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Utility Standby Tariffs Are Standing in the Way of CHP Investments

By Bradford Weir, intern, in collaboration with Jennifer Kefer, Vice President of David Gardiner and Associates and Executive Director of the Alliance for Industrial Efficiency

Energy efficiency allows manufacturers to boost profits and become more competitive by spending less on heat and power. However, industry efforts to improve energy efficiency face significant barriers in states with unfair rates for what is known as standby power. Last week, eight Pennsylvania companies –manufacturers and developers like ArcelorMittal, Ecolab, The Sheet Metal & Air Conditioning Contractors’ National Association of Pennsylvania, and Schneider Electric – told the Pennsylvania Utility Commission that these rates are standing in the way of their energy efficiency investments. The business letter emphasized the need for fair and reasonable standby rates to encourage energy-efficient investments across the state. The manufacturers urged the Utility Commission to lower financial barriers that inhibit businesses from becoming more competitive by increasing their operating costs.

Many factories and other large energy users can benefit from installing clean, energy-efficient combined heat and power (CHP) or waste heat to power (WHP) systems. A CHP system allows its host to produce both heat and electricity on site from a single fuel source. A WHP system captures otherwise wasted heat to generate electricity. Both CHP and WHP allow their hosts to use less power from the grid, which saves manufacturers money in energy costs, reduces demand on the grid, and makes the entire energy delivery system more reliable and less prone to blackouts – ultimately making manufacturers more competitive.

While CHP and WHP are steady and reliable sources of energy, they may not cover all of a factory’s needs. Companies may still need to connect to the grid for backup or supplemental power, or to cover periodic shutdowns for planned maintenance or repairs. When manufacturers depend on grid power, they pay “standby rates” – often hefty charges, which vary widely from one utility to another.

Inherently, there is nothing wrong with standby rates. CHP and WHP system hosts expect to pay to ensure access to back-up power in the rare instances when it is needed. But these systems are favored because of their reliability and unplanned outages are very rare. Despite their reliability, many utilities charge unfair and inconsistent prices for standby service. These fees can become a major burden to manufacturers.

The problem occurs when companies need to buy energy from the grid. In the case that a company has an outage or requires maintenance, unfair standby rates leave that company completely out of luck. Each utility sets its own standby rates and can stack them with unfair fees that don’t necessarily reflect actual cost of service. These kinds of penalties discourage companies from investing in CHP/WHP, blocking them from being as clean, efficient, and competitive as they could be.

Recent analysis indicates that standby tariffs in Pennsylvania are not an exception to this pattern. A study by 5 Lakes Energy found that a Pennsylvania company with a 2 MW CHP system with no outages would be required to pay standby fees ranging from roughly $5,200 to over $11,500 each month in standby fees – dependent on where the system is located. These fees are on top of regular energy costs. These exorbitant prices are not fair to companies or consumers, which is why some businesses are starting to speak out.

A study by the Alliance released last fall found that Pennsylvania businesses could save $11 billion in their energy bills from 2016-2030 by investing in industrial energy efficiency, CHP, and WHP. Burdensome standby rates discourage these investments. Earlier this year, the Department of Energy reported that there are already twice as many energy efficiency and renewable energy jobs in Pennsylvania than there are in the natural gas, coal, and oil generation and fuel sectors combined. By making standby rates more consistent and transparent, the Pennsylvania Utility Commission could increase the number of energy efficiency jobs in the state – and help Pennsylvania businesses become more competitive.

“Through Combined Heat and Power projects, we’ve helped industrial businesses across Pennsylvania save energy and money,” said Jeff Beiter, Managing Member for E-Finity, one of the eight businesses that wrote to the Utility Commission. “We need fair standby rates, which help protect manufacturer’s investments in energy efficiency projects that not only sustain our business, but keep the industrial and manufacturing sector competitive.”

Manufacturers around the country are beginning to shine a spotlight on the burden that standby rates create. Earlier this spring, companies in Michigan and Minnesota sent letters to their Public Utility Commissions highlighting the benefits of lowering barriers to CHP and WHP. Companies with 2 MW CHP systems with no outages in Michigan and Minnesota would be required to pay standby fees ranging from $8,300-$10,500 and $1,000-$6,600 each month, respectively. As in Pennsylvania, the same system faces dramatically different rates dependent upon where it is built. Indeed, this analysis shows that a CHP host may face a tenfold increase in standby fees – simply because it had the bad fortune of being located in one utility’s service territory versus another. To address this, the Alliance for Industrial Efficiency has laid out guidelines for fair and effective standby rates.

Outreach from manufacturers and trade associations to state regulators is beginning to make a difference. In Minnesota, the PUC has required its four rate-regulated utilities to review their standby rates and file updated tariffs. Utility companies need to hear that standby rates affect companies’ bottom lines and will influence their investment decisions.

Read a press release about the recent letter from Pennsylvania businesses here and learn more about the potential for energy efficiency to save money and create jobs on the Alliance for Industrial Efficiency website.


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