It seems that not a week goes by without another announcement challenging the electricity industry’s current structure. The Rocky Mountain Institute released a report last month examining the increasingly attractive economics of distributed generation resources, particularly solar PV. Meanwhile, Tesla has announced its latest product line; battery packs geared towards the residential and commercial field, with prices as low as $350/kWh before installation. Similarly, in New York City, large commercial buildings are choosing to install cogeneration systems in order to reduce their energy usage, as well as to provide backup power to their tenants in emergency situations.
The confluence of these and other emerging distributed generation technologies is creating tension in the business models of many players in the electricity field.
As customers produce more electricity on site, they need to buy less from the utilities. This phenomenon is known as load defection, and it forces the utilities to compensate for the lost revenue by either raising the per-unit price of electricity, or by adding other, fixed charges to the bills. In New York, distributed generation customers are moved to a different tariff, which includes a charge for the amount of electricity demand that would be required if the distributed generation system did not exist. While it is clear that the utilities must be compensated for the use of their grid, there is a balance between penalizing customers who choose to install distributed generation assets through fixed charges and penalizing customers who do not install new equipment through increased electricity rates. Furthermore, the benefits that the utilities receive from distributed generation, such as postponement of infrastructure upgrades, also need to be taken into account when designing tariffs.
At GI Energy, we will continue working with our customers in order to recommend the optimal mix of on-site and grid-provided electricity for their specific needs given today’s tariff structure. As distributed generation becomes increasingly prominent, we look forward to contributing to the conversation around new tariff models that encourage adoption of distributed generation resources and equitably share the costs and benefits of the new technologies.