The Effects of Electricity Tariff Structure on Distributed Generation Adoption in New York State

Abstract

No Abstract. First page of Executive Summary follows:  As in other U.S. states with relatively high electricity prices, New York State has offered economic incentives for certain consumers that generate their own electricity on-site, a practice known as distributed generation (DG).  DG can be particularly attractive when the waste heat from thermal generating equipment, such as gas turbines and internal combustion engines (ICEs), can be used to offset fuel purchases for water and space heating, cooling, or steam production.  This practice is known as combined heating and power (CHP) or cogeneration.  Typically, DG is most economical when utility electricity is used to cover peak consumption or during DG equipment outages. Utility service under this paradigm is termed standby service.  Aside from lower energy bills, DG systems can offer additional benefits to adopters, other electric utility customers, and society in general.  DG adopters gain improved reliability if their systems are capable of operating in isolation from the grid.  DG can offset or delay the need for building more central power plants or increasing transmission and distribution infrastructure, and can also reduce grid congestion, translating into lower electricity rates for all utility customers.  Societal benefits can include reduced carbon and other pollutant emissions.   However, DG is not necessarily a win-win-win proposition.  Utilities may see DG customers as “peakier,” or having more variations in their consumption patterns than non-DG participants. This requires the site to have the same service capacity as before DG installation while the customer is buying less energy.  Depending on the operating scheme and relative performance of the DG system and the power plants supplying the grid, fuel consumption, carbon and other pollutant emissions, and noise pollution can all increase with DG adoption.  For these reasons, DG policy needs to encourage applications with greater public benefit, while discouraging those from which the public incurs a net cost.  Inherent in this is the need to analyze DG costs and benefits and the influence public policy has on DG adoption and operation.  In 2002, NYSERDA (New York State Energy Research and Development Authority) published a report on the market potential for CHP in New York State (Hedman, 2002).  The report found DG CHP systems account for five GW of total electrical capacity distributed among 210 sites, mostly at large industrial complexes, each with an average capacity of 25 MW.  Hedman estimates the potential for an additional 8.5 GW of electrical capacity for CHP, distributed among 26,000 sites, each generating about 330 kW.  Seventy-four percent of these new installations, mostly commercial and institutional facilities, would require less than five MW of electrical capacity.  DG prevalence in New York has been increasing, and is now economically feasible at smaller scales.  Recently, electric utilities began to question the equity of electricity pricing for standby service.  In particular, the utilities did not feel that DG customers were paying their fair share of delivery (transmission and distribution) costs under existing tariff structures.  In response, the New York State Public Service Commission (NYSPSC) opened regulatory hearings and ultimately approved a tariff structure for standby service.