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Analysis of Standby Rates and Net Metering Policy Effects on Combined Heat and Power (CHP) Opportunities in Minnesota

In nature nothing is wasted1, but in the electricity industry we have a long way to go. More than two thirds of the fuel used to generate power in the U.S. is lost as heat2. Combined heat and power (CHP) systems can achieve higher overall efficiency levels by using this heat that would otherwise be wasted. Significant potential exists in Minnesota for CHP projects, but rate structures and policies may be preventing some of this potential growth. 

Energy Information Administration Annual Energy Review 2007 graph

A CARD grant was awarded to University of Illinois, Energy Resources Center (ERC) in 2012 to analyze the effects of existing standby rates and net metering policies on the market acceptance of CHP and waste heat to power (WHP) projects in Minnesota and to provide recommendations to reduce the barriers these factors impose on CHP development.

Net metering is a policy that allows customers with on-site generation to receive a bill credit for unused electricity exported to the grid during times when their generation exceeds their on-site consumption. Standby rates are charged by utilities to customers with on-site, non-emergency generation (including CHP) for the service of providing backup power when on-site generation is not available. Standby rates can be complex and difficult to understand, but the analysis performed by the ERC breaks down and explains the components of standby rates and identifies best practices for standby rate design to promote transparency, flexibility, and economically efficient consumption. The report provides examples of standby rates used in other states, and information on how other states apply standby rates to net metered facilities. Specific recommendations for improving standby rate and net metering policies are included in the report.

The ERC also modeled the economic potential of CHP projects in the service territories of investor-owned utilities (IOUs) in Minnesota under current versus hypothetically improved standby rates. This analysis concludes that of an estimated total 1,798 MW of CHP potential in Minnesota IOUs, the potential for CHP with a less than a 10-year payback increases from 779 MW to 1,116 MW from the base case to the hypothetical case (Table 1).

Economical Potential for Minnesota IOUs

A copy of the project report is available on Commerce’s recent energy reports web page. For more information on this CARD project, contact project manager Lise Trudeau or CARD Grant program administrator Mary Sue Lobenstein.

1 A. Lavoisier, 1760 & H.D. Thoreau, 1856

2 U.S. Department of Energy