Electricity Markets

In the short term, distributed power can alleviate problems created by incorrect load forecasts or transmission and distribution shortfalls. The national average cost for adding transmission and distribution infrastructure is about $1,260/kW, so the potential savings are enormous (Source: "Distributing the Power", by Bhavesh S. Patel, Energy Markets, September 2001).

Strategic positioning of distributed power allows utilities to provide solutions to customer problems while maintaining market share and control. When utilities own and operate the DER systems, they can control when and how these units are used, interconnection (which protects the grid and customers), and maintenance (which ensures system reliability and worker safety).

Utility Market for DG

Across the nation, the use of distributed generating resources among utility companies is gaining momentum. Some recent activities include:

• Tacoma Public Utilities in Washington State installed and is operating 30 diesel-fired engines for a combined capacity of 48 MW.
• GPU proposed a program to New Jersey regulators for the dispatch of customer-owned diesel stand-by generators, with the aim of overcoming delivery system bottlenecks in certain counties. The utility is proposing to pay up to 50¢/kWh to customers who use on-site generators.
• PacifiCorp leased and installed five 22-MW gas turbines adjacent to the main office of its subsidiary, Utah Power, in Salt Lake City.
• The New York Power Authority is seeking regulator approval to install eleven gas turbines (with a collective capacity of 444 MW) at six sites in New York City boroughs and on Long Island.
• Long Island Power Authority has added a new supplemental service rate to on-site generators that will provide lower demand charges during the summer and lower energy charges throughout the year.
• Transmission grid operators (Independent System Operators) are establishing programs to reward energy users who shed utility load by using on-site generators. Programs established by PJM, ISO-New England, and New York ISO are the most favorable to distributed generation.

In 2000, the American Gas Association commissioned a study to explore the DER market for gas utilities. Principal recommendations resulting from the study are as follows:

• DER is not really about technology, but about adding customer value (through enhanced reliability, lower power costs, more flexible operations during peak periods, combined heat and power, etc.) and demonstration of that value to the customer in a complete package (design, analysis, installation, maintenance, financing, etc.).
• Emissions are a key issue to consider; emissions requirements will be getting tighter as other states follow California's lead.
• Gas and electric companies can form alliances so that total benefits of using distributed resources can be more efficiently allocated.

Distributed generation technologies can be fueled by a variety of sources, ranging from natural gas to solar energy. The use of less-environmentally friendly fuels (e.g., diesel) is not encouraged and natural gas is becoming the fuel of choice for most distributed generation technologies. Since DER displaces grid power, the price of natural gas versus that of grid power is a critical factor in determining the economic feasibility of a DER project.

The economics of cogeneration in particular, depend very heavily on prevailing retail gas and electric rates which can differ significantly by geographic region and utility. Cogeneration plants displace electric utility load with gas utility load. Gas utilities see cogeneration as beneficial, and many offer lower rates for gas used for that purpose. Low cogeneration gas rates not only make it less expensive to generate electricity; they also make it less expensive to generate thermal energy.