The industry makes strides, but messy issues like air quality and building codes could be showstoppers.

Progress in California's initiative to set guidelines for the deployment of distributed generation took a shift as 2000 came to a close. Activity moved from the California Public Utilities Commission to the California Energy Commission, with the CEC's release of two DG reports: one addressing permit streamlining under the California Environmental Quality Act (CEQA), released Dec. 20, and the other addressing interconnection rules, released Nov. 7.

Permit streamlining, with its "not-in-my-backyard" entanglements, and issues concerning interconnection of DG to the grid-arguably the most glaring lightening rod in the DG regulatory debate historically-are two important facets in a complex regulatory picture. The new reports indicate progress on both issues, and in particular it looks like smooth sailing ahead for permit streamlining. Most stakeholders say they are satisfied with the results of the process that produced the streamlining report. But many issues remain to be resolved.

"[CEQA permit streamlining] is all part of a bigger piece of the pie," says Manuel Alvarez, manager for regulatory affairs at Southern California Edison. Clearly, much needs to be sorted out on the subject of DG, a fact underscored by the CPUC's decision to "subcontract out" to the California Energy Commission the investigations on CEQA review and interconnection.

And in the future, look for a new focus on building codes and limits on DG emissions-the issue that most stakeholders now agree is the true hot button.

Interconnection: Big Systems, Big Headaches

The lack of uniform interconnection standards long has been a sticking point for DG deployment. Industrial users seeking to install larger units especially decry the problem.

"The utilities have just made you dance around and write a blank check and take up a lot of your time, and it's just been a very difficult process," says Karen Lindh, principal at Lindh & Associates, a consulting and government affairs firm that represented the California Manufacturers & Technology Association in the CEC's DG working group. "And then all the utilities were different to boot, and so if you had multi facilities in the state, you couldn't draw any lessons learned from [for example] putting something in Northern California down to Southern California because everything was totally different."

(For a comprehensive report on interconnection problems for distributed generation, see "Making Connections: Case Studies on Interconnection Barrieres and Their Impact on Distributed Power Projects," National Renewable Energy Laboratory, July 2000, at www.eren.doe.gov/ distributedpower/barriersreport/.)

Now in California, with the issuance of "Supplemental Recommendation Regarding Distributed Generation Interconnection Rules" , the CEC took a step in answering some major interconnection questions-at least for smaller generators. That report, which standardizes interconnection rules for all utilities for smaller generators and sets time lines for implementation, was approved by the CPUC on Dec. 21.

Even though the approval only applies to smaller generators such as those with residential applications, Lindh is encouraged by the progress. "It makes it affordable because you know what the costs are going to be," she says. "That's now a part of the interconnection rule. There's a time line. The utilities can't run you around. It will be much more simplified."

Questions remain, however, about the more complex issues of larger machines, such as the ground rules for selling excess capacity back onto the grid.

Nevertheless, progress on the small-scale DG front lays the groundwork to resolve issues involving larger units. Getting the smaller DG applications out of the way, Lindh says, "establishes a process of how decisions are arrived at on interconnection that I think is a useful way to go.

"I think in terms of arriving at a more standard process for say, export applications, I think it will make it simpler to just focus on that and arrive at some kind of standardized application for that component. So, it's not done, but I think we are 60 percent of the way there."

Lindh says the process of hammering out small-scale DG interconnection solutions cleared the air between the utilities and DG proponents. The industrial advocate, in fact, suggests that DG proponents got the chance to call the utilities' bluff.

"Some of the things the utilities were requiring were just nuisance. It was gold-plating, and it wasn't really necessary to protect either the generating equipment or the utility's distribution system."

Unlike the rules hammered out for small-scale DG, however, there is no time line to come up with solutions for the larger equipment, but Lindh promises to push the decision makers.

"If I haven't heard something in a couple months, you can bet I'll call the Energy Commission staff and say, 'So what's up with this?'"

Emissions Limits: One Rule Fits All Sizes?

Aside from the more publicized squabbles over interconnection, says Lindh, the second sticky point will prove to be limits on DG emissions.

"That's in a real state of flux right now," she says, pointing out the soaring prices of emissions credits in the state in 2000.

Lindh asserts that distributed generation should be given every opportunity to flourish because it not only may alleviate supply limitations, but it can be environmentally friendly. "I really think that all of the policy wonks have come to the conclusion that distributed generation really can play a role to help fill some of the need in a much more, perhaps, benign way than building a big, giant central generating station."

That's exactly the attitude that environmentalists are leery of.

"Distributed generation is often portrayed as being environmentally friendly, and the reality is that there's a huge disparity between the different technologies and units and their environmental impact," says Sheryl Carter, senior policy analyst at the Natural Resources Defense Council.

Last year the state legislature recognized a need to address the emissions issues that distributed generation creates when it passed Senate Bill 1298. The bill, approved by Gov. Gray Davis on Sept. 25, calls on the California Air Resources Board (CARB) to create uniform emission standards for DG equipment exempt from permitting requirements of the state's air quality districts.

In essence, SB 1298 fills in the gap of regulation for equipment below the size of generators regulated by air districts (thresholds for generator size vary from district to district), authorizing CARB to regulate such machines. CARB is holding working groups for stakeholders to develop the standardized emission requirements.

Has that process been sympathetic thus far to the concerns of industrial manufacturers?

"It's too soon to tell," says Lindh. "If it's like the energy commission process, then I think we have every expectation of developing something useful."

Emissions legislation is not necessarily bad news for the industrials. With its push for uniform standards, SB 1298 is good news to any business that operates in a state chopped up into 30-plus air quality districts, each with its own emissions limits and regulations. But while SB 1298 focuses on smaller generators, industrials are concerned about some of its ramifications.

Permit Streamlining: One Issue Down With little at risk in the matter, stakeholders find much to agree on.

Apparently, the development of the California Energy Commission's permit streamlining report, produced with the input of stakeholders ranging from Southern California Edison (SCE) to the California Manufacturers & Technology Association, didn't stir much controversy. Distributed Generation: CEQA [California Environmental Quality Act] Review and Permit Streamlining," (publication # 700-00-014, www.energy.ca.gov/distgen/ documents/index.html) was issued Dec. 20. Few Quarrels. "It was a good process," says Sheryl Carter, senior policy analyst at Natural Resources Defense Council. "It was a very public process." Manuel Alvarez, manager for regulatory affairs at SCE, agrees. Speaking of participating stakeholders, "They're comfortable with the process, and they'll deal with the results. … I'd be surprised, quite frankly, if anybody who was involved would really complain about it." But all the good feelings may be because permitting is not the most important issue at stake for the various participants. "These permitting issues are not the things that are really holding up installation of DG in industrial facilities," says Karen Lindh, principal at Lindh & Associates, a consulting and government affairs firm that represented the California Manufacturers & Technology Association in the CEC's DG working group. State vs. Local Power. If there was one issue of greatest concern, participants say, it was the relationship between state and local governments and the question of local autonomy. Stakeholders from various camps expressed concern that the report might recommend a stronger state role at the expense of local authority. "To me, that was the biggest point of controversy," Alvarez says. In the end, however, the report recommended that the state serve more as an educator and consultant in assisting local jurisdictions make DG siting decisions. In this regard, it calls for additional funding from the state legislature. Both Lindh and Alvarez agree that the report does not attempt to hand the state any more power. NRDC's Carter, who agrees that the recommendations don't usurp local authority, says that the coordination of local and state processes goes the furthest in streamlining permitting as a whole. "A lot of [state and local efforts] can be done parallel, and some of it might be duplicated," she says, explaining that better coordination between the state and localities can save time and effort. Possible Exemptions? But NRDC also had one of the few quibbles about the report. The group worries that the CEC's recommendation to expand categorical exemption from CEQA for certain types of projects will come to pass. The report leaves open how the exemption would be expanded, calling for the CEC's staff to develop eligibility criteria.

"It seems to express the intent that DG equipment should be meeting the same kinds of emissions standards as large central stations-you know, 5 [parts per million, for nitrogen oxide] or better-and that's going to be quite difficult when you're dealing with these little units," says Lindh. "You don't have the economy of scale to put on selective catalytic reduction, for instance. I think if the [CARB] takes as its marching orders that it has to standardize a level around 5 ppm, then I think fossil DG is dead in this state."

Interestingly, while the CEQA report states that most DG equipment manufacturers also are opposed to setting emission standards at the same levels as central power stations, Capstone Turbine Corp. is an exception. The manufacturer of microturbine systems supports the idea in principle.

"Capstone is very supportive of the goal that's seen in the legislation … that … over a time frame to be defined by the regulators, the emissions of distributed generation shall align with the emissions of central power plants," says Kevin Duggan, manager of environmental and regulatory issues at Capstone.

But, says Duggan, Capstone can't meet those limits right now, so a "reasonable time frame" needs to be set. In working to meet the emissions limits, the company is operating on the premise that the public will demand an equal playing field for power generators, whatever their size. "[W]e believe that to become an acceptable mainstream product, we have to live by the rules of the industry-no exceptions, no special deals. If we want to be a player, we have to be playing on the same field as the rest of the electricity industry."

California isn't the only state grappling with emissions standards for DG. In November the Texas Natural Resource Conservation Commission released a draft of its "Air Quality Standard Permit for Small Electric Generating Units." The draft states the TNRCC's belief that distributed generation must adhere to the emissions standards of central generating power stations.

Of greater import to Capstone is another key policy issue: that the DG products themselves should be permitted rather than the sites. That, says Duggan, is crucial to DG's proliferation because the very concept of DG is based on lots of small units producing power, as opposed to a few large generating stations. Certify the technology by verifying that its emissions levels meet a certain standard, and then let it be installed without being site-specific.

Thousands upon thousands of DG installations out there, Duggan says, would make individual siting virtually impossible. "It's just going to be an overwhelming burden on the bureaucracy to actually permit site by site. … I think that's the other really important thing that both Texas and California have picked up on and are moving forward with."

Clearly, air quality regulations for distributed generation are an issue regardless of California's dire need for additional capacity.

"One of the interesting things we found out in the process of being short of generation in California is that air quality management districts still have their basic mission, and being forgiving of air quality management district rules is not on their radar screen," observes Mike Pretto, division manager-market analysis and pricing for Silicon Valley Power, the city utility for Santa Clara.

Silicon Valley Power, in fact, is working on a distributed generation pilot program, and one of the primary goals of the project is to learn about air quality regulatory issues for DG. The utility is in the process of finding a customer site for installation, and then once it chooses a technology, it will go to the local air quality district for a permit. Pretto says that the program will allow it to "see how … the Bay Area Air Quality Management District really works."

Building Codes: Race Through a Patchwork System

Building codes represent another critical piece of the DG regulatory pie receiving increased attention and concern. Never mind that California has over 30 air quality districts with different regulations. There are some 44,000 local building code jurisdictions throughout the country, an astounding number when you consider that whenever a new technology comes out, new regulations must be promulgated in every jurisdiction before the product can proliferate.

That "makes it really hard to come up with a single solution," says Anne Marie Borbely, program manager at the U.S. Department of Energy. Borbely is five years into developing a framework of national codes and standards for fuel cell DG, and just began work on a framework for natural gas microturbines. "That's the crux of the problem."

Unlike site permitting, building codes tend to focus on such issues as safety. When you have a machine onsite that, as in the case of a Capstone generator, rotates at 96,000 rpm, safety advocates naturally will come calling.

But developing codes takes time, and many stakeholders are realizing that efforts in development and even education need to be stepped up. The formation of national codes and their subsequent trickling down to the local site inspector is an arduous 10-year process, Borbely says. Once a technology emerges, standards and a testing protocol must be developed by an organization such as the Institute of Electrical and Electronics Engineers (IEEE). Then, after the standards are accepted by the four national building code bodies, they must be adopted by the states. Finally, when the standards reach one of the 44,000 jurisdictions, "the guy on the street" must be educated about them.

A workshop sponsored by the city of Austin/Austin Energy, the Distributed Power Coalition of America, and the DOE recently delivered the message that a lack of national codes and standards ultimately may prevent widespread implementation of DG. According to the DOE, the National Electric Code, Mechanical Code, and International Fuel Gas Code all must be modified to reference onsite power generation to ensure its deployment nationwide.

That concern has caught the attention of the Urban Consortium Energy Task Force, which is pushing for cities to focus on building codes and standards. The consortium sees the lack of codes as the greatest barrier to future DG implementation in cities.

"We have come to the conclusion that we really need [standards]," Borbely says in a tone of understatement. Without a collaborative effort toward getting something on paper at the national level, she says, "this billion dollar market is simply not going to happen."

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