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Considerations with Distributed Generation: Utility Tariffs

Tariffs and other charges may alter the economic feasibility of distributed generation for those interested in generating electrical power while remaining connected to the grid. Two principal types of tariffs impact DG decisions:

  • Back-up tariffs, consisting of supplemental and standby charges, can significantly alter the economics between grid and distributed power. Back-up charges that are too high can make it uneconomical for the customer to bypass the system.
  • Competitive transition charges are charges placed on distribution services to recover utility costs incurred as a result of the customer leaving the system (i.e., stranded costs usually associated with generation facilities and services), which are not recoverable in other ways.

DG systems operate when the marginal cost to operate is lower than grid costs. Therefore, the owner will operate DG technology whenever it is economical versus the grid. In many states, off-peak electricity prices are lower than the DG marginal production costs (e.g. 4-6 cents/kWh). In these cases it is cheaper to purchase electricity from the utility than to operate a distributed energy (DE) system during off-peak times. This provides the opportunity to utilize the on-peak only DE to offset intermediate and peak power from utility generation and relieve grid congestion.