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Standby Generation: A New Proposition

A cost/benefit analysis of full interconnection of customer-owned standby generators.
Fortnightly Magazine - June 1 2002

hurdles, the lack of interest among power marketers to trade small blocks of energy, and the overwhelming financial risk of liquidated damages for failing to deliver previously committed energy. In regions with net or bi-directional metering, these hurdles are lower. However, utilities generally offer to pay exporters the avoided cost or the retail price of energy exported to the grid, which generally amounts to less than the marginal operating costs of a small standby generator. 3

Capital and Operational Costs

In most applications, the largest cost associated with a seamless utility interconnection is the nonreccurring capital expense of purchasing and installing a closed transition transfer system. The typical cost for grid interconnection ranges from $50/kW to $200/kW depending on the size of the generator, application, and utility requirements. Higher costs are not uncommon for smaller units (under 500 kW) or where complex technical requirements are encountered. 4 However, once installed, a closed transition transfer system provides the benefits previously detailed, which are difficult to achieve with a less costly open transition transfer system.

Small generators are generally designed for backup power applications and can be de-rated when their productivity exceeds a finite number of hours without additional maintenance routines. Many service schedules call for two maintenance checks a year for a backup generator in good condition. Base load power or peak shaving operations require a greater frequency of maintenance visits that will increase operational costs. All operations consume fuel, which is the largest variable cost. Depending on price and efficiency, the fuel cost to operate a backup generator often ranges from 5.5 cents to 11 cents per kWh.

Indirect operational costs include potential new permitting and emissions requirements, as well as unfavorable utility tariff changes. While there is an acute shortage of peak generation and transmission capacity in many regions, regulators, legislators, and utilities have not created a simple and consistent program for adding customer-owned capacity to meet peak reserve requirements. Utilities may offer generous demand-side management programs while simultaneously threatening to levy high penalties to reduce customer peak shaving. Lawmakers often rely on separate entities with dissimilar missions to regulate environmental and energy policies.

Prior to committing to capital projects, energy managers should understand the local economic dynamics and the regulatory impact of operating a small generator in standby, peak shaving, and base load power modes. In doing so, they should consider the potential costs and benefits of grid interconnection.

The potential value of a full interconnection can be calculated once energy managers are able to quantify the benefits that can be achieved through applications such as increased power reliability, improved power quality, the ability to test under normal operating loads, peak shaving, and economic dispatch. These benefits over a reasonable period of time may be greater than initial capital costs, but it is unlikely that an energy manager can expect full payback within a year. The equation in Figure 2 summarizes the potential costs and benefits.

Assuming the potential value of full interconnection exceeds the estimated costs, the project warrants initial approval. After engaging the local utility to define technical