Standby Rates

Along with clear interconnection standards (and net metering rules), a key condition for the economic viability of CHP is that the avoided costs of purchasing electricity from the grid be greater than the capital and operating costs involved in building the facility. Excessive standby rates and other charges can upset this balance by adding to operating costs, negatively impacting the economics of CHP systems.

Standby rates are charges levied by utilities when a CHP system experiences a scheduled or emergency outage, and then must rely on power purchased from the grid. These charges are generally composed of two elements: energy charges, in $/kWh, which reflect the actual energy provided to the CHP system; and demand charges, in $/kW, which attempt to recover the costs to the utility of providing capacity to meet the peak demand of the facility using the CHP system. Utilities often argue that demand charges act as a strong incentive for CHP system owners to manage their peak demand.

Regulators typically approve demand charges on the questionable assumption that utilities must maintain capacity equivalent to a CHP facility's peak demand in the case of an outage, and that such outages are common. This view recognizes only the costs to the utility of a highly improbable emergency outage of the CHP system (Casten & Karegianes 2007). It fails to recognize the benefits that highly efficient distributed generation systems provide, including increased system reliability and power quality, and reduced distribution losses.

The use of demand charge "ratchets" further discourages CHP by maintaining a high demand charge, initially levied for a one-time outage, for a period ranging from several months to more than a year. Ratchets thus turn a charge for a one-time demand peak into a long-term fee for the CHP facility.

As noted in EPA (2009), utilities and regulators seem unprepared to forego all demand charges, but there are examples of rate tariffs favorable to CHP that include both energy and demand charges, such as Portland General Electric's Schedule 75, Partial Requirements Service. 

Best practices for standby rates include:

• Rates weighted towards energy charges rather than demand charges
• Demand charges based upon the (low) probability of an emergency outage coinciding with a period of grid peak demand
• Elimination of demand ratchets; or, at worst, limiting their use to thirty days