Distributed Power in the United States: Prospects and Policies

Institution

CHAPTER 1

OVERVIEW OF DISTRIBUTED POWER SYSTEMS

1.1 DPS in Context

For the past century, the U.S. electric power system has operated predominately on a model of centralized electricity generation, with power being delivered to end-users via a long-distance transmission and distribution infrastructure. The original rationale for the centralized model was economically compelling. Economies of scale in the construction of generation assets coupled with the highly capital-intensive nature of generation and transmission construction led to the emergence of local monopolies in the form of franchises responsible for discrete geographic service. The requirements to balance loads and ensure reliability of supply led to the development of an interconnected system. By the 1950s, the vast majority of U.S. power demand was served by the electric utility industry with the exception of a small number of industries that continued to rely on self-generation. Driven by inexpensive fuels and unlimited capacity growth, electricity generation grew by an average of 6.5 percent per year from 1950 to 1960 and by an average of 7.5 per year from 1960 to 1970, creating a robust demand for the output of the central station power system.[1] As the system grew, the laws and regulations designed to protect the consumer from the natural monopolies helped to expand the centralized grid model.

The Move to Decentralized Generation

The trends in operating efficiency, cost, and size that supported a centralized power system have leveled out over the past forty years. Beginning in the 1970s, the electric utility industry changed from one characterized by decreasing marginal costs to one of increasing costs.[2] The energy crises and oil price shocks at the beginning and end of the 1970s, stricter air quality regulations, rising interest rates, and escalating costs of nuclear power led to increased costs of building large-scale power plants, while a drop-off in the rates of electricity demand growth made the case for new additions of such plants less attractive. At the same time, the market for non-utility generation also began to open up. The National Energy Act of 1978, which encompassed the Public Utility Regulatory Policies Act (PURPA) was enacted to address a nationwide energy crisis. PURPA heralded a new era of distributed generators by enabling small power producers to sell generation from qualifying facilities, or QFs, to utilities without discrimination. Qualifying facilities were accorded the right to sell energy or capacity to a utility; the right to purchase certain services, such as back-up power, maintenance power, and interruptible power from utilities; and relief from certain regulatory burdens.

Under the terms of PURPA, utilities subject to federal regulation were required to purchase electricity from QFs at avoided cost, the cost the utility would have to pay to generate the electricity itself. While the Federal Energy Regulatory Commission (FERC) created a set of rules for the implementation of PURPA, the interpretation and implementation of PURPA—and particularly the avoided cost calculation—was left to the discretion of the states and their public utility and public services commissions.[3] The consequence of this state-level implementation was a patchwork of varying policies for the integration of QFs into the power generation mix. Generous avoided cost levels led to the policy proving so popular in California that the state suspended its PURPA system in 1985 due to surplus supply from operators of QFs. PURPA implementation, together with associated tax incentives, contributed to the addition of 12,000 MW of geothermal, small-scale hydro, solar, wind, and biopower generation facilities through the 1980s in the United States, more than half of which were in California.[4] In most other states, however, PURPA was not enacted with such enthusiasm and FERC acknowledged the uneven nature of the policy’s implementation.[5] California’s interpretation of PURPA provided the basis for many current feed-in tariff policies, through which utilities offer fixed-price, fixed-term contracts for power generated from specified sources.

While the early 1980s saw a spike in the number of small-scale power producers, the requirement for small generators to sell their power at a state-determined avoided cost, combined with falling natural gas prices, made many of the long-term QF contracts uneconomic relative to centralized generation.[6]

Several other legislative and regulatory developments in the following decade continued to support distributed generation. The Energy Policy Act of 1992 began the process of opening access to interstate transmission lines to independent power producers, thereby creating a competitive wholesale electricity market. The move to deregulate (or restructure) retail electricity markets in the late 1990s gave an even larger boost to distributed generation. By 2000, fifteen states had enacted restructuring legislation that challenged the dominance of large utilities by enabling smaller power producers to compete for retail customers.

In the past decade, several factors have combined to hinder the development of centralized power generation while increasing the attractiveness of distributed generation. According to IHS CERA, the cost of constructing new power plants increased 131 percent between 2000 and 2008,[7] owing in large part to rising raw material and labor costs, a shortage of skilled and specialized engineers, and a global increase in demand for similar equipment and services. New large-scale generation has also faced several non-financial obstacles. New coal facilities are threatened both by new environmental regulations on greenhouse gas (GHG) emissions and potential increased generation costs if carbon is priced. Pending EPA regulations for sulfur dioxide (SO2), nitrogen oxide (NO) and mercury (Hg) may shut down substantial portions of coal-fired power in the United States while causing many remaining coal power assets to require costly retrofits. Water usage rules also threaten to impede the build-out of large-scale generation plants, evidenced by the federal ban on once-through cooling, which has had a negative effect on new power plant construction. Even for cleaner-burning natural gas, regulations and rules on emissions have created considerable uncertainty. A potential rebirth of new large nuclear facilities in the United States, already in doubt owing to financial and regulatory concerns, has been thrown further into question amid public safety concerns after the Fukushima disaster in Japan.

Large scale renewable generators also are facing severe challenges of land use and transmission capacity. Generators located in remote regions where renewable resources are abundant—such as wind resources in the plains of Wyoming, Montana, and the Dakotas and solar in the Mojave Desert—will require the construction of significant amounts of new transmission infrastructure to reach load centers. According to the Electric Power Group’s report for the California Energy Commission,[8] it takes eight to ten years to permit, construct, and build a new high voltage transmission corridor. Environmental considerations are also an issue for such projects: large solar projects in the desert have faced strong opposition to their land use and impact on endangered species, while proposed wind farms have faced local opposition on environmental and aesthetic grounds.

At the same time that large-scale generation has faced an increasing number of challenges, advances in technology have increased the competitiveness of small-scale generation by further driving down the cost of modular power-generation and storage systems and enhancing the options for communications between small generators, utilities, and end-users. New grid technologies including real-time metering, communication, and storage devices have increased the potential for networking energy sources at a community level.

Federal and state-level efforts to incentivize and mandate the build out of lower-carbon power generation capacity have added to the economic attractiveness of many DPS applications through loans, grants, tax incentives, portfolio standards, and other mechanisms. Interest from the private sector, which is more likely to consider investments in DPS than in large generation owing to lower capital costs and greater innovation potential, has also helped make DPS more attractive. Finally, new markets mechanisms also are being considered that will enable distributed generators to compete with larger incumbent sources of generation. Grid operators such as PJM, New York Independent System Operator (NYISO) and California Independent System Operator (CAISO) are considering changes to allow distributed loads and storage resources to provide ancillary services competing with natural gas generators.

1.2 Definitions

Distributed power systems (DPS) are a combination of distributed sources of generation (often termed DG) and distributed storage. They are also referred to as distributed energy resources (DER), dispersed generation, embedded generation, and on-site generation.[9] There is far more existing literature on the definition of distributed generation than on distributed storage. The definition of distributed generation is informed by three principal considerations: the nature of the generator’s output, its location, and its size. There is substantial variation in the definition of DG as illustrated by examples from the following organizations:

• Institute of Electrical and Electronics Engineers: the generation of electricity by facilities that are sufficiently smaller than central generating plants so as to allow interconnection at nearly any point in a power system.[10]

• North American Electric Reliability Corporation: a generator that is located close to the particular load that it is intended to serve. General, but nonexclusive, characteristics of these generators include: an operating strategy that supports the served load, and interconnection to a distribution or sub-transmission system (138 kV or less).[11]

• United States Congress: an electric power generation facility that is designed to serve retail electric consumers at or near the facility site.[12]

• International Council on Large Electricity Systems (CIGRE): not centrally planned, today not centrally dispatched, usually connected to the distribution network, smaller than 50–100 MW.[13]

For the purposes of this study, DPS are defined as:

Selected electric generation systems at distribution level voltages or lower whether on the utility side of the meter or on the customer side; and distribution-level electricity storage applications.

This definition is explained below according to its constituent parts.

Selected electric generation systems . . . and distribution-level electricity storage applications: This study focuses on an exclusive subset of technologies that constitute the most significant components of DPS applications. As with the general definition of DG, the technologies that qualify for consideration are diverse. Ackermann et al provide an excellent overview of the electricity-generating technologies that can be considered as DG (see Figure 1.1).

For the purposes of this study, the definition of DPS technologies has been reduced to a set of eight applications that constitute, in the view of the research team, the principal elements of distributed generation and storage. These applications are a combination of renewable and fossil fuel generation sources.

Solar: Systems that use either solar photovoltaic technology to convert sunlight directly into electricity or solar thermal technology to concentrate solar heat to drive a turbine for electricity production.

Wind: Systems that use wind-driven turbines to create electricity.

Combustion Engines: Reciprocating engines, spark-ignited, or compression-ignited piston-driven engines that run on natural gas or liquid fuels and generate electricity.

Microturbines: Combustion turbines that convert fuel (usually high-temperature, high-pressure gas) into mechanical output, which is then converted into electricity. Most commonly comprise a compressor, a combustor, a turbine, an alternator, a recuperator, and a generator.

FIGURE 1.1  TECHNOLOGIES FOR DISTRIBUTED POWER

Source: Technologies and capacity data from Ackermann et al, 2001

Combined Heat and Power (CHP): Applications, located near the point of consumption, that simultaneously produce useful thermal heat and harness process heat for the production of electricity. (It should be noted that CHP is not included in Ackerman’s description, as it is an application rather than a specific technology—see Section 1.3 for more