Last Thursday’s massive blackouts are certain to generate actions aimed at preventing future electric transmission failures. The country has a unique opportunity to transform the electric planning process into a system that is more efficient, less costly, more reliable and more secure. Electric generation technology advances over the last twenty years have reduced generator size to a level appropriate for a variety of medium and large commercial and industrial customers and apartment buildings. Integrating customer generation, or DG, in generation and transmission planning, will provide a more decentralized system, reducing costs and reliability.
Transforming the current electric system to include DG is similar to the computer industry transformation that occurred with the introduction of PC's and local computer networks. An insurance company, for instance, may have had one computer center with a remote terminal at each branch office. When the “mainframe" went down, the entire network died. Today's distributed computing systems have two-way information flows with much of the processing and data storage occurring at individual remote sites increasing reliability of the entire system and preventing entire system failures.
DG has the potential to provide the same kind of benefits that remote computing has had in the computer industry. Interestingly, the economic benefits of this policy will more than pay for the process. This paper identifies a series of measures which can be undertaken to insure that DG becomes an integral part of the nation's power planning solution.
Distributed generation (DG) is the production of electricity at or close to its use. DG has been used for decades by large industrial companies and by institutions like hospitals and universities. Most DG systems provide only a portion of a facility’s power needs with the remainder purchased from utilities or competitive power providers. While large utility generators lose fifty percent or more of the energy content of generation fuel in waste heat and transmission line loses, DG permits the capture of this waste heat for space heating, water heating, industrial process and even air conditioning resulting in efficiencies of as much as 85 percent. Onsite generation also permits utilities to avoid transmission and distribution (T&D) upgrades which would have been required to service DG customers. This comparison is shown schematically below.
Technology developments, especially those achieved over the last five years, have reduced the cost and improved the design of DG systems to such an extent that smaller customers like health clubs, restaurants and nursing homes can benefit with DG systems.
DG systems include engines, microturbines, turbines, fuel cells, photovoltaics and a variety of other technologies. Engines and turbines have been used for decades and reflect mature technologies. While microturbines are newer technologies, they have now been successfully used in thousands of applications. Fuel cells are applied commercially in a variety of niche applications and are expected to achieve significant cost reductions within the next several years making them competitive with other DG technologies. Photovoltaics are economically attractive in limited climate areas; however, renewable incentives available in many locations significantly improve their economics.
In addition to avoiding future T&D costs and reducing strain on the power system, DG can also reduce overall levels of emissions. (a summary of DG characteristics and an examination of its potential on Long Island is provided in the paper Applying Distributed Generation Strategies to Ease the Long Island Power Crisis ).
Current DG Market Barriers
While DG benefits to customers and the utility system are well known, a variety of institutional barriers have prevented DG from playing a significant role in the power delivery system to date. These barriers stem primarily from the fact that the rules of utility regulation are based on utility system designs of fifty years ago. When a utility customer adopts a DG system, most of the lost revenue goes right to the utility's bottom line. Customer use of DG, under most state utility regulations, reflects a serious threat to utility profits. Not surprisingly, most utility policies do not promote DG.
Specific DG market barriers include:
- Expensive and time-consuming utility interconnection requirements
- High electric utility “standby” rates applied to DG customers
- Cumbersome and time-consuming permitting processes
A number of fallacious arguments often appear in discussions of DG . Since many of these arguments appear "reasonable" at first glance, it is useful to address them before presenting recommendations for integrating DG in utility system planning.
Fallacy 1. Current natural gas shortages make DG a bad option. Wrong. Using natural gas for onsite generation and capturing the resulting waste heat actually stretches current supplies further. Instead of sending gas to a utility turbine where half or more of the gas energy is lost as waste heat, it should be sent to a DG system where only 15 percent or so is lost to waste heat. Gas savings can also be achieved by switching to oil at dual-fuel central power plants where the added benefit of more effective pollution controls will also reduce the overall level of emissions.
Fallacy 2. DG isn't economical except for large industrial customers. Ten years ago, this was true; it no longer is. System costs make DG an attractive option for 15 – 25 percent of customer energy use in commercial and industrial sectors. (see Applying Distributed Generation Strategies to Ease the Long Island Power Crisis). Improvements in equipment costs are likely to increase this potential to as much as 30 percent by the end of this decade.
Fallacy 3. DG can't make a big enough difference to have an impact on the system. Reducing system loads by even a small amount when the system is at or near capacity has a substantial impact on system reliability. DG contributions can significantly improve transmission and distribution system reliability.
Fallacy 4. DG causes safety problems for utilities. A great deal of effort over the last several years has resulted in a final set of industry standards that addresses safety and other interconnection issues.
Fallacy 5. The DG market isn’t mature enough to provide substantial benefits to the electric system. DG opponents often point to the high current cost of fuel cells to suggest that DG cannot provide an economic solution to today’s energy problems. The DG market includes a variety of technologies which vary in their development stages. As pointed out above, engines and turbines have been used for decades and can easily be integrated in the current electric system. At this moment thousands of companies are using DG to lower their electric bills and improve reliability – DG is not the distant technology option portrayed by some media reports of the last several days.
While the current cost of fuel cells makes them attractive only for niche markets that require maximum power quality and reliability, rapidly declining costs will make fuel cells a competitive option within several years. In meantime engines, turbines and microturbines can economically be integrated in the current electric system. (see the white paper When Will the DG Market Take Off? Distributed Generation Market Development and Investment Opportunities).
A Policy that Pays For Itself
Current DG market barriers are primarily a result of misguided regulatory requirements. Both utilities and consumers are prevented from taking advantages of the benefits of DG. Correcting regulatory shortcomings will encourage utilities to promote DG and provide a level playing field for customers to consider DG.
DG-related efficiency improvements and cost reductions permit utilities, their customers and DG users to end up better off than they were before. This result is similar to the impact of production efficiencies which permit producers to grant workers pay increases, to reduce prices to consumers and to increase profits at the same time.
NIMBY and the Environment
One reason that the transmission grid has become so antiquated is the difficulty of gaining permits to build additional transmission lines. “Not in my back yard” or NIMBY obstacles can be completely avoided with DG. DG systems are small in size and can be place on rooftops and in equipment rooms. Microturbines and fuel cells are quiet while noise generated by DG engine systems noise can be muffled.
Natural gas fueled DG systems also reduce the overall level of pollutants released into the atmosphere. While a natural gas DG engine generates more pollutants than a central power plant per unit of natural gas burned, that increase is more than offset by using waste heat from the engine to avoid pollution generated by burning gas in boilers for space heat, water heating and industrial process.
Transmission Investments are Still Required
Large investments in the traditional transmission system will still be required to bring the country’s infrastructure up to date. DG costs and benefits should be considered simultaneously with traditional transmission investments in identifying a least-cost strategy for improving the electric system.
Making DG Part of the Solution.
The following policy measures will insure that DG becomes an integral part of the nation's power planning solution.
- Institute DG-related performance based rates. Utilities typically earn profits on investments they make in transmission, distribution and generation equipment. When customers install DG equipment, the utility sees only a loss in revenue whereas if the utility had provided that generation through an addition to its central plant equipment and its transmission and distribution (T&D) lines it would have earned a return on these investments. It is no wonder that utilities have not welcomed customer-owned generation. Performance-based rates can provide a comparable return to the utility for encouraging customers to make these investments themselves. The utility earns a return consistent with what it would have made on comparable central plant/T&D investments, the customer saves money on its utility bills and other customers benefit from increased system costs related to expanding the generation, transmission and distribution system.
- Design standby rates to reflect actual “emergency” use of system capacity. Utilities typically charge DG customers standby rates based on the capacity that they would require if they have an unexpected DG system failure. However, the nature of these demands on the system tend to be random and much less frequent than assumed when utilities set these rates. A more equitable standby charge can be modeled on unemployment compensation insurance principles where initial charges are based on usage typical of similar businesses and subsequent charges are increased or decreased to reflect actual experience.
- Standardize and simplify interconnection requirements. Several states, including California and Texas have standardized DG electricity grid interconnection requirements for small and medium-sized customers, significantly reducing the cost of installing DG systems.
- Streamline the permitting process. California and Texas are also in the forefront of states providing streamlined emissions permitting reflecting “output-based” emissions advantages of DG systems.
- Provide DG incentives to reflect externalities. When a customer installs a DG system, benefits accrue to the utility and to other customers of the utility by reducing transmission, generation and distribution expenditures and in many cases reducing emissions. DG investments will reach their optimal level only when DG customers are provided compensation for external benefits that result from installation of their systems. Appropriate price signals will provide a system where choices of thousands of individual companies and households will provide the appropriate level of investment in DG.