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Distributed Generation: Hype vs. Hope

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

what DG applications can possibly provide. The danger of such "irrational exuberance" is, of course, unmet expectations: if DG is too broadly promoted as an alternative to central-station generating supplies and traditional transmission and distribution (T&D) capacity investments, the entire concept cannot help but fail. DG will be installed where it ought not to be, and fail to provide the hoped for advantages to utilities and their customers.

We have found four common myths pervading DG and its application:

  • DG is cheaper than traditional system power;
  • DG makes sense because traditional electric utilities will be obsolete in the not-too-distant future;
  • DG can defer traditional T&D system investments; and
  • Even if it is more expensive today, DG investments should be emphasized because T&D investments are likely to become stranded in the (not-too-distant) future.

Myth 1: DG is cheap

Cheap. Modular. Who could ask for anything more? Unfortunately, it's not quite true. The most common commercially available DG technologies are either simple-cycle turbines or diesel generators. These tend to have higher capital costs and higher operating costs than central-station alternatives, owing to diseconomies of scale and higher heat rates. And, while the fuel cell Holy Grail continues to improve, it has yet to become commercially viable.

It is true that DG applications may be able to avoid some T&D costs at the margin, including system losses. But installing DG can just as easily require additional T&D costs, such as more sophisticated monitoring, switching, and safety systems. Furthermore, the environmental impacts of fossil-fueled DG technologies may be higher than those associated with central-station generation, precisely because DG is designed to be installed near customer loads, where more individuals can be affected by pollutant emissions. 2 That is why we sometimes observe local environmental regulators adamantly opposing the very DG installations that utility regulators are promoting-an untenable situation for any electric utility.

Myth 2: Traditional electric utilities are soon to be obsolete

This myth may have been divined by the same pundits who predicted that Enron would become the world's dominant electric, gas, water, and broadband company. At the very least, many utilities would likely take exception to such pronouncements of their imminent demise, as they continue to provide safe and highly reliable electric supplies. DG technologies may play an increasingly important role in helping utilities meet customers' differing needs for power quality and reliability, but it is not at all clear that many customers will want to be in the electric generation business. Furthermore, the "generator-in-a-box" technology for the basement of every house, which will provide electricity cost-effectively and with high reliability like today's water heaters and furnaces, does not yet exist.

Myth 3: DG can defer traditional T&D investments

Of all of the myths claimed for DG, its ability to defer traditional "poles and wires" investments is probably the most cited. The argument goes as follows: by installing DG, utilities can avoid the need to upgrade substations and circuits, thereby saving themselves and their customers millions of dollars. But while DG may defer the need for some system upgrades, such deferral should be seen