Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Distributed Generation: Hype vs. Hope

Separating myth from reality in identifying DG applications.
Fortnightly Magazine - June 1 2002

as a consequence of installing DG, not a goal.

The goal should be to reduce utility and ratepayer costs without sacrificing reliability and power quality. A moment's thought shows that, from a strict economic standpoint, introducing DG applications to further a goal of deferring T&D investments as long as possible will not result in any savings for utilities or their customers. This is precisely the same flawed economic reasoning that many regulators used to promote demand-side management (DSM). By using the same "avoided cost" methods as was done for DSM, DG investments are selected as long as their average cost is no greater than the T&D alternatives and, ultimately, no savings in average costs are realized by utilities or consumers (not to mention the additional regulatory oversight costs.) Instead, as we discuss in the next section, applying a more sophisticated economic analysis can identify the most beneficial applications for DG.

Myth 4: DG should be emphasized today to reduce the potential for future "stranded" T&D costs

The logic of this myth would require utilities to install DG even if such investments were uneconomic, in order to lessen the likelihood of stranding future assets. In doing so, however, utilities easily could be found to be violating their obligation to serve or, in the case of unbundled utilities providing only distribution service, their obligation to connect. Of course, it may be perfectly sensible for utilities to invest in distributed resources even when not strictly economic in order to better understand the ramifications of DG on T&D systems. But neither utilities nor regulators should have to cloak such legitimate research and experimentation behind poorly conceived economic concepts.

If these myths are not dispelled, it is far more likely that utilities will install distributed resources in situations where they are uneconomic, thus raising costs for all, and hindering beneficial implementation of DR/DG in the long run. Fortunately, using a more sophisticated economic approach, we can identify the circumstances under which DR/DG has the greatest economic value. Thus, applications of distributed resources can be more appropriately targeted. In that way, they will be more likely to produce "win-win" situations that reduce overall costs and improve reliability.

The Appropriate Economic Framework

So what makes a DG application economic? Fundamentally, most DG applications require a tradeoff between higher costs and greater flexibility. One of the great advantages of DG is its modularity and flexibility: a utility can install several megawatts of new DG capacity as needed, rather than building large, central-station generating plants or signing long-term purchase-power agreements. This is particularly beneficial because load growth at the local level is more uncertain than at the overall utility level. At the local level, we often see load growth occurring in fits and starts (what economists call a "lumpy," rather than a smooth process). By providing additional flexibility, DG can allow utilities to improve their use of scarce capital, while continuing to meet customer needs. Capturing the true economic value of this flexibility is important if DG is to be installed where it can provide the greatest economic benefits.

To capture