Standby Service to Distributed Generation Projects: The Wrong Tool for Subsidies
15 October 2003
By Dr. Hethie Parmesano
Distributed generation (DG) is receiving increased attention, particularly following the recent blackouts, as DG can help to mitigate the need for transmission expansion, in addition to providing other benefits. In an article in the October 2003 issue of the Electricity Journal, NERA Special Consultant Dr. Hethie Parmesano argues that DG-related benefits are project specific; not every potential DG project deserves to be built.
Dr. Parmesano proposes that incentives for DG development should be targeted and tied to the specific benefits provided, and that subsidization of standby rates for DG projects is the wrong tool for encouraging socially useful DG development. Distorting standby rates to provide DG subsidies is a shotgun approach that will encourage both good and bad projects, give uneconomic signals for the design of such projects, and lead to inefficient use of standby service. Standby rates for DG should be judged not on the basis of whether they encourage DG development, but rather on whether they reflect the cost of providing service to the DG project (plus a fair contribution to any above-market costs that other customers are paying). These rates should recover in fixed charges the costs of the local network required to stand by to serve intermittent DG loads, and recover in (ideally time-differentiated) usage charges per kWh costs that vary with electricity delivered to the project.
This abstract is republished with permission from the Electricity Journal, Volume 16, Issue 8, October 2003, Copyright (c) 2003 Elsevier Science, Inc., http://www.elsevier.com/locate/tej. All rights reserved.
