What is Combined Heat and Power?
Combined heat and power (CHP) is a system that not only generates electricity, but also harnesses the thermal energy from power generation for heating and cooling applications (typically burning natural gas for electricity and capturing the exhaust for steam heat). By combining these two processes, some CHP systems can achieve thermal efficiencies of 60-80 percent, which is up to twice the efficiency of traditional power generation.
While a CHP system can be sized for nearly any application, its benefits are particularly apparent in energy-intensive industrial applications such as manufacturing or institutional applications such as hospitals and universities. The benefits of CHP are wide-ranging, including:
- Reduced utility bills
- Reduced stress on grid infrastructure
- Fewer fossil fuel inputs and reduced greenhouse gas emissions
- Efficiency gains by using energy produced on site (by siting generation close to its end-use, we can avoid the loss of power that occurs as it travels over transmission and distribution wires)
- Reliability and resiliency benefits during severe weather or grid blackouts
- Ability to anchor microgrids for district energy usage
What are standby rates?
Standby rates are charged to customers with on-site distributed generation (i.e., generation cited closed 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.
In general, utilities’ standby rates distinguish between three types of power:
- Supplemental power: Energy used in regular business operations that isn’t supplied by the CHP system. Many industrial customers have a CHP system that offsets some of their energy usage but does not completely satisfy their energy needs. These customers are realizing the benefits of CHP on all energy produced onsite, while still purchasing additional energy from the utility.
- Maintenance power: Energy used during planned repairs to a CHP system. All CHP systems require infrequent but periodic maintenance. If a customer cannot fully cease business operations during this time, they will likely need to be connected to the utility for the purchase of maintenance power.
- Backup power: Backup power is energy supplied during unanticipated (or forced) outages of CHP systems. Modern CHP systems have very low forced outage rates (under 5 percent), making it unlikely that CHP systems will require backup power during peak hours.
Why do standby rates matter?
Customers relying on distributed energy (e.g., CHP, solar, etc.) pay standby charges to a utility even when their systems work perfectly and don’t need standby power. There can be costs to a utility to provide power to be “on call” in the event of unplanned outages, and industrial customers expect to pay a fair rate for their energy needs. But standby rates can be poorly designed, or sometimes seem to intentionally discourage the use of CHP. Depending on the size of a customer’s CHP system, standby charges can run in the thousands (or tens of thousands) of dollars per month, which can significantly impact the economic viability of distributed energy options for industrial facilities.
These practices impose an economic barrier to CHP deployment and prevent our energy mix from being as resilient, efficient, and competitive as possible.
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.
What are the best practices for standby rate design?
In line with best practices recommended by the Regulatory Assistance Project and Oak Ridge National Laboratory, standby rates should attempt to align customer rates with the actual costs imposed on the utility’s system and should provide appropriate incentives for proactive maintenance and efficient operation of the CHP system.¹
Best practices for standby rate design include the following:
- Rates should be transparent, fair, and aligned with the cost of service. One of the most significant barriers to CHP implementation is overly-complicated tariffs. The language of a utility’s standby tariff should be clear enough so that a potential CHP user can understand and estimate their future bills. In addition, fair standby rates should not assume that backup or maintenance power will be needed during peak hours as this is already seldom the case, and thoughtful standby rate design can further reduce this risk by incenting proactive, scheduled maintenance and efficient operation of CHP systems.
- Rates should incent efficient operation and maintenance of CHP systems. In most cases, costs imposed on the utility can be almost entirely avoided by incenting CHP system outages to take place with advance notice to the utility (i.e., scheduled maintenance), and during off-peak hours. Modern CHP systems are very reliable, as reflected by their very low forced outage rates (under 5 percent), making it unlikely that CHP systems will require backup power during peak hours, let alone simultaneously throughout the utility’s service area. Utilities should reward CHP customers for the efficient operation and maintenance of on-site generation which provides benefits to the grid as a whole.
- Reservation fees should be small (or non-existent) and should take into account a CHP system’s reliability. Some utilities charge standby customers a fixed per kilowatt (kW) fee each month in order to reserve standby service. The reservation fee is usually the primary driver of customer costs incurred during a “no outage” month. If a utility deems it necessary to charge a reservation fee, it should be relatively small and calculated based on the reliability of the system. Taking reliability into account (by reference to the CHP system’s forced outage rate) incents proactive maintenance and investment in the latest, most reliable technology.
- Rates should not include demand ratchets. Many utilities employ “demand ratchets” in their standby tariffs. A demand ratchet fixes a customer’s minimum billing demand (expressed in kW of standby capacity used) based on the customer’s maximum demand during a month, and applies that fixed amount of demand on the customer’s subsequent monthly bills (often over a 12-month period). A utility may justify the use of a demand ratchet under the theory that it helps to reduce the risk on the utility when a customer can potentially experience large swings in demand during the year. A high demand ratchet can be fixed in place for up to a year or more, even if the customer only experiences a CHP outage for a very short period of time.
According to best practice, standby rates should not include ratcheted demand charges, especially over periods extending longer than one month. In general, a CHP system’s forced outage in one month is not a reliable predictor for forced outages in subsequent months. Instead, utilities should consider an hourly or daily “as-used” demand charge to recover any costs associated with providing standby service during a CHP system outage.
Looking to the future…
As deployment of distributed generation, such as CHP systems, continues to rise, utilities have an opportunity to take a renewed look at their approach to standby service. When utilities engage in a thoughtful examination of their standby rate designs, it can be a win-win for utilities, customers, regulators, and other stakeholders.
Now is the time to institute these best practices in standby rate design. By investing in CHP, we can achieve a more resilient, efficient energy future while reducing emissions and saving money.
¹ See Brubaker & Associates, Inc. and the Regulatory Assistance Project for Oak Ridge National Laboratory, Standby Rates for Combined Heat and Power Systems, February 2014, https://info.ornl.gov/sites/publications/Files/Pub47558.pdf
