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Standby Rates

Standby rates are charges levied by utilities when a distributed generation system, such as an on-site 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 CHPfacility'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.  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. 

ACEEE tracks standby rates at the state and utility level in our state policy database and we assess them in our annual State Energy Efficiency Scorecard. 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

⇒ FInd out which states have favorable standby rates in place with ACEEE's State Energy Efficiency Policy Database.


⇒ Learn about best practices for standby rates with ACEEE's State Technical Assistance Toolkit.

Related Publications

(White Paper - 5/10/2012)