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Distributed Generation: Hype vs. Hope

Separating myth from reality in identifying DG applications.

Fortnightly Magazine - June 1 2002

It's no secret that distributed generation technologies have become more efficient and less costly. As a result, the potential of distributed generation (DG) to provide cost-effective alternatives to central-station generating facilities and traditional "poles and wires" investments for electric distribution has increased. But despite the loudest voices of DG's greatest proponents-manufacturers and, in some cases, utility regulators-DG isn't viable in all situations, and rumors of the death of traditional utility investments are greatly exaggerated.

DG technologies, especially fuel cells, are receiving increasing attention in the popular press as the "Holy Grail" of distributed generating technology. For example, in "Dreams of the New Power Grid," which appeared in the March 2002 issue of Popular Science, the goal is fuel cells in every home. That article quotes one fuel cell proponent who compares price projections for fuel cells to the rapid drops in prices for VCRs. Alas, images of microturbines and fuel cells humming away quietly and reliably in millions of basements remain just that: images. While DG has filled certain niche applications well, some of the promised technological breakthroughs have not materialized as quickly as expected. Furthermore, like the proverbial tortoise, generation manufacturers have continued to improve the efficiency and cost-effectiveness of traditional generation technologies.

So what role DG play in the future? Answering that question is critical for utilities, regulators, and especially consumers, who will continue to demand greater quantities of electricity. Utilities, developers, regulators, and consumers all have an interest in ensuring that the best applications of distributed resources are identified, lest DG be over-sold and have its real promise squandered.

A number of regulatory initiatives establishing DG programs have begun in states as diverse as California and Vermont. In the fall of 2001, the New York State Public Service Commission (NYPSC) issued an order requiring the electric utilities it regulates to participate in a pilot program designed to test the applicability of DG alternatives. 1 The Vermont Department of Public Service is currently engaged in a collaborative program with the state's electric utilities to develop standards for evaluating and installing DG. Indiana's regulators also have begun a similar process to investigate the role of DG.

All of these efforts will need to address a variety of environmental, reliability, and safety issues. The fundamental test of DG, however, ought to be its impact on the bottom line: will it increase utility costs and lead to higher customer rates?

Through case studies and the development of an economic model that evaluates DG alternatives using advanced investment analysis techniques, we have discovered several critical issues surrounding the economics of DG. Our studies have specifically incorporated future uncertainties concerning market prices, operating costs, and load growth, as well as reliability consequences. We believe that successful DG applications can be identified only after analyzing these critical issues. Otherwise, regulators and utilities risk unpleasant surprises.

The Danger of Hyperbole

There has