The Value of Distributed Generation under Different Tariff Structures

Distributed generation (DG) may play a key role in a modern energy system because it can improve energy efficiency. Reductions in the energy bill, and therefore DG attractiveness, depend on the electricity tariff structure; a system created before widespread adoption of distributed generation. Tariffs have been designed to recover costs equitably amongst customers with similar consumption patterns. Recently, electric utilities began to question the equity of this electricity pricing structure for standby service. In particular, the utilities do not feel that DG customers are paying their fair share of transmission and distribution costs - traditionally recovered through a volumetric ($/kWh) mechanism - under existing tariff structures. In response, new tariff structures with higher fixed costs for DG have been implemented in New York and in California. This work analyzes the effects of different electricity tariff structures on DG adoption. First, the effects of the new standby tariffs in New York are analyzed in different regions. Next generalized tariffs are constructed, and the sensitivity to varying levels of the volumetric and the demand ($/kW, i.e. maximum rate) charge component are analyzed on New York's standard and standby tariff as well as California's standby tariff. As expected, DG profitability is reduced with standby tariffs, but often marginally. The new standby structures tend to promote smaller base load systems. The amount of time-of-day variability of volumetric pricing seems to have little effect on DG economics.