholders.

A roadmap for DER tariffs is the 2016 National Association of Regulatory Utility Commissioners (NARUC) Distributed Energy Resources Rate Design and Compensation publication. While this has been out since 2016, it bears some repeating as more distributed generation resources come online. The methodologies described are being implemented by electric co-ops and utilities, although not yet in a widespread manner. The methods are straightforward and can be adapted in most co-ops or utilities.


Illustration 1 discuss the major methodologies for rate types charged to Distributed Energy Resources:


Illustration 1 – Distributed Energy Resources Rate Designs



Rate Type

Main Components



Demand charges

Rate structure includes a per kW charge based on the highest demand for the month. Rate also includes fixed customer charge and variable energy (kWh) charge.

Demand charges are being introduced in residential customer classes. Demand charges are common in large industrial customer rates.


Fixed charges and minimum bills

Fixed charge - Customer pays a fixed monthly charge to recover a portion of the connection costs to the electric system.


Several states require minimum bills for distribution utility accounts that have net metering credits. The goal is to recover a portion of the costs of connecting to the electric system grid.


This is also known as the “available for use” charge, i.e., the electric system is available to provide power when the customer’s DER is unable to provide for the customer’s full power needs.

Fixed charges generally recover less than ½ of the per customer fixed costs. The remaining per customer fixed costs is included in the customer energy (kWh) charge. These charges recover a portion of the DERs connection to the electric provider’s system and the “available for use” concept that the DER customer can have power provided when it is needed.


Standby and backup charges

Standby charges pay the cost of instantaneous power to the customer when their distributed resources are not sufficient for their needs.

Backup charges pay the cost of power provided for a planned customer outage, i.e., for DER system maintenance. This category is also called a “partial requirements” customer.

Planned outages are for resource maintenance and the DER would work with the electric provider to plan their power needs.


Interconnection fees/Metering charges

Interconnection charges recover the one-time costs of connecting to the co-op or utility’s system.

Connection costs are for the infrastructure physical connection to the electric system (poles, overhead and underground conductor, metering, substations)


Illustration 2 discuss the major methodologies for rate types charged to Distributed Energy Resources:





Illustration 2 – Distributed Energy Resources Compensation Designs


Compensation Types

Main Components



Net energy metering based on the value of the resource

The customer is credited or billed for the difference between the amount of energy provided to the electric provider and the amount of energy provided to the customer by the electric provider.

The rate used as compensation is calculated under several main methods: (1) as the electric provider’s daily avoided cost of energy based on market prices at the time the energy was provide by the DER or (2) an average/kWh amount based on the provider’s budget for DER resources for the year. Any charges to the DER are based on the DER’s retail rate.


Value of service

The DER is paid for grid reliability services

A valuation is determined per kWh for grid reliability services such as the value the DER provides for ancillary services – frequency measure, voltage measure, supply reconstruction, and operational management.




Compensation Types

Main Components



Transactive energy

Transactive energy is a future oriented concept, where the DER plays a more proactive goal with the electric provider, is interconnected with the grid and is an integral part of the grid operational balance of supply and demand.

Rather than transactions between DERs and electric providers being settled after the fact, the DER is an integral part of the electric provider’s integrated resource planning process.


Where are Distributed Energy Resources and Electric Providers in this Process?

More electric utilities and co-ops are implementing some of these rate structures, although there is a large portion of the industry that could begin to embrace more of these concepts. With advanced and smart metering systems and houses and businesses equipped with the internet of things devices, there should be ample opportunity to implement demand charges for residential and commercial rate classes, not just larger industrial customer rate classes. With advanced metering technology, there will be more opportunities to monitor transactions in real-time vs. settling transactions  at the end of each month.

As the industry moves to these rate and compensation methods, it will be easier to use electric rate structures to send price signals to customers to make decisions on the timing of their use of electricity and for electric providers to work with Distributed Generation Resource providers in planning power supply resources.


Russ Hissom is the owner of UAES, a company that offers online electric co-op and utility accounting, finance, rates, business process and strategy courses, custom courses, articles, and eBooks. Russ has over 35 years of electric co-op and utility industry experience, serving as a partner in a national public accounting and consulting firm’s energy practice. Russ has worked with electric investor-owned and public power utilities and electric cooperatives, learning and leading best practices. He is passionate about the power and utilities business, and his goal is to share his knowledge of best practices with you and provide value to your organization. You can find out more about Russ’ experience on his resume.

The website has a wealth of articles and online resources on electric utility and co-op accounting, finance, electric rates, business processes, and strategy implementation in the electric business. 

Matt Chester's picture
Matt Chester on Sep 17, 2021

Do you think the rates being used right now or the new rates that will be coming out soon are suitably encouraging customers to get in on the DER opportunities, or is incentivizing that not really the goal of the utility? Are they instead just focused on finding the best rates for what the status quo is to work well? 

Russ Hissom's picture
Russ Hissom on Sep 18, 2021

The rate structures are guidelines, but what I’ve seen in practice is some entities encourage electrification so are more proactively working with DERs, while other organizations see DERs as a necessary evil and do not seek to incorporate DERs into power supply planning. Also, in some communities DERs are a local group, so the rate structures get more attention than in other communities, where the DERs are lesser in number or less vocal.

Jim Stack's picture
Jim Stack on Sep 17, 2021

Russ, A great subject. I feel FERC needs to step up and make the utilities pay the real value of Renewable power. Net-Metering should mean they pay the high clean power rate just as they sell it to their customers. But instead I have seen most pay a very low rate while charge 4 times greater to others. Some small coops don't pay any net-metering and steal the power like my unregulated Government utilitiy did for 4 years on my system. 

Bob Meinetz's picture
Bob Meinetz on Sep 17, 2021

Jim, FERC doesn't determine net metering rates, which are set by public utility commissions on a state-by-state basis.

The Federal Energy Regulatory Commission is only authorized to "step in" to ensure fair market competition. Because net metering customers don't sell their electricity in an electricity market, it's beyond the Commission's reach.

Furthermore, except for when it affects grid reliability, FERC will not make any ruling that favors one source of generation over another. The Commerce Clause of the U.S. Constitution prohibits any federal agency from picking favorites in the regulation of interstate commerce, or making any decision based on the environmental merits of various sources of electricity.

"Some small coops don't pay any net-metering and steal the power like my unregulated Government utilitiy did for 4 years on my system."

It's easy to stop small coops from stealing your power - just disconnect from the grid.

Russ Hissom's picture
Thank Russ for the Post!
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