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Overview of Key Issues in Electric Utilities Restructuring
Published in Mohammad Shahidehpour, Muwaffaq Alomoush, Restructured Electrical Power Systems, 2017
Mohammad Shahidehpour, Muwaffaq Alomoush
A major and a debatable issue associated with the electric utility restructuring is the issue of stranded costs; how to be determined, how to be recovered and who pays for recovery. Stranded cost is a terminology created under restructuring process. Multiplicity of definitions and interpretations of stranded costs confused people working on restructuring, but in general this term refers to the difference between costs that are expected to be recovered under the rate regulation and those recoverable in a competitive market.
Distributed Generation
Published in Barney L. Capehart, Wayne C. Turner, William J. Kennedy, Guide to Energy Management, 2020
Barney L. Capehart, Wayne C. Turner, William J. Kennedy
Stranded costs can also be a problem. A stranded cost is a capital cost that cannot be recovered when the income from electricity sales is reduced either by customers using less electricity or by customers leaving the system. The capital costs were originally incurred under the assumption that the capital would generate an acceptable rate of return to stockholders, and stockholders are left holding the bag when some of the expected revenue disappears.
Distributed Generation
Published in Barney L. Capehart, William J. Kennedy, Wayne C. Turner, Guide to Energy Management, 2020
Barney L. Capehart, William J. Kennedy, Wayne C. Turner
A utility will incur a number of costs when one of its customers installs a DG unit. According to a study by A.D. Little Co., these costs can include reduced revenues and profits, added controls costs, and stranded costs [2]. Reduced revenues and profitsUtility revenues and profits are generally reduced when a customer installs a DG unit. This depends, however, on the regulatory system under which the utility operates and on the utility’s electric rate schedule. If the utility charges a fixed price, then any time the utility’s cost of energy goes above that price, the utility loses money, and reducing the amount of electricity produced can save the utility money. If, however, the utility can pass on any incremental costs to the customer, any reduction in peak demand will reduce the revenue to the utility. The relation between demand and capacity is also very important. If the demand for electricity is very close to the maximum capacity of the utility, the marginal cost to the utility of additional electricity can be very high and the marginal profits very low or even negative; if the capacity far exceeds the demand, the marginal cost is low, the profits are higher, and the utility is less enthusiastic about anything that reduces the peak demand for their electricity.Added controls costsManaging the utility transmission and distribution system to handle distributed generation can be expensive. Problems that must be overcome include phase differences between the distributed generation units and the utilities, harmonics generated by the DG units that may damage equipment on the utility distribution system, and power that flows the wrong way on the utility grid. Controls are available to lock in the phase of the DG unit to that of the utility grid, and other equipment is available to control and minimize harmful harmonics. It is also possible to purchase voltage controls so that power will not flow the wrong way or, if the utility is purchasing power from a DG unit, so that the DG power is of acceptable quality for the grid. All of these controls cost money, but their expense is necessary to insure the quality of the electric power being delivered by the utility.Stranded costsStranded costs can also be a problem. A stranded cost is a capital cost that cannot be recovered when the income from electricity sales is reduced either by customers using less electricity or by customers leaving the system. The capital costs were originally incurred under the assumption that the capital would generate an acceptable rate of return to stockholders, and stockholders are left holding the bag when some of the expected revenue disappears.
The levelized cost of energy and regulatory uncertainty in plant lifetimes
Published in The Engineering Economist, 2021
David C. Rode, Paul S. Fischbeck
Small changes in an asset’s economic life can cause outsized changes in an asset’s LCOE. We use the term “stranding” to refer to the early termination (relative to initial expectations) of an asset’s life due to changes in regulation or legislation.1 The costs of stranding an asset were originally defined as “losses in undepreciated capital resulting from reductions in asset prices” (Brennan, 1999: p. 81). Typically, however, these losses were assumed to occur as a result of a change in regulation. For example, if regulators have previously approved recovery of an asset’s cost over time, but change their policy in such a way as to cause that asset to be removed from service prior to its costs having been fully recovered, the remaining costs are deemed to be “stranded.” Electric market deregulation gave rise to stranded costs. Changing deadlines in emission regulation, such as the Biden administration’s stated goal of making the U.S. electric power sector carbon-free by 2035 (Joe Biden for President, 2020), can also produce stranded costs (Grubert, 2020). Likewise, regulators retroactively requiring the hardening of existing infrastructure without also providing for a compensation mechanism (as exists in Northeast power markets) may be a highly salient example given the outages during severe winter weather in Texas in early 2021. Prior to electric market deregulation, these stranded costs were often compensable. Today, however, cost recovery is rarely guaranteed.2 As a result, the early retirement of an asset is a key risk for investors.