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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

Zonal Credits

The first step in the calculation of zonal credits, akin to the traditional rate-making exercise of setting the revenue requirement, is to establish for each zone the total amount to be credited to entities that install DG in the zone. This amount should be the sum of the deferral and replacement benefits in the particular DG zone, which represents the "pot of dollars" that these projects in the zone will make available to society. By dividing this pot of dollars in an equitable manner, utility shareholders, utility customers and DG developers can all benefit. If the benefits of DG are not divided among the interested parties, utilities will have no incentive to calculate accurate zonal costs and, in fact, will have a powerful incentive to estimate inaccurate costs. Consequently, developers will face artificially diminished incentives to install new DG facilities. Distribution system costs will increase needlessly.

The next step in the calculation, akin to rate design, is to decide how to flow the distributed generation developer's share of the zonal pot of dollars to the developer. The parameters developed in this step will be used to derive zonal credits for expected new DG facilities. In theory, the utility should only be required to accept facilities up to some megawatt limit in a DG zone. Today, this limit will rarely, if ever, be binding.

If the DG facility's share of the "pot of dollars" is sufficiently large, then, to avoid gaming, the zonal credit should be unitized on a cents per kilowatt-hour basis over the time period the facilities are expected to provide replacement or deferral benefits. The kilowatt-hours represent the power expected to be generated over the time period by the optimal megawatt capacity for the zone, as determined on the basis of the localized least-cost plan. By flowing through the distributed generation credit on a volumetric basis, the more the DG facility runs, the greater the benefits it receives and the greater the benefits the facility provides to other customers.

A potential drawback to flowing through the benefits on a volumetric basis is that it provides the utility a disincentive to dispatch the DG facilities. The regulatory regime needs to include rules designed to minimize this disincentive.

For a customer installing DG facilities, zonal credits are not the end of the story. More methods are necessary to protect and to provide incentives to both the customer and the utility.

Residual Distribution Service

Rates for residual distribution service are crucial. The crediting mechanism proposed will fail if utilities can take back with one hand what they have given with the other. Most DG customers will not self-supply their entire loads and will occasionally experience forced outages or planned maintenance outages.

Since it is in the utility's interest to erect barriers to competition, utilities have tried to block DG by requiring DG customers to purchase standby or supplemental service at discriminatorily exorbitant rates. Typically, the customer is required to purchase these services under high fixed-cost, low variable-cost pricing, while it would have faced purely or largely variable cost pricing had it