Lloyd Cibulka
Contributing Editor
Major market forces are driving significant change in the distributed generation industry. First, there`s good old economics. As technologies mature, they become more efficient and less expensive, so that distributed generation (DG) becomes a more cost-effective alternative in more situations. Diesel engines are reliable, have low purchase cost and are cheap to operate where peaking capacity is needed. Abundant and cheap natural gas makes many of the newer technologies like gas turbines and gas-fired reciprocating engines fairly economical, as well. Even fuel cells, which use hydrogen from reformed natural gas, can be cost-effective in situations requiring low (or no) emissions. Wind turbines are becoming more competitive, but solar systems and fuel cells are still expensive to install, even though they, too, are gradually coming down in price and improving in conversion efficiency, and have some viable market niches.
From the utility perspective, it is no longer true that bigger generating plants are more efficient, economic or lower-polluting than smaller plants. Many of the new small generating technologies are quite competitive now, especially when compared with fossil-fired plants. DGs are smaller by definition, so generation can be added in smaller chunks, allowing utilities to limit both their financial risks and the risk that the load won`t grow, stranding investments.
Advances in power electronics have made converter systems smarter and more versatile, allowing better integration with the electrical system. And smarter control systems allow better dispatch by system operators.
High energy prices and demand charges, where they exist, give industrial and commercial customers an incentive to examine the cost saving benefits of DG. Power quality and reliability concerns, while harder to quantify in pure dollars and cents terms, also are a factor with customers.
These forces have always been around, and have caused relatively gradual evolutionary change in the implementation of DG. But in the last few years the push to restructure the electric industry to operate on market-based mechanisms has added new variables to the equation, ones that could result in much-accelerated proliferation of DG in utility markets.
As restructuring progresses, a typical scenario is that utility generation assets get spun off into independent subsidiaries or generating companies (gencos) that bid their resources into a power pool or power exchange (PX), competing on price with new market players like independent generators, merchant plants, energy service providers (ESPs) and energy service companies (ESCOs). When supplies get tight, peaking generation capacity can become quite valuable. And ESPs and ESCOs can make good use of DGs as a service option to woo customers from utilities, particularly in service territories with high costs and substandard reliability. Utilities, too, may find it more economical to install DGs in areas with reliability and PQ concerns than to install new distribution facilities.
Unfortunately for DG, deregulation often results in utilities no longer having an incentive to invest in energy efficiency and conservation measures, which potentially could include installing DG near loads to relieve distribution system capacity constraints, or partnering with large customers to net out load.
Where there`s a PX, there is probably also an Independent System Operator (ISO) or similar entity that controls the operation of the transmission system. The ISO can direct that certain generating plants either must run or cannot run for reasons of reliability or transmission system constraints; it can require utilities to examine all capacity options, including DG, as well as energy efficiency and conservation programs, before approving wires upgrades; and it can contract with generators for ancillary services, such as volt/VAR control, spinning reserve, frequency control, etc.
Hard data on the size of the market for DG is difficult to come by, but one industry organization, the Distributed Power Coalition of America, estimates that 20 percent of new generation could be cost-effectively supplied by DG. That translates to about 35,000 MW over the next 20 years.
Challenges and barriers
Despite these forces for change, there are still many factors that impede the acceptance and implementation of DG in contemporary energy markets:
Cost. In many cases it is still cheaper for a customer to buy from a supplier (utility, ESP, etc.) than to install DG themselves, when analyzed on a long-term basis. If cogeneration is possible, the economics could be better. But distribution “wires” capacity is frequently fairly economical when viewed from the typical 30-year utility perspective. And if the generation market is awash in abundant resources, the commodity cost is also low.
Regulatory Issues. There has been some debate over who is (or should be) allowed to own and operate DG, and under what conditions; what roles the utilities, state regulatory commissions and/or FERC should play; and how to include DG fairly as a factor in the restructured market. Some market players are concerned that utilities could retain market power if allowed to own and operate DG. At present, FERC has left the DG issue to the states to address individually.
Technical Barriers. Interconnection requirements invariably top the list of technical barriers in need of resolution. Utilities cite the need to ensure safe and reliable operation of the system to protect utility workers and the public as justification for conservative interconnection practices. Vendors and customers counter that utility requirements are needlessly strict and expensive for small DGs, and that variability from utility to utility can certainly be mitigated with some effort at standardization.
Utility Practices. Most utility regulation gives utilities incentives for installing electric facilities; utilities can view DG on the customer side of the meter as cutting into their business, or at least stranding their wires investments. Defensive utility strategies that result typically take the form of high standby charges, exit fees, and even proposed new rate designs that have higher fixed charges and energy charges. Even if this is not the case, the process of executing an interconnection agreement with a utility can be time-consuming, complex, expensive and frustrating. For many would-be DG users, the extra time and expense can make or break a project.
Environmental. While DG units under a certain size, or operated for a limited number of hours, may be generally exempt from Federal or state environmental regulations, they may still have to meet local rules. Larger DG units usually need to meet the same air regulations as large utility plants. And local opposition to siting any type of generation is always a possibility.
Siting and Permitting. Permits may be required from a number of agencies, relating to zoning, safety, building and other requirements.
Fuel Availability. Natural gas may not be available at the desired DG site; if not, the expense of a line extension is required. And in many states, tariffs stipulate that such use of gas is interruptible if supply is needed for residential peak use. Diesel generators require on-site storage of fuel.
Entering the mainstream
The concept of distributed generation is on the verge of becoming mainstream in the electric power industry. While alternatives like photovoltaics and fuel cells will continue to have their high-value but small market niches, electric utilities are starting to seriously consider wider use of larger-scale DG technologies to cut their costs and serve customers better; independent power producers and energy service companies are actively looking for ways to deploy DGs in lucrative segments of the customer market; and economical and efficient modern DG technologies are enticing more and more customers to think about using DG on-site to manage their energy use. The key barriers to further DG use have been identified and will soon fall, allowing DG to achieve a more prominent role in today`s energy marketplace.
Lloyd Cibulka is an EL&P contributing editor and industry consultant based in San Francisco. He formerly worked in Pacific Gas & Electric`s research and transmission planning departments.
THE FUTURE OF DG
There are new distributed generation (DG) technologies on the horizon, and existing ones keep improving. Several manufacturers are actively marketing microturbines (gas turbines in the 25 to 75 kW range) that are aimed at the small commercial market; these units come in compact configurations and are touted as quiet, clean, efficient and economical. Gas turbines in larger sizes for more conventional industrial applications are becoming cleaner and more efficient as well. Small fuel cells in the 7 kW range that are about the size of a home appliance and use natural gas at low pressures are aimed at the residential market.
Regulatory & legislative trends
Regulators in some states are taking a more proactive role regarding DG. In New York, while the state electric restructuring plan was under review by the Federal Energy Regulatory Commission (FERC), the Public Service Commission (NYPSC) instituted proceedings to address potential near-term generation capacity shortfalls. Included in the investigation of possible solutions was a proposal to induce DGs and independent power producers to offer their power for peaking duty, through the payment of a capacity charge ($/kW-year). Enlisted generators would need to install controls and protection systems to meet interconnection requirements, and appropriate metering so that compliance could be monitored. The NYPSC also formed working groups with representation from all stakeholder groups to address barriers to DG. At the end of 1999 the NYPSC adopted an order including standardized interconnection requirements, one of the working groups` top priorities for lowering barriers to DG.
In late 1998 the California Public Utilities Commission (CPUC) opened a ratemaking proceeding to investigate the need for new state regulations regarding distribution competition and distributed generation. A year later, after several hearings and rounds of comments, the CPUC ruled that there was sufficient support from stakeholders on all sides to institute a fast-track proceeding to deal with the issues surrounding DG (a slower track was also started to examine distribution competition issues). Key issues are who could or should own and operate DG, interconnections issues, identification and resolution of market entry barriers, standby charges and exit fees, and new tariffs that may be required for DG. These new proceedings are just now getting started.
In Texas, the need to address critical generation shortfalls in 1999 and 2000 led the Public Utility Commission to examine DG as a potential solution; the result was a recommendation for new rules for interconnection and operation of DG in the Texas market. As in New York, the objective was to provide some level of standardization of rules and procedures across utilities, so as to minimize the costs of interconnections and remove barriers to DG.
On the national level, the Institute of Electrical and Electronics Engineers (IEEE) Standards Coordinating Committee 21 has taken the lead in developing a national Standard for interconnection of distributed resources with power systems. It is close to being approved, and most states that have developed their own rules plan to coordinate with the IEEE Standard when it is finalized.
Organizations
Founded in 1997, the Distributed Power Coalition of America (DPCA) is a cross- disciplinary organization that promotes the concept of distributed power. Members include electric and gas utilities, consumers, equipment manufacturers and suppliers, natural gas transmission pipeline companies; gas and electric marketers, and research organizations. One of the DPCA`s primary goals is to remove regulatory and legislative impediments to the use of distributed power technologies. Check out its Web site at www.dpc.org; its links will take you to other groups that are active in the distributed generation field, including the Electric Power Research Institute (EPRI), the National Renewable Energy Laboratory, the California Alliance for Distributed Energy Resources (CADER), and others.
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Fuel cells like GE`s HomeGen 7000 are opening new doors into the market for distributed generation systems. Photo courtesy of GE MicroGen.
