Predicting the market potential for distributed generation

Robert J. Cuomo, Ph.D.

In the current environment of increasing deregulation, the expansion potential of distributed generation (DG) systems is quite substantial. However, the spread of DG will vary substantially by region and technology. Those markets set to experience strong electricity demand will be more prone to an increasing penetration, as will markets which experience extreme price volatility.

In assessing the market potential for DG, a number of key questions must be addressed, including size of market, units to be sold, cost of technology, potential markets, buyers, price elasticity, types of fuel cells available and other drivers affecting distributed generation. Market potential studies on DG, like the one currently being conducted by DRI-WEFA, allow companies to assess the profitability of operating in particular markets, making them invaluable tools in an ever-changing energy marketplace. An independent power producer contemplating expansion of generating facilities in a particular market would need to know the extent to which DG poses a competitive threat in that area. Utilities will be able to identify those markets in which DG poses a threat to sales and, conversely, those markets where DG can be used as a load management tool. Energy traders will gain insight in terms of which markets customer-sponsored DG poses a serious competitive threat and in which markets DG should be marketed as a load growth tool. Finally, equipment manufacturers will also benefit by knowing the most profitable markets in which to sell DG equipment.

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Studies that will effectively assess the market potential for distributed generation will need to address the following issues in detail:

  • Market size: Traditionally, the size of the DG market has been small and confined to standby power, but this will change as deregulation becomes more widespread. The availability of DG equipment has not been an issue. However, there has been a great deal of uncertainty on the demand side. As technologies improve and the cost of distributed generation systems fall, their attractiveness will increase.The reliability of distributed power will also be a significant factor. Many companies value reliability more than price in deciding upon their power source. As energy users become more convinced of the reliability of DG, its adoption will become more widespread. Closely related to reliability is the issue of security. In the aftermath of September 11, there is increased concern that energy sources be adequately protected from terrorist acts. Therefore, DG systems will need to be secure if their market penetration is to increase.Stranded costs will be a driving factor in those markets in which utilities have a substantial investment in plant and equipment. Transitional charges could be prohibitive and dissuade a company from purchasing a distributed generation system.
  • Sales by unit type: There are a number of technologies embedded in DG equipment. Currently, the technologies being utilized include reciprocating engines, industrial gas turbines, microturbines, fuel cells, renewables, photovoltaics and wind power. The market is currently dominated by reciprocating engines, industrial gas turbines and microturbines.

  • Cost of technology: A key driver affecting the adoption of distributed power systems is the cost of installed capacity for each unit type. The table shows the cost of installed DG systems by technology type in the year 2000.Currently, diesel engines, microturbines, and miniturbines are the most attractive technologies. However, as fuel cells, photovoltaics and wind become more commercialized, it is expected that their costs will fall dramatically.
  • Location of potential markets: A critical component of assessing the market potential for DG is to identify electricity demand growth by detailed market segments. If a particular market segment exhibits strong power demand growth, then it is a ripe market for distributed generation expansion.
  • Buyer profile: Price volatility is a key parameter with this factor. If an energy user is in a market characterized by highly volatile prices, then he will have a greater proclivity to purchase a DG system. Also, buyers experiencing supply and reliability problems will be attracted to their own dedicated power supply source.
  • Price elasticity: How sensitive is the demand for DG systems to their acquisition costs? This is a key question whose answer will vary by market segment. In markets where customers have high energy demand and face extreme electricity price volatility, the demand for DG systems will be highly inelastic. However, in those markets where electricity demand growth is sluggish, and where prices are expected to be stable, the demand will be highly elastic and potential buyers will be highly price sensitive. Each market segment must be analyzed carefully in order to identify these forces.
  • Fuel cell technologies: This is the final component, and it will play an important role in the future of distributed generation. As fuel cell technologies become more commercialized and more efficient in energy generation, they will certainly have an even more dominant place in distributed generation systems.

DRI-WEFA is currently conducting customized studies to assess DG potential for selected clients. Dr. Cuomo is a principal in the general consulting group. He can be reached directly via phone (781-860-6739) or e-mail (

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