TransActions - November 2001 (Vol 501)

Distributed Generation Opportunities and Impacts

Distributed Generation - An Overview
Distributed generation (DG) is not a new concept but is receiving increased attention as the electric power industry begins to consider fundamental changes to its business practices to meet the new era of competition. What is now considered distributed generation has taken on many names in the past, including back-up or stand-by generation, cogeneration, combined heat and power, renewable generation, and remote power. A broader definition of distributed generation is referred to as distributed energy resources (DER) and encompasses not only generation but also tools for reducing energy usage on the customer's side of the meter such as storage technologies, end-use technologies and demand side management (DSM) concepts.  For the purposes of this article, DG will refer to all small-scale (1kW - 50MW ) sources of electric energy production, unless explicitly stated otherwise. Examples of DER technologies include wind turbines, micro turbines, fuel cells, reciprocating engines, photovoltaic units, Stirling engines and hybrid systems.

Distributed energy resources, unlike traditional large-scale central generation sources, are small, modular, and are typically located on-site or near large energy end users.  There are a number of technologies, both renewable and fossil fueled, that make up the current, and near future, portfolio of distributed generation plants.  The following table includes a sampling of the most prominent technologies as well as a few of their key economic and operating characteristics.

Customer Perspective
These technologies can be used to meet a variety of customer energy needs, including; lower cost electricity, continuous power, backup power, remote power, combined heat and power (CHP), and peak shaving. The physical plants can be installed directly on the customer's premises or located nearby in district energy systems, power parks, and minigrids.

Major factors involved in the decision of energy users to evaluate on-site generation are the rising concern about the electric system reliability and the increased volatility of retail electricity prices.  According to the North American Electric Reliability Council, the increasing competition in the wholesale power markets have contributed to lower reserve capacity margins in the regional power systems, which results in a system that is more susceptible to power outages, brownouts and price spikes.  While a worst case scenario for this situation has already been witnessed in California, there are certain niche industries for which future reliability appears to be a nationwide concern that is driven by their requirement for continuous power rather than by where they are located.  The increased use of sensitive electronic components in some industries has resulted in the critical need for continuous, high-quality power.  In order to get a sense of how important continuous electric power is to such operations, the following table illustrates the estimated cost of temporarily losing electrical power:

In addition to the industries that have the requirement of highly reliable power, many customers are evaluating power supply alternatives in order to hedge against potential future price increases, as well as to avoid any supply shortages. For example, McDonald's Corporation is currently testing a microturbine application in Bensenville, Illinois and, if successful, the company could deploy this technology at restaurants nationwide.

The other key customer incentive to installing DG is the tremendous boost in efficiency that can be gained by combining electricity production with thermal requirements. Currently referred to as combined heat and power (CHP), the simultaneous production of electricity and useful heat can provide low cost energy to customers with the appropriate energy use characteristics. The uses for the residual heat from the electricity production can vary from space heating for adjacent buildings (e.g., campuses, hospitals) to thermal needs for industrial processes.  There are several computer models that are designed to assess potential distributed generation technologies and determine the cost effectiveness of installing CHP at a customer's site based on the particular operating parameters .

Remaining customer benefits for considering on-site DG include: remote applications, green power alternatives, and increased energy bill management/control. Key issues include: equipment selection and sizing, facility ownership, operation/maintenance and life cycle costing analysis.

Utility Perspective
The discussion of the benefits of distributed generation to the utility industry has typically been focused on the reduced costs of upgrading or extending T&D systems, which is purported to result in enhanced system reliability. While this may be true in many instances, NRECA's White Paper on DG points out that many of the claimed benefits may be premature and unsubstantiated. A prime example of this is found in the following table of monetized utility savings for avoiding T&D upgrades, as issued by the Distributed Power Coalition of America (DPCA):

Although the savings values are substantial, NRECA notes that the underlying data behind these values are unavailable and therefore cannot be applied to a particular utility system. Due to the unique characteristics of each utility system, generic claims of DG's benefits to the system, monetary or otherwise, should be taken with some skepticism. A few of the utility system areas that may be sensitive to the expansion of DG are categorized by NRECA as follows:

• Safety - Interconnection requirements must include islanding capability, which is the automatic isolation of the DG from the grid if there is a fault detected on the system (Texas and New York have already adopted this requirement).

• Reliability - Every connected generation source affects the system and is affected by the system, posing challenges to a system operator with many small generators (Texas and New York have addressed such reliability risks in their current DG legislation).

• Interconnection Agreements - A host of issues relating to the certification of the DG facility and all related costs.

• Net Metering - The potential exists for subsidizing customers with qualifying DG facilities, and the potential exposure exceeds the subsidy resulting from the "avoided cost" price required by PURPA (30 states currently have net metering regulations).

• De-averaging Rates - Designed to encourage DG where it will provide distribution cost savings by conveying a customer's true distribution costs. This could unfairly target rural cooperatives that have fewer customers per mile of line and has the potential for encouraging DG where it is least beneficial (i.e., where distribution costs are high due to remote areas or recent upgrades).

In addition to perceived T&D benefits, other potential items for utilities to consider when assessing its options regarding involvement and support of DG development include: potential impacts on rate base (revenue erosion); improved customer satisfaction (reliability and price stability); and utility ownership, operation and maintenance opportunities.

Conclusion
The July 2001 Distributed Energy report issued by the Consumer Energy Council of America prominently lists seven consumer benefits.  However, the key to the listed benefits is the qualifying text that precedes them, which is:

"CECA believes that distributed energy…when properly integrated with an improved national electric power system, incorporated into the economic structure, and accommodated by appropriate regulatory and administrative regimes, has the potential to benefit…"

Yes, there are substantial benefits that can be realized by the installation of DG facilities, owned by end-use customers or utilities, but careful consideration is required by regulators, system operators, equipment manufacturers, utilities, and end-use customers before these benefits can be reaped. Specific areas requiring further research/ development are divided between utilities and customers, as follows:

Outstanding DG-Related Issues for Utilities

• Design of innovative electric utility pricing and rate structures.

• Interconnection regulations, including a full assessment of associated costs and risks.

• Opportunities for utilities as DG owners/operators.

• Rate base erosion impacts and compensation for stranded costs associated with DG installation.

Outstanding DG-Related Issues for Customers

• Accurate/unbiased equipment selection and determination of the economic viability of the DG investment.

• Is the technology capable of providing the required service?

• Risk associated with substantial initial investment.

• Lack of standardized interconnection requirements.

• Equipment certification requirements.

• Status of Net Metering - not necessarily paying market price.

• Siting and permitting of equipment.

• Who should own and operate the DG plant (not part of customer's core business)?

GDS has been working closely with utilities and customers across the country to help them identify opportunities, quantify impacts, and develop policies and strategies associated with distributed generation.

For more information on these technologies and how to address their potential implications, please contact Scott Albert or Tom Rooney at 603-471-0336, or e-mail: info@gdsassociates.com.