[BETA] Fortnightly

Presenting a fair and simple distributed generation plan for utilities and policy-makers.

Distributed generation (DG) continues to face many institutional barriers erected before the technology emerged as an economic alternative. Chief among these barriers are existing rate and regulatory regimes, which fail to offer appropriate incentives to utilities and customers who might otherwise substitute DG facilities for distribution and generation.

DG as discussed here refers to small electricity generation facilities, up to 50 MW, located on the distribution system close to the point of consumption. DG facilities include micro-turbines, fuel cells, internal combustion engines and small gas turbines. These frequently are combined heat and power facilities.

This article addresses the rate treatment accorded these facilities and discusses changes that will enable distributed generation to compete head-to-head with traditional distribution facilities and central station generation, purely on the basis of the relative economics of each. Accordingly, rate proposals focus on methods that provide incentives to customers and utilities to install DG facilities whenever those facilities make economic sense.

To begin with, policy-makers must establish zonal credits. For example, when it does make economic sense, distribution utilities should be challenged to engage in a "localized" least-cost planning process for their distribution facilities. The process would be comparable to generation least-cost planning, establishing zones in which installation of DG facilities would be encouraged through the provision of credits that recognize the benefits provided to the distribution system by these facilities. These credits should be available to any customer that installs the facilities in a DG zone. A utility should be allowed to install facilities in a DG zone and be entitled to recover in its distribution rates the capital and operating costs of the facility (subject to crediting of the generation-related revenues from the DG facility).

In addition to rate issues, numerous other important regulatory and institutional issues must be resolved before distributed generation can compete with distribution and generation on a fair, unbiased basis. These problems include interconnection procedures, the role of standardized versus negotiated contract terms, payments for ancillary services, stranded costs, and the transmission and distribution losses applied to DG sales to others.

Valuable ancillary benefits of DG include voltage and frequency support, voltage regulation, enhanced reliability, ability to provide both heat and power, and emission reductions. It is important to accurately estimate the value of these benefits, and design pricing systems to flow the benefits through to owners of distributed generation facilities. The associated issues are complex and their resolution is being discussed throughout the industry.

DG: Economics Should Be the Guiding Principle

Two tenets of equity and economics should govern the regulation of distributed generation facilities. First, the regulatory system should be neutral. It should not be artificially tilted toward or against customer-owners of DG facilities. Likewise, it should not incorporate measures that overly encourage or discourage utilities to invest in these facilities. Fairness is the goal.

Second, the regulatory system should be simple. Distributed generation facilities are by their nature small. Prospective DG owners cannot afford to navigate complex regulations or engage in protracted negotiations with utilities. Moreover, complex