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A Blueprint for DG

Presenting a fair and simple distributed generation plan for utilities and policy-makers.
Fortnightly Magazine - January 1 2003

the playing field.

Incentive rates in the form of a price cap or a revenue cap can provide utilities strong incentives to invest in DG on the utility side of the meter. For a utility with a price cap or revenue cap in place, reduced costs translate into increased profits. It follows that, unless regulations are artificially skewed in favor of DG facilities, the utility will compare its cost of expanding its distribution facilities to its cost of installing DG and choose the lowest-cost option to maximize its profit.

Meanwhile, a vertically integrated utility that installs DG enjoys a variety of benefits. In addition to reducing its need for new distribution facilities, utility installation of DG avoids transmission and distribution energy losses, reduces the need for central station or purchased power, and reduces the need for transmission capacity. Some of these avoided costs, such as transmission facilities, are lumpy in nature, so, for example, one small DG unit obviously will not eliminate the requirement for a new 765-kV transmission line. Just as obviously, a sufficient mass of DG facilities will reduce today's pressing need for substantial transmission investment.

The utility should be required to engage in a localized least-cost planning exercise. The exercise would compare the costs and benefits of the DG unit(s) to the sum of all of the avoided costs and benefits it would receive from reduced investment and operating costs in distribution, central station generation, and purchased power and transmission. At the conclusion of the localized least-cost planning procedures, the utility should choose the lowest-cost option.

Unbundled Utilities

The state of affairs for unbundled utilities contemplating the purchase of DG units is more complex than for vertically integrated utilities. This applies to all unbundled utilities, albeit with differing degrees of emphasis, depending on the degree of competition the utility faces and the format of its structural or functional separation.

Distributed generation embodies aspects of both generation and distribution, but the utility's generation and distribution operations are separated. While it is eminently sensible to closely monitor the relations among the various marketing, wires and generation arms of a utility, such regulation need not preclude the use of DG by an unbundled utility.

Furthermore, an unbundled utility should be allowed to recover the cost of DG facilities through its rates, with an appropriate crediting of generation-related revenues. Under this mechanism, the utility would place the capital cost of the DG unit into its rate base, recover operating costs on a flow-through basis, and credit all generation-related revenues to the cost of service. The generation arm of the utility should be allowed to sell the output of the distributed generation unit subject to the restrictions that apply to any other of its generation sales. In this manner, the regulatory process would be neutral between both utility and non-utility DG and between DG and distribution facilities. Meanwhile, on the customer side of the meter, a customer installing distributed generation facilities should receive a proportionate share of the credits established for the zone in which its DG facilities are being installed.

The Details: Calculating