Draft 

Utility Rates 

Designing Rates to Level the Playing Field for Clean Energy Supply 

Electric utilities may apply different rates 

and charges to clean energy supply 

projects (i.e., renewable energy and 

combined heat and power [CHP]) than they 

do to customers that do not generate 

electricity. These charges are designed to 

recover reduced income or provide for special 

services that are required due to the unique 

operating profile of clean distributed 

generation (DG) projects. If not properly 

designed, these additional rates and charges 

can create unnecessary economic barriers to 

the use of renewables and CHP. Appropriate 

rate design is critical to allow for utility cost 

recovery while also providing appropriate 

price signals for clean energy supply. 

How Can Utility Rates Affect 

Clean Energy? 

Customer-sited clean DG projects are usually 

interconnected to the power grid and may 

purchase electricity from or sell electricity to 

the grid. Depending on the specific DG system 

design, operating conditions, and load 

requirements of the facility, the system may 

What Are the Benefits of Developing Utility Rates 

to Support Clean DG? 

DG is the generation of electricity at or near the energy end-user. Clean energy 

technologies include renewable energy sources such as solar, wind, geothermal, biomass, 

biogas, and low-impact hydroelectric, as well as CHP (the simultaneous generation of 

electric and thermal energy from a single source). 

Clean DG projects yield numerous public benefits, including: 

•	 Bringing economic development to a state. 

•	 Reducing peak electrical demand on the grid. 

•	 Reducing electric grid constraints. 

•	 Reducing the environmental impact of power generation. 

•	 Reducing fuel price volatility. 

•	 Helping states achieve success with other clean energy initiatives. 

The use of utility rates to encourage DG in targeted load pockets can: 

•	 Yield improvements to grid system efficiency by reducing grid congestion. 

•	 Provide additional reserve power and reduce system losses. 

•	 Defer or displace more expensive transmission and distribution infrastructure 

investments. 

•	 Improve stability from reactive power and voltage support. 
$101,372

$119,712

$135,408

$138,048

$146,255

$147,866

$150,064

$160,555

$0$20,000$40,000$60,000$80,000$100,000$120,000$140,000$160,000$180,000

Time of Use

Substa ntia l Non-coincide nt De ma nd

Charge** 

Substa ntia l Non-coincide nt De ma nd

Charge*

Declining Block

Standby Energy Charge

High custome r cha rge

Standby Rate

Pure Volumetric

* No Ratchet **Ratcheted Electric Savings for the Month of August

Source: Energy and Environmental Analysis, Inc.2005 

provide anywhere from 0 to greater than 100 percent of 

electricity needs at any given moment. When the unit 

produces less than the full electricity requirements, power 

is purchased from the grid. When the unit produces more 

than is required, power can be sold back to the grid, 

depending on grid access. 

The rates and conditions applied to the services associated 

with interconnection and the rates offered by utilities to buy 

back electricity from clean energy generators have a significant 

effect on the economic viability of clean energy projects. 

Figure 1 shows how utility rates can have a large impact on 

electricity savings from a 1.3 megawatt (MW) onsite 

CHP project. 

What Types of Utility Rates Affect 

Clean Energy? 

Under conventional electric utility ratemaking, electricity 

suppliers are paid largely according to the amount of 

electricity they sell or distribute. If customers purchase 

less electricity due to onsite generation projects, the utility 

has less income to cover its fixed costs. Many utilities have 

received regulatory approval for a variety of rate designs 

and charges to offset reduced margins that can result 

from onsite generation. Some states, however, are 

beginning to explore whether these rates and charges are 

creating unwarranted barriers to the use of clean energy 

supply, because applying them overlooks the system-wide 

benefits that onsite power may provide. 

Some of the rate issues that states are addressing include: 

•	 Exit fees. Exit (or stranded asset recovery) fees have 

typically appeared in states that have restructured their 

electric utility. To avoid potential rate increases due to 

load loss, utilities may be authorized to assess exit fees 

on departing loads to recover the fixed costs of capital 

assets without shifting these costs onto remaining 

customers. However, many factors affect utility rates 

and revenues (e.g., customer growth, climate, fuel 

prices, overall economic conditions). It does not 

naturally follow that any reduction in load will 

necessarily result in increases in cost—an issue states 

are beginning to examine. 

•	 Standby and related rates. Facilities that use 

renewables or CHP usually need to have standby power 

accessible when the system is unavailable. For these 

facilities, electric utilities often assess standby charges 

to cover the additional costs of the generating, 

transmission, or distribution capacity required to supply 

intermittent service. The utility’s concern is that the 

facility will require power at a time when electricity is 

scarce or at a premium cost, and that it must be 

prepared to serve energy loads during such extreme 

conditions. Nevertheless, the probability that all 

interconnected small-scale distributed generators will 

need power at the same time is relatively low. 

Consequently, states are exploring alternatives to 

standby rates that may more accurately reflect realistic 

system operating conditions. 

2 

Figure 1. Effect of Rate Structure on Electricity Savings for a 1.3 MW CHP Project 
•	 Buyback rates. Renewable and CHP projects may have 

electricity to sell back to the grid, either intermittently 

or continuously. The payment received for this power 

can be a critical component of project economics. The 

price that the utility is willing to pay can vary widely 

and is affected by federal requirements (e.g., Public 

Utilities Regulatory Policy Act standards) and other state 

policies. For example, net metering regulations allow 

small generators a guaranteed price at the utility's retail 

cost, a price that is generally considered to be 

reasonable for small (<1 MW) generators. 

•	 Gas rates for CHP facilities. Some states, including New 

York, California and Connecticut, have established 

special favorable natural gas rates for CHP facilities. For 

example, New York has required that gas rates for DG 

facilities be frozen until at least 2007 to provide 

economic certainty to developers. California offers a 

significant discount in its transmission and distribution 

rate to cogeneration facilities. Connecticut will waive the 

natural gas delivery charges for customer-sited DG. 

What Can States Do? 

States are employing new strategies to avoid undue 

barriers and to provide a reasonable rate structure that 

balances appropriate cost recovery for utilities with the 

societal benefits of renewable and CHP projects. Some of 

these approaches include the following: 

•	 States are evaluating new rate designs to “decouple” 

utility profits from sales volume. Alternative rate 

structures, such as performance-based rates, would 

remove the disincentive for utilities to support clean 

DG projects. 

•	 States are attempting to ensure that rates are based on 

accurate measurement of the costs and benefits of 

clean DG. For example, California has funded a study 

that investigates the effects of DG on the performance 

of an electric power transmission and distribution 

system. This report presents a methodology to quantify 

the potential benefits of these projects (Evans 2005). 

•	 States may wish to explore ways to ensure that the 

benefits of clean DG that can accrue to the electricity 

grid (e.g., increased system capacity, potential deferral 

of transmission and distribution investment, reduced 

system losses, improved stability from reactive power 

and voltage support) are reflected in rates. 

Which States Have Implemented Utility 

Rates That Support Clean Energy? 

As of December 2006, several states had made changes to 

utility rate structures. These changes promote CHP and 

renewables as part of larger efforts to support costeffective clean energy supply as an alternative to 

expansion of the electric grid. 

•	 California and New York have established revised 

standby rate structures that ensure fair and reasonable 

treatment of clean DG. Other states have adopted exit 

fee exemptions for existing loads that leave a utility’s 

distribution system. Illinois, Massachusetts, and 

New York allow certain levels of exemption from these 

fees for loads that are replaced by clean DG, specifically 

CHP and renewables. 

•	 In 2004, the Oregon Public Utilities Commission (PUC) 

approved a settlement regarding Portland General Electric 

Company’s (PGE) tariffs for partial requirements 

customers. The load served by the onsite generation is 

treated in the same manner as any other load on the 

system, which, under Oregon rules, is obligated to have 

(or contract for) its share of contingency reserves. The 

onsite generation is, in effect, both contributing to and 

deriving benefits from the system’s overall reserve 

margin. Under the new rates, the partial requirements 

customer must pay or contract for contingency reserves 

equal to 7.0 percent (3.5 percent each for spinning and 

supplemental reserves) of the “reserve capacity” (i.e., 

either the nameplate capacity of the onsite unit or the 

amount of load it does not want to lose in case of an 

unscheduled outage; if the customer is able to shed load 

at the time its unit goes down, then it will be able to 

reduce the amount of contingency reserves it must carry). 

A similar pricing package has been adopted by PacifiCorp. 

•	 More than 30 states have net metering regulations that 

provide small generators a guaranteed purchase price 

for their excess generation at the distribution utility's 

retail cost. 

•	 Three states have established special gas rates for 

electric generators, including CHP projects. California 

has special gas tariffs for all electric generators. In 

2003, the New York Public Service Commission 

ordered natural gas companies to create a rate class 

specifically for DG users and certify that they had 

removed rate-related barriers to DG. In 2005, the 

Connecticut Energy Independence Act included a 

provision that the natural gas delivery charges for 

customer-sited DG be waived and those costs recovered 

by the electric distribution company. 

3 
Elements of a Successful Policy 

Based on the experiences of states that have implemented 

utility rates to support CHP and renewable energy, a 

number of best practices have emerged. These best 

practices include: 

•	 Ensure that state PUC commissioners and staff have 

current and accurate information regarding the rate 

issues for CHP and renewables and their potential 

benefits for the generation system. 

•	 Open a generic PUC docket to explore actual costs and 

system benefits of onsite clean energy supply and rate 

reasonableness, if this cannot be addressed under an 

existing open docket. 

- State energy offices, energy R&D offices, and 

economic development offices can be important 

sources of objective data on actual costs and 

benefits of onsite generation. 

- Energy users can help provide data to ensure 

utility rate reasonableness when examining costs 

and system benefits of existing and planned onsite 

clean energy supply projects. 

•	 Establish a working group of interested stakeholders to 

consider design issues and develop recommendations 

for favorable rates. Key stakeholders include: 

- PUCs. 

- Electric utilities and competitive electric service 

providers. 

- Developers of CHP and renewable energy systems, 

and trade associations that represent these 

interests. 

- Regional Transmission Organizations (RTOs) or 

Independent System Operators (ISOs). 

- State Energy Offices, Energy R&D Agencies, and 

Economic Development Authorities. 

- Current renewable energy and CHP users. 

•	 Identify if existing or pending renewable portfolio 

standards or other policies, which might be significant 

drivers to new onsite clean DG, generate a need for 

rate evaluations. 

•	 Whenever new rates are adopted, monitor utility 

compliance, pace of new clean energy installations, and 

impact on rate payers. Unanticipated or adverse ratepayer 

impacts can be addressed through implementing or 

adjusting cost caps or other appropriate means. 

EPA Assistance Available 

The EPA CHP Partnership is a voluntary program that seeks 

to reduce the environmental impact of power generation by 

promoting the use of cost-effective CHP. The Partnership 

assists state policy-makers and regulators in evaluating 

opportunities to encourage CHP through the implementation 

of policies and programs. See www.epa.gov/chp. 

Additional Resources 

EPA has created The Clean Energy-Environment Guide to 

Action. The Guide provides an overview of clean energy 

supply technology options and, in addition to utility rates, 

presents a range of policies that states have adopted to 

encourage continued growth of clean energy technologies 

and energy efficiency (e.g., interconnection standards, 

system benefits charges, output-based regulations). The 

Guide is available at www.epa.gov/cleanenergy/ 

stateandlocal/guidetoaction.htm. 

The Regulatory Requirements Database for Small 

Generators is an online database of regulatory information 

for small generators. It includes information on standby 

rates and exit fees, as well as environmental permitting 

and other regulatory information. See www.eea-inc.com/ 

rrdb/DGRegProject/index.html. 

California has funded a study, Optimal Portfolio Methodology 

for Assessing Distributed Energy Resources Benefits for the 

Energynet (Evans 2005) that addresses the question of 

whether DG, demand response and localized reactive power 

sources can be rigorously shown to enhance the 

performance of an electric power transmission and 

distribution system. This report presents a methodology to 

determine the characteristics of distributed energy resource 

projects that enhance the performance of a power delivery 

network and quantify the potential benefits of these 

projects. See www.energy.ca.gov/2005publications/ 

CEC-500-2005-061/CEC-500-2005-061-D.PDF. 

For more information, contact: 

Neeharika Naik-Dhungel 

U.S. Environmental Protection Agency 

Combined Heat and Power Partnership 

Phone: 202-343-9553 

e-mail: naik-dhungel.neeharika@epa.gov 

Last updated April 12, 2007 4