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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Distributed Generation–The Promise and the Problem

by Richard Lehfeldt, Dickstein Shapiro LLP

The CEO of a major competitive power company, also a former colleague, said to me a few years ago, “The entire legal and regulatory framework that we’ve toiled under throughout our careers will be blown up one day by some technological breakthrough that sneaks in our back door. It could be something as simple as an ionized house paint that can generate enough electricity to power the entire household. But whatever it is, the century-old debates about federal vs. state authority, fuel choices, monopoly vs. competition, and the rest will be mooted forever.”

My friend’s outburst, half wistful prediction and half angry verdict, came back to me as I met for the umpteenth time in the past 25 years with my old friend Scott Sklar, longtime executive director of the Solar Energy Industry Association.

More recently, he is CEO of the Stella Group, a consulting firm that provides advice and services to commercial, industrial and government customers. The services range from basic energy efficiency retrofits to sophisticated, building-integrated power systems, green backup power generation, and optimized technology blends.

Sklar organized this outing as a field trip–my favorite type of outing–with two stops: a power plant and a distributed generation showcase. But, Sklar being Sklar, the field trip was not what I’d expected.

The first stop was a parking lot in an Arlington, Va., commercial strip mall, or, more specifically, a tiny, fenced-in sliver of a parking lot on which sat a shipping container with four solar panels of varying makes and designs and a single wind microturbine. A skinny wire looped the output of Sklar’s power plant to a Dominion Virginia Power distribution line. The plant is not a moneymaker. Sklar said that the authorized feed-in tariff isn’t high enough, but it satisfies his objectives for the project: small, modular, easily assembled and replicable. Sklar’s high school-age daughter and a friend assembled the plant in hours from its component parts, all of which were sent in the shipping container that is the base of the power block.

The second stop was the piece de resistance: a visit to Sklar’s combination home and home office, two freestanding structures also in Arlington. Before entering the two buildings, we walked the perimeter. Starting with the office building’s electric load (approximately 1.5 kW), Sklar then proceeded to show me energy efficiency, distributed generation and storage retrofits to both buildings, in each case subtracting load until he reached zero.

The energy efficiency retrofits include double-paned, argon-filled windows, LO/MIT thermal barrier paint in the attic, and high-end insulation throughout the house, together with superefficient appliances and lighting provided by cold-cathode compact fluorescent bulbs and bundled LED lights.

Power for the office buildings comes from a small wind turbine, solar electric roofing shingles and a PEM 5-kW fuel cell for power augmentation. Finally, Sklar has installed sophisticated energy storage capability, including a battery pack with hydrogen fuel cell as backup that could keep the power on up to a month during a power failure, without the inherent vulnerabilities of classic diesel or natural gas backup generators. The Arlington buildings are completely uncoupled from the local utility. There is no backup power and no safety net–utterly self-sufficient.

Distributed generation is one of a growing number of silver bullets that magically could solve the multivariate equation of electric supply, reliability and environmental improvement. But Sklar’s dazzling expo got me thinking again about unfulfilled promises that have swirled through the on-again, off-again energy policy debate since at least the first big energy crisis of the 1970s: conservation, efficiency, renewable power, cogeneration, self-generation, distributed generation, etc. Forty years later, why does each still occupy only a sliver of the electric portfolio?

Regarding distributed generation, one answer is the time lag between capital investment and payback. Whether an investment’s benefit is viewed as a simple calculation of how long it takes the investment to pay for itself (measured as the net present value of the difference between pre- and post-investment electric bills), or as a return on investment, Sklar’s gizmos cost a lot of money.

As he did the math to demonstrate why he no longer pays a penny for his electrons, I mentally ran up a tab that was in the high tens of thousands of dollars. Such investment analyses are typical and prudent in the commercial and industrial sectors, but substantially less so for most U.S. homeowners.

It’s hard to imagine that Sklar’s investment will be replicated quickly or easily by his neighbors, or the rest of Arlington or the nation, even with substantial tax credit and grant supports available under federal and state law.

As U.S. policymakers inch toward some major, necessary decisions about the next generation of electricity options, including how to price the environmental ramifications of those decisions, distributed generation should come into its own as an option that adds electric supply, improves the environment and can deliver direct economic benefits to retail ratepayers.


Richard Lehfeldt is a partner in Dickstein Shapiro LLP’s energy practice. Reach him at 202-420-2215 or lehfeldtr@dicksteinshapiro.com.


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