Combined heat and power (CHP) installations offer industrial and commercial owners stable energy prices, lower overall energy costs, and reliable power during grid outages. Interest in CHP is on the rise as a result of increased attention to microgrids anchored by CHP and the possibility of reducing emissions below grid-supplied electricity. Under some electricity rates, CHP customers face confusing and potentially contradictory tariff conditions, leading to excessive costs for the back-up electricity and grid services provided by their local utility and a disincentive to invest in CHP resources.

In Standby Rates for Combined Heat and Power Systems, the Regulatory Assistance Project (RAP) and Brubaker & Associates, Inc. examine utility standby rates in five states and showcase sound applications of regulatory principles. Where the authors identify deficient rate designs, they recommend steps to improve the rate design with the goal of encouraging deployment of cost-effective CHP resources. CHP and other distributed resources have proven to be reliable and pose little risk to utility operations. However, many standby rates are designed around outmoded and outdated assumptions, which create barriers to widespread adoption of CHP resources. RAP recommends a basic, two-part standby rate consisting of a monthly generation reservation charge and a daily, as used, demand charge as a starting point for standby rates.

“Regulators easily overlook standby rates but they should give them some attention now,” said Rich Sedano, principal and director of US programs at RAP. “Getting standby rates right—sending the right price signals and charging CHP customers for the grid services they actually receive—will unlock private investment in these cleaner, more efficient resources and reinforce the emergence of customers as a power system resource.”

President Obama established a goal of installing 40 gigawatts (GW) of new, cost-effective industrial CHP by 2020, a 50 percent increase from current levels. This would save an estimated $10 billion on energy per year, generate $40 to $80 billion in new capital investment in local manufacturing, and reduce emissions equivalent to 25 million cars. Standby rates are an important factor in determining the relative economies of CHP installations compared to taking electricity from the utility. Public service commissions should review standby rates in their jurisdictions to ensure that these rates actually match utility costs with the services customers’ use, and do not otherwise disincentivize CHP.

This paper presents the results of an analytical assessment of the rates, terms, and conditions for standby service in Arkansas, Colorado, New Jersey, Ohio, and Utah. Specifically the study evaluates the efficacy of standby tariffs for CHP applications. Although the study and recommendations target participating states, the analytical methods, spreadsheets, and recommendations can be adapted for use by other jurisdictions.

Join RAP for a webinar on Wednesday, April 9th at 1:00 p.m. EDT to learn more.