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What is a Microgrid Tariff?

Andrew Rasetti

Microgrids have many benefits: They offer customers access to low-cost, efficient, and clean energy, generate electricity during power outages, and provide utilities with key services such as reducing peak loads and congestion, integrating renewable energy resources, augmenting resilience for critical infrastructure, and providing ancillary services like voltage support. Unfortunately, the value of microgrid services is not well-defined in the market and represents a critical barrier to future economic growth. As a result, states have begun to explore novel rates and tariff structures to address these barriers for microgrids. 

Essentially, a rate is a specific component (i.e., one variable) of the broader pricing structure that determines a customer’s utility bill at the end of each month. For example, an electric rate is the price of electricity, measured in dollars per unit of electricity consumed by the customer. In contrast, a tariff represents the overall pricing schedule or rate plan (i.e., a combination of rates). A utility tariff will include a number of rates and other charges, including electric rates, time-of-use (TOU) charges, consumption tier charges, and service charges. A tariff structure effectively assigns an overall price to the unique combination of utility services that each customer utilizes on a monthly basis. However, there is no existing tariff structure that prices the unique value of microgrids into the market, which is a significant barrier to microgrid development. 

The two primary purposes of a microgrid tariff are to (1) “facilitate the commercialization of microgrids” by “accounting for the flows of services… [between] parties” and (2) “standardize the interconnection process.” In turn, such a tariff would help commercialize microgrids by unlocking greater value for microgrid customers and increasing the economic viability of grid-tied systems. The issue of cost recovery for utilities (i.e., recovering the costs imposed on the utility by the microgrid) is also a key component of microgrid tariffs, as utilities must be compensated for the costs that they incur due to the microgrid. An effective microgrid tariff would compensate both microgrid operators and utilities; in turn, this would reduce barriers to development and attract increased private capital to the microgrid market. Given these considerations, a robust microgrid tariff should: 

Streamline Interconnection 

The first goal of a microgrid tariff is to streamline the interconnection process for grid-tied systems. Currently, there is much uncertainty surrounding the process of interconnecting microgrids and its associated costs. As such, developers often lack the necessary information to make informed decisions throughout the planning and development process. Moreover, since local utilities own distribution assets within a multi-customer microgrid, the successful development of grid-tied systems is ultimately contingent on the willingness of utilities to permit interconnection. These barriers make the process of interconnection costly and time-consuming, and the lack of a standardized interconnection process results in many projects never moving beyond the planning phase. 

Monetize Resilience 

A microgrid tariff should monetize the value of enhanced resilience provided by the microgrid. Microgrids can provide ancillary services, standby power, and valuable grid management tools, all of which drive resilience in the face of increasing grid disturbances. However, “resilience” is a broad concept and difficult to monetize. Ultimately, the value of enhanced resilience varies by customer and distribution grid conditions: for example, critical facilities and utilities in areas prone to frequent grid outages and excessive demand will place an especially high value on added resilience.

Establish a Feed-In Tariff

The microgrid tariff should establish a feed-in tariff to facilitate the exchange of electricity between microgrid operators and utilities. A feed-in tariff is a long-term contract that establishes a wholesale rate for owners of small renewable energy projects—like microgrids—to sell power to the local utility. Ideally, this would be a market-responsive tariff that (1) allows the price to automatically adjust over time based on the market’s uptake and response to the microgrid and (2) enables microgrids to capitalize on their solar plus storage arrays by selling excess electricity.

Compensate Microgrid Operators for Ancillary Services

A microgrid tariff must compensate microgrid operators for ancillary services (e.g., frequency control, voltage regulation and support, demand response and congestion reduction, improved power quality). These services are provided to the utility under blue-sky conditions and their value varies based on the size and design of the microgrid system, as well as the utility’s needs.  

Recover Upgrade and Operating Costs for Utilities 

A more controversial component of microgrid tariffs is compensating utilities for the costs incurred for the development, interconnection, and operation of the microgrid. This creates a conflict of interest: while utilities want to maximize their cost recovery from the microgrid, this frequently imposes prohibitive costs on developers and/ or microgrid operators. For example, standby rates recover costs from microgrid customers in exchange for the utility having power on “standby” for the grid-tied system; and departing load charges require customers to pay for reducing electricity purchased from the utility while still remaining in their service area. 

In California, both of these rates have been heavily criticized by public stakeholders, such as the Microgrid Resources Coalition, because the value provided by microgrids offsets these charges. However, local utilities and the Public Utilities Commission (PUC) disagree, claiming that there is insufficient evidence to suggest that the value provided by a microgrid does offset these costs for the utility’s ratepayers. This issue of utility cost recovery will need to be resolved before substantial progress can be made toward an agreeable and feasible microgrid tariff. 

In short, an effective tariff structure must: 

  • Monetize the full range of services provided by microgrids; 
  • Simplify the interconnection of microgrids and microgrid-dependent systems; and 
  • Clarify and streamline the microgrid development process. 

However, designing and implementing such a tariff is an immensely complex task rife with conflicting stakeholder interests, local regulatory hurdles, and ambiguity surrounding the monetary value and distribution of microgrid services. Ultimately, grid-tied systems provide valuable services to the distribution grid, and utilities will need to embrace this perspective as microgrid costs decrease and the appeal of building resilience continues to grow.

Cover image credit: Haixin Guo

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One thought on “What is a Microgrid Tariff?

  1. This blog is a fantastic resource at the intersection of business, finance, and energy, with a specific focus on microgrids. Your ability to seamlessly blend these diverse topics into a cohesive and engaging narrative is truly commendable. The insights you provide into the world of microgrids and their implications for both the business and finance sectors are incredibly valuable. It’s evident that you’ve conducted thorough research and possess a deep understanding of the subject matter, as you eloquently convey the potential these decentralized energy systems hold for transforming industries and fostering sustainability. Your commitment to delivering well-rounded content that appeals to a wide range of readers is truly impressive. Thank you for sharing such an informative and thought-provoking perspective on the role of microgrids in shaping our energy future and their significance for the business and finance realms. Looking forward to more enlightening reads from your blog!

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