Net Metering in South Dakota – A Primer, Part 2

This is part two in a three-part series; part one can be read here, and part three will be up tomorrow.

by Bill Powers

Most utility companies make purchases of electricity from other utilities on the order of a few percent of their annual sales. These purchases don’t influence their fix costs. One could imagine such purchases taking the place of increased generation capacity. When they purchase electricity on this market, that is not their only cost in supplying it to their customers. For example, they still have transmission costs to account for. Midwest Independent System Operation (MISO) operates a large grid of transmission lines using “smart grid” technology, which enables it to not only query the status of the lines, but also to allocate sales of electricity to sub grids. The price is referred to as the Locational Marginal Price (LMP) and is usually expressed in dollars per MWH. To convert this to dollars per kwh divide by one thousand. As of 1/19/2015, prices are quite low, about 2.5 cents per kwh. But these prices can be quite volatile depending upon the time of the year and location. They can easily be twice that price.

Some have suggested tying the prices paid to net meter producers to the current LMP price. While this suggestion makes sense, it is not overly clear in what way that would be done. The purchase of net metering electricity, unlike that of electricity purchased from MISO, must be done whether the utility needs it or not. Where local producers decrease the purchases from MISO, there is a clear one-to-one exchange. When this is not the case, perhaps the utility can sell excess production through MISO. If this makes sense, then we can still imagine that the rate paid to the local producer would be the current LMP price. One difference between purchases from MISO and locally generated electricity are the much reduced transmission losses. Even so, these prices will not excite most local electricity generators, nor will they likely serve as a significant incentive to local production.

South Dakota legislation, passed in 2008, established a voluntary objective of providing 10% of electricity sold in state to be provided by renewable resources. Utility compliance with this policy can be found at https://puc.sd.gov/energy/reo/reo.aspx. Many local utilities have already met this requirement through hydro and wind generation, as has MISO. (Note: of the investor-owned utilities, only Otter Tail and Xcel have met the requirement. Black Hills Power, MidAmerican, Montana-Dakota, and Northwestern have all not reached 10%, though Northwestern is very close). Minnesota requires its utility companies to provide 25% of its electric energy through renewable sources by 2025. If the South Dakota objective were taken seriously or its renewable fraction increased, prices paid to producers per kwh might be used as an incentive to encourage local renewable electric generation, thereby serving as a means of achieving the stated goal. In order to assess the value of such a suggestion we need some idea of what would serve as a sufficient incentive.

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  1. […] is the final post in a three-part series. Miss the first two? Check them out here and here. by Bill Powers In order to determine what the price of electricity would have to be to encourage […]

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