Outdated "wisdom" wastes the nation's electricity infrastructure. Distributed CH&P is the answer.
The use of wasted heat-which now comprises two-thirds of the energy value of the fuels used in generat-ing electricity in this country-may be the most important benefit from using more distributed generation.
The 2001 Annual Energy Review, published by the Department of Energy's Energy Information Administration (EIA), camouflages the waste of the energy value contained in the fuels used to generate this nation's electricity. The camouflage occurs in the otherwise highly informative "Energy Flow 2001" diagram for electricity generation, reproduced with additional color coding on page 41.
As the diagram shows, by far the largest output of our nation's electricity generation infrastructure is in the form of so-called conversion losses. The EIA, a part of the U.S. Department of Energy, cites the laws of thermodynamics as the culprit for this egregious waste of resources. The real culprit, however, is the industry's century-old paradigm for building large, central generating stations and then transporting (albeit relatively efficiently, with suitable voltage transformation) the electricity over an expensive and complex transmission and distribution grid. That model remains the basis for how most regulators and utilities view the world. Increasingly, this view is shortsighted, wasteful and expensive.
The EIA graphic shows the magnitudes of energy inputs coming in on the left and the resulting uses of the heat energy or electricity exiting on the right. Most striking, even from a casual look at the chart, is that the biggest output -no less than 67 percent, according to EIA-is in "conversion losses" (shown in red).
- In an explanatory note some 35 pages after the graphic, the EIA states, in part:
The highlighted language from the EIA report matter-of-factly dismisses the reality that our nation wastes the majority of the energy it uses to produce electricity because of the choices we have made in designing the system! This waste goes up the smokestacks of our largely coal-fired, largely single-cycle steam turbine-based generation fleet.
This is not a call to repeal the laws of thermodynamics. Plant inefficiencies are what they are. This is, however, a call for regulators and other policy-makers to acknowledge the consequences of a choice to build our nation's electricity infrastructure around large, central station generation plants. It is also a call for regulators to rethink how they look at electricity generation, including how new technology is evaluated. It is, finally, a call for regulators to recommit to the idea that the public interest is best served when electricity is delivered to customers at its lowest cost measured on a whole system basis.
For much of the last century, electricity was produced and delivered without much regulatory turmoil or legal wrangling. To the credit of regulators and industry alike, the system did what it was supposed to do, given the practical choices available at the time.
However, many new choices exist today. If industrial and commercial electricity consumers can utilize small gas turbines and other clean generation technologies to generate electricity cost-effectively themselves, then the potential exists to whittle away the two-thirds of the resource chain lost to wasted heat.
Also, until recently relatively few opportunities existed for our nation's engineers and entrepreneurs to find productive uses for waste heat, as it is much harder to transport heat efficiently than to transport electricity. The cost-effective and efficiency-increasing uses that will be uncovered as these heat sources are increasingly distributed throughout the end-user community may far exceed the uses of today.
Unfortunately, they may remain undiscovered for a while. The current regulatory environment is a result of the co-evolution of the nation's regulated monopoly utilities and the (largely) state utility regulatory system. In most states, that regulatory environment continues to discourage the interconnection of distributed generation to the local distribution system. Worse, pursuing the public interest based on century-old assumptions and pearls of wisdom, public utility commissions and state laws continue to sanction arcane tariffs such as "customer retention rates" or "economic development rates" used to provide "secret" discounted rates in exchange for the promise not to install on-site generation-even if such generation would be up to 90 percent efficient and the utility itself may need more power! These arcane and perverse tariffs thus allow utilities to disrupt ventures aimed at providing more cost-effective and far more efficient cogeneration or combined heat and power alternatives.
In supporting such customer retention or economic development rates, regulators-perhaps unwittingly, and certainly without consideration of what is in the public interest today-help utilities retain customers at the expense of well established and proven technologies that can offer greater efficiency and, potentially, lower costs. More egregious still, perpetuating the out-of-date regulatory-utility paradigm thwarts realizing the greater public interest, which clearly should be focused on making the most efficient and cost-effective use of our resources.
Shareholders and ratepayers may benefit in the short term (only if externalities are not considered) from stable utility revenues. The public suffers, how-ever, from the continued inefficient use of fuel resources and the resulting high-er financial and environmental costs.
What Regulators Must Do
As a basic tenet, the public interest re-quires that where demand is growing or where an increase in generating capacity is required, regulators must eliminate or scutinize very carefully legacy rules and tariffs that work to exclude more economical CHP and other clean distributed energy resources-even when offered by third parties.
Regulators could fashion the necessary new guideposts largely through a case-by-case analysis of combined heat and power opportunities. As a general rule, however, regulators should eliminate economic development rates and customer retention rates where the objective of using those rates is to limit the introduction of energy-efficient generation in order to protect the revenue of the incumbent.
It is unrealistic to expect a century of regulatory practice and utility thinking to be swept away overnight. Instead, the road to creating a new regulatory paradigm that embraces new distributed generation and combined heat and power technologies will follow a series of steps. Among the first steps regulators should be prepared to take are the following.
- The nation's policy-makers must become aware of the enormous waste inherent in our electricity infrastructure. This waste partially can be addressed by the increased use of combined heat and power technologies. These technologies are becoming increasingly cost-effective as the nation's electricity consumers move toward generation technologies located on the customer's site.
- Similarly, waiting in the wings for market encouragement is a new wave of transmission and distribution capacity, essentially bringing the information and communication revolutions to our century-old industry structure. Integration of loads and sources, utilizing real-time pricing, or much improved proxies for real time, became an obvious need during the California crisis, when electricity customers were "protected" from the real prices. Unfortunately, now the state and its citizens will pay those real prices over decades to come.
- The nation's state and federal regulators and policy-makers need to reconsider the anti-competitive and anti-environment effects of many outdated utility regulatory practices. Specifically, the legacy revenue protection schemes-such as customer protection rates and economic development rates-must be eliminated, or at least scrutinized for clear public benefit in today's world. These rates should not stand if regulators cannot be assured that the public interest is being served.
- Regulators ultimately will need to deal with the difficult political issue of what to do about the considerations and tradeoffs that were routinely considered in least-cost planning and integrated resource planning proceedings. The demand responsive load initiatives in some RTO/ISO areas are a precursor to further exploration of approaches to asking many of the same fundamental questions of IRP-"What are the cost-effective options to doing more of the same that we have always done?"-whether at the level of a distribution utility or RTO/ISO.
- While it might also be argued that the real driver of the deregulation fervor for major industrial users was the combination of technological deregulation with the belief that integrated resource planning sometimes resulted in imposed energy costs that were not clearly energy costs, the continuing decline in the size of cost-effective self generation also will provide a kind of cost safety cap to the reintroduction of more systematic decision making.
Regulators and utilities worked well through the 20th century to build an admirable but increasingly flawed electricity system. One of the system's greatest flaws has been its inefficient-even wasteful-use of fuel resources in the face of opportunities to implement combined heat and power. As in other parts of the economy where inefficiencies have emerged, new technologies offer practical alternatives. These alternatives often allow greater efficiencies and lower costs than traditional central station, single-cycle generation solutions. The challenge now is for regulators to rethink and reinvent the regulatory paradigm to embrace these technologies. Doing so will help regulators recapture the notion of serving the public interest, and it will provide a won-derful opportunity for the United States to lead an important strike against unnecessary environmental effects.
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