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The Perils of Greenfield Gas Development

Presenting a fair and simple distributed generation plan for utilities and policy-makers.
Fortnightly Magazine - January 15 2002

regulatory systems are too easily manipulated. Today, the regulation of DG fails these two tenets: It is neither neutral nor simple. Furthermore, distribution costs vary geographically, but distribution rates do not. The capital costs of new and upgraded distribution facilities vary widely from one geographic area to another.

Despite this variation, for social and political reasons, the typical distribution company's rates are uniform over its entire service area. In a classical distribution monopoly setting, this geographic uniformity has no effect on competition because there is no competition. However, with the advent of DG facilities, this geographic uniformity stifles beneficial competition from DG, increasing the costs and reducing the efficiency of the electric system.

Many DG facilities that should be installed in lieu of distribution facilities in areas where there are high distribution costs are not installed simply because of artificially low retail prices faced by the prospective DG owners. Stripped to the economic fundamentals, the DG facility is the preferred option. But, cloaked by regulatory distortions, uneconomic distribution facilities are built instead.

The solution is geographically de-averaged prices-or credits-for distributed generation. It is politically infeasible to eliminate the geographic uniformity of distribution rates. The price increases for customers in high-cost areas would be excessive. This very political impossibility highlights the benefits that would accompany strategically placed distributed generation facilities.

Nevertheless, there is a method of harnessing the existing cost disparity to enable the installation of economic distributed generation. Specifically, states should implement a system of zonal crediting for DG facilities in which facilities are effectively confronted with the true geographic dispersion of costs. This crediting mechanism effectively "de-averages" distribution costs and benefits all parties-the distributed generation owner, the utility and other retail customers.

Establishing Distributed Generation Zones

Distribution companies should be required to establish distributed generation zones through a localized least-cost planning process administered by the state utility commission.

Generally, distributed generation zones would coincide with portions of the distribution system that are either congested or experiencing customer growth, calling for enhanced or expanded distribution facilities. Not unlike traditional least-cost planning processes focusing on the production plant, the utility would be asked to submit its distribution plan for consideration by the state utility commission biennially. The localized least-cost plan would compare on a zonal basis the cost and benefits of projected distribution facilities against the capital and other operating costs and benefits of distributed generation to determine the least costly alternative.

The plan should recognize the ability of new DG facilities to allow the utility to defer the construction of new or upgraded facilities or to replace some or all of the facilities with distributed generation technologies. On the basis of the least-cost plan, the state utility commission would delineate as distributed generation zones those portions of the distribution system in which deferral or replacement benefits are attractive.

The deferral benefit equals the difference between the net present value of the cost of constructing distribution facilities now and constructing them later. The capital replacement benefit is the net present value of the construction cost of the facilities that DG would replace.