Distributed Generation: Implications for Restructuring the Electric Power Industry

Fortnightly Magazine - June 15 1995

Until a few years ago, the concept of distributed or modular generation was largely academic. Recent developments in the electric power industry, however, have brought this once esoteric subject to the attention of utility executives as well as state and federal policymakers. Centralized, large-scale plans to use modular generators and demand-side management (DSM) to displace utility investments in bulk-power resources and high-voltage transmission projects is unrealistic. Nevertheless, the inevitable growth in the market for distributed generation will place increasing stress upon regulatory and organizational infrastructures.

The basic forces behind the anticipated expansion of distributed generation are the increasing scarcity of resources, the concomitant technological innovations in energy conversion and storage applications, and the evolution of regulatory oversight in response to resource scarcity and technological change. Resource scarcity is reflected in the growing competition over fuel availability, increasing power-plant siting constraints, and the dwindling number of large thermal hosts for cogeneration projects. Downsizing facilities increases both investment opportunities and the number of eligible investors.

Technological change has created a diverse array of commercially competitive products. For example, the average consumer can purchase a portable 2.25-kilowatt (Kw) standby generator at a retail price of about $100/Kw from major discount warehouses. At the other end of the spectrum, large commercial and industrial (C/I) customers can acquire gas turbine cogeneration packages in sizes exceeding 10 megawatts (Mw) per unit. And the future promises even more intriguing products.

Regulatory oversight itself has, perhaps unintentionally, promoted a downsizing of investments in new generating facilities. For example, the 50-Mw project size limit on the siting jurisdiction of the California Energy Commission has prompted a remarkable shift to investments in smaller power plants. Another illustration of technological adaptation is the development of cogeneration packages as small as 60 Kw for applications as common as the heating of public swimming pools.

Off-the-Shelf Technologies

Distributed generation forms a subset of a broader class of distributed technologies that includes DSM tools and power-quality enhancement products. Such technologies meet four fundamental prerequisites for a competitive market: many sellers, many buyers, product divisibility, and product substitutability. However, distributed generation is distinguished by the fact that it can provide more than the real and reactive power of large generating stations. Utilities, for example, can use modular generators and energy storage devices to minimize distribution system upgrades, facilitate customized energy services, and neutralize much of the debate over the externalities of electric power generation.

Commercially available distributed generation technologies can be divided by type of service into six categories: standby generation, peak-shaving generators, baseload generation, cogeneration packages, energy storage devices, and mobile resources.

Standby generation consists primarily of internal combustion (IC) engine-generator sets (gensets), fueled with natural gas and/or petroleum derivatives. Because of safety codes, and the high reliability needs of certain C/I electricity users, standby generators are by far the most commonly applied form of distributed generation technologies. A relatively new application for this type of distributed generation is emergency support to defer reliability-related upgrades of distribution systems. Current applications involve unit sizes ranging from less than 5 Kw to several megawatts. Standby generators normally require modest capital investments for highly reliable service.

Peak-shaving generators can be either IC gensets or small gas turbines (GTs), ranging in size from less than 100 Kw to several megawatts. Peakers are primarily used as capacity resources rather than energy providers. A common application is peak shaving (reduction) to lower customers' billing demand. A number of utilities have initiated customer-partnership programs for collaborative investments in inside-the-fence generators (to reduce the need for bulk-power capacity).

Baseload generation faces two economic barriers: low conversion efficiency (less than

two-thirds that of a modern combined-cycle plant) and high fuel prices. Fuel procurement for small generators normally requires using fuel distribution delivery systems. Although such systems represent a cost disadvantage for distributed baseload generators, gas service unbundling will at least partially redress the situation.

Cogeneration packages (electricity and heat) typically aim to partially or totally bypass the utility to reduce the customer's electricity and fuel bills. The commonly used technologies are IC and GT generators equipped with highly efficient waste heat recovery systems, in unit sizes that range from less than 50 Kw to more than 10 Mw. Fuel savings from successful projects provide a margin sufficient to overcome the required high capital investment and efficiency disadvantage of distributed baseload operation.

Energy storage devices are currently limited to batteries, and often used in uninterrupted power supply systems by C/I customers who require especially high service reliability and quality. The currently favored product for utility applications is the valve-regulated lead acid (VRLA) battery. Ranging in size from a few kilowatts to more than 20 Mw, these batteries can store energy for a few minutes or up to several hours. Round-trip (charging and discharging) efficiency could reach 75 percent. High initial capital costs call for niche applications where the projected benefits outweigh the costs.

Mobile resources can be relocated from one site to another in a matter of a few hours or a few weeks. The most mobile options are housed in a trailer, complete with switchgear and fuel hookup equipment. The earliest examples of such products were IC gensets and GT units designed to serve offgrid loads and temporary and seasonal customers. Now, mobile batteries and cogeneration facilities are also available. Mobile generators can be rented (normally on a monthly or annual basis) or leased.

Developing Technologies

Although the distributed generation industry is clearly well established, new and developing products lie on the horizon. Expected significant technological innovations include advanced fuel cells, small-scale GTs, and energy storage systems.

Advanced fuel cells represent the modular answer to baseload bulk power, promising competitive operating costs and very low air pollution emissions. The current generation of commercial fuel cells (em the 200-Kw phosphoric acid fuel cell (PAFC) (em has an impressive record of performance and reliability. However, PACFs entail considerable capital investment.

Development efforts are proceeding along several tracks. First, the PAFC technology is being repackaged into larger units, lowering the balance of plant costs and installation expenses on a per-kilowatt basis. Second, the United States, Europe, and Japan have active programs to develop carbonate fuel cells (em the second-generation technology (em which are expected to operate at much higher efficiencies, generate lower emissions, and produce higher grade recoverable waste heat than PAFCs. Although utility-scale demonstration projects are scheduled to come on line late this year, serious commercialization is not expected before 2000.

Finally, a number of third-generation technologies are being actively pursued. An intriguing example is the solid oxide fuel cell (SOFC). Compared to carbonate fuel cells, SOFC technologies appear inherently less complex, more modular (potentially in sizes that will permit household applications), more efficient, and capable of producing higher-grade useful heat. The technology lags a few years behind carbonate fuel cells, but SOFCs could be to central power plants what the PC is to mainframe computers.

Advanced small gas turbines with more efficient, less polluting designs are generating considerable interest. Several demonstration projects are expected in the next two or three years. Targeted product sizes range from 200 Kw to more than 20 Mw, but there are also plans to develop modular combined-cycle units of 1 to 5 Mw. Because of their high power density, small GTs are ideally suited for mobile resource applications. The new technology could prove quite effective for peak-shaving applications and cogeneration projects.

New energy storage systems are evolving in three distinct directions: batteries, supermagnetic energy storage systems (SMES), and flywheels. Two advanced battery technologies seem most suited for utility applications (em the sodium-sulfur and zinc-bromine systems. Both systems promise improved performance (80 to 85 percent round-trip efficiency), two to four times the energy density of current battery technologies, and lower operating and maintenance costs. Certain technical problems remain, however, including component reliability and safety concerns.

SMES technology offers high-efficiency storage (90 to 95 percent), high reliability, extended durability (30+ years), relatively safe operation, and considerable size flexibility. Its principal drawbacks are high capital cost and low energy storage density. Flywheel technology might soon combine the desirable qualities of SMES systems with an energy storage density that may well exceed the most advanced battery system. The future of flywheel utility applications has been significantly enhanced by the development of high-temperature superconducting materials, advanced power electronics, and high-strength composite materials.

Strategic Industry Impacts

The potential impacts of distributed generation on the future of electric utilities can be explored in terms of two bounding scenarios.

Scenario 1: The vertically integrated utility persists and manages to absorb a substantial increase in distributed generation projects. Most of the generators are independently owned and recruited through competitive bids. To minimize the cost of service, utilities will have to integrate their distribution and subtransmission investments with modular resources. Gradually, the system becomes too complex and increasingly difficult to manage. Further, regulatory oversight becomes regulatory micromanagement; commissions are increasingly drawn into the local distribution planning process.

The utility can improve matters by reorganizing into autonomous geographic units. This process will mark the birth of the horizontal utility. However, internal reorganization is not likely to deter regulatory micromanagement. Regulators will continue to oversee the determination of resource needs, system upgrades, and future avoided costs at the distribution level. Commissions will face nagging problems in ensuring transparent least cost planning and determining inherently volatile locational avoided costs. Allowing direct access might temporarily reduce the onslaught of self-generation investments, but this will pave the way for retail wheeling of distributed generation and storage power. On the other hand, discouraging retail wheeling will promote self-generation unless the utility is willing and able to absorb most projects as inside-the-fence investments. Either way, the regulatory and utility business infrastructures will be severely tested.

Scenario 2: Utilities break up into separate and independently operated units along the traditional functional divisions of generation, transmission, and distribution. Initially, a single, regulated distribution company (DisCo) will probably serve the entire territory of the original franchise. Assuming the DisCo

is barred from owning generating facilities, the distribution planning process can satisfy the principles of transparency and least cost planning. The regulatory burden will not increase, and may even diminish in an absolute sense.

The continued proliferation of distributed generation could lead to two developments. First, vertical disaggregation undermines the assumptions behind the Public Utility Holding Company Act. Exemptions from the Act's requirements are extended to the retail market, creating a new industry player: the exempt retail generator (ERG).

Second, project planning and permitting becomes localized, forcing the horizontal restructuring of the original DisCo into autonomous or even independent DisCos, defined along city or county limits. Communities, cities, and counties demand a greater say in what is happening in their neighborhoods. Local governments become keenly interested in the economic and environmental impacts of future distributed generation investments in their jurisdictions. The ultimate result is decentralized regulatory oversight in the areas of ratemaking, environmental planning, and resource acquisition. Localizing generation redefines the debate on externalities.

Regulation's Future

Skeptics will argue that the proliferation of distributed generation will not affect restructuring. They will argue that: 1) the cost advantages of bulk generation will serve as market barriers to large-scale implementation of modular investments, and

2) environmental constraints will limit competitive options to low penetration rates.

The skeptics ignore a few important facts.

First, the regulatory infrastructure is already in trouble. In regions where resources are scarce, the industry is already in a state of chaotic command-and-control micromanagement. Consider, for example, the Biennial Resource Planning Update (BRPU) experience in California. Even if the BRPU is somehow reformed to the satisfaction of the Federal Energy Regulatory Commission (FERC), a single distributed generation project can bring a new cycle of competitive resource solicitation to a halt. Proliferation does not necessarily mean high penetration rates.

Second, if policymakers are intent on genuine reform, the extent of their planning horizon should easily encompass the technological advances that could resolve some of the environmental and cost constraints of distributed generation.

Third, local generators can bring benefits above and beyond the traditional energy and capacity worth of new investments. These added values will transform marginal projects into resources that can compete with the best bulk-power suppliers. Several leading investor-owned utilities have already embraced proactive strategies in that direction.

Remarkably, the FERC and California debates have so far failed to seriously consider the implications of technological change for restructuring and deregulating the electric utility industry. The FERC's focus on wholesale transactions involving interstate commerce is understandable. However, wholesale trade may often prove nothing more (or less) than the sum of retail transactions. California's behavior is less excusable; the reform debate must extend beyond the wholesale power logic of yesterday. t

Dr. Mohamed M. El-Gasseir is founder and principal of Rumla, Inc., a California company specializing in simulation, planning, and policy analysis for the energy industry. He has consulted for U.S. and foreign utilities, regulatory agencies, the U.S. Academy of Sciences, the Electric Power Research Institute, and the Gas Research Institute, among others. The opinions expressed in this article do not necessarily represent the views of Rumla's clients.

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