HOW TO COUNTER AN ICAP CHARGE.

Federally chartered independent system operators (ISOs) now control the power grids and wholesale markets for more than half the retail power customers in the U.S. In such areas, electric bills may soon (or already) include a charge to pay for keeping installed generating capacity (ICAP) available regardless of how much electricity it actually produces. While that ICAP charge is controversial (some regions avoid or have fought against it), power customers having backup generators may also be able to make money from it.

Prior to deregulation, costs for building and maintaining generators were charged by utilities at rates regulated by public utility commissions (PUCs). After deregulation (and depending on the region), such costs became part of the wholesale power price charged by generation owners. When that process led to volatility in power pricing (and generators' revenues), ICAP was proposed as a way to limit it while creating an incentive to build new power plants.

HOW BIG IS AN ICAP CHARGE?

It is typically calculated as a ratchet demand charge based on a customer's highest summer or annual (not monthly) kW demand, which is multiplied by a $/kW factor for the region or zone where a customer is located. It may be combined by a marketer or utility with the customer's energy (i.e., kWh) charge or fuel adjustment charge and thus not be seen separately (though some retail power contracts may do so). Utility or ISO websites should have such information. For most customers, ICAP may add 4% to 8% to their total power bill, but some customers (especially those with poor load factors) have seen over 15% of their electric bills go toward ICAP.

COMING SOON TO A BUSBAR NEAR YOU

Retail power customers in New England and Mid-Atlantic states have been paying a capacity charge for several years, though the structure and magnitude varies among ISOs and is still changing. During the last year, other states (e.g., Illinois, California, Ontario) have been discussing or planning to implement an ICAP charge in the near future. For a heads-up in your area, watch for phrases like "resource adequacy," "reliability pricing," or "installed capacity" in news from your PUC, utility, and/or ISO.

$$$ IN YOUR BACKUP GENERATOR

ICAP charges are highest in areas where transmission capacity is tight during peak demand periods and/or the margin between supply and demand is otherwise narrow. Financial incentives may be offered to make on-site generation available when called upon by the utility or ISO (typically when hourly wholesale pricing in such areas starts to rise exponentially). The same $/kW ICAP rate is offered to those with on-site generation as is paid to central power plants. On-site generators are only rarely asked to run more than a few hours a year, but could collect a bundle simply for being available (just like the big boys). In markets where demand is rapidly rising and/or no new power plants are being built, on-site generation may then become quite valuable beyond its prime purpose of keeping the business running during a blackout.

CLEANING UP YOUR GENSET

Such locations may also, however, suffer from restrictions on diesel generator emissions, especially nitrous oxides (NOx), a primary component of smog. To participate in such programs, NOx emissions must be cut 70% to 90% for most diesels over 10 years old. Fortunately, the cost of retrofit NOx cleanup systems has recently dropped by over 65% and is now as low as $50 to $60/kW (for a 2-MW engine; price varies with the size of the existing diesel).

Utilizing urea-based (not stored ammonia) selective catalytic reduction (SCR) technology, these systems convert NOx into harmless nitrogen and water. Doing so breathes new life (and value) into existing diesels that could otherwise be used only during rare power outages. Where ICAP charges are high (e.g., over $35/kW/yr), payback periods of only a few years (when installation is included) may be attainable. Federal or state grants covering some of those costs may also become available in 2006 under the Energy Policy Act passed in 2005.

WHO OFFERS SUCH RETROFIT TECHNOLOGY?

By mid-February 2006, Caterpillar Co. expects to introduce its new retrofit SCR for existing diesels (including those manufactured by others). Find information about it at www.cat.com. Combustion Components Associates has offered its ELIM-NOxTM SCR since 2004 (see it at www.combustioncomponents.com/downloads/ELIM-NOx%20Stationary.pdf).

ICAP charges may not go away soon, but upgrading on-site generation may bring some of that money back to your bottom line.