Reallocating Distribution Upgrade Costs for Farm Digester Projects

Reallocating Distribution Upgrade Costs for Farm Digester

Projects

byEd Cubero, Sam Harms, Sam Shannon

University of Wisconsin-Madison

Dairy Industry in Wisconsin

• 141,000 jobs

• $5.2 billion in annual sales

• $26.5 billion economic impact

• Trend towards larger CAFOs, more concentrated waste streams

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Anaerobic Digesters

3Source: Hallmark Power Ltd.

Digester Potential in Wisconsin

• 251 dairy farms in WI are candidates for Anaerobic Digestion (500+ cows)– Currently, 30 on farms (≈10% of potential)

• Approx. 44 MW of potential capacity (386k MWh/yr) from manure alone – Co-digestion w/ other wastes would increase

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Benefits of Anaerobic Digestion• Environmental

– Odor Reduction

– Methane Reduction

– Pathogen Reduction

– BOD Reduction

• Economic

– Electricity offset / sales– Fiber– Heating– Fertilizer

– Jobs• 75-80 Construction• 3 long term

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Interconnection

• Often requires upgrades to distribution system – wires, substations, protection equipment

• State admin. code allows utility to recover these costs from connecting customer

• Liability on balance sheet, but no asset– Especially tough for capital-constrained smaller farms

Distribution Upgrade CostsDigester Costs

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Troubling Trifecta• Low utility buyback rates for dist. generation

Source: Federal Energy Regulatory Commission

MISO 30-Day Rolling Average LMP ($/MWh)

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Troubling Trifecta• High material costs for upgrades

Source: U.S. Dept. of Labor

Price of Nonferrous Wires and Cables (Index)

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Troubling Trifecta• Requirements for expensive equipment– Fiber optic cables

• Wis. Admin. Code PSC 119.25(3)“A Category 2, 3, or 4 DG facility shall include…Other equipment, such as other protective devices, supervisory control and alarms, telemetry and associated communications channel, that the public utility determines to be necessary.”

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Wisconsin Precedent

• WP&L: Shared Savings Program– Low-interest loans for Ag-related businesses

• Econ. Development Rates/Real-Time Pricing– WP&L, WEPCO

• Recent shifting of rate increases away from large users, towards other ratepayers

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Status Quo

• Wis. Admin. Code PSC 119.08(2)“The public utility may recover from the applicant an amount up to the actual cost, for labor and parts, of any distribution system upgrades required.”

• All major utilities require customer to pay for upgrades

• Must be paid in full prior to (or soon after) startup

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Policy Options

1) Utility option

2) Net metering option

3) Transmission utility option

4) Operating lease option

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Utility Option

• Require utilities to cover costs of distribution upgrades and earn rate of return

• Advantages– Spreads the costs across the rate base– Keeps the upgrades off the generator project

• Disadvantages– Fairness Issues– Largest impact to ratepayers

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Utility Option

• Energy chargesUtility Number of Farms

with 500+ cowsRate Class Energy Rate Increase

– Lower Bound (cents/kWh)

Energy Rate Increase – Upper Bound (cents/kWh)

Madison Gas & Electric

1Residential 0.02 0.06

Small Commercial 0.01 0.03

Northern States Power



Wisconsin Electric Power Company



Wisconsin Power & Light



Wisconsin Public Service Corporation


Small Commercial 0.25 0.67 14

Net Metering Option

• Change to state net metering rules• If utility does not pay for upgrade, required to

offer net metering (up to 1 MW) for ADs

• Advantages– More assistance to smaller generators (more capital constrained)– Already being done in NY

• Disadvantages– Does not accurately reflect the cost of the upgrades– Upgrades show up as a liability on the generator project

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Net Metering Option• Energy charges

Utility Number of Farms with 500+ cows

Revenue Impact Residential Energy Rate Increase (cents/kWh)

Commercial Energy Rate Increase (cents/kWh)

MG&E 1 $36,000 0.004 0.002

NSPW 27 $1,998,000 0.104 0.075

WEPCO 34 $2,240,000 0.028 0.026

WP&L 20 $754,000 0.024 0.033

WPSC 57 $3,794,000 0.136 0.098

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Transmission Utility Option

• Require local transmission utility to pay for the upgrade

• Most likely a one-time invoice from the utility company to ATC

• Advantages– Larger rate base– ATC gets a say in the engineering – Michigan pays for 1% of costs

• Disadvantages– Requires a statutory change– Requires a decision from FERC allowing these charges on the rate filings

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Transmission Utility Option• Capacity charges


Units of Sale (kW)

Rate Increase – Lower ($/kW)

Rate Increase – Upper ($/kW)

ATC 112 10,014,000 0.015 0.040


Peak Demand (kW) Annual Expense Increase – Lower Bound

Annual Expense Increase – Upper Bound

MG&E 1 957,000 $91,000 $242,000

WEPCO 34 9,395,000 $891,000 $2,375,000

WPL 20 4,264,000 $404,000 $1,078,000

WPSC 57 4,045,000 $383,000 $1,022,000

UPPCO N/A 323,000 $31,000 $82,000

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Proportional Cost Sharing:Utility v. Transmission Options

Utility Share of Costs under Utility Option

Share of Costs under Transmission Option

Madison Gas & Electric0.7% 4%

Northern States Power19% 19%

Wisconsin Electric Power Company 24% 40%

Wisconsin Power & Light14% 18%

Wisconsin Public Service Corporation 41% 17%

Upper Peninsula Power Company -- 1%

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Operating Lease Option• Utility recovers the cost of the upgrade via long-term lease

to generator• Ratepayers secure lease in case of default• Leases could be combined with other options

– Ratepayers cover lease payments for first 5 yrs (25% of total) – Generator covers payments over remaining 15 yrs (75% of total)

• Advantages– Generator does not need capital financing for upgrades– Easy to implement; no new legislation required– Minimal impact to ratepayers

• Disadvantages– Generator still responsible for the cost of the upgrade

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Recommendation

• Operating leases

– Generator does not need to secure capital financing upfront

– Easiest to implement; no new legislation required– Minimal impact to ratepayers

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Thank You!

Questions?

Reallocating Distribution Upgrade Costs for Farm Digester Projects

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