Distributed Generation— When Customers are Generators

By Louis Szablya, R. W. Beck, an SAIC company

Historically, electric utility customers have been unaware of local energy source options mostly because practical alternatives have been nonexistent. That is changing.

A few customers are installing generation at their homes and are receiving great satisfaction. In Florida and other parts of the eastern seaboard, it’s common to find backup generators that provide power for extended periods after hurricanes and other severe weather.

From California to Washington, D.C., solar panels are connected to the grid 1, 2 or 5 kW at a time as residential customers buy and install systems that deliver solar power to the grid. Even with tax credits and solar rebates, these systems are just barely cost-effective.

In today’s market it is impractical for consumers to operate their backup generators to produce energy solely to provide for their own consumption, except perhaps during critical-peak pricing.

In time, the value proposition of on-premises generation will become great enough to cause significantly wider penetration that will allow customers to transition from static consumers of electricity to being producers and consumers.

A few years ago at an Austin, Texas, meeting, former general manager of Austin Energy Roger Duncan described this new type of producer-consumer customer as a “prosumer.” The term is not unique to the utility industry and has been adapted to describe the shift from a regular consumer to a more professional or producer role. Prosumers will impact the utility industry, and utilities will embrace them or be left out in the cold.

Changing Customers

Customers can be fickle, and what they desire and need today likely will be different tomorrow. With high confidence we can predict that future consumers will be different than consumers today, and consumers today are different than they were when electricity was a nascent industry—when the electric industry did not sell electricity, it sold lighting. It did not sell electricity, it sold comfort. It did not sell electricity, it sold convenience.

This often was accomplished by installing a generator at a customer’s premises. And utilities sold it to the wealthy. Over time and accelerated by the adoption of the electric meter and the obligation to serve, electricity became available to common people.

In the current market, wealthier people tend to purchase distributed generation. Solar systems can cost more than $25,000 and have long payback periods. Backup generation with a transfer switch could cost more than $5,000 installed, and never operate. Whether for renewable energy or backup power, customers are not purchasing these resources to deliver the lowest possible cost; they purchase for convenience, comfort or because they can afford it (especially with the help of utility and government incentives) and want to produce their own power. That means the increased penetration of distributed generation likely will be driven by the combination of factors unrelated to the lowest possible cost. It will be driven by other factors, such as independence, reliability, sustainability, security and just “because I can.”

Wealthier, grid-isolated consumers might justify on-premises generation today, but in time regular customers will purchase their own on-premises generation. With sales of personal generators from 2002–06 at a 21 percent compound annual growth rate, according to the SBI Energy report “U.S. Market for Residential Generators,” the trend is clear: People want to ensure their own supply. A customer today who has a natural gas-fired backup generator could incrementally burn local distribution company-delivered natural gas and produce energy for less than 30 cents per kilowatt-hour. That likely will not compete with most retail rates. With California rates for critical-peak pricing at $1 per kilowatt-hour, it might make sense to run that generator some days. How long will it be before an important selling feature of a house is whether it has its own energy source?

Role of the Utility or Energy Provider

As a utility or energy provider transforms from the seller of electricity to serve customer loads to the seller and buyer of electricity, utility management will face many challenges, including managing power transactions (direct purchases and facilitating third-party transactions), operational issues (power quality and system protection), safety (for employees and the general public), and stakeholder education (with a new class of prosumers).

Because the grid is interconnected, the impact of interaction between prosumers and the system must be monitored and managed. A single prosumer’s impact on the grid likely will not create a major failure, but the aggregate behavior of all distributed generation could cause significant system impacts. Will prosumers be obligated to provide governor response to frequency changes? Must they produce or consume reactive power to help keep voltage within acceptable boundaries? Must they make their generation available during emergencies? Answers to these questions and others will drive how utilities respond to distributed generation when it affects their reserve obligations, voltage control, billing, penalties and liquidated damages.

Most likely the largest change for a utility is the transition from supplier to partner as the customer relationship evolves. Utilities no longer will have full control of all the generation, and they must dedicate resources to absorbing excess distributed generation energy and arranging for additional reserves or make that an opportunity for prosumers to provide.

To prepare for this change, utilities must partner with prosumers to educate, engage and gather necessary information. Depending on how a utility approaches the purchase of power, prosumers might allow utilities to have information from their sides of the meter, such as generator output (whether it is solar, renewable or conventional) or whether their generators are online or offline.

Utilities also might encourage distributed generation participation by leveraging advanced metering infrastructure (AMI) data into incentives. For example, prosumers might be offered more meter information or have access to a Web portal with data unavailable to traditional consumers. In the power system, we must match load and supply constantly; the need for reliable resources that can respond to changing conditions will continue to be needed independent of more prosumers on the system. This new commercial and operating relationship will allow utilities to know how much generation is available and how much is producing power. Utilities must create distributed generation programs that will evolve to match customers’ changing roles.

Nothing is more important than employee and general public safety. Although interconnection rules and standards address most safety concerns, the changing needs of the distribution system and future application of intentional islanding will require utilities to be aware of the status and amount of generation available on each feeder, lateral and phase and the impact generation has on the magnitude of faults and detection. Prosumer education programs and compliance monitoring might become required for those who want to fully participate in the interactive grid, much like many states require car safety inspections if they will be used on highways.

In addition, the pressure on utilities to reduce the cost of power will never stop. If regulators do not pressure them, customers will because they will have a ceiling on the amount they will pay a utility for electricity: their avoided cost.

Customers’ Role

Customers will become more aware of their energy options, including on-premises generation. This increased awareness will create demand for new energy options, and the competition for this spend will force companies to sell lighting, comfort and convenience as electric utilities did more than a century ago. Nevertheless, this time utilities will sell reliable lighting and continuous heating and cooling even when the grid fails. Premium maintenance programs will remotely monitor their on-premises energy resources and keep them in tip-top repair. This service could be provided by utilities as a new revenue source.

The attributes prosumers will consider from their personal generation will not just be the up-front investment but also the operating cost, carbon footprint and other noneconomic perceived benefits that satisfy customers’ needs. Ease of maintenance, noise and size or color might be the deciding factor because the ever improving technology will increase the efficiency and decrease the cost, making the economic differences among vendors smaller. Perhaps propane dealers will sell generation with the equivalent of “batteries included” by filling tanks for free on installation.

As utilities contemplate how they will incorporate distributed generation, they must focus on their specific customers’ needs and motivations to determine what an effective distributed generation program might look like and start preparing for and embracing prosumers.


Louis Szablya is a director of smart grid integration with R. W. Beck, an SAIC company, where he helps clients identify and resolve integration issues that arise as smart grid technologies are adopted. Reach him at louis.j.szablya@saic.com.


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