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308 IEEE TRANSACTIONS ON RELIABILITY, VOL. R-31, NO. 3, AUGUST 1982
Planning, Pricing and Public Policy Issues for Reliability of
Interconnected Solar Energy Systems
J. Walter Mion based on a broad view of system reliability. Under the
University of Florida, Gainesville traditional engineering view of reliability, the supply of
Barney L. Capehart electricity must always meet any level of system demand
University of Florida, Gainesville with virtual certainty [2-4]. A contrasting view of reliabili-
Clyde F. Kiker ty is based on the economic criterion that the total system
University of Florida, Gainesville is designed so that the marginal benefits to end users from
alternative levels of reliability are equal to the marginal
costs of providing these levels of reliability 15-8]. In
Key Words-Dispersed solar system, Cost/benefit analysis, Solar today's climate of increasing electric energy costs, the issue
electric rates. of the appropriate criterion for system reliability is receiv-
ing considerable attention. This discussion has a direct
Purpose: Present a system analysis bearing on policies governing the use of interconnected
Special math needed for explanations: None dispersed solar energy systems.
Special math needed to use results: None The purpose of this analysis is to identify the major
Results useful to: Reliability theoreticians and electric utility planning policy issues that will influence both the costs and penetra-
engineers tion rate of dispersed solar systems. The primary focus is
Abstract-The electric power system reliability criteria and rate struc- an end-user decision analysis in which alternative levels of
tures adopted by regulatory commissions and utilities have important im- reliability for dispersed systems and total system reliability
pacts on the design, cost, and market penetration rate of photovoltaic and are explicit considerations. A discussion of the principal
other dispersed solar electric systems. The implications of alternative elements in reliability planning is followed by an il-
levels of reliability for dispersed generating facilities are examined lustrative model of end-user investment decisions for
through an end-user decision analysis in which the reliability of dispersed dispersed system reliability and the role of utility prices in
and utility electric supply are considered. Broad issues of public policy are
addressed from the perspective of end users' demands and the social costs formulating these decisions. The paper concludes with a
of reliability. We conclude that benefits and costs of electric power discussion of policy issues related to power system reliabili-
reliability for the end user should be considered in establishing reliability ty with dispersed solar systems and the implications of
standards and rates for interconnected dispersed solar systems. alternative reliability standards for the interconnection of
dispersed solar power systems.
1. INTRODUCTION 2. PLANNING FOR SYSTEM RELIABILITY
Many electric utilities are considering or implementing The purpose of power system planning is the develop-
solar energy programs as part of their system diversifica- ment of a rational program to provide, in an orderly and
tion to satisfy conservation goals and requirements to economic manner, electric power to final users. Many fac-
reduce dependence on imported oil. A 1980 survey con- tors are considered in the planning process, and reliability
ducted by the Electric Power Research Institute [1] showed has been of prime importance. In the broadest sense,
236 utilities involved in solar programs. The Public Utility reliability relates to the delivery of power to final user
Regulatory Policies Act (PURPA) of 1978 required within specified tolerances of interrupted service. As a
utilities to examine conservation strategies which include regulated entity serving the public the ultimate objective of
solar energy technologies as a substitute for fossil fuels. In any electric utility is to assure that customers are supplied
addition, the Federal Energy Regulatory Commission the service reliability they need and are willing to pay for.
(FERC) has promulgated rules that prohibit utilities from Typically, end users only consider the reliability of the
discriminating against solar electric systems in either back- electric service they receive while the cost of that reliability
up rates or purchase agreements. These major federal is spread across all end users served by the utility [5]. Since
policies, in addition to fossil fuel prices which are end users present demands of different amounts and dura-
escalating, are providing incentives for the use of tion, the costs to the entity of providing reliability differ
photovoltaic and other dispersed solar energy systems by across end users. But typically these costs of serving dif-
utility system customers. ferent customers are not reflected in electric power rates
The acceptance, however, of solar energy technologies except to the largest industrial users. As a result of this
depends on the impact these dispersed systems have on cross-subsidization, the only costs of reliability that the
total interconnected electric system reliability. Any poten- end user -actually considers result from outages. These
tial solar energy program must be evaluated in terms of its costs are a function of the rate, timing, magnitude, and
positive and negative impacts, but this evaluation must be duration of interruptions, and of past levels of reliability
0018-9529/82/0800-0308$00.75 © 1982 IEEE
MILON ET AL.: RELIABILITY OF INTERCONNECTED SOLAR ENERGY SYSTEMS 309
13]. In effect the full burden of risk due to different levels number of objections can be raised against this criterion and
of reliability is on the utility. these objections merit further elaboration. Telson [5], Kauf-
The trend toward centralized power generating man [2], and Munasinghe [7, 8] have all argued that the
facilities since the early 1900s has lead to a particular way engineering view of reliability only indirectly considers the
of planning power systems. Planning is divided into three associated costs and benefits from alternative levels of
major areas: generation system, transmission system, and reliability. End users of electricity desire different reliability
distribution system. Generation system planning deter- levels depending on the final use of the electric power. With
mines the minimum-cost mix of generating units to serve uniform reliability and rate structures that do not differen-
the projected magnitude and duration of system load. tially price reliability, end users have no means of selecting a
Transmission and distribution system planning determine reliability level that is consistent with the benefits derived
the most economical and reliable network to deliver power from that reliability. Clearly with dispersed solar systems it
from the generating units to the end users. The overall seems appropriate to allow end users to select the level of
system planning process usually consists of the following reliability from the dispersed system and from the utility
steps: preparation of a load forecast based on expected that equates the cost of reliability to the end user with the
peak demand and energy requirements, identification of benefits. This would allow the end user to select a level of
alternative system expansion plans, examination of system reliability consistent with his own risk preferences and
reliability and economic consequences of each alternative remove some of the burden for near perfect reliability from
expansion plan, and finally, analyzing these results and the utility. In order to clarify the relationship between utility
formulating the recommended plan. To assure reliable ser- and dispersed system reliability to the end user, it is useful to
vice to the customer, the system expansion plan must ac- consider an illustrative end-user investment model for
count for the uncertainty of load forecasts, daily and dispersedsystems.
seasonal variations in load, equipment failures, and fuel
availability. 3. UTILITY PRICING AND END USER RELIABILITY
Historically, electric system reliability in the USA has INVESTMENT
been based on an engineering view of reliability which A frequency overlooked aspect of end-use electricity
assumes that all demand placed on a system must be served demand is its 2-part nature: both quantity and reliability.
and that all users be exposed to the lowest possible occur- Final users not only demand different quantities of elec-
rence of power outages [3-5]. This reliability criterion is tricity but they also require different levels of reliability
usually a system failure of one day in ten years; for prac- depending on timing, purpose, and benefits of the power.
tical purposes this is the requirement for a "near perfect In assessing the reliability of dispersed solar systems it is
system [3]. essential that the factors which determine a customer's de-
The integration of photovoltaic and other dispersed mand for reliability be considered. In brief, this can be
solar systems with the utility complicates the planning pro- summarized as a comparison of the marginal benefits from
cess. Dispersed system users can install both generating a particular level of electricity reliability with the marginal
and storage capacity thereby controlling the availability of cost of that reliability. For an end user the marginal costs
power from periodic insolation. It is assumed that end are the capital costs of dispersed solar system designs with
users will own the dispersed systems. Although it is possi- improved reliability ratings while the marginal benefits are
ble that utilities could own and operate dispersed systems, the savings in power not purchased from the grid and the
recent federal and state regulations have restricted utility benefit to the end user from the availability of power.
participation. Depending on the aggregate amount of Clearly the optimum level of reliability will differ across
dispersed capacity installed and the provisions governing users and will be influenced by the rate structure used by
the availability of backup power to dispersed system users, the utility.
the load facing the utility will become more uncertain. This
uncertainty will be reflected principally in generating Assumptions
capacity planning since the transmission and distribution
network will be only slightly affected by the interconnec- 1. End users attempt to minimize total cost for alter-
tion of dispersed systems. This is because the costs of native levels of power and reliability.
assuring safety on the system are small relative to the cost 2. Power output from solar systems and end-user
of changes in generating capacity. The planning process power demand are stationary stochastic processes over
thus expands to include both utility planners and dispersed some time interval.
system users. Both groups are capable of planning for 3. Solar capacity costs are a function of reliability.
generating capacity and reliability. 4. The decision framework considered is a one-period
In light of this dual planning framework, the critical analysis with no discounting.
issue is "What level of reliability should, or will be, 5. Total end-user costs are the sum of the cost of
selected?" On the basis of precedent, the engineering view power purchased from the grid at alternative levels of
would suggest that both central and dispersed systems reliability, solar capacity and operating costs, and the loss
should have the lowest possible occurrence of outages. A resulting from insufficient power to meet demand.
310 IEEE TRANSACTIONS ON RELIABILITY, VOL. R-31, NO. 3, AUGUST 1982
Notation reliability are greater than the marginal avoided power
costs. With small differences between pc and b and with
B solar system capacity cost small changes in E{qd} due to changes in reliability, the
b solar system operating cost end user would have little incentive to invest in dispersed
C total cost to end user system reliability. Power would be drawn from the dis-
Kd solar system output capacity persed system whenever it was available and the end user
L loss function would rely on the utility for backup at other times. Both
PI,c price of electricity from the grid the risk and the cost of reliability are shifted to the utility.
Q total end-user electric demand An alternative approach is to allow the utility price to
q. electric demand from the grid reflect the cost of alternative levels of power reliability,
qd output from a solar system p(r). Substituting pC(r) into (1), the first order conditions
r system reliability could be expressed as:
The end user's objective is to minimize total cost, C, pc(r)[9E{qJ}/ r] + E{qc}[apc(r)/ar]
which is a convex function with a unique minimum reflect-
ing nonincreasing returns for end-user cost with respect to - b[aE{qd}/ar] - aL!ar = [aB(r)/ar] Kd.
r and Kd.
(5)
C = pc E{qc} + b E{qd} + B(r)Kd + L(Q - E{qc}
On the condition that 8p#(r)/ar > 0 and aLI ar < 0, the
-E{qd}) (1) end user would consider: a) the cost of reliability pur-
chased from the utility, b) the loss resulting from alter-
Eq. (1) states that total cost to the end user is composed of native levels of power reliability, and c) the cost of pro-
the cost of purchases from the utility, the variable cost of viding reliability through the dispersed system. The end
solar system ouput, the capital cost for a selected level Of user is no longer able to shift the risk and cost of reliability
solar system reliability, and the loss to the end user from to the utility, rather the end user must determine the least
insufficient electricity to meet demand. Assuming that the cost alternative(s) that satisfies a desired level of reliability.
extreme occur at an internal point, first order conditions Unlike the constant price structure, the reliability-based
for minimizing (1) require: price schedule allows the end user to weigh the costs of dif-
ferent levels of power reliability against the benefits. End
SC/Sr = pc[SE{qc}/ Or] + b( SE{qd}/ Sri users with a high value (large potential loss) for power
reliability (e.g. industrial users) are more likely to invest in
+ Kd[aB(r)/ar] + aL/ar = 0 (2) dispersed system reliability than users with a low value
(residential). As a result the utility price schedule serves as
SC! SKd = Pd SE{qc}/ SKd] + b[ SE{qd}/ SKd] a coordinating mechanism in system planning that forces
decentralized decision makers to consider the system-wide
+ B(r) + aL/ Kd = 0 (3) effects of dispersed system decisions. The economic
literature concentrates on two alternative approaches to
Consider first the situation where the utility provides determining reliability charges in electric tariffs: either a
backup service to dispersed system end-users at a constant reliability constraint which imposes restrictions on the
price pc. From (2), the first order condition reduces to: probability of meeting demand or an explicit rationing
cost. For a more detailed discussion of utility pricing and
[Pc- b] [ aSE{qd}/Sar] - aOL/Oar = [(aSB(r)/Sar] Kd,4 reliability see [9].
(4a) An additional consideration in dispersed system invest-
ment decisions is the revenue from sales of excess power to
where the 1.h.s. of (4a) represents the marginal benefits the utility. This of course requires compatability with the
and the r.h.s. the marginal costs of reliability. The benefits grid to maintain transmission integrity and is an issue that
stem from avoiding losses and power purchases while the must be resolved on technical standards. The buyback
costs stem from the concomitant investment in reliability rates, however, are influenced by many economic factors
With the utility backup service approaching 100 percent that determine dispersed system payback; andI, these
reliability, the loss approaches zero and (4a) reduces to: buyback rates will depend on several characteristics of in-
dividual utility systems. For example, a utility that is will-
[p - bl[OE{qd}/Or]= [OB(r)/Sr] Kd, for L(.) = 0° ing to pay both a capacity credit and an energy credit for
(b) power from a dispersed solar system will significantly
enhance investment opportunities. Similarly, dispersed
The economic decision for the end user is to determine systems that supply power with high reliability during
whether the marginal costs of changes in dispersed system system peak periods will complement the utility system.
MILON ET AL.: RELIABILITY OF INTERCONNECTED SOLAR ENERGY SYSTEMS 311
Buyback rates that reflect these effects on utility system In assessing these policy aspects of interconnected
reliability will promote an efficient integration of dispersed dispersed solar systems it is important to consider the
solar systems for both the utility and the end users [10]. capacity planning process. Several writers [3, 5, 7] have
argued that reliability standards have been imposed with in-
sufficient consideration for the economic costs and benefits
4. PUBLIC POLICY IMPLICATIONS of alternative levels of reliability. This has led to the charge
At the p nthat electric utilities-are "gold plated" [13] with reliabilityAt the present time the policy debate on the reliablity of characteristics that greatly exceed the needs of many
interconnected dispersed solar systems focuses on sections customers. Different customer classes, or even different
201 and 210 of PURPA and recent rules from FERC [11]. customers within the same class, might have widely varying
Most interconnected dispersed solar electric systems would needs for electric reliability. A framework for integration of
qualify as small power producers [12], that is, power pro- dispersed systems that employs an explicit price to account
ducers with less than 80 MW of capaci'ty using a renewable...for reliability factors would allow rational end users to selectfuel source. Under this status, dispersed systems must meet a reliability level consistent with their needs. As a result this
"reasonable standards to ensure system safety and reliabili- c t
ty of inteconnectedoperation" establihed by stte utilit could translate into lower costs for dispersed system capaci-ty of interconnected o aton eishe by stateutiity ty and storage. Rigid adherence to strict reliability standards
commssios.his s amajo isse o conenton sncecould preempt all but the most expensive dispersed systems.
utilities would clearly like to require as high a level of .crld question thatrempnsihoweer, iswther
reliability as possible to preserve the integrity of the distribu- .cust ill respondto p res tharefect lther-
tionsystmwile otetialenduser ar priciplly on-customers will respond to price structures that reflect alter-tion system while potential end users are principally con- naiv leel oreiblt.Tsqutoncntbeawrd
cerned with the reliability of their onsite systems. ...a.r
A different aspect of the reliability issue relates to the with certalnty until the concept of reliability based pricing is
rates for backup power to dispersed system users. Under implemented, at least on an experimental basis.
On the issue of dispersed system demand that jeopar-the FERC rules backup rates must be "just and . . .the FERCrules backup.rates must be "just and dizes utility reliability by presenting a stochastic peak de-reasonable" and a utility may not charge a dispersed end
user a different rate than other customers in a similar class mand, one solution is the use of load management through
a direct control device. In terms of overall system planningunless significant differences in cost of service can be this could promote load-leveling since off-peak use fordemonstrated. This reliability consideration deals with the backup could be increased while on-peak use could be
volatlity of end user dem'and and directly relates to Iongvoltiltyof.nduse.dman addretlyreatet log decreased or eliminated. An incentive price reflecting thisterm planning. A utility system that faces a certain erosion
of base demand with a stochastic peak demand from inerpil.aku. evc ol rooeedue nbeem di.ina di nancial vestment decisions that are consistent with the planningdispersed systems would clearly be n aobjectives of the utility.
situation that would eventually force other utility- . . ~~~~Some additional policy aspects of dispersed solarcustomers to pay higher rates. In this instance, a, ,,~~~~~~~~~~~systems are less precise but nonetheless important."discriminatory" rate based on the reliability of end user
demand might be appropriate. On the other hand, rates
s d l m e ib c reliability because of smaller sized units, fuel diversity, fastshould reflectimprvemetsiyemrliabliand flexible installation, and grid connections closer to enddispersed systems that reduce peak demands and thereby
iniecl beei ote cutmr.Teefcieueo use locations. One of the problems of having large
indirectl benefit other customers. Theeffectiveuseofgenerating units in electrical systems is the large perturba-rates for utility power can encourage reliability investment- . . ~~~~tion in system capacity caused by loss of the unit due to aby the end users that benefit overall system efficiency. forced outage. In many cases a reserve margin equal to the
An additional aspect of the reliability issue concerns
size of this large unit must be maintained for reliabilityutility buyback rates from dispersed systems. The FERC purposes. Smaller dispersed units with non-coincident
rules identify a number of factors that must be considered power outputs couldreduce tsneed f ornclrer v. . . ~~~~~~~~~poweroutputs could reduce this need for a large reservein determining buyback rates. But the most important for margin. Also, with smaller, dispersed units, the time
this discussion is the recognition that the reliability of the needed to add new system capacity is relatively short com-
dispersed system in providing power to the grid at different pared to that of a new coal or nuclear central station unit.
times during the load cycle is a primary determinant of the This gives a flexibility in response to system load changes
rate. It is not yet clear whether individual dispersed that can be utilized to the advantage of both a utility and
systems will have to demonstrate their reliability level in- its customers. The dispersed nature of the solar systems
dividually or if systems will be grouped generically accord- also allows construction and siting near the end-use loads.
ing to supply characteristics such as the availability and Overall service reliability could be improved if dispersed
variability of insolation. It seems apparent that regulations systems could supply power to the grid during system
based only on supply characteristics will do little to en- peaks or generating unit shutdowns. Finally, in terms of
courage reliability investments by end users and will not reliability problems due to oil embargos or coal strikes, the
promote a coordinated planning effort between the utility fuel diversity attributable to dispersed solar systems could
and end users. be a welcome addition.
312 IEEE TRANSACTIONS ON RELIABILITY, VOL. R-31, NO. 3, AUGUST 1982
5. CONCLUSIONS [101 J.W. Milon, "Electric rate reform and alternative energy
systems," Public Utilities Fortnightly, vol 107, 1981 Jun, pp
The purpose of this analysis was to highlight a number 15-20.
of major public policy issues that will significantly [11] R.H.J.H. Lock, "Encouraging decentralized generation of elec-
of major public policy issues that will significantly in- tricity: Implementation of the new statutory scheme," Solar Law
fluence both the costs and the penetration rate of dispersed Reporter, vol 2, 1980 Nov/Dec, pp 705-752.
solar systems. The policy making process should explicitly [12] Federal Energy Regulatory Commission, "Small power produc-
recognize Ithat the goals of end users and the utility tion and cogeneration facilities: Regulations implementing section
recognize * *** ** r210 of the public utility regulatory policies act of 1978," Federalconcerning standards of reliabilityand the availability of Register, vol 45, 1980 Feb 25.
backup power may differ. Actual problems that will be en- [13] U.S. Congress, House of Representatives, Committee on In-
countered in the process of integrating dispersed solar terstate and Foreign Commerce, Are the Electric Utilities Gold
systems with electric utilities are more complex than Plated? A Perspective on Electric Utility Reliability, 96th Con-
described here. However, if efficient use of dispersed solar gress, First Session, Washington, DC, US Government Printing
systems is of concern, utility rates that reflect the costs of Office, 1979 April.
reliability would allow end users to select the appropriate AUTHORS
reliability level consistent with the benefits to the end user.
The end-user investment model illustrated the significance Dr. J. Walter Milon; Dept. of Food and Resource Economics; University
of reliability and backup power availability in the decision of Florida, Gainesville, Florida 32611 USA.
to invest in dispersed system reliability. State utility com- J. Walter Milon is assistant professor of natural resource economics in
missions will have the responsibility for establishing a the Dept. of Food and Resource Economics at the Univ. of Florida. His
framework that will encourage end users to utilize dis- current research centers on the technical and regulatory issues involved in
persed systems that complement the utility system. A direct interfacing alternative energy systems with electric utilities. Dr. Milon at-persesystems that,.omplement theutility system. A drei - tended the London School of Economics and the Univ. of Virginia and
recognition of the need for a flexible approach to relal- received his PhD degree from Florida State Univ.
ty standards reflecting different values of reliability to end
users will help fulfill this responsibility.
Dr. Barney L. Capehart; Dept. of ISE: University of Florida; Gainesville,
REFERENCES Florida 32611 USA.
Barney L. Capehart (S'65, M'67, SM' 72) received the BS and MEE
degrees in electrical engineering, and a PhD in systems engineering from
[1] M. Laliberte, E. DeMeo, "Solar update," EPRI Journal, vol 6, the Univ. of Oklahoma in 1961, 1962, and 1967 respectively. Since 1968
1981 Jun, pp 12-15. he has been with the Dept. of Industrial and Systems Engineering at the
[2] A. Kaufman, "Reliability criteria - A cost benefit analysis," New Univ. of Florida where he is presently a Professor. His main research area
York State Department of Public Service, OR Report 759, 1975 is energy systems analysis. Dr. Capehart is a Senior Member of IEEE and
August. AIIE, a Fellow of the American Association for the Advancement of
[3] 5. WalldorfL. Mark,"Thelectrictilityidustry-pastand Science, and serves on the Administrative Committee of the IEE Systems,
present," in The National Electric Reliability Study, 1981 April, Man and Cybernetics Society. He is a member of the AIIE National
prepared for the US Department of Energy. Energy Committee and serves on several local, state and federal energy
[41 J. Endrenyi, Reliability Modeling in Electric Power Systems, John avsry Committee.
Wiley and Sons, 1978.
[5] M.L. Telson, "The economics of alternative levels of reliability
for electric power generation systems," The Bell Journal Of Dr. Clyde F. Kiker; Dept. of Food and Resource Economics; University
Economics, vol 6, 1975 Autumn, pp 679-694. of Florida, Gainesville, Florida 32611 USA.
[6] Decision Focus, Inc., "Costs and benefits of over-under Dr. Kiker holds the rank of associate professor and has appointments
capacity," for Electric Power Research Institute, 1978 October. in both the Food and Resource Economics Dept. and the Agricultural
[7] M. Munasinghe, "A new approach to power system planning,"
IEEE Trans. Power Apparatus and Systems, vol PAS-99, 1980 Engineerng Dept at the Univ. of Florida. He received his BS and MS in
May/Jun, pp 1198-1206. agricultural engineering and PhD in Food and Resource Economics from
[8] M. Munasinghe, M. Gellerson, "Economic criteria for optimizing the Univ. of Florida. He has served on the Univ. of Kentucky faculty and
power system reliability levels," Bell Journal of Economics, vol on various foreign assistance programs. His research interests are in the
10, 1979 Spring, pp 353-365. economic and technical aspects of dispersed energy systems including
[9] M.A. Crew, P.R. Kleindorfer, "Some elementary considerations photovoltaics and biomass.
of reliability and regulation," in Problems in Public Utility
Economics and Regulation, edited by M.A. Crew, Boston: D.C. Manuscript TR81-166 received 1981 April 13; revised 1981 August 22.
Heath, 1979, pp 143-160.
Seepage 307for details.