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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

not installed DG facilities. These discriminatory practices are improper.

A customer that installs DG is akin to a non-distributed generation customer whose load varies from zero to the customer's non-coincident peak. Accordingly, the DG customer should be no different from any other customer in its ability to select from a menu of service options that vary in terms of firmness and other attributes.

Adjusted Incentive Rates and Performance-Based Rate-Making

A corollary to zonal credits is adjusted incentive rates and performance-based rate making. If a customer adds DG on the customer's side of the meter, under volumetric distribution rates, the utility will lose revenues. As a result, the utility is encouraged to block DG. The issue is how to mitigate this phenomenon.

The solution is properly designed incentive rates. Incentive rates come in two main forms: price caps and revenue caps. A price cap simply places a ceiling on the price a utility can charge. Under a pure application of this mechanism, if a DG facility reduces the utility's sales, the utility loses profits. The solution to this dilemma is simple. To the extent DG facilities reduce the utility's sales, the utility's price cap should be increased.

The second type of incentive rate, revenue caps, requires the utility to adjust prices to offset increases or decreases in revenues stemming from a change in sales volumes. Thus, a utility with a revenue cap is automatically protected against adverse effects on its profits from a DG facility that reduces the utility's sales.

Negawatts and Megawatts

It is widely recognized today that a customer that lowers its consumption at peak provides a benefit to other customers by reducing the peak period price. Indeed, several electricity markets, including PJM and the New York Independent System Operator, have implemented so-called "demand response" programs. A customer that reduces its demand at peak is paid for its reduction or "negawatts" (interruptible load)-just as a generation unit is paid for supplying energy at peak. These programs recognize that there is no difference between the demand reduction and the supply increase, since both make energy available for other customers to consume.

DG is ideally suited to provide either negawatts or megawatts at peak. DG owners can interrupt their utility service and self-supply their entire load (provide negawatts) or increase the output of their facilities above their consumption (provide megawatts). In either case, other consumers benefit by the distributed generation contribution of energy.

In markets where the DG facility may sell its output to a regional transmission organization (RTO) with a demand response program, the DG provider can participate in the program, provided it has adequate metering equipment. In these markets, the local utility need not provide any demand response services to the DG owner. Where there is no RTO demand response program, or where the local utility is a vertically integrated utility that does not afford the DG facility any real opportunity to sell its output off-system, the state regulatory authority should mandate that the utility institute such a program. Included should be provisions that allow DG units and other qualified entities