Cost Recovery for Standby and Ancillary Services for Distributed Generation: Considerations for New Mexico
A New Mexico statute allows investor-owned utilities to recover costs of “standby and ancillary services” resulting from distributed generation (DG). In attempting to do so, it is important to recognize both the physical and economic impacts, positive and negative, that distributed generation creates. Distributed generation has different impacts on ancillary and standby services depending on the location, capacity, and production patterns of the systems. Low penetrations of small distributed generation systems will not create significant contingencies for utilities. System impact of fluctuations in DG production may be no larger than normal fluctuations caused by customer demand, such as an air conditioner cycling. Higher penetrations and large DG system may produce noticeable impacts; so magnitude is critical when determining potential additional recoverable utility costs. Understanding DG impact on ancillary services is a relatively new and emerging area of study and as such there are not well-established formulas or protocols. Discretion is required. A hosting capacity analysis can help determine how much DG can be implemented before the impacts become substantive. Standby rates are traditionally used for large industrial generators or combined heat and power systems and threshold system size levels are often used in determining applicability of standby rates. System size thresholds may also be appropriate for standby rates and DG. Relatively small, geographically diverse DG systems are unlikely to create a noticeable coincident outage, so developing a standby charge based on assumed coincidence may not be appropriate. Individual lines and feeders may have considerable excess capacity during coincident outages, or they may be fully utilized and facing upgrades in the near future, which could vary over time. Understanding specific events that create concern for utilities is critical to developing an appropriate rate mechanism (e.g., single residential or community system outage, cascading event, clouds, eclipse). Any modeling or studies of the grid should also recognize the unique situation created when DG is coupled with a smart inverter or storage. These devices change the value proposition and can help mitigate some of the voltage and ramping issues DG can pose for a utility. Utilities can recover their fixed costs in a variety of ways, and some are better suited for DG than others. Beyond charging for standby and ancillary services, other options include fixed customer charges, demand charges, minimum bills, time-of-use rates and updated net energy-metering policies. Studies and analyses of the specific impacts that DG has on the grid should inform utilities’ decision-making process because distributed generation creates both costs and benefits for the grid. Any charge specific to DG customers should be backed up with analysis. At the heart of this conversation is utilities attempting to recover fixed costs. Allowing utilities to indiscriminately recover all stranded fixed costs can negatively affect long-term market efficiency by blunting utility incentives to lower costs and acting as a barrier to entry and exit. The current status of New Mexico’s grid, impending infrastructure updates, and likely customer adoption patterns for DG (backed up by transparent analysis) should remain at the forefront when considering charges for standby and ancillary services. Recognizing that utility regulation is largely a reactive process, it is recommended that applications for DG related standby or ancillary services cost recovery mechanisms be thoroughly reviewed by an experienced economist. If the commission has no such skill set on staff, one might be hired.