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Distributed Generation: Competitive Threat or Opportunity?

Fortnightly Magazine - August 1996

third parties to form "inside-the-fence" energy partnerships with their industrial customers. For example,

Sacramento Municipal Utility District has implemented four cogeneration projects on industrial customer sites as part of a strategy to co-locate generation resources in conjunction with industrial and commercial customers who can thereby benefit from low-priced process steam.

Small Industrial/Commercial Applications

Small industrial and commercial customers face needs different from those of the industrial sector, such as backup generation, peak shaving, premium quality power services, and heat and hot water. For this group of customers, a utility's retail and energy services strategy might feature distributed generation to boost customer satisfaction and loyalty, or to oppose a competitor's strategy designed to market a commodity product.

For example, utility-owned and dispatchable diesel generator sets located at the customer site can increase power reliability for commercial customers whose activities include intensive computer data processing, such as insurance companies, banks, brokerages, and commercial buildings. Jersey Central Power & Light offers premium quality power using commercially available phosphoric acid fuel cells. Enron is using distributed generation technologies to provide energy services to several Kaiser Permanente medical centers in California.

Several urban transit districts

are piloting the use of polymer electrolyte membrane fuel cells in buses to evaluate their life-cycle costs compared to conventional diesel-powered buses. A market study conducted by the Electric Power Research Institute (EPRI) has estimated that small solid oxide fuel cells could serve most of the electric needs of over 900,000 existing U.S. commercial buildings at lower costs than their current utility rates, assuming that projected installed cost targets of $1,100/Kw are realized. The extent to which such markets develop will depend on what happens to retail rates as a result of competition, and on whether exit fees act as disincentives for customers to leave the utility system for a resource offering from another supplier.

Residential Applications

Early experience with deregulation of other U.S. industries and of the electric industry in other developed economies suggests that in a fully deregulated market, electric rates tend to rise for unaggregated residential consumers. Therefore, a logical surmise predicts that some technologies that are uneconomic or marginally economic today (em even distributed generation options that may be uneconomic for industrial or commercial sectors in the next decade (em will develop attractive residential markets (see Figure 1).

Distributed generation sites in densely settled cities or in remote rural areas may become attractive to both the customer and the

supplier, offering power that is highly efficient, environmentally unobtrusive, high quality, low maintenance, unstaffed, and dispatchable. Evolving consumer

values will also influence opportunities in the residential segment; already several utilities have introduced "green pricing" to provide customers with electricity from renewable energy.

Internal Network Applications

The T&D system represents over one-half of the capital investment made by the regulated electric utility industry in the United States. Historically, distribution systems have been planned and built to deliver peak electric demand all the time. Now the business drivers are much different. When a delivery system nears its capacity because of regional load growth or new demand from mandated access for outside