Renewable Distributed Generation and Pricing Challenges

By: Ralph Zarumba, Vice President and Tom O’Neill, Jr., Consultant 

Overview 

In April 2020, the Kansas Supreme Court (KSC) overruled the Kansas Corporation Commission and a lower courts order on a tariff which Evergy, the local power utility, explicitly developed for customers operating behind the meter Renewable Distributed Generation (RDG) systems. The KSC opinion stated that the requirement for RDG customers to take service under a separate tariff from their non-RDG peers constituted discrimination under K.S.A. 66-117d of the Kansas Public Utilities Act, which states:  

“No electric or gas utility providing electrical or gas service in this state shall consider the use of any renewable energy source other than nuclear by a customer as a basis for establishing higher rates or charges for any service or commodity sold to such customer nor shall any such utility subject any customer utilizing any renewable energy source other than nuclear to any other prejudice or disadvantage on account of the use of any such renewable energy source.” 

This emphasizes how legal venues such as the KSC offer opinions based upon legal interpretations and not the broader policy issues that state and federal regulators consider in evaluating pricing designs proposed and implemented by regulated utilities. Provided below is a discussion of many of the various issues that should be addressed in developing a pricing design that fulfills the needs of current and potential RDG customers while limiting the adverse impact on other customers. 

Evergy’s Proposed Tariff

Evergy’s proposed Residential Standard Distributed Generation tariff (the “DG tariff”) differs from their typical Residential Service tariff in that it is a three-part tariff. The pricing design contains a fixed monthly charge, a volumetric energy charge, and a demand charge. Evergy’s existing Residential Service tariff contains only a monthly fixed charge and an energy charge. Both tariffs are seasonally differentiated with a higher energy charge during high-usage summer months than during winter months.

Given that the fixed monthly charge for these two tariffs is identical, the main differences between them are:  

  1. The DG tariff contains a demand charge 
  2. The Residential Service tariff has a higher energy charge, which captures the capacity costs as well as usage

Is a Pricing Design Specifically for DG Customers Discriminatory? 

Traditional pricing design theory looks at the following attributes to determine if customer groups should be split into different tariffs: 

Since these questions must be answered by any utility proposing such a tariff, most analyses have found different load shapes and load factors between DG and non-DG customers. Further, a difference exists in the type of DG equipment being utilized. These conclusions are logical if you assume that a customer has installed photovoltaic (PV) DG, which operates when the sun is shining; the resulting load shape would undoubtedly differ from a customer without PV DG equipment installed 

Does Cost Shifting Occur? 

Most jurisdictions require that the rates charged are “just and reasonable.” Though the definition of “just and reasonable” is broadly defined and subject to various interpretations, a commonly accepted simple explanation is the equitable treatment of all classes of customers. Equity is often measured through an allocated cost of service analysis or, less frequently, through a marginal cost revenue study.

Many studies have identified significant cost differentials between DG customers and non-DG customers when they are served under the same tariff. For example, a study performed by the author in Puerto Rico produced a revenue deficiency approximately 500 percent greater for DG customers compared to non-DG customers.

Cost shifting can occur when simple DG compensation approaches, such as Net Metering, are implemented as a substitute for a more sophisticated (i.e., unbundled) pricing design. Many jurisdictions adopted Net Metering as straight forward pricing approach, which is often predicated upon a limit to the number of DG customers who are allowed to receive service under such tariffs. When rooftop PV technologies were a novelty, the impact of the cost shifting on other customers was less significant. However, as DG saturation has increased, the cross-subsidization problem inherent in approaches like Net Metering has grown 

What is the Solution? 

As a foundation, we suggest revisiting Bonbright’s[1] Criteria for sound rate design. Bonbright suggested pricing solutions that treated all customers equitably and promoted the efficient use of resourcesWhile Bonbright first proposed his principles almost sixty years ago, they remain applicable today. 

Ultimately, there are existing pricing solutions that could help mitigate the challenges of DG adoption. The key principles are rooted in the efficient usage of the electric power system and sending price signals that promote the adoption of technologies to achieve societal goals.

For more information, please contact Mr. Zarumba and Mr. O’Neill.

Next in the series: Arguments for and against demand charges

[1] “Principles of Public Utility Rates,” Public Utility reports, Inc. by James C. Bonbright, Albert L. Danielsen and David R. Kamerschen. Second edition March 1988, pages 383-384.

All views expressed by the authors are solely the authors’ current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, or related companies. The authors’ views are based upon information the authors consider reliable. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.

Newsletter Sign Up
 
Search
 
Follow