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Paradigm Buster: Why Distributed Power Will Rewrite Open-Access Rules

Fortnightly Magazine - October 15 1999

merchant plants, distributed power frequently offers additional, site-specific benefits, the value of which may not be reflected in power price calculations alone. These "geographic" benefits include (a) power quality for sensitive loads (a particular advantage of fuel cells); (b) savings from cogeneration, now called CHP (combined heat and power); (c) opportunities to dispatch on-site generation and load management to reflect local power and gas prices and local needs; and (d) avoided costs to the T&D system, reflected in avoided T&D charges. With these benefits, distributed power increasingly competes economically with the market prices of power supplied from the grid.

The small size of these new units implies a different geographic pattern of generation. This dispersed pattern, in turn, implies different roles in the power grid. These different roles require a different interface with the existing T&D line, both operationally and commercially. Together, these changes require a new operational, commercial and regulatory conception of the power industry. In sum, the new, dispersed generation technologies increasingly look like "paradigm busters" that will force changes in the "newly traditional" open-access paradigm just as surely as open-access overwhelmed its predecessor.

Interconnection: Now a Two-Way Flow

The new distributed resources have another characteristic that makes them quite different from existing central station plants: In most instances, electric power will flow to as well as from the customer. Depending on the relative economics of available supplies (and the rate consequences of different operating decisions), the distributed generators may be used either as base-load units, with third-party, grid-based sources supplying the "swing" power, or as peak-shaving units, with the grid supplying the base, off-peak load.

In this interactive world, no generation plant need be an island. This dynamic interconnection of on-site generators with the grid poses real and significant issues as to synchronization with the grid, routing and accounting for power flows, assurance of frequency harmonization and the like. But significant benefits are made possible as well, including the coordinated use of dispersed generation to help compensate for supply outages from central station facilities, or to overcome transmission limitations to serve constrained load "pockets" - steps that could have helped ease the kind of blackouts experienced this past summer. Much as changes in the pattern of usage of gas pipeline transmission lines and storage facilities in the 1980s required new operational terms and conditions, as well as new business processes for addressing them, the interconnection of distributed power resources will require significant changes. Legitimate concerns of the T&D companies must be addressed, as must the need to ensure safety and reliability. At the same time, regulators must be alert to the potential for artificial operational restrictions on distributed power development.

Squeezed Margins:

Competitors Pay No

Wheeling Charge

Under the old, "cost-plus" paradigm, the assumption was that the retail price of electricity service would equal the sum of the cost of producing, transmitting and distributing the power to the customer. The new, open-access paradigm shares this basic assumption, while assuming that the electricity production component of the equation would be set by a newly competitive wholesale market.

The economics of