Distributed generation

What Is Distributed Generation?

Distributed generation (DG) refers to an approach to power production where electricity is generated at or near the point of consumption, as opposed to large, centralized power plants. This method falls under the broader category of Energy Finance, which considers the economic aspects of energy production, distribution, and consumption. Distributed generation systems can range from small residential solar power installations to larger community-based wind power farms or industrial facilities with on-site energy storage. The primary goal of distributed generation is to enhance energy efficiency, reliability, and resilience by reducing transmission losses and offering alternatives to traditional utility-scale power delivery.

History and Origin

The concept of generating power close to where it is consumed is not new; early power systems were often localized. However, the modern resurgence and significant growth of distributed generation can be traced to several factors in the late 20th and early 21st centuries. Advances in renewable energy technologies, particularly the decreasing costs of solar photovoltaic panels and small wind turbines, made smaller-scale generation economically viable for a wider range of consumers and businesses. Concurrently, growing concerns about energy security, environmental impacts of large fossil fuel plants, and the vulnerabilities of a centralized power grid spurred interest in more decentralized solutions.

In the United States, policies and technological advancements have increasingly supported distributed generation. By 2017, the U.S. Energy Information Administration (EIA) noted a rise in the use of distributed generation systems, including solar photovoltaics and combined heat and power (CHP), influenced by evolving government policies and falling project costs.⁶ A significant regulatory development occurred in 2020 when the Federal Energy Regulatory Commission (FERC) issued Order No. 2222. This landmark order aimed to remove barriers and enable distributed energy resources (DERs)—which include distributed generation, energy storage, and demand response—to participate alongside traditional resources in organized wholesale electricity markets. The order sought to enhance competition, lower consumer costs, and improve grid flexibility and resilience by allowing aggregations of small-scale distributed generation to bid into these markets.

##⁵ Key Takeaways

• Distributed generation involves producing electricity near the point of use, enhancing local energy independence.
• Common forms include rooftop solar, small wind turbines, and combined heat and power (CHP) systems.
• Benefits include reduced transmission losses, improved grid resilience, and lower carbon emissions when renewable sources are used.
• Regulatory frameworks, such as FERC Order No. 2222, are evolving to integrate distributed generation into wholesale energy markets.
• Challenges include interconnection complexities and the need for significant infrastructure investment to modernize the existing power grid.

Interpreting Distributed Generation

Understanding distributed generation involves recognizing its role in transforming the existing energy landscape. Rather than a singular numerical value to interpret, distributed generation represents a paradigm shift in how electricity is produced and consumed. It is interpreted in terms of its benefits to grid stability, energy independence, and environmental impact. For instance, the deployment of distributed generation can reduce peak load demands on the central grid, mitigating the need for costly grid upgrades or the activation of less efficient "peaker" plants. When evaluating distributed generation projects, factors such as the amount of energy generated, the avoided cost of purchasing electricity from a utility company, and the associated environmental benefits are considered. The effectiveness of distributed generation is often measured by its contribution to local energy supply and its ability to provide services to the broader power grid, such as voltage support or reactive power.

Hypothetical Example

Consider a small manufacturing plant that decides to install a 500-kilowatt (kW) rooftop solar power system along with a 2-megawatt-hour (MWh) battery energy storage system. This setup represents a form of distributed generation.

Previously, the plant relied entirely on electricity purchased from the local utility company. With the new system:

1. On-site Generation: During daylight hours, the solar panels generate electricity, directly powering the plant's operations. This reduces the amount of electricity the plant needs to draw from the grid.
2. Energy Storage: Any excess solar power generated that is not immediately consumed is stored in the battery.
3. Peak Shaving: During periods of high electricity demand or when solar production is low (e.g., in the evening), the plant can draw power from its battery storage rather than buying expensive electricity from the grid. This practice, known as peak shaving, can significantly lower the plant's electricity bill by reducing its demand charges.
4. Grid Services: If allowed by local regulations and grid operator rules, the plant could potentially sell excess power from its solar panels or battery back to the grid during times of high demand, generating additional revenue. This demonstrates the active participation of distributed generation in the energy market.

This example illustrates how distributed generation enables a consumer to become a producer, leading to potential cost savings and increased energy resilience.

Practical Applications

Distributed generation is being applied across various sectors, impacting investing, market dynamics, and regulatory frameworks.

• Residential and Commercial: Homeowners and businesses install rooftop solar power or small wind power systems to reduce electricity bills and gain energy independence. This often involves taking advantage of financial incentives like tax credits or rebates.
• Industrial: Large industrial facilities use combined heat and power (CHP) systems, which simultaneously produce electricity and useful heat from a single fuel source, significantly improving energy efficiency.
• Grid Modernization: Utility companies and grid operators are increasingly integrating distributed generation into grid planning to improve overall system reliability and resilience. This involves upgrading infrastructure to handle bidirectional power flow and manage diverse energy sources. The Pew Charitable Trusts highlights that distributed energy resources can help modernize the U.S. power grid by generating electricity closer to the point of use, alleviating congestion, and improving efficiency.
• ⁴ Market Participation: As facilitated by regulations like FERC Order No. 2222, aggregators of distributed generation assets can participate in wholesale electricity markets, providing services such as capacity and ancillary services to the grid.

Limitations and Criticisms

Despite its numerous benefits, distributed generation faces several limitations and criticisms:

• Interconnection Challenges: Connecting individual distributed generation systems to the main power grid can be complex and costly. Technical standards, safety protocols, and administrative procedures vary, creating hurdles for widespread adoption.
• Grid Management Complexity: The proliferation of distributed generation introduces new complexities for grid operators, who must manage intermittent renewable sources and bidirectional power flows. This requires significant investment in smart grid technologies and advanced control systems.
• Cost and Economics: While costs for certain technologies like solar power have decreased, the initial capital expenditure for installing distributed generation systems can still be substantial. The return on investment can depend heavily on local electricity prices, available incentives, and interconnection costs. Distributed generation systems often cost more per unit of capacity than utility-scale systems.
• ³ Regulatory Frameworks: Outdated regulatory frameworks designed for centralized power generation can hinder the full integration and fair compensation of distributed generation. States and regulators are actively working on modernizing these policies, but progress can be slow and inconsistent. The National Conference of State Legislatures (NCSL) notes that reliability and resilience are top priorities as states contend with grid modernization and the transition away from fossil fuels.
• ² System Reliability Concerns: While distributed generation can enhance local resilience, a high penetration of poorly managed or coordinated distributed resources could, in some scenarios, introduce new reliability challenges for the broader grid if not properly integrated and controlled.

Distributed Generation vs. Microgrid

While often discussed in similar contexts and frequently involving similar technologies, distributed generation and a microgrid are distinct concepts:

The confusion often arises because distributed generation units, such as solar panels or small generators, are fundamental components within a microgrid. However, a microgrid is a more comprehensive system that includes not just distributed generation but also sophisticated controls, loads, and the ability to operate independently from the main grid.

FAQs

What are common types of distributed generation?

Common types of distributed generation include rooftop solar power systems, small wind power turbines, combined heat and power (CHP) systems, fuel cells, and small modular reactors. The¹ integration of energy storage technologies, like batteries, is also becoming increasingly common alongside these generation sources.

How does distributed generation benefit the environment?

Distributed generation can significantly benefit the environment by reducing reliance on large fossil fuel power plants, which are major sources of carbon emissions. When distributed generation uses renewable energy sources, it directly lowers greenhouse gas emissions and other pollutants associated with electricity production. It also reduces the need for long-distance transmission, which can minimize energy losses and the environmental impact of new transmission line construction.

Does distributed generation improve grid reliability?

Yes, distributed generation can improve power grid reliability, especially at a local level. By generating power closer to consumers, it reduces strain on transmission and distribution lines, potentially preventing outages caused by failures in the centralized system. In some cases, distributed generation systems with energy storage can even provide backup power during grid outages, enhancing local resilience.

What is a distributed energy resource (DER)?

A distributed energy resource (DER) is a broader term that encompasses distributed generation, but also includes other resources that can provide energy services at or near the point of consumption. Besides generation sources like solar and wind, DERs also include energy storage systems, demand response programs (where consumers reduce their energy use in response to grid signals), and electric vehicles.