As the electric power industry continues to transform its distribution system — enabling electricity and information to travel freely back and forth between the utility and the consumer — a question of increasing importance for utilities and customers is how much to charge for providing backup electricity service for customers who generate a portion or all of their own electricity. This is becoming especially important because of the growth of distributed energy resources (DERs) like rooftop solar panels, microturbines and fuel cells. Driving the trend are falling costs, today's low natural gas prices as well as a host of state and federal incentives.

Backing Up Power

When homes or businesses install DERs, backup electricity service is needed because their power output won't always match their needs exactly. In these situations, the self-generating customer who wants to keep the power flowing must be backed up by another power supplier, whether it's the local utility or the customer's alternative power supplier.

Regardless of who provides the backup service, there's a cost incurred in standing by to provide backup power and not selling it elsewhere. The backup provider also must pay for the transmission and distribution costs related to supplying the backup service.

Incurring the Expense of Backup Rates

To determine whether DERs are economically feasible, developers will look at the rates, terms and conditions for backup service. For these reasons, developers and self-generating customers typically oppose the imposition of backup rates during regulatory proceedings.

They argue that backup rates shouldn't be imposed on them because utilities ignore the benefits provided by DERs, such as deferred or avoided generation, transmission and/or distribution capacity, reduced line losses that naturally occur along distribution and transmission lines, and lower air emissions. DER developers also argue that backup rates are discriminatory because the utility levies different charges on customers than on those who do not self-generate.

Contrary to these claims, utilities often can't defer or avoid generation because of the unreliable nature of variable DERs. In fact, these types of DERs often trigger transmission or distribution upgrades, or both, as opposed to deferring them.

Despite these facts, state utility regulators have sometimes exempted self-generators from backup service charges based on varying criteria. Other states have set backup rates in a manner that doesn't enable the utility provider to recover the full costs of providing the service.

Failure to recover the costs of backup service from self-generating customers who rely on backup service shifts costs to other customers. The utility must recover the backup costs that are incurred on behalf of self-generating customers.

Evaluating the Economics of DERs

As DERs grow, state policies that deny full recovery by utilities of the costs of backup service from self-generating customers will expose other customers to higher rates to pay for those costs. This hidden subsidy for self-generators unfairly burdens customers who do not self-generate, including lower-income customers who can't afford to install their own generation, or customers who don't use a lot of energy and therefore aren't inclined to install DERs.

To accommodate the growth of DERs on their systems, utilities must continue to make investments in distribution systems, backup power sources and modernizing the grid. If utilities weren't making these investments, and thus maintaining the capability to provide backup services, customers with DERs would have to go elsewhere for these services, probably at a much higher cost.

Failure to recover actual backup costs from self-generating customers who rely on backup service hides the true costs of DERs. Rate exemptions or rates that don't adequately compensate the utility for providing backup service may encourage DERs that aren't economically efficient.

Doing Away with Subsidies

Choices to self-generate shouldn't be made at the expense of other customers based on faulty economics. Usually, effective subsidies are transparent and adjust to the cost developments of nascent technologies, paying less as the technologies mature. The amount of the subsidy provided to self-generating customers through backup rate exemptions or rates that are not fully compensatory is not transparent, which makes it hard for policy makers to make informed decisions.

The electric utility industry shares and supports the desire of customers to adopt DERs. It's critical, though, that it be done right. As DERs become more cost-competitive, the reason for the subsidy no longer exists. It's time to remove subsidies, not to expand them.

For more information about EEI, visit www.eei.org.

Rick Tempchin (rtempchin@eei.org) is the executive director of retail energy services for Edison Electric Institute.