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Summary Summary
D
istributed generation, the small scale production
of electricity at or near customers homes and businesses,
has the potential to improve the reliability of the power
supply, reduce the cost of electricity, and lower emissions
of air pollutants. The recent disruption in electricity ser
vice throughout major portions of the upper Midwest
and the Northeast has reminded policymakers of the
importance of a very reliable supply of power. The high
price of electricity in certain regions and problems with
emissions from older power plants have stimulated inter
est in alternatives to traditional utility supplied power.
Distributed generation could provide benefits in all of
those areas. Energy legislation under consideration in this
session of Congress includes provisions that will en
courage wider use of distributed generation. This paper
explores the context in which policymakers may be ad
dressing distributed generation issues in the near future.
Distributed generation can come from conventional
technologies, such as motors powered by natural gas or
diesel fuel, or from renewable technologies, such as solar
photovoltaic cells. Over the past two decades, declines in
the costs of small scale electricity generation, increases in
the reliability needs of many customers, and the partial
deregulation of electricity markets have made distributed
generation more attractive to businesses and households
as a supplement to utility supplied power. Some policy
makers believe, however, that various rules, restrictions,
and prices set by utilities, regulators, or administrative
bodies do not reflect the net economic benefits of dis
tributed generation and act as barriers to its cost effective
adoption and operation. Those barriers could be lowered
significantly by clarifying and standardizing the rules for
connecting distributed generators to the electricity supply
network (the grid) and by setting prices for basic elec
tricity services (access to the grid, the electric power itself,
and the transportation of that power) that reflect their
costs.
If the new rules and prices are well designed, the cost of
providing highly reliable electricity service to customers
who desire it and the total cost of serving all customers
will probably fall as distributed generation becomes more
widely used. But initiatives to reduce barriers to wide
spread adoption have costs and risks, which will pose a
challenge to electric utilities, regulatory bodies, and other
public agencies that must develop and enforce the rules
governing interconnection and establish prices for elec
tricity from those new sources of power. If customers are
allowed to connect their distributed generators to the
grid without adequate safeguards, the overall perfor
mance of the electric system can be impaired. Changes
that can promote cost effective distributed generation,
such as the adoption of economically sound pricing, may
increase rates for customers who currently pay prices that
are below the utilities costs for providing service. If the
new rules and prices are poorly designed, the changes
that benefit distributed generators will raise the overall
cost of electricity and increase rates to most other cus
tomers. Aside from those risks, separate technological
and regulatory changes that would significantly lower the
future cost of utility supplied electricity (for example,
additional cost reductions in large generation technolo
gies and extensive competition in wholesale markets)
could lessen the attractiveness of some new investments
in distributed generation. x
PROSPECTS FOR DISTRIBUTED ELECTRICITY GENERATION
To investigate those issues, this paper addresses four
questions. What are the current status of and prospects
for distributed generation technologies, particularly in
terms of their costs as compared with those of utility
supplied power? What are the benefits and risks of a
wider adoption of distributed generation in restructured
electricity markets? What specific utility practices, local
government regulations, and electricity pricing methods
may be acting as barriers to adoption? And what types
of policy changes could help reduce those barriers while
limiting the downside risks of greater reliance on dis
tributed generation? Although many of those policy
changes could be the concern of state and local au
thorities, this paper highlights the federal rolepar
ticularly those aspects that might receive legislative
attention.
The Current Status of and Prospects
for Distributed Generation
Distributed generation is an important, although small,
component of the nations electricity supply. The prin
cipal source of electricity today continues to be large cen
tral facilities that generate electricity from steam plants
(fueled by coal, natural gas, or nuclear power) and hydro
electric power. Historically, most steam plants were oper
ated by large investor owned utilities that were respon
sible for generating electricity, transmitting it from the
central generating facilities to communities, and, in
many regions, distributing it to retail customers within
those communities. The federal government has had an
important role in producing most of the nations hydro
electric power, and local governments own many of the
distribution systems that deliver the power supplied by
the investor owned utilities and the federal government.
Among distributed generation technologies, the most
important in terms of their capacity to generate elec
tricity are customer owned generators that produce both
electricity and steam for on site use (called combined
heat and power, or cogeneration) and emergency backup
generators. Together, those two sources account for more
than 95 percent of the customer owned generation
capacity in the United States. For the most part, the
cogeneration plants that have been built to date are large
facilities that sell the majority of their output to utilities.
Natural gas fuels most of those plants, but coal and
biomass also power a significant percentage of the total
capacity. Most backup generators are internal combus
tion engines fueled by diesel oil or gasoline. Diesel fired
backup generators are commonly used in high rise
buildings for safety reasons (as required by local building
codes), in hospitals, and in manufacturing facilities that
depend on a highly reliable supply of power.
Renewable technologies that are currently used to gener
ate electricity at homes and businesses include wind tur
bines and solar photovoltaic systems. Those technologies
produce electricity intermittently and generally are not
available to operate continuously. Fuel cells and small
turbines (called microturbines) are frequently mentioned,
newly emerging high efficiency technologies. Although
they account for very little of the nations existing elec
tricity supply, proponents believe they will contribute
significantly in the future.
Four developments over the past decade have spurred
interest in moving distributed power beyond the limited
markets that it now serves and integrating it more fully
into the nations electricity supply. First, the costs of re
newable technologies and high efficiency technologies
that are suitable for operation by households and small
businesses have fallen. Typical costs of electricity from
certain distributed generation systems are now within
range of those of electricity from large generators, and
they are below the average prices of electricity in some
regions of the United States (
see Summary Figure 1
).
Second, the introduction of competition to wholesale
electricity markets has increased the possibilities for sales
of customer owned distributed power. Those newly com
petitive markets feature prices that vary hourly and that
are high during periods of peak demand (times at which
distributed generators would be most profitable to op
erate). Third, many commercial and industrial customers
place increasing importance on highly reliable electricity
service, which can be provided by on site generation.
Fourth, building new transmission lines to meet growing
demand has been a contentious issue for local, state, and
federal regulators and among power producers. Wider
adoption of distributed generation can in some cases
obviate the need for new transmission capacity. SUMMARY
xi
Summary Figure 1.
Levelized Cost of Selected Technologies Suitable for Distributed Generation
Source: Congressional Budget Office using data on electricity prices from Department of Energy, Energy Information Administration,
Electric Power Annual 2000
(August 2001), Table 21.
Notes: CHP = combined heat and power (also known as cogeneration); ICE = internal combustion engine; N.E. = New England.
The levelized cost is the average cost of electricity (cents per kilowatt-hour) over the operating life of the generation equipment. Future costs and output
flows are based on data in Table 2 and are discounted at 7 percent from their present values. The cost estimates assume that the systems powered by fossil
fuels will be operated 90 percent of the time and that the wind and solar photovoltaic systems will run 40 percent and 27 percent of the time, respectively.
Levelized cost comparisons do not include the effects of tax credits or other direct subsidies for specific technologies.
Large wind turbine is not included in the figure (as it is in Table 2) because it is not generally considered to be well-suited to distributed generation
applications (typically, it is not located near customers).
a. In a combined-cycle system, a combustion turbine is operated in tandem with a steam turbine. The system is included here as a benchmark for the cost of powe