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Utility Cost Allocation - ORIGINAL CONTENT

Edward A. Reid Jr.
Posted On:
Jan 16, 2024 at 6:00 AM
Energy Policy, Climate Change

One of the most contentious issues in utility ratemaking has been the issue of allocation of both capital and operating costs among customer classes. This allocation has been accomplished through monthly service charges, time of day rates, seasonal rates, demand charges and various demand side management approaches.

However, the proposed transition from the current fossil and nuclear based electricity generation system to a system based largely on intermittent renewable generation presents a very different set of cost allocation issues. The current system costs include fuel supply costs and fuel inventories or supply contracts, depending on the generation technology. The system achieves stable output largely as the result of the large rotating masses of the steam and gas turbines which power the generators.

The system to which we have begun transitioning does not require fuel, but rather is dependent upon the intermittent availability of wind or sun. However, frequent fluctuations in wind availability and wind speed and frequent fluctuations in solar insolation result in generator output fluctuations which must be stabilized. Presently, these fluctuations represent a relatively minor fraction of cumulative generation. Short duration fluctuations (seconds to minutes in duration) can be stabilized with the application of power electronic devices and capacitors. Longer duration fluctuations (minutes to hours to days to weeks) are offset by adjustments to the operation of the fossil generation systems. The costs associated with stabilizing the outputs of intermittent renewable generators would appropriately be allocated to the intermittent generators, though this is not the current situation.

As the proposed transition proceeds, the capacity of intermittent renewable generation would increase and the capacity of existing fossil generation would be reduced. At some point, the remaining fossil generation would be insufficient to meet grid demand during periods of low/no renewable generation and some alternative method of achieving stable generation output would have to be implemented. The current assumption is that storage of some type, such as batteries, pumped hydro or compressed air storage would provide the stabilizing function. Regardless of whether this storage was collocated with each of the intermittent renewable generators or located at a number of strategically located grid hubs, the capital and operating costs of the storage required to stabilize the output of the renewable generators would appropriately be allocated to those generators.

Renewable generation developers have so far been able to claim that they provide electricity at lower cost than existing fossil and nuclear generators, as the utilities have borne the responsibility of adjusting the output of those generators to compensate for the fluctuations in renewable generator output. However, if the current costs of utility-provided output compensation or the costs of storage to provide output compensation were appropriately allocated to the renewable generators, the fallacy of their claim of lower electricity generating cost would become obvious.

Electric utilities earn a return on net physical plant in service (rate base). They are therefore faced with a Hobson’s Choice. Utilities could require that the intermittent renewable generation attached to their grids be dispatchable, in which case the investment in storage would be made by the renewable developers, increasing their delivered electricity costs, while the utilities” rate base and earnings potential declined as fossil generation was removed from service. Alternatively, the utilities could invest in the storage required to stabilize renewable generator output, increasing the utilities’ rate base investment and earnings potential, while accepting responsibility for increasing electricity costs.

Regardless of which approach were chosen, the transition would continue to increase electricity costs as long as the cost of storage capacity exceeds the cost of owning and operating fossil generation. Incentives and subsidies could offset all or a portion of the increase in rates, as they do now, but could only increase the real costs, as they do now.

TANSTAAFL – There ain’t no such thing as a free lunch.