combined heat and power

Great Plains Institute is excited to publish a new white paper, Best Practices for Standby Rates for Combined Heat and Power (CHP), prepared for GPI by Jamie Scripps of Hunterston Consulting. This paper is a culmination of a years-long collaboration with Jamie and other partners to address barriers to deployment of CHP systems in the Midwest—including the design of standby rates, which are monthly charges to customers with on-site distributed generation like CHP systems. We are grateful for the thoughtful contributions of Carl Linvill of the Regulatory Assistance Project in advising on the starting point for this research, and for his review of the final product.

Combined heat and power (CHP) systems can play an important role in achieving a low-carbon economy. These systems generate both electricity and thermal energy, and use the thermal energy from the power generation for heating and cooling. CHP systems benefit the energy system by delivering increased energy efficiency, lower emissions, greater system reliability and resilience, and financial savings.

The best practices white paper incorporates research and stakeholder feedback gathered through a survey and interviews in the last year.

In this interview, I talk with Jamie Scripps of Hunterston Consulting and Carl Linvill of the Regulatory Assistance Project about the importance of standby rates for CHP, development of the best practices, gathering feedback given the topic’s complexity, surprises (and non-surprises!) in the results, and more.

Note: See information at the end of this post for our May 14 webinar with Jamie and Carl to discuss these best practices.

Question: Can you talk about what standby rates are and why they matter?

Jamie: Standby rates are charged to customers with on-site distributed generation (i.e., generation sited close to its end-use) such as CHP systems. The rates are intended to help the utility recover costs related to reserving and providing backup electricity during scheduled and unscheduled outages of the customer’s CHP system.

Standby rates can be prorated to reflect partial and/or infrequent use by these customers. Customers relying on distributed energy such as CHP systems pay standby charges to a utility even when their systems work perfectly and do not need standby power.

When standby rates are too high, inflexible, unpredictable, or simply too difficult for customers to navigate, these extra costs imposed on a customer mean that the economics of a CHP system will fail to provide the needed return on investment, and a potential project will not pencil out.

Additionally, because standby charges can vary significantly from utility to utility and across state lines, this variation can pose economic development challenges for states hoping to attract new companies that may be interested in pursuing CHP or other distributed generation to increase efficiency, reduce emissions, and save money. 

Question: Why is rate design so important?

Carl: Rate design—the framework utilities and regulators use to set prices for the reliable provision of electricity and energy services—influences consumption and investment decisions across the full range of resource choices: energy efficiency, demand response, and traditional and distributed generation (DER Resources). Prices must reflect the true economic costs of providing energy services, which reflect other market and non-market values, such as environmental performance, resource capabilities, and fluctuations in supply and demand over time. If the rate design does not reflect economic costs then otherwise economically desirable DER resources may appear to be uneconomic and the investment may be forgone. The consequences of poor rate design include potential DER adopters missing out on cost saving opportunities and all customers paying more when the utility and its customers rely upon less cost effective resources.

Question: Can you describe GPI’s recommended best practices for standby rates for CHP?

Jamie: Based on the research conducted for this paper, GPI recommends that utilities, regulators, and stakeholders look to the following as best practices in standby rates for CHP:

  • Standby rates should be reasonably simple and transparent.
  • Standby rates should take into account the forced outage rate of customers’ generators.
  • Time of use should be reflected in the energy component of standby rates.
  • Maintenance demand charge rates should be discounted relative to backup demand charge rates.
  • Demand charges for backup power should be pro-rated based on actual use.
  • Demand ratchets in standby rates should be avoided where possible.

While GPI is not recommending it as an accepted best practice at this time, utilities, regulators, and stakeholders may wish to investigate further the assessment of demand charges or a coincident peak price based on a facility’s coincident peak.

And beyond these proposed best practices in standby rates for CHP, based on data gathered through survey responses and interviews, GPI recommends that those interested in embracing the benefits of CHP as a resilient, low-carbon resource should also investigate: (1) distribution system cost allocation and rate design for CHP systems; (2) possibly exempting small CHP systems from standby charges; (3) updates to interconnection standards; and (4) the availability of CHP operational data to improve rate design in the future.

Question: GPI has a strong history of supporting CHP policy work in the Midwest, including collaborating with you on issues like standby rates. Can you briefly describe this how this work has evolved?

Jamie: Over the past five years, GPI has been actively engaged in standby rates work, initially supporting the development of the “apples-to-apples” standby rate analytical tool, which I helped to develop while at 5 Lakes Energy. This tool informed stakeholder comments in the Minnesota standby rates proceeding in 2015 (Minnesota Public Utilities Commission, Docket No. CI-15-115). In the years since, by using the apples-to-apples comparison tool, GPI has been active in supporting technical assistance in standby rate discussions across a number of states, including Michigan, Ohio, Indiana, and Illinois.

In 2019, GPI recognized that while best practices in standby rates had begun to emerge, there was a need to test these emerging recommended practices with interested stakeholders such as regulators, potential CHP users, developers, technical experts, and utilities. Early in 2020, GPI set out to evaluate emerging best practices in standby rates for CHP, which I did through conducting a survey and interviews.

Question: Standby rates can be a complicated, highly technical topic. How did you address the need to level-set with regard to survey and interview participants’ knowledge of the issue?

Jamie: Throughout this project, GPI took a proactive approach to outreach and education on the topic of standby rates. In June 2020, GPI hosted a webinar to introduce and officially launch the survey. With over 35 participants, the webinar audience included a diverse range of perspectives, including CHP developers, utilities, technical consultants, and regulatory staff.

Within the survey itself, there was a glossary of terms to help participants decode any technical terminology.

Later, on behalf of GPI, I hosted a breakout session with Q&A at the 2020 CHP Alliance Summit in September 2020, and presented an overview of the survey regarding best practices in standby rates for CHP, including results to date.

Question: For the survey that was launched in June 2020, how did you arrive at a starting point?

Jamie: GPI’s standby rates best practices work builds upon previous efforts related to standby rates and CHP, including:

Given their strong expertise in rate design, the experts at the Regulatory Assistance Project have been an important partner in GPI’s work, and Carl was instrumental in helping to establish our starting point for this research.

Carl: One of the key resources on Jamie’s list was a 2014 paper from the Regulatory Assistance Project titled “Standby Rates for Combined Heat and Power Systems.” She and I spoke early on in the project about how to adapt some of the recommended practices from RAP’s earlier research based on GPI’s standby rates-focused work over the past few years. For purposes of building out the survey and interview questions here, we developed an initial list that included:

  • Rates should be as simple and transparent as possible.
  • Rates should not assume usage during peak times.
  • Reservation fees should be small (or non-existent) and should take into account a CHP system’s reliability.
  • Rates should not include demand ratchets.

Question: What kind of stakeholders participated in the survey and interview process?

Jamie: There were 34 total survey responses: 2 respondents were affiliated with an electric utility and 0 were affiliated with a gas utility; 4 were affiliated with a governmental entity (including regulators from Michigan and Ohio); 3 were categorized as providers of technical assistance; 1 was a consultant for a utility; 3 were consultants for advocates; 3 were consultants for other; 7 were manufacturers; 1 was an advocate; 8 were developers; 1 was an equipment supplier; and 1 was an original equipment manufacturer.

In addition to the survey responses received, 20 individuals participated in direct interviews. Of these interviewees, 2 were advocates; 2 were consultants for advocates; 1 was a consultant for other; 1 was a developer; 1 was affiliated with an electric utility; 1 was affiliated with a gas utility; 9 were affiliated with government (including regulators from Michigan and Ohio); 2 were affiliated with manufacturers; and 1 was affiliated with a technical assistance provider.

Question: Were there any surprises in the survey and interview results?

Jamie: We were a bit surprised by the strength of the rejection of demand ratchets in the survey results, and the depth of feeling expressed in interviews. Specifically, 75 percent of survey respondents disagreed that it should be considered a best practice in standby rates for a utility to recover fixed costs through the use of demand ratchets. A number of interviewees expressed doubts as to the fairness of demand ratchets, citing a strong preference for as-used demand charges, which were supported by 62 percent of survey respondents.

The biggest non-surprise was the overwhelming support for transparency and simplicity in standby rates. GPI’s previous research on standby rates had highlighted a need for increased clarity and transparency in the presentation of standby tariffs to customers contemplating the installation of a CHP system. Here, 91 percent of survey respondents agreed that it should be considered a best practice for standby rates to be reasonably simple and transparent such that customers and third-parties can make informed decisions based on reading the published tariff, along with any accompanying educational materials. As Steve Huso of Xcel Energy Minnesota stated in his interview, “A limited amount of complexity is feasible, so we should use complexity where it does the most good.”

Carl: The survey results produced through Jamie’s work are an important addition to previous work on this topic. Her results align well with rate design best practices overall and her pointed results on demand ratchets and transparency re-affirm RAP’s best practice guidance. Rate design should be as simple and transparent as possible while reflecting true economic costs.  Standby rates that hit the sweet spot of rate design that Jamie describes can ensure potential CHP adopters have the opportunity to optimize their consumption and investment choices.

Download the paper, Best Practices for Standby Rates for Combined Heat and Power.

A webinar was held on May 14, 2021 to accompany the whitepaper.

You can also access slides from the webinar here.

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