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Distributed Generation: Hype vs. Hope

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

value of the incremental investment. Therefore, the height of the steps continually decreases.

In this example, the lowest present value cost occurs after 11 months. Thus, the utility would be better off installing DG today and deferring the new substation for 12 months. Of course, in the interim, new information may come to light that would allow the utility to refine its planning further. If several industries decided not to build at the site, then the utility will not have devoted scarce capital to a large, and mostly unused, substation. Alternatively, if development is seen to be accelerating, the utility might be able to install additional DG and then build the substation. In general, the optimal timing will depend on the relative differences between per-kW installation costs, capacities of the DG and substation alternatives, fuel cost, and the utility's discount rate.

Incorporating uncertainty about DG fuel costs, electric market price, and load growth complicates the analysis, but the underlying logic remains. The difference is that we search for the lowest expected cost solution. In the approach we developed with EPRI, called the Area Investment Planning Model, 4 we simultaneously evaluate all possible distribution alternatives, installation constraints (such as timing and compatibility with previous installations), and uncertainty. 5 While this approach is more complex than a typical deterministic "avoided cost" approach, it is far more likely to capture the true value of DG investments and therefore identify greater benefits for utilities and customers. 6

Identifying the Conditions Most Conducive for DG Applications

Fundamentally, the benefits of DG applications stem from the modularity and the planning flexibility they can provide. Utilities and customers benefit when DG investments defer traditional large T&D capital investments, while lowering the overall present value of distribution and generation costs. In our past case studies, we have shown that the value of DG is greatest when there is a high degree of future load growth uncertainty. 7 If a utility knows precisely when local area loads will develop, then the value of flexibility is eliminated. Thus, DG applications can be thought of as providing "real option" value, whose value increases with greater uncertainty, and vanishes without uncertainty.

It also turns out that the value of DG is greatest when load growth is not too rapid. As load growth rates increase, the value of the distributed resources decrease. While this may seem paradoxical-after all, DG can be brought in rapidly, such as with truck-mounted generators-DG's value decreases because the deferral benefits it provides decrease as load growth rates increase. Hence, the greater unit capital cost ($/kW) of distributed resources becomes more difficult to justify economically as the amount of deferral benefit decreases.

What Does the Future Hold?

No doubt, DG technologies will continue to improve. Perhaps the futuristic vision described in Popular Science and others will even be realized, with DG replacing many new central-station generation and local area T&D investments. Today, however, DG investments are not universally beneficial, and so it is critical to identify the conditions under which DG likely will provide the greatest possible benefits to utilities and