Assessing Market Barriers
to Distributed Generation
Backup Rates and other Misleading
Questions
Thomas R. Casten Chairman
World Alliance For Decentralized Energy
630-371-0505, tcasten@privatepower.net
March 28, 2003
Presentation Outline
 The essential question – What is optimal way
to provide expected electrical load growth?
 Describe expected results of meeting load
growth with100% new GG, 100% new DG, and
various mixtures of CG and DG
 Meeting all load growth with DG reduces capital
expenditures, power costs, emissions, CO2 and
vulnerability
 Explore why power markets don’t optimize
 Explore locational benefits and costs, how
new rules could reward incumbent utilities for
encouraging optimal path of DG?
What are “Correct” Standby
rates is a misleading question
 Question assumes DG has a net cost to
society
 Assumes no load growth, or no cost to meet
expected load growth with new central generation
 Assumes transmission is adequate for load growth,
 Assumes central generation is efficient and clean
 Assumes CG and transmission is cheaper than DG
 Assumes what is good for DISCO’s is good for
society, or stated another way,
 Assumes regulatory rules reward DISCO
behavior that is beneficial to society
Each Assumption is False
 DOE projected 20 year load growth:
US = 44%
New England 28%
 US transmission is badly congested
 Likely mix of new DG is more fossil efficient
and less polluting than likely mix of new CG
Capital Cost, CG versus DG
Item
NEW CG
NEW DG
Average cost
per kW
$700
$1200
Average trans.
cost per kW
$1200
None
Total Capital
cost per kW
$1800
$1200
Is DISCO and Society Benefit the Same?
Perspective on Govt. Rules
 “A history of American government limited to
those laws which sprang pure from the brains
of the nation’s politicians with no special
interests as their objects would be a very
short history indeed.” Jonathan R. T. Hughes, The Government
Habit, Basic Books Inc., 1977
 Incumbents vastly better financed to promote
protective rules than insurgent companies
blocked by current rules
 Regulation always flawed, filled with
unintended consequences
Perspective on Electric Regulation
 Ninety year history, sub-optimal
regulations reward capital investment,
create throughput bias, ignore or
penalize efficiency gains and block DG
worldwide
Utility efficiency stagnant at 33% for 42
years and counting
 Looming problems of CO2 and criteria
pollution, fossil fuel dependency, balance of
payments, and vulnerability all exacerbated by
bad regulation that promotes CG
What are Societies Goals for
the Heat & Power System?
 Consensus goals are to minimize:
Capital expenditures
Cost per kWh to users
Criteria pollutant emissions
Fossil derived CO2 emissions
Vulnerability to storms and terrorists
Power failures
The Process
 We modeled each generation technology
– capital cost, performance, emissions
 We checked impact on each of societies
goals from meeting all load growth with
new CG, with all new DG, and with
various mixtures
 We summed up all societal benefits and
costs for each approach to satisfying
load growth
Inputs included:





Baseline data for existing generation
Average line losses for CG power – 9%
Load factors for each technology
Line losses at peak load – 15%
Progress expected on cost and
performance for each technology
 DOE projected 44% load growth through
2020
 Nine mixtures of CG and DG
Results – Optimizing
Generation of Incremental
Heat and Power
DG as % of Total US Generation
Impact of Generating 2020 Load Growth with Central or Decentralized Generation
100% CG
100% DG
Savings
% Change
$853
$562
$291
34%
$149
$97
$52
35%
8.89
5.78
3.11
35%
PM10
255
175
155
80
16
146
175
159
9
68%
91%
5%
Million Metric Tonnes CO2
720
387
332
46%
Total Capital Cost
(Capacity + T&D)
Billions of Dollars
2020 Incremental Power Cost
Billions of Dollars
2020 Incremental Power Cost
Cents / KWh
Emissions from New Load
Thousand Metric Tonnes
NOx
SO2
Capital Cost to Supply 2020
Electric Load Growth
900
800
$ Billions
700
600
500
400
300
200
100
0
6.11%
8%
10%
15%
20%
25%
30%
35%
39.38%
% DG of Total US Generation
Inv. In New Cent. Gen.
Inv. In new Dist. Gen.
Inv. In T&D
Total Costs for Incremental
Electricity Purchases in 2020
160
140
$ Billions
120
100
80
60
40
20
0
6.11%
8%
10%
15%
20%
25%
30%
35%
39.38%
% DG of Total US Generation
O&M
Fuel
Capital Amorization + Profit
T&D Amorization
Retail Costs per KWh for
Incremental 2020 Load
Cents / KWh
10
8
Average 2000 Retail Price- 6.9 cents / KWh
6
4
2
0
6.11%
8%
10%
15%
20%
25%
30%
35%
% DG of Total US Generation
O&M of New Capacity
Capital Amorization + Profit On New Capacity
Fuel
T&D Amorization on New T&D
39.38%
Added Annual Fossil Fuel Use
for Incremental 2020 Load
Quads of Fossil Fuel /
Yr
12
10
8
6
4
2
0
6.11%
8%
10%
15%
20%
25%
30%
% DG of Total US Generation
Total "New" Distributed Generation Fuel Use
Total "New" Central Generation Fuel Use
35%
39.38%
Emissions from Generating
Incremental 2020 Electric Load
Thousand Metric Tonnes /
Year
700
600
500
400
300
200
100
0
6.11%
8%
10%
15%
20%
25%
30%
35%
% DG of Total US Generation
SO2 Emissions
NOx Emissions
PM10 Emissions
39.38%
Added Annual CO2 Emissions
for Incremental 2020 Load
Million Metric Tonnes /
Year
800
700
600
500
400
300
200
100
0
6.11%
8%
10%
15%
20%
25%
30%
35%
39.38%
% DG of Total US Generation
CO2 emitted for added Cent Gen.
CO2 emitted for added Dist. Gen.
Why Don’t Markets Move to
Optimal Solutions?
 Power is not a free market
 Optimization requires on-site generation to
utilize waste heat
 90 year old laws and regulations are barriers
to efficiency
 DISCO’s are rewarded for capital investment,
penalized for loss of throughput, given no
rewards for improving efficiency or cutting
costs to consumers
Observations on Locational
Benefits/Costs of DG?
 Net of costs and benefits dramatically
favors using DG to meet future load
growth
 Need 13,000 MW of new generation
every year for US, 282 MW every year for
New England
 If CG, must build 118% more generation
and 118% of load growth in new T&D
 Emissions and vulnerability concerns
favor DG as well
What are True Standby Costs
 Typical DG has 96% availability, i.e., 4%
probability of outage.
 1000 DG units of 1 MW average capacity
have actuarial need for 40 MW backup, if
all were fully utilized at peak hour.
 Utilities have been unable to invest in
adequate T&D, congestion increasing
 T&D is aging, book value is shrinking
 DG saves new T&D and holds down
costs of future power
Impact of Standby Charges
 Any standby charge serves to
discourage DG, and will thus raise future
costs of electric power and pollution
associated with that generation
 Future generation will not be optimal
unless locational value of generation is
recognized and rewarded, i.e. a DG
payment.
Other Rule Changes Needed
 Reward DISCO’s for encouraging DG
and avoiding more CG and more T&D
Allow wires utilities to invest in DG,
providing they give equal treatment to third
party DG
Increase DISCO allowed rates of return
based on T&D avoided, line losses, and
efficiency gains
Refuse to authorize T&D investment until
DG opportunities have been exhausted
Conclusions
 DG has significant net benefits in
economics, emissions and vulnerability
 DG should receive significant locational
benefits for net value it provides to other
users
 Utilities are rewarded for blocking DG,
even though more DG will dramatically
benefit society
 Any backup charges will make the future
cost of heat and power higher
Thanks for Listening
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