Much has been written about the opportunities distributed-generation (DG) technologies
offer the energy marketplace. DG will one day reduce local congestion, reduce
peak loads, improve grid reliability, insulate customers from volatile energy
prices, and offer low-emissions alternatives to centrally generated power. So
say the DG visionaries. Those with a more cynical view — some might say
more realistic — point to a host of barriers that DG must overcome before
it can have any significant impact on the nation’s energy infrastructure. They
might both be right.

DG does have tremendous potential, but it also faces substantial challenges
on several fronts. Nevertheless, a variety of forces are beginning to converge
that make the best case yet for DG.

Driving DG

In recent years, numerous technological advances have been made with small-scale
generation technologies to bring the cost of alternative energy sources down
considerably. Fuel cells, for example, have gone from a laboratory curiosity
to widespread use in locations where noise and emissions requirements prohibit
the use of diesel generators. Similar reductions in the cost of solar technologies,
microturbines, and other DG devices are making them increasingly attractive
to a growing audience.

The restructuring of energy markets has also turned a spotlight on DG and its
potential to mitigate price spikes and let DG owners sell power back to the
grid. DG also fits hand-in-hand with real-time pricing, allowing energy managers
to run their generators on the basis of price signals. Add to that the skyrocketing
wholesale electricity prices in summer, the slowly expanding “go off the grid”
movement and a newfound interest in the security of the nation’s power grid,
and DG looks very attractive indeed.

Perhaps the latest and most interesting force in the mix comes from major energy
customers who require electricity that is both highly reliable and of high quality.
The digital economy has spawned a new class of energy customer — organizations
for which even a momentary fluctuation can seriously compromise sensitive equipment
and an outage can spell financial disaster. According to a survey by Cambridge
Energy Research Associates, roughly 30 percent of all electricity is currently
consumed by power-sensitive equipment. The amount will surely increase with
each passing year. For these companies, controlling the supply and quality of
their power is a competitive advantage that DG can deliver.

Keys to DG Proliferation

But as much as these factors are pushing forward the concept of local generation
serving local loads, others are holding it back. There are many roadblocks in
the path of DG development, falling primarily into three main categories: the
need for widely accepted standards; economic incentive for potential DG owners;
and regulatory changes.

Open Standards in IT

There are various “layers” within the DG infrastructure: generation units,
gateway devices that collect the stream of data from the DG units, and business
applications that manage the physical operation of the unit and track the flow
of money between the centralized market and the DG device owner (Figure 1).
The data exchange between these layers is currently governed by a patchwork
of proprietary standards that presents a barrier to the free flow of information,
potentially numbing the market penetration of DG technologies. This prevents
the customer community from reacting efficiently to price signals, and more
importantly, acts to reduce the exercise of market power on the clearing price.
Data collected by one manufacturer’s gateway, for example, cannot be imported
to another vendor’s software.

Figure 1 – Data Flow for DG Interconnection

The adoption of open standards for data communications between the layers of
the DG infrastructure would eliminate the barriers associated with proprietary
technologies. This would also allow the transfer of “vital signs” from the DG
device to the financial applications that can signal customers when it is more
economical to self-generate due to supply/demand imbalances. When independent
power producers know that retail customers are able to respond to hourly/real-time
price variations, they are less likely to apply undue market power by, for instance,
declaring a plant outage for the purpose of artificially reducing supply and
driving up prices. At the same time, open standards would compel vendors in
the relevant DG component industries to compete in price, functionality and
other factors, instead of simply having the ability to exchange data with another
component in the DG system.

Standards for Interconnection

The rules governing the interconnection of a generation device to the grid
are as varied as the PUCs and utilities that administer them. The present regulatory
environment makes little or no distinction between a 100 kW solar array and
a 500 MW cogeneration facility. Connecting to the grid might be cumbersome for
the cogen owner, but would be mind-boggling to a residential customer with a
solar array.

The traditional model of power plants serving distant loads via a T&D network
simply does not allow for the ready introduction of many small generation devices
to the parent grid. The cost and complexity presently associated with interconnection
make it all but impossible, except for a few industrial users with the resources
to navigate the obstacle course.

Clearly, a simplified set of rules designed to make DG interconnection quick
and easy will not be developed overnight. What is perhaps most important, however,
is that the energy industry and the regulatory bodies that oversee it begin
to consider DG as a beneficial addition to the energy landscape. Once the concept
of small, local generation has gained that foothold in the minds of government
and industry leaders, the simplified regulations will follow.

Economic Incentive

The cost of interconnection is prohibitive, but even if it were as easy to
install and connect a microturbine as it is to buy one, the owner of that device
would still be hard pressed to justify the expense, outside of any specific
opportunity costs associated with outages. The DG owner must have a way to participate
in the central electricity exchange market, to make educated decisions about
when and how to operate his device in light of market prices and his own cost
structure. The economic incentive we refer to here is not in the form of a government
rebate for buying green power; it is the incentive to be an active participant
in a competitive energy market. The competition of power providers — from
nuclear plants to microturbines to solar panels — would lend stability
to electricity markets experiencing price volatility, and would reduce the potential
for gaming.

Regulatory Changes

Any energy manager who has tried to connect a generator back to his local grid
can tell you the regulatory environment is not conducive to plug-and-play solutions
for distributed generation. Regulators cannot make DG successful, but by re-evaluating
the rules surrounding interconnection with an eye towards a future that includes
DG, they can sow the seeds of change. Beyond that, federal and state bodies
can foster the development of a vibrant DG industry — and a more stable,
more reliable grid — by advocating the adoption of IT standards and simplified
rules for interconnection of small generation devices.

State PUCs in particular would be well-advised to consider DG resources. Intercon-nected
DG units offer an alternative to buying expensive power from neighboring states
on the spot market. During peak periods, a state with a substantial portfolio
of DG units at its disposal has more choices about how to address short-term
needs. In California, for example, it has been estimated that a real-time pricing
and DG interconnection scheme would have saved the state between $181 million
to $672 million in one year alone.

The Future

DG shows enormous potential, but the barriers to DG acceptance must first be
addressed. Advances in technology, changes in the regulatory environment, and
the adoption of industry standards will pave the way for DG to assume its place
in the national energy landscape. The only question now is whether the parties
with economic and political investments in the energy sphere will act to encourage
its widespread acceptance.