Distributed
Generation
The Next Wave of the
Technology-Enabled
Revolution
Presentation to the
Edison Electric Institute
DG Task Force
June 2001
Marc w. Goldsmith
Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
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Distributed Generation
Industry Context
The energy industry is changing. Among the more successful players are
those companies we have identified as “innovation energy.”
60
BG
“Innovation Energy”
Enron
E&P companies
Utility companies
50
AEP
40
Dynergy
P/E
Ratio
(%) 30
TFE
Centrica
Duke Energy
20
ExxonMobil
Repsol
Texaco
10
“Conventional Oil”
ENI
TXU
Shell
BP
Source: Winthrop Corporation
0
0
50
100
150
200
250
300
350
Market Capitalisation ($bn)
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Distributed Generation
Innovation
Enron’s reputation for innovation has enabled it to consistently outperform its peers in total shareholder return.
1000
900
ENRON
800
700
Premium
600
500
400
300
200
Peergroup Average
100
0
1/1/92
1/1/93
1/1/94
1/1/95
1/1/96
1/1/97
1/1/98
1/1/99
1/1/00
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Distributed Generation
Innovation & Technology
We expect energy companies will leverage innovation and technology to
close the widening growth gap.
The Innovation
Challenge:
Closing the Growth Gap and Building
Confidence for the Longer Term
How to Target
Earnings Growth
New Markets and
Ventures (Beyond
Bulking Up)
Earnings Growth
New Rules and
Standards (Beyond ISO
9000)
New Methods and
Processes (Beyond
Continuous Improvement
New Products and
Services (Beyond
Line Extensions)
Projected Business Growth: What worked
Total Anymore
Quali
Before Doesn’t Work
Through
Conventional
M&A, TQM,
BPR, and NPD
Base Business
Today
Tomorrow
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
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Distributed Generation
Threat or Opportunity Company-Specific
Generally it is corporate strategic perspectives and/or operational focus
that determine whether companies see DG as a threat or an opportunity.
Potential Opportunity
Generator
Transmission
Company
Potential Threat
•
•
Distributed virtual power plants
O&M service
•
•
•
Direct kW/kWh competition
Impact on standard cost recovery
Air quality impacts
•
Some potential increase transfer
capability
•
•
Little direct impact
Long-term stranded costs
•
•
•
•
System by-pass
Negative operational impact on
distribution system (system protection
outage recovery)
Impact on metering systems
Distribution
Company
•
•
•
New service offerings (DG ISO/PX)
Tool to help manage system growth in
de-regulated environment
Potential impact on distribution
systems design
Reliability and maintenance
Substitute for new construction
Electricity
Company
•
•
New product opportunity
New service opportunity
•
New market entrants with a
differentiated product
•
•
•
Innovative image
Reliable image
Hedge on disruptive technologies
•
•
Uncertainty of reward
Loss of traditional revenue sources
Corporate
•
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Distributed Generation
Threat or Opportunity
Overview
Distributed Generation (DG) has provoked significant interest and
investment from energy companies…
Definition of Distributed Generation
Integrated or stand-alone use of small
modular resources by utilities, electricity
customers, and third parties in applications
that benefit the electric system, specific
electricity users, or both.
Often synonymous with other commonly
used phrases like: self-generation, on-site
generation, combined heat and power
(CHP) or cogeneration, and "inside the
fence" generation, our definition includes
storage, superconducting and demandside management technologies.
Central Plant
Step-Up
Transformer
Distribution
Substation
Gas
Turbine
Transmission
Substation
Distribution
Substation
Fuel Cell
Distribution
Substation
Microturbine
Commercial
Recip
Engine
Photovoltaics
Gas
Turbine
Flywheel
Residential
Industrial
Fuel
Cell
Commercial
Cogeneration
Adapted from EPRI Distributed Resources Target
… If deployed on a widespread basis distributed generation represents
a fundamental shift in the electricity industry.
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Distributed Generation
Threat or Opportunity
Emerging Opportunities
Several forces are aligning to create opportunities for DG.
Increased risk in large
power plant
construction
Unbundling of
traditional, vertical,
integrated utilities
Difficulty siting T&D
and large plants
Emerging
Distributed
Generation
Opportunities
Advances in
communications &
control technologies
Slower demand
growth
Reliability and power
quality concerns
Improved
distributed power
technologies
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
CAM
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
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Distributed Generation Technology
Availability
There are several commercially available and emerging DG technologies.
Commercialization Status of DG Technologies
Research &
Development
Demonstration
Initial System
Prototypes
Refined
Prototypes
Commercial
Prototypes
Market
Entry
Market
Maturity
Market
Penetration
Fuel Cell
Microturbine
PV Solar
Recip Engine
Gas Turbine
• Fuel cells provide electricity and thermal services to buildings
• Proton Exchange Membrane (PEM) fuel cells are being developed for transportation applications
• If fuel cell transportation market develops, it would greatly accelerate the fuel cell market for stationary applications
• Microturbine technology was initially developed for transportation, defense and aerospace applications but now shifted to powergen
• Projected to have low capital cost, low maintenance cost, low emissions, low noise, and moderate efficiency
• Photovoltaic semiconductor-based panels convert sunlight into power
• Ideally suited and cost-effective for many off-grid applications
• Still relies on government subsidies for grid-connected use, but price is steadily dropping
• Diesel or gas recip engines packaged for power generation
• Used widely for standby, baseload, cogeneration, and peaking
• Drawbacks: emissions, noise, and high maintenance cost
• Most products available were initially developed for mechanical drive applications
• Majority of power generation applications are cogeneration or standby
• Limitations are relatively high first cost and low efficiency
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Distributed Generation Landscape
DG Technologies
Characteristics and Applications
Commercial
Availability
Efficiency (%)
Remote/Off-Grid
Distributed
Grid-Distributed
Industrial
Commercial
Residential
Each of these DG technologies has distinctive performance characteristics
that best fit the needs of different applications.
Typical Unit Size
Range
(installation size
can be larger)
2000
Installed
Capital Cost
($/kW)
25 - 500 kW
1,000-1,300
22-30
2000
Reciprocating Engines
5 kW - 20 MW
400-6002
28-40
Now
High-Temperature Fuel
Cells
50 kW - 3 MW
NA3
45-55
2003
PAFC
50 - 500 kW
3,000+
34-40
Now
PEM
1 - 250 kW
NA4
30-40
2001+
500 kW - 20 MW
650
25-405
Now
0.5 - 200kW
NA6
20-32
2001+
0.05 - 200kW
6,000 -10,000
12-13
Now
Microturbines1
Low-Temperature Fuel Cells
Small Gas Turbines
Stirling Engines
Photovoltaic Cells
Primary Target Market
Secondary Target Market
1. Recuperated microturbine
2. Large, gas-fired reciprocating engine
3. Not available; projections of $1,000-$2,000
4. Not available; projections of $1,000 - $2,000
5. 40% efficiency achieved with advanced turbine cycle
6. Not available; projections of $700-1,500/kW
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
CAM
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Distributed Generation Landscape
Disruptive Technologies Applications
There are many DG applications emerging in both developed and
developing countries.
Commercial Building Segments
Reliability
Assembly
Education
Food Sales
Food Service
Health Care
Lodging
Retail
Office
Public Order
Worship
Warehouse
Multi-Family Residential
Farms
Power Quality
On-Site Baseload
Peaking
Industrial Segments
Food
Textile
Furniture
Paper
Pharmaceuticals
Stone/Clay/Glass
Primary Metals
Fabricated Metals
Machinery
Electronics
Transportation
Cogeneration
Remote
Portable
Landfill gas
Biomass
Residential
Power Delivery Business Needs
System Performance
•
•
•
System capacity
•
•
•
Microgrids
Avoided system improvements and capacity upgrades
Improved capacity utilization system optimization
Reduced power losses
System Maintenance
•
•
Grid Support
Service reliability
Power quality
Power transfer capability
Temporary power during maintenance of critical elements
Emergency power during system restoration
Financial Hedge
•
•
•
Energy cost reduction
Portfolio risk management
Financial resource management (capital and O&M)
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Distributed Generation Topics
Economics
Customer Benefits
There are benefits that DG can provide to customers that must be
considered in assessing DG economics.
ISO New England Market Clearing Price
Market Clearing Price ($/MWh)
$1,200
$1,000
$800
$600
$400
$200
$0
May 1, 1999 - April 9, 2000
• Reduced energy costs for thermal
energy loads (steam, hot water and
cooling)
• Decreased exposure to electricity
price volatility
• Increased power reliability
• Improved power quality
• New sources of revenues
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Distributed Generation Topics
Economics
Grid-Side Benefits
There are also benefits on the grid-side that will also impact DG economics.
•
•
•
•
•
•
•
•
•
•
Avoided increases in system capacity
Reduced transmission and distribution (T&D) electric losses
T&D upgrade deferrals
VAR support
Transmission congestion relief
Peak shaving
Reduced reserve margin
Improved power quality
Improved power reliability
Avoided T&D siting concerns
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Distributed Generation Topics
Economics
Added Costs for Customer
Besides benefits there are additional costs to the customer when
installing DG.
• Typical additional costs when installing DG, include:
– Standby charges
– Exit fees
– Competitive transition charges (CTC)
– Additional incremental capital costs for interconnection and
permitting
• These added costs are extremely site-specific, and vary widely
state by state.
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Distributed Generation Topics
Economics
Benefits and Costs
The attractiveness of DG will vary by these added benefits and costs
that will fluctuate by fuel and electricity prices.
4.2 MW Gas Turbine
12
11
5-year payback
with customer or grid
benefits
1998 Gas Prices ($/MMBtu)
10
9
5-year
payback
8
MA
7
FL
VA
AZ
6
CA
5
5-year payback
with added
NY
cost
IL
TX
4
3
2
4
5
6
7
8
9
10
11
12
1998 Electricity Prices (¢/Kwh)
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Distributed Generation Topics
Economics
Vertically Integrated Utility
DG could be an attractive option for the vertically integrated utility if their
system is constrained.
Range of Utility Costs to Meet New Demand
na
r
io
s
in
ts
Al
lS
on
st
C
N
o
ce
ra
...
io
n
G
en
er
at
io
n.
..
ns
m
is
s
a.
.
Tr
a
io
n
at
G
en
er
Costs to
Meet New
Demand
($/Kwh)
0.24
0.2
0.16
0.12
0.08
0.04
0
Central Plant
Distributed
Generation
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Distributed Generation Topics
Economics
Wires Company
DG could be an attractive option for a wires company in lieu of system
expansion.
Range of Utility Costs to Meet New Demand
0.16
0.12
Range of
Utility Costs
to Meet New
Demand
($/Kwh)
0.08
0.04
0
Transmission and
Distributed
Constrained
No Constraints
Central Plant
All Scenarios
Distributed
Generation
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
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DG Going Forward
Market Perspective
The DG opportunity will come in waves.
Watt
Wave
Kilowatt Wave
Megawatt Wave
Why?
•
•
•
•
Technology availability
Transaction and project costs ($/kW)
Project economics
Receptive customers
– Large commercial and industrial
– Wires companies
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DG Going Forward
Market Perspective
What does the Megawatt wave look like?
• Gas turbines, reciprocating engines, photovoltaics
• Customer needs - price volatility and reliability
– Rentals
– Back-up generation plus DG
– Capacity
– T&D support
– Hedge
• Still traditional players
– Equipment suppliers
– Gas and electric utilities
– Wires companies
– Large customers
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DG Going Forward
Market Perspective
What does the Kilowatt wave look like? The Megawatt wave with more
uncertainty.
• Microturbines and fuel cells
• Drivers?
–Power quality
–Image
–Green power
–Cost savings
• Seamless direct access to
markets
• Traditional players
–Moving down and up value chain
–Creating new value networks
• Nontraditional players?
–Market channels
- Appliance manufacturers
- Consumer products
- HVAC suppliers
- Retail (Home Depot, Walmart)
- e-business
–Equipment suppliers
–Automotive
–Appliance
–HVAC
–Consumer
–Energy suppliers
- Large and small C&I (telecom,
supermarkets)
- Residential
–Customers
- Residential
- Small commercial
–Large energy companies
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Back-up Generation Market Review North American Market
The North American back-up generation market continues to grow steadily,
driven by the < 2 MW recip engine segment.
Annual Sales (US$M)
North American Market for Backup Generators
5500
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
1992
Market Trends for Backup Generators
• The gas turbine and > 2 MW reciprocating engine
markets both maintain a 2% CAGR, while < 2 MW
reciprocating engines maintain a 7% CAGR.
GT Backup
Recip Backup >2MW
• Post Y2K markets for standby generators are
primarily: data centers, internet applications and
telecom. These segments make up roughly 50% of
standby generator market.
Recip Backup <2MW
• Recip engines now dominate this market, but they
may see competition from fuel cells and
microturbines as the technologies develop.
• Sales of backup generators to utilities and endusers will continue to be driven by reliability
concerns.
1994
1996
1998
2000
2002
2004
• There is increasing interest in using backup
gensets for peak shaving/DG, but there are barriers
(interconnection and emission standards).
Annual sales based on Power Systems Research and “Diesel and Gas
Turbine Worldwide” historical data (1992-1999) and ADL analysis.
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Distributed Generation Markets DG Market and Reliability Pockets of System Weakness
Generation and transmission constraints and reliability concerns are
creating near-term opportunities for DG.
New York City/Long Island
Wisconsin/Upper Michigan
Lack of transmission
capability between upper
Michigan and Wisconsin has
resulted in congestion.
California
Generation shortages
and transmission
constraints result in
repeated voluntary load
shedding and rolling
blackouts during 20002001
WSCC
Peak demand growth
has exceeded new
generation capacity.
The southwest
portion of WSCC may
not have adequate
resources for
widespread heat
waves.
Dallas-Fort Worth
NYC and Long Island have a
peak load of 14,840 MW with a
combined capacity and import
capability of 19,021 MW.
With demand growing, ISO
published that ‘”after summer
2000, the New York Control
Area will not be able to meet
NPCC adequacy criteria.”
S. Illinois
PJM
PJM has issued 19
Emergency
Generation actions
and/or Manual Load
Dump Warnings,
including 2 days of
voluntary load
shedding in 2000.
Texas
ERCOT issued 10
incidents of voluntary
load curtailment
resulting in 9,407 MW
shed as of September
2000.
ISO NE has issued
6 voluntary load
curtailments in 2000
and 11 during the
summer of 1999.
Boston/Connecticut
Congestion in
Southern IL due to
the shipment of
power to the south.
Dallas-Fort Worth has
800-1,000 MW annual
load growth and
insufficient generation
and transmission
capacity into the area.
New England
Houston
Houston has excess
generation but lacks
export transmission
capability.
Transmission into
Boston is often
heavily congested.
Connecticut also
has congestion
problems.
Delmarva
S. Delmarva had 13
Emergency generation and/or
manual load dump warnings in
Summer 2000, and continues
to pose problems to grid. No
grid upgrades are planned as
S. Delmarva is rural.
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Distributed Generation Markets
Case Study
Commonwealth Edison
Commonwealth Edison has been using DG for capacity and system
support during peak periods over the last three summers.
Recip Engines installed by ComEd
for system support
Over the past 3 summers, ComEd bolstered its
system with rental recip engine packages
350
• Modular diesel generators installed in
groups of 20 to 30
• 160 Caterpillar Power Modules producing
240 MW at 8 locations
– trailer-mounted units driven to location
– units have on-board fuel capabilities
• 60 Aggreko container generators
producing 60 MW at 2 locations
– unloaded using cranes
– standard design, e.g., switchgear is
same from unit to unit
• Setup takes about 1 month for the
Caterpillar units and within 1 week for the
Aggreko units
Summer Installed Capacity (MW)
300
250
200
150
100
50
0
1998
1999
2000
Source: PMA Online
In the summer of 2000, ComEd began to use
small gas turbines as well.
• In each of the three years ComEd has used
DG, they have looked at alternatives to recips,
including GTs
• Low emissions, a feature of GTs, are an
increasing large concern for users of DG,
particularly in urban areas where air quality
may be poor
• In summer of 2000, ComEd rented
5xTM2500’s (22.8MW each) from GE Rentals.
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Distributed Generation Markets
Back-up Generation
Texas
Based on prior ADL analysis, there are potentially 3,300 MW of operable
gensets available in Texas.
Population of Gensets Available in Texas
600
< 1 MW
Continuous
15%
> 1 MW
400
Peaking
4%
300
200
100
Standby
81%
0
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
Gensets Available (MW)
500
Applications of Available Gensets
Cumulative Capacity of Gensets Installed
in Texas: 3,300 MW
The vast majority of the gensets are less than 1 MW in size and were
originally designed for standby application. About 1/3 might be convertible.
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Distributed Generation Markets
Uncertainties
While the market potential is very large, the development of DG still carries
some fundamental uncertainty…
Which technologies (and
suppliers) will be the
winners?
No single technology is likely to dominate, some will fail; there will
be different speeds to market.
How soon will technical
uncertainties be resolved?
Most technical uncertainty is likely to be resolved (eventually), but
not as quickly as predicted and with unexpected barriers.
Fit With
Needs?
Will product attributes find a
match with customer needs,
enabling a winning product?
A key issue that involves technology, product and business/
service model components - a 50/50 proposition at this point.
Disruptive
Potential?
Will customers find “value”
in other than commodity
electricity?
The great unknown - a lot of speculation, but none identified yet.
The key to Distributed Generation’s real potential to revolutionize.
Economics?
Will the economics work at
application and business
levels?
Economics vary widely from application to application, with
several areas of uncertainty. Although there will be attractive
applications, mass market economics will be more difficult than
assumed.
Regulatory
Environment?
Will a supportive regulatory
environment emerge?
A regulatory environment which is technology neutral is likely to
emerge. Disruptive triggering events could tip the scale.
Winning
Technology?
Technology
Development?
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
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DG Policy Overview
Impact Analysis
We measured the impact of eight DG policy issues against five broad
public policy objectives and on DG-specific policy.
DG Policy Issues
• Grid-side benefits
• DISCO participation
• Interface with grid
• Interconnection
• Stranded costs
• Stand by charges and customer
retention tariffs
• Siting and permitting
Public Policy Objectives
• Encourage competition and economic
efficiency
• Protect consumers from cost-shifting
• Maintain a viable utility franchise
• Protect the environment
• Ensure safety and grid reliability
• Create a competitive environment for
DG
• Public support
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DG Policy Overview
Impact Analysis
The analysis linked eight DG policy questions most directly with two major
regulatory policy objectives, and five questions had a high impact on the
policy goal of a competitive environment for DG.
DG Policy Questions
Major regulatory policy objectives
Encourage competition and economic efficiency
Ensure safety and grid reliability
Priority DG issues for creating a
competitive environment for DG
System interfaces
Interconnection
Siting and permitting
Stranded costs
Standby charges
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DG Policy Overview
Impact Analysis
Among the eight DG policy questions, five had a high impact on the
policy goal of a competitive environment for DG.
• Engineering connections and market access.
System Interfaces
Interconnection
• High technical complexity vs. additional capacity for
T&D system, customer market access and operational
flexibility.
• Technical requirements, processes and contracts
modified for DG?
• Safety and reliability vs efficiency and fairness.
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DG Policy Overview
Priority Issues
Among the eight DG policy questions, five had a high impact on the
policy goal of a competitive environment for DG. (continued)
Siting and
permitting
Stranded Costs
(CTCs and exit
fees)
• Streamlined process vs. adequate consideration.
• Environmental goals vs. reliability and other public
policy objectives.
• Potential high assessed costs (disproportionate to cost
of DG project) that discourage innovative solutions that
are more efficient and cost effective vs. recognition of
past investment and loss of load.
• Scale of DG threat to load vs. customer choice and
opportunity for system improvement.
Standby Charges
• Excessive (e.g., no recognition of combined reliability
of DG units) vs. too low (no recognition of cost of
backup power on spot markets.
• Cost to utility vs. benefit to system and customer.
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DG Policy Overview
Additional Key Issues
Three other key policy questions were identified in the analysis.
Grid-side Benefits
Stranded Costs
(CTCs and exit
fees)
Public Support
• Correct price signals by sharing DG benefits and costs
among appropriate parties vs. difficulty of calculating
these benefits for local conditions.
• Best position to recognize best DG opportunities in
distribution network vs. unique access to customers
could threaten open markets and customer choice.
• Alternatives to ownership that share benefits.
• Active encouragement of commercialization of advanced
technologies to provide public benefits (e.g., improved
system reliability, climate change, energy efficiency) vs.
distorted price signals and pursuit of poor technical risks.
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
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DG Business Models
Developing a DG Business
In order to assess the total value of a distributed generation business,
revenue from all segments of the value chain should be considered.
Marketing & Sales
Marketing
Sales
- Advertising
marketing
collateral
- Sales force
- Customer
analysis
- Account
management
- Training
Product Development & Supply
Manufacture
- Technology
core
- Equipment
selection
- System design
- Pricing
decisions
- Financing
packages
- Fuel cells
- Battery storage
- Small GTs and
microturbines
- Small IC
engines
- Automation/
diagnostics
- Photovoltaics
- Flywheels
- Power
electronics
- Switchgear
- Controls
Packaging
Financing
- Generation
- Marketing
- Distribution
- Service
requirements
- Storage
- Portable
systems (e.g.,
barge, truckmounted)
- Sales/lease
Operations
Distribution
&
Installation
Fuel
Supply
- Distribution
networks
- Structuring
contracts
- Dedicated
sales staff
- Gas marketing
Operate
Service
Service
Delivery
Maintain
- Savings levels
- Billing
- Performance guarantees
- Payment terms
- Outage arrangements
- Customer
satisfaction
- Electric
marketing
- Noise and environmental
- Fuel switching
- Customer interfaces
- Operating
strategies
- Maintenance services
- Remote multi-node
system control
- Operate/maintain facilities
network
- Managing end-user
systems
- Service/overhaul centers
- Ownership of
distributed systems
- Contingency
planning
- Service
- Hedging
strategies
- TQM strategy
- Fuel management
acquisition/ storage service
- Replacement packages
- Providing energy
services
- Performance/monitoring
maintenance management
system
Arthur D. Little’s approach is designed to assist in assessing the fit
where there is substantial business in the DG area.
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DG Business Models
Utility Business Strategy
Competing Players and Strategies
Although a number of approaches are being tried, the winning strategies
are yet to emerge, giving the new entrant significant strategic freedom.
Strategy
Core Component Technology
Supplier
Key Players
Howmet
Ballard
Visteon
Delphi
Key Discriminators
•
•
Strong proprietary technology position
Unique production capabilities
Equipment Package Supplier
AlliedSignal
Plug Power
Capstone
•
•
Efficient production processes
Strong product design capabilities
Exclusive Regional Distributor
Unicom
DTE Energy
GE Power Systems
•
•
Regional market and distribution channels
Ability to manage inventory risk
Turnkey Customer Solution
Provider
Sempra
PSEG
Williams
•
•
Creative solution design capabilities
Access to product and technology
solutions
Field Service Provider (Install,
Operate, Maintain)
Honeywell
•
•
Extensive contractor network
Efficient dispatch and field support
processes
Energy Service Provider
Enron
Duke
•
•
Energy marketing and trading capabilities
Ability to manage technical and economic
risks
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DG Business Models
Market Potential
Formation
Because DG technologies, business models, and regulatory frameworks
are still embryonic, there is significant uncertainty in key market drivers.
Technologies
Business Models
Regulatory Frameworks
• Microturbines nearing
commercial status - beta
units in the market today
• Fuel cells
– PEM nearly commercial;
residential beta units
available by mid-2000
– SO commercial by 2005
• IC engines established incremental improvements
• Supporting technologies
(power conditioning, fuel
processing) developing
rapidly (costs still high)
• No clear winning business
model (yet)
• Equipment supply and
distribution channels
forming
• Commercial & Industrial
business models tend to
focus on energy service
(similar to traditional
ESCO)
• Residential business
models aim toward
eventual mass market
• Emerging in several states
(CA, TX, PA, NY, OH) as
part of deregulation - some
allowing DG net metering
• Interconnection standards
now being developed
(IEEE)
• Duration and level of
competitive transition
charges and impact on DG
varies
• In a number of states,
there is no penalty for
disconnecting from the grid
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DG Business Models
Business Opportunities and Risks
The emergence of distributed generation creates both important
opportunities and risks for utility businesses.
Unregulated Utility Business
• Increased portfolio of products, services
and technologies to support turnkey
customer solutions offerings
• Potentially large, new markets for
innovative DG products and services (e.g.,
residential)
• New value chain and industry structure
create opportunities for alliances and equity
investments
• Risk that national and global scale
companies (GE, auto manufacturers, megaESCOs) will capture bulk of market
• Risk that technologies or disruptive market
potential do not develop
Re
gulated Utility Business
• Risk of stranded investments (especially
T&D) as end-users adopt DG solutions
• Opportunity for DG to economically
displace required T&D investments
• Both opportunities and risks created by
introducing end-user DG adoption into the
regulatory equation
– Potential ongoing role for T&D utilities as
small-scale generators
– Will equitable costs of providing standby
power be recovered?
– Added uncertainty in forecasting for
regulated rate development
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DG Business Models
Strategic Option Identification Value Chain
Analyzing the value chain, under alternative future scenarios is another
tool to identify potentially attractive strategic options.
Equipment Supplier
Core
Component
DR value creation C&I
by VC Segment
1includes
Equipment
Core
Integration /
Component Packaging
26%
Res
Operator
and
Maintainer
Product Distributor and Supplier
Equipment
Sales and
Distribution
8%
33%
7%
System
Design and
Sales
Installation
and Interconnection
Financing
Operation
and
Maintenance
5%
7%
1%
4%1
5%
6%
1%
Energy
Provider
Energy
Service
Fuel
Delivery
48%
10%
1%
37%
1%
replacement parts
System Designer
and
andSeller
Seller
Strategic Technology/
Product Investor
Equipment Seller
and Distributor
• Able to achieve
synergies with other
business areas of the
investor
• Complete distribution
network
• Innovative product and
services
• E-commerce capability
(or alliance)
• Financial staying power
• Secure exclusive
distribution rights for
key products or
technologies in the
region of interest
• Brand recognition
• Strong system and
application
engineering
capabilities
• Well-established
relationship with DR
equipment suppliers
Financing
Financing
Supplier
Provider
• Experience in
consumer
product finance
Equipment/System
Equipment/System
Installer
Installer
• Make DR equipment/systems
transparent to the end-users
• Expertise in system/process
optimization
• Provide integrated valueadded gas/electric solutions
FuelFuel
Supplier
Supplier
• Ability to provide
customers with
multiple gas supply
options
• Comprehensive fuel
sales and distribution
network
Operation and
Maintenance
Maintenance
Provider
Provider
• Rapid accessibility
of O&M personnel
to customer sites
Energy
Energy Services
Services
Provider
Provider
• Broad portfolio of
energy services
package offerings
• System/product
monitoring
capability
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DG Business Models Utility
Business Strategy
The Challenge
The challenge: to capture the opportunities from DG, companies must
act quickly, but without enough information to fully resolve uncertainty.
Potentially
Large
Opportunity
DG presents potentially
attractive opportunities . . .
Unresolved
Uncertainty
Near-Term
Delay
Diminishes
Strategic
Position
• Commercial/small industrial DG products/services
• Residential DG products/services
• Equity investment opportunities (DG technologies
and innovative DG product/service elements)
. . . about which there is
substantial uncertainty
which won’t be resolved
in the near term . . .
•
•
•
•
Technology commercialization
Technology economics
Disruptive product attributes
Competitive intensity
. . . and upon which a
• Competitors moving now
company must act soon, or • Diminishing alliance options
significantly diminish its
• Losing first mover advantages
future DG strategic
• Disadvantaged learning curve position
position.
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Industry
Wires Perspectives
Interconnection
Iso’s and Grid
4
The ADL Difference: Our Expertise and Experience
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Distributed Generation Industry
Wires Perspective
DG Concerns
Wires companies are concerned about the DG technologies and how
they would interact with the grid.
90
80
70
60
50
40
30
20
DG Equipment related concerns
Other
Islanding
Slower Service
Restoration for
Those Without
DG
Safety to
Workers
Reduced System
Protection
Quality Control
0
Inconsistent
Maintenance
10
Negatively
Impact Reliability
% of Respondents Who Agree
100
Grid-related concerns
Source: Arthur D. Little Interviews with 14 U.S. electric distribution companies.
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Distributed Generation Industry
Wires Perspective
DG Potential Benefits
Most wires companies consider DG’s potential to augment the T&D
system as its most important benefit.
100
% of respondents who agree
90
80
70
60
50
40
30
20
10
Other
Provide Fuel
Diversity
Defer T&D
Expansion
Relieve
Transmission
Congestion
Reduce T&D
Losses
Provide/Reduce
Reserve margin
Provide Reactive
Power
Deliver Ancillary
Services
Provide Black
Start Capability
Provide Additional
Capacity
0
Source: Arthur D. Little Interviews with 14 U.S. electric distribution companies.
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Distributed Generation Industry
Interconnection
The interconnection black box provides protection for the customer’s
and the utility’s equipment, safety of line workers as well as the parallel
operation of the DG with the utility grid.
TYPICAL GENERATOR PROTECTION
TYPICAL UTILITY PROTECTION
52 TRIP SIGNAL
52 TRIP SIGNAL
CTs
(3)
CTs
(3)
52
27
59
81
O/U
PTs
86
87G
32
RV
46
CTs
(3)
52
32
27/
59
47
81
O/U
PTs
86
87T
50/
51
32
CTs
(3)
FROM 87G
51N
50/
51
FROM 87T
GEN
TO 86
40
CTs
(3)
C
T
TO 86
ALTERNATE
C
CTs T
(3)
51G
51G
INCOMING UTILITY
21 - Distance relay
25 - Sync check relay
27 - Undervoltage relay
32 - Reverse power relay
32RV - Reverse vars (loss of excitation)
40 - Loss of excitation
46 - Negative phase sequence time overcurrent relay
47 - Voltage sequence/undervoltage relay
50 - Instantaneous overcurrent relay
51 - Time overcurrent relay

51G - Ground overcurrent relay

51N - Residual ground overcurrent relay

52 - Circuit breaker

59 - Overvoltage relay

59G - Ground overvoltage

81O/U - Over/under frequency relay

86 - High speed lock-out relay

87G - Generator differential overcurrent relay

87T - Transformer percentage differential overcurrent
relay
Source: Enercon Engineering
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Distributed Generation Industry
Interconnection
Levels of Complexity
Grid interconnection and process has emerged as an important issue
for multiple reasons.
• The number of small generators seeking interconnection to the grid could
increase in the future which will present stakeholders with:
– Increased burden for processing
– Potentially negative impact on the system
– Potentially positive impact on the system if done properly
– Opportunity for standardization and thus reduce costs
• DG advocates contend that the current interconnection requirements and
approval processes are effectively increasing costs unfairly and pricing DG out
of this market (negative history of cogen).
• Distribution companies are concerned that DG will negatively impact the safety
and reliability of the grid, and unfairly increase the distribution companies’
costs.
• ISO/RTOs may add another level of complexity relative to metering, scheduling
and settling DG accounts and vice versa.
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Distributed Generation Industry
Interconnection
Issue Summary
There are three overlapping elements of interconnection that must be
addressed together.
Process
Technical
Contract
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Distributed Generation Industry
Interconnection
Technical
The technical issue revolves around having a safe, reliable, meterable
and standardized interconnection.
• Existing requirements perceived by some as
unreasonable
• To ensure safety and reliability, utilities must
test each alternative solution before it can be
integrated with the distribution system
• Technical requirements vary by utility
• Utilities give the minimum requirements that
may change with each interconnection
Process
Technical
Contract
• Alternative solutions/ technologies (new and
existing) particularly for integrated devices are
not readily accepted by utilities
• Existing requirements do not account for
emerging applications and needs for dispatch,
metering and power quality
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Distributed Generation Industry
Interconnection
Issue Summary
Interconnection processes vary widely across the country in that some
are reasonable and others are lacking or onerous.
• Lack of defined process at some utilities,
ISOs, RTOs ; or process and technical
requirements limited to Qualifying Facilities
• Perceived lengthy, onerous process
• Process controlled by entities that view DG as
competition
• Utilities’ process can be an early warning
system of loss of customers and respond with
reduced rates
• Lack of timely and efficient settlement of
disputes
• Results of interconnection analysis not always
made available to customers
• Customers must pay for studies the utility
performs on interconnection based on fees
set by the utility
• Interconnection studies are required in some
states no matter the size of the facility
Process
Technical
Contract
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Distributed Generation Industry Interconnection
Issue Summary
Contract terms are overwhelmingly in favor of incumbent wires companies.
• Lack of standardized utility contracts for
interconnection.
• Those that exist are more complicated
than necessary for DG.
• Contract length and complexity not in line
with DG facility’s impact on the grid
• Contracts not reciprocal in terms of liability
and indemnification (e.g. universal
indemnification required by some utilities)
Process
Technical
Contract
• Interconnect agreements require
customers to carry general liability
insurance to cover utility’s interests
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Distributed Generation Industry
Current DG Programs
Utility and ISO Examples
There are several examples of ISO and utility programs that now
incorporate DG.
Utility/ISO
Strategy
Program Size
New York Power
Authority
Program created in Summer of 2000 and scheduled to go online
Summer of 2001. Created to meet New York Power needs.
500 MW
Commonwealth
Edison (ComEd)
Program created to begin in Summer of 2000 to meet market demand
and relieve constraints on distribution system.
>400 MW
Kansas City Power
and Light
Program designed to reduce utility’s generation costs during times of
peak load via DG located on the grid.
30 MW
Portland General
Electric
Program locates utility-owned assets on the grid created to increase
generation capacity and reduce customer costs during times of peak
load.
Currently has 30 MW generating capacity
with goal of 100 MW for 2005.
Mississippi Power
Program created to provide extra capacity during peak loads and also to
provide customers with improved reliability.
Currently has 20-25 MW generating
capacity.
Illinois Municipal
Electric Agency
Program locates Agency-owned assets at customer sites and pays
customers a capacity fee, Goal is highly reliable energy supply for key
IMEA accounts and lower Illinois Municipal Electric Agencies energy
costs.
183 MW of DG, with JITKA representing
20MW of this total. IMEA plans to
increase to 270 MW of DG capacity in 17
member communities.
Georgia Power
Program created in 1992 to offset peak capacity costs.
CAL ISO
Program designed to increase California’s generating capacity and
improve grid reliability in 2001.
PJM ISO
Pilot Program created to evaluate interconnection issues and DG role in
improving grid reliability through DG at customer sites.
66 MW
2000 MW
80 MW
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Distributed Generation Industry
ISO Perspective DG Interests and Concerns
In an interview program, ISOs expressed both support and concern over
potential DG use in bulk electricity markets.
ISO Support
• Relatively small amounts of DG capacity
can positively affect reliability and market
pricing under the right circumstances and
conditions
• DG solutions may be more economic than
traditional bulk power engineering solutions,
provide faster solution, and avoid/postpone
more extensive or expensive alternatives
• DG may be next logical broad policy
initiative to complement programs for
bidding load reductions into the market
• DG may be most effective during peak
periods when systems need relief the most
• DG can be a source of ancillary services
• Market opportunities could be structured to
encourage aggregation of DG capacity for
economies of scale
ISO Concerns
• Potential for gaming the system so that
profits are made without improving system
operations
• Rules must avoid both inadequate and
excessive control of DG (e.g., 1 MW
scheduling threshold)
• Transco is prevented from owning
generation; Transco and ISO need to
coordinate with and rely on other parties for
important elements of a reliability solution
• Practical considerations of interconnection
and operation that could affect system
integrity and safety
• Existing technical and economic barriers to
DG (e.g., interconnection, metering and
tariffs)
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Distributed Generation Industry
Integrating DG with Power Markets
Example
US Postal Service - Anchorage, Alaska
• The US Postal Service facility in Anchorage is just one example of remote
dispatch of DG.
• Opened August 9th, 2000
• “Nation’s Largest Assured Power Commercial Fuel Cell System”
– Five fuel cells connected in parallel to produce 1MW of electricity
– Primary source of power for the US Postal Service Anchorage
facility
– Owned/Dispatched by Chugach Electric
• Fuel Cells provided by International Fuel Cells
• Interconnection, Site Management System and Dispatch Software
provided by GE Zenith Controls
Fuel Cell LSM
Control Signals
Fuel Cell No 1
Fuel Cell
Bus
Fuel Cell No 2
Chugach Electric
Control Center
Telephone Line
Controller
Utility
Grid
SSW
Isolation
Switch
STATIC TRANSFER
SWITCH (SSW)
Fuel Cell No 3
Fuel Cell No 4
Global
Bypass
Fuel Cell No 5
Post Office Load
Source: GE Zenith Controls
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DG Going Forward
Conclusions
The ever popular conclusions slide
• The Megawatt Wave is happening now.
• Emerging technologies will be better from both an economic and
market perspective.
• DG has the potential to “disrupt” the utility industry.
• There are benefits to customers, wires companies, vertically integrated
companies and the electric system.
• DG implementation will need to be understood and managed to obtain
the optimal benefits.
• Policy and regulatory issues exist and will need to be collaboratively
solved.
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Contents
1
Distributed Generation and Innovation
2
Distributed Generation: Threat or Opportunity?
3
ADL Research in Distributed Generation
Technology
Economics
Markets
Policy
Business Models
Industry
4
The ADL Difference: Our Expertise and Experience
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The ADL Difference
ADL is a world leader in its capacity to combine the application of
technology-based solutions to business issues for the energy industry .
Power Generation
Equipment
• Gas turbine
technology
• Fuel cells
• IC engines
• Coal technology
• Energy storage
Renewable Energy
Systems
•
•
•
•
•
•
Photovoltaics
Wind
Biomass
Solar thermal
Hydro
Geothermal
Advanced Energy
Systems
•
•
•
•
Hydrogen generation
Fuel reforming
Battery technology
Electric/hybrid
vehicle
• Hydrogen storage
•
•
•
•
•
•
•
•
•
•
Operational
Efficiencies
Optimal resource
portfolio
Sourcing
economies for the
fuel mix portfolio
Enhancement of
information and
control technologies
Process changes
due to delivering
synergies in power
plant dispatch and
operations
•
•
•
•
•
•
•
•
•
Industrial heating
Burners
Alternative fuels
Air toxics control
Exhaust/flue gas
treatment
Energy
Technology
Strategic
Issues
Strategy
Formulation
Integration of
strategies
Visioning
Planning and
management of
strategic
investments
Technology
management
R&D portfolio
management
Technology
assessment
Combustion
Emissions Control
Organizational
Effectiveness
Optimization of
staffing levels and
skill sets
Best set of
corporate values
Consolidation of
collective
bargaining
agreements
Best set of
compensation and
benefits programs
Financial
Management
• Optimization of
resource portfolio
through asset
management
• Appropriate
financial management practices with
regard to dividend
policy, capital structure and treasury
manage-ment
• Best means to deal
with non-performing
assets
Regulatory Tactics
• Achieving
regulatory flexibility
in a multijurisdictional
environment
• Minimization of
environmental
compliance
program costs
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Distributed Generation Experience
Utility Business Strategy
Developed the business strategy selected by a major U.S. utility to pursue
growth opportunities related to distributed generation.
The
Challenge
The
Approach
The
Result
Develop a business strategy that positions the
utility to capitalize on growth opportunities, while
managing resources effectively and achieving
synergies with other business areas and initiatives
 Identified strategic options along the value
chain, including equipment supply, sales and
distribution, and turnkey end-user solutions,
and using a blend of technologies, internal
capabilities, alliances and equity investments
 Screened and evaluated the options based on
business potential, competitive differentiation
and fit with the utility’s overall strategy
 Designed a phased, learnings-based approach
and organization to capture the upside, while
maintaining high investment flexibility.
The utility adopted our recommended approach and decided to form a small,
entrepreneurial organization to develop innovative product and service solutions
and pursue the specific distributed generation business areas we identified.
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Distributed Generation Experience
Electric Utility
Assisted a large U.S. electric utility with developing a strategy to increase
the penetration of distributed generation in its service territory.
The
Challenge
The
Approach
The
Result
A large regulated utility wanted to use
Distributed Generation as a resource to
meet customer needs in the near future.
 Assessed the current market
penetration of Distributed Generation
in the utility’s service territory
 Determined the market potential for
Distributed Generation within the
service territory
 Evaluated the economic drivers and
the economic potential for Distributed
Generation over the next five years
 Developed incentives that would be
required to facilitate more widespread
adoption of Distributed Generation
The client has a strategy that will promote the use of Distributed
Generation in its service territory in a manner that fits with the utility’s long
term strategic objectives.
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Distributed Generation Experience
Energy Company
Developed a global distributed generation strategy with a large energy
company that maximises the opportunity across its business units.
The
Challenge
The
Approach
A large global energy company wanted to
maximize the distributed generation (DG)
opportunity across all its regulated and
unregulated businesses.
 Developed a common understanding
of the future external and internal
environment for DG
 Assessed the strengths and
weaknesses of each business unit.
Identified threats and opportunities
presented to each business unit.
 Explored innovative ways to create value with DG in the future business
environment.
 Created a shared vision which will guide the development of strategies at
both the Corporate and Business Unit level
 Defined priorities for investment, support, and collaboration among
businesses and with the corporate parent
The
Result
The client implementing business unit strategies that are consistent with a
shared corporate vision for Distributed Generation.
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Distributed Generation Experience
Electric Utility
Evaluated the effect of different distributed generation incentive programs
for a large U.S. electric utility.
The
Challenge
The
Approach
The
Result
A large regulated utility needed to
increase the penetration of Distributed
Generation in its service territory to meet
the projected capacity shortfall.
 Evaluated the economic
attractiveness of DG under several
Distributed Generation incentive
programs
 Estimated the economic market
potential of Distributed Generation
under the incentive programs
 Ranked the effectiveness of the
Distributed Generation incentive
programs
DG Equipment
First Cost and
Operating Cost
Grid Cost
of
Delivered
Energy
Economic
Incentives
from Local
Utility
DG
Economic
Model
Achievable DG
Market Potential
Under Different
Incentive Programs
The client was able to make strategic decisions based on the ranked
effectiveness of the programs to promote Distributed Generation.
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Distributed Generation Experience
Electric Utility
Developed a resource allocation framework for distributed generation,
demand side management and load management for an electric utility
The
Challenge
The
Approach
The
Result
A large regulated utility desired assistance
in its resource allocation planning, based
upon growth in peak demand and energy.
 Quantified the future impact of
customer on-site generation, potential
demand-side management, and load
management programs on forecasted
load requirements
 Analyzed existing studies of market
potential for each of these resource
types to establish feasibility
 Contrasted results with the forecast
growth in peak demand and energy
 Determined power needs that must be
met by other sources
The client successfully revised its Integrated Resources Plan and was able
to develop strategies for resource allocation.
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Distributed Generation Experience
Regulatory
Assisted 12 Distributed Generation equipment suppliers in developing
information to educate policymakers in Distributed Generation.
The
Challenge
The
Approach
The
Result
A group of equipment suppliers needed to
educate regulators, legislators, and policy
makers with sound, fact-based information
on Distributed Generation.
 Identified gaps in the current
understanding in Distributed
Generation on part of regulators,
legislators, and policy makers
 Created a Distributed Generation
primer to provide the sound
intellectual foundation for decision
making
 Wrote a series of white papers
addressing regional, stake-holder,
and technical issues in Distributed
Generation
{1}
Legislators
Regulators
Exec.
Summary
White Papers
{3}
Staff
DG Primer
{1}
Intellectual Foundation
Clients will have a uniform, unbiased, information base to educate
regulators, legislators, and policy makers on Distributed Generation.
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Distributed Generation Experience
DG Impact Study
Completed a DG impact study for a northeastern U.S. electric utility to help
it understand the market potential for DG in its service territory.
The
Challenge
The
Approach
The
Result
Perform a detailed assessment of the market
potential for DG within the client’s customer base
and determine the impact on the client’s business
 Developed a detailed economic performance
model that simulated DG operation under
several scenarios, and applied the model
using actual customer data to determine
market adoption of DG
 Completed an assessment of the local,
regional and national regulatory environment
with respect to DG
 Assessed the likely impact of DG on the
client’s power delivery business and made
recommendations for strategic response
The utility used the results of the study to begin a strategic DG business planning
effort.
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