Distributed Generation: Can it Fill the Gap?

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The concept of siting relatively small power plants at or close to the end-use customer is becoming increasingly attractive to many utilities. Deregulation of both the electricity and gas industries is creating niche applications for these installations, which are commonly known as distributed generation. While there are many applications where distributed generation could be feasible, many barriers still must be addressed before it becomes commonly used by utilities.

Types of Distributed Generation

Distributed generation can take several forms. One is standby (or back-up) generation that typically operates only when the normal power supply is interrupted. Another form is peak-shaving power, which operates when the aggregate load on an electrical circuit exceeds some threshold power level. The third form is baseload power, which is a distributed generation system that normally operates continuously. A fourth form, cogeneration, is actually a variation of peak-shaving power and baseload power. Electrically, it is fully equivalent to either of them. The distinction is that cogeneration also provides useful thermal energy to serve selected heating and/or cooling loads. The final form of distributed generation is an independent power producer (IPP), a small power plant that transmits electricity to a remote purchaser via the utility grid.

Numerous applications are possible within each of these alternatives. Many involve installations made within or just outside a home or other occupied building. Other applications involve providing power to equipment located at a utility substation, or at a communications relay station or tower built at a remote site.

In addition to being categorized by its various forms, distributed generation can be considered in terms of technology type. As the table shows, commercially available technology types include generators driven by reciprocating engines (REs), generators driven by gas-turbine engines (GTEs), batteries, fuel cell power plants, uninterruptible power-supply (UPS) systems, which are usually battery-powered, photovoltaic (PV) arrays, and wind turbines.

The first two technologies are generally referred to as gensets. PV arrays and wind turbines have only limited geographical applicability and, like fuel cells, are not yet being manufactured in large enough volumes to be economically competitive except in special situations.

In the future, when the newer microturbine and fuel cell technologies are more fully developed, regulated utilities will be able to use small fuel cells instead of batteries as backup power for their substation switchgear controls and the internal communications system that links all transmission and distribution (T&D) substations and power plants. Utilities may also consider distributed generation as a way to defer T&D-system upgrades and extensions.

However, in some states where electric utility restructuring has occurred, the regulatory agency has required the regulated utility to divest all of its generation assets. Some distributed generation developers and public-interest advocates are concerned that the regulated utilities will use this application to regain a role in generation. In these states an alternative procedure could be for the utility to evaluate each potential upgrade and extension and calculate the revenue requirement associated with each over a 15- or 20-year period. Distributed generation system installers would then have the opportunity to bid on installing and maintaining a system that would accomplish the same end as making the upgrade or line extension.

Increasingly, electric utilities and utility customers are finding situations where it is cheaper to install distributed generation to serve a load rather than upgrade or extend a utility power line. An example where this approach was used occurred in Manhattan, where a 200 kW fuel-cell power plant was installed to serve a police station and other nearby loads located within Central Park. This solution was more economical than digging-up and replacing a buried distribution feeder that had degraded with age. In addition, studies have shown that distributed generation is often more economical than extending distribution lines to new customers in rural areas.

Distributed Generation Barriers

A number of key regulatory and policy issues will affect distributed generation’s future. Congress, FERC or some other federal regulator will settle some of these issues at the national level. Individual states or counties will settle other issues. Actions by public-interest groups are also likely to affect the outcome of the developing policy debates. Some of the issues being debated include:

1. Interconnection Requirements. What will future interconnection requirements be for various distributed generation system capacities? Will a national standard be adopted, and will all electric utilities adopt a common set of requirements?

2. Electric Rate Structures. To what extent will tariff designs be changed to adjust average electricity prices when the amount of electrical energy delivered by an electric utility is sharply reduced due to increased use of distributed generation?

3. Supplemental-Supply Electric Rate Structures. How will tariff designs and the free market affect back-up electricity (electricity supplied by the electric utility when a forced or scheduled maintenance outage of the distributed generation system occurs) prices?

4. Competitive Transition Charge and Systems-Benefit Charge. How will these charges be computed for a customer who installs distributed generation?

5. Exit Charges. Will a customer who installs distributed generation be required to pay “exit charges” to the electric utility to compensate it for stranded investments?

6. Taxes. What taxes will be imposed on a distributed generation system and/or on the electricity it generates?

7. Electricity Sell Back. How difficult will it be for the owner or operator of distributed generation to make all needed arrangements to sell excess electricity to the electric utility or another party?

8. Portfolio Requirements. Should distributed generation be viewed the same way as electricity supplied from a competitive provider, which may be required to have a portfolio of electricity sources, including a given minimum percentage of renewable energy? Since few distributed generation installations use renewable fuels, this requirement would be extremely difficult to satisfy.

9. Certification/Permitting Requirements. To what extent will new equipment certification and/or permitting requirements be imposed by state or local government, increasing distributed generation installation costs? For example, there may be concerns about noise or fuel storage. New requirements may be imposed, further limiting the locations where fuel-storage tanks can be installed.

10. Allowable Electric Utility Role. Will an electric utility be permitted to install distributed generation systems, either to reduce T&D system investments or as a new source of revenues? This issue is currently being examined in California. The outcome likely will set a precedent for other states.

11. Air-Pollution Regulations. Will climate change or general air-quality concerns result in tougher regulations on power plants that burn coal or on all types of stationary fuel-using equipment? Further restrictions would give an important boost to highly efficient distributed generation technologies, such as fuel cells, that consume “clean” fuels.

Another issue creating a barrier is electrical interconnections. Distributed generation systems in all service applications must be connected to the host facility’s electric-power distribution system. The number and characteristics of the switches and relays that accomplish this interconnection are subject to requirements stated in the National Electrical Code as well as requirements contained in utility tariffs. All parties-the local electric power distribution utility (DISCO), the customer at whose premises the distributed generation system is installed, the installing contractor, and the owner of the generator (if this party is different from the others)-agree that the interconnection must protect the safety of people, must prevent damage to equipment, and must not adversely affect the reliability of either the distributed generation installation or the DISCO’s power distribution system. However, there is still not a clear agreement on how these objectives can be accomplished most economically.

Currently, each DISCO has its own individual requirements, which create two barriers for distributed generation. First, the fact that there are many different requirements means there cannot be one standard interconnection equipment package. Second, many of the specifications require very expensive equipment, even for installations rated at 200 kW or less. Typically, the requirements are “one spec fits all sizes” documents that were intended for plants with large capacity ratings. The requirements are the same for 3 kW generators as they are for 300 MW generators. Some distributed generation developers have proposed that “small” distributed generation systems be treated differently than “large” ones, but there is no consensus on this issue. An effort is currently under way by an Institute of Electrical and Electronic Engineers (IEEE) Standards Committee Working Group to develop an industry guide that will reflect a consensus on all technical issues associated with interconnection. However, the document is probably at least three years away from completion and acceptance by the Standards Committee.

Utilities’ Potential Role

Most regulated electric utilities tend to view distributed generation as a threat to their revenues, believing it very much the same as the small cogeneration plants that posed a similar threat during the 1980s. As these utilities look more carefully, however, the potential opportunities begin to become apparent.

Unregulated utility subsidiaries, on the other hand, are investing in a wide variety of non-energy and energy-related products, and distributed generation clearly fits in the energy-related product area.


A regulated utility, non-regulated utility subsidiary or service provider can follow three alternative strategies when considering distributed generation. The first is the observer/user strategy, the second is the equity investor strategy, and the third is the distributor strategy.

The observer/user strategy entails little or no financial risk. With this strategy, the utility decides to “watch and wait.” The objectives are to become familiar with distributed generation technologies, look for opportunities, and be ready to make a significant investment when the right opportunity is found. The utility may join one of the industry consortia organized by EPRI, the Gas Research Institute, or manufacturers, and may actually purchase and install a few distributed generation systems to gain first-hand experience.

To take advantage of the equity investment strategy, a gas or electric utility that wants to become actively involved with distributed generation, particularly fuel cell power plants, can make a direct financial investment in technology development by becoming a partial equity owner of one of the companies in that business. Several utilities have elected to take this approach. For example, GPU, which has regulated utility operations in New Jersey, Pennsylvania, and the U.K., has made such an investment in Ballard Corp. DTE Energy, the parent of Detroit Edison Co., has made a similar investment in Plug Power, and IDACORP, the parent of Idaho Power Co., purchased Northwest Power Systems early in 1999. In addition, a consortium of electric cooperative utilities invested in H-Power Corp., and Avista, which has regulated utility operations in the state of Washington, has taken a somewhat different approach and is developing its own fuel cell system internally.

This strategy relies on a hoped-for price decline of various types of distributed generation systems based on economies-of-scale in manufacturing and deployment. Manufacturers want to be able to get a large number of units sold and installed over a period of two or three years, and they see utilities as logical partners for accomplishing this objective. Customers tend to view utilities as trustworthy and knowledgeable experts in energy matters, so if the utility is making it available, it must be reliable.

There are two key reasons that utilities are potentially interested in pursuing a role as distributor. First the strategy is in line with their core service of providing energy to end-users; and secondly, the utility can use existing corporate resources, such as trained personnel and service vehicles, to install and maintain the systems.

However, according to some research results (see “U.S. Businesses Show Interest in On-site Power,” page 18 of this issue), many business customers prefer to acquire the distributed generation technology directly from the equipment manufacturer, not their local utility.

The benefits of distributed generation can be significant to utilities. However, as with most new opportunities, there are also barriers and risks. Each utility must consider both before deciding which strategy it will adopt. n

William Steigelmann, Independent Energy Consultant, is a professional engineer who has been involved in distributed generation assessment studies for the past 15 years. He has recently prepared a report titled “The Business Case for Fuel Cells” that has been published by AdvanceTech Monitor in Woburn, Mass. He can be contacted at Bsteig@aol.com.

Note: Some of the information contained in this article was obtained from Advance Tech Monitor’s (ATM’s) Fuel Cell Report, which can be viewed in its entirety at ATM’s Web site.

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