CDG Model – Economics

Jan Borchert, Current Hydro and Dana Hall, Esq.

Understanding CDG economics is essential for both the host and subscribers. For the host, the economics depend on determining future revenue streams to meet financing goals and/or satisfy investors, and to clearly explain the product the CDG host is offering to subscribers. For subscribers there is a significant learning curve, which must begin with a basic understanding of the electricity bill, and an acceptance of the unique product the CDG host is offering. And then there is the value stack. See our other Finances blog posts for more information.

Understanding Electric Bills

To understand CDG economics and explain it to potential subscribers, one must begin with the information provided on the customer’s electricity bill. Electricity bills contain two main charges, the energy supply charge (sometimes referred to as a commodity charge) and the delivery charge. A third component often contains different type of surcharges.

Most electric bills are organized in different sections. An account balance or overview, a summary of current charges, the detail of current charges and a section explaining what which charge stands for. In many cases the bill also contains statistical information about historic or average energy uses.

We’ve attached an actual electric bill as an example. In the second block you see a delivery charge of $34.45, a supply charge of $10.51 and other charges/adjustments (in this case for paperless billing) of -$0.41, totaling at $44.55 for 304 kWh (effectively 14.65 Cents / kWh). Further down you see the sub-categories of the delivery and supply charge like the basic charge ($17.00) and others.

If the customer from the example bill becomes a CDG subscriber, they will begin to see a credit applied to their bill that reflects the output of the CDG generation and thus reduce the amount to be payed to the utility.

Host Metering

To determine CDG economics, the CDG host must have a clear understanding of how the host generation facility will be interconnected and metered. The type of meter at the host account determines the nature of the credits to be applied to each subscriber; an interconnection can either be demand or non-demand metered.

Most microhydro facilities that are newly constructed and requesting new interconnection service from their distribution utility will be non-demand metered host accounts. The same is likely the case if the facility is installed in a location where there is already a non-residential demand meter in place. Larger sites, with higher energy needs, that consume 2,000 kWh monthly and more will likely fall into the demand-billing rate; the specific threshold might vary between utilities.

The type of meter at the host account influences how generation credits are applied to the subscriber accounts:

• A CDG with a non-demand metered host will have volumetric credits applied to the subscriber accounts (in kWh), offsetting both, supply and delivery at the subscriber end.
• A CDG with a demand metered host will have monetary credits applied to the subscriber accounts using the “value stack” price, offsetting the supply charge only. (See Value Stack Section below).

The subscriber continues to receive electricity from their distribution utility and pay delivery charges, surcharges and for any supply charge that the credits do not offset.

If our customer from the example bill was enrolled in a volumetric CDG, they would see their percent allocation credited on the supply charge section of their bill as a kWh credit. Let’s assume he was credited 200 kWh on that bill of 304 kWh; then the utility would bill them for the remaining 104 kWh at their usual rate, including all surcharges, etc.. Volumetric crediting makes it very easy for the subscriber to see how many kWh are covered by the CDG, and how many are covered by their normal utility contract.

Let’s now have a look at the value stack, which is applied to subscribers’ bills of demand metered host accounts, and a bit more complicated.

The Value Stack

The value stack is relevant to the CDG program because all commercial demand metered CDG hosts are to have their generation output valued using the new method.

In 2017, in the Value of Distributed Energy Resources (VDER) proceeding the NYPSC created the value stack compensation mechanism as a new way to compensate distributed energy resources.[1] The value stack is literally a “stack” of different categories of value, including: the sum of the energy value; the capacity value; the environmental value (RECs); the distribution system value (comprised of locational system relief value and demand reduction value); and lastly a market transition credit (MTC) created to ease the transition from the retail NEM price to the new value stack tariff.[2]

Each component of the value stack is described in greater detail in this blog post.

The Price of Credits

CDG projects since 2017 fall under monetary crediting using the value stack, if they’re connected via demand metered host accounts. The value stack attempts to price renewable energy according to its benefit to grid and the environment. Instead of kilowatt-hour for kilowatt-hour credits, subscribers receive credits of a certain price per kWh – depending on location, type of renewable source, and other factors captured by the value stack that depend on the host generator of the CDG.

Under program rules, a CDG host can negotiate the price they charge to their subscriber so long as they follow oversight and disclosure requirements. And this is where it gets complicated: If the CDG host wants to charge a different price than value stack – which the CDG host is allowed to, as long as he explains how the pricing for his CDG works.

Example: If the subscriber is used to paying $0.13/kWh, and the host offers them $0.11/kWh, then both parties could be satisfied: the host receives a fair price for his electricity and the subscriber is paying less than he would pay the utility. Now it is possible that value stack for the CDG generator is priced at $0.08/kWh, a number that will be displayed on the subscribers bill. The host is ultimately put in a position to explain to subscribers the difference in value stack price vs the host price – they might say to the host: “My utility bill says your power is only worth 8 Cents, why should I pay you 11 Cents?”

But it gets even more complicated, when we look at the crediting mechanism on the subscriber’s bills. Let’s assume a subscriber signs up to buy 100 kWh monthly (100% of their historic average monthly consumption) through the CDG – and all three prices 13 Cents, 11 Cents, and 8 Cents apply as described:

Before enrolling in the CDG, the subscriber will see on their electric bill the 100 kWh they consumed in the prior month at a total supply charge of $13 ($0.13/kWh). Once the CDG credit allocations begin, in the next billing statement the subscriber will receive an $8 monetary credit that offsets 100 kWh of usage based on the value stack price of $0.08/kWh. The price on their electric bill for that 100 kWh of supply has been reduced from $0.13/kWh to $0.08/kwh, however they do not owe the utility $5.00 (100 kWh x $0.05) for this reduction of their prior rate. Instead, the subscriber agreed to pay a total of $0.11/kWh in their CDG contract, which means they will be billed the next month from the CDG host at the agreed upon price of $0.11/kWh, amounting to $11. As a result, they are paying the CDG host $0.03/kWh more than the monetary credit that was applied to their bill.

If the subscriber consumes more than 100 kWh in a month, or if the CDG percent allocation in a given month does not reach the amount the subscriber consumed (perhaps because of a dry month), then the gap in supply is filled by the utility at the old $0.13 rate. Service will not be interrupted, but the subscriber may see fluctuations on the bill depending on these types of occurrences.

Yes, it’s complicated. But with monetary crediting in place, charging a higher rate than the project’s value stack can still lead to an overall price per kWh reduction for the CDG member; the key is to help the subscriber understand that and to help them not get confused by the value stack credit on their bill. If the host can help the subscribers see that their CDG subscription as an overall price reduction, that supports the development of local renewable generation it will be easier to have a successful (demand metered) CDG.

Next Steps

To get a sense of the potential value stack price for your hydro-project, check out NYSERDA’s Value Stack Calculator, which allows a CDG host to enter facility specific data points to determine the likely value stack price in the CDG program. It’s an excel based tool that can show you annual projections and monthly projections detailing the expected monthly price for each component of the value stack.

Central to the success of CDG is the acquisition of subscribers who buy the project’s electricity. But how does a CDG host find subscribers? What’s the best strategy and what marketing efforts does it take? More about CDG subscriber acquisition and legal considerations in our next posts.

Or download our full Microhydro Community DG report.

[1] The value stack was envisioned to transition New York away from traditional NEM to a new way to compensate distributed energy resources.

[2] DPS has a proposed several changes to the value stack, including new tranches of MTC and changes to the distribution system value component. As of this writing, DPS currently has two whitepapers out for comment. Email communication with John Garvey, DPS Markets & Innovation. January 3, 2019.