Distributed Energy: What Lies Ahead? PILLSBURY WINTHROP LLP 2004 GLOBAL ENERGY CONFERENCE SAN ANTONIO, TEXAS JUNE 12, 2004 ROBERT W. GEE PRESIDENT GEE STRATEGIES GROUP LLC

2 What is Distributed Energy (DE)? Distributed generation (DG): –Small electricity generation facilities: < 50 MW –Located on the distribution system close to the point of consumption –Includes: micro-turbines, fuel cells, internal combustion engines and small gas turbines –Combined heat and power facilities & emergency back-up = 95 percent of customer-owned generation in U.S. today But also will include: –End use enabling technologies –Load management applications –Sensors/nodes to “smarten” grid intelligence

3 Driving Forces Behind DE/DG Decline in cost of renewable & high-efficiency technologies suited for households & small businesses Competition for wholesale power opened possibility for sales of customer-owned power during peak periods in real-time markets Commercial & Industrial customers placing increased reliance on high-quality power Opposition to siting of new transmission capacity drives search for alternatives

4 Benefits of Distributed Energy/Generation In real-time markets, could be more cost effective in meeting peak demand than additional central station power If operating costs lower than central station power, could reduce wholesale prices Enhanced system flexibility could increase reliability If supply increased and customer demand more flexible, power price volatility could be reduced

5 Risks of Distributed Energy/Generation Reliability could decrease if system operators unable to manage greater number of generation inputs Retail power price could increase if ratepayer-funded investments required to maintain power quality Proliferation of fossil-fired DG potentially poses threat to air quality Migration of customers off grid poses threat of embedded cost shift to remaining utility customers Escalating fuel costs of fossil-fired generation, reducing “spark spread for DG”

6 The Story Thus Far... DG deployment has been halting owing to barriers & failure to meet financial expectations (insufficient pay back rates) Market support nosedived following “dot com” bust DG has struggled to find successful business models Market penetration impeded by slowed or regressive restructuring policies

7 Major Barriers to Distributed Generation Contractual & technical interconnection requirements for equipment protection and safety to ensure power quality Utility tariffs requiring surcharges for standby service Environmental & permitting requirements of local governments restricting installation and operation of generating equipment Average cost pricing of utility services

8 Contractual and Technical Interconnection Issues DG developers claim contractual issues used to impede interconnection Lack of common technical interconnection standards raises cost of manufacturing Progress on developing some technical standards (i.e., IEEE 1547) helpful but not sufficient FERC proposal to mandate national standards for small DG (<20 MW) spawns opposition from certain states and co-ops, and concerns about state air quality standards

9 The “Standby Charge” Tariff Debate Utilities seek to recover fixed costs associated with continued obligation to serve DG-owning customers seek to avoid charges, and want credit for benefits they provide to system (enhanced reliability, transmission capacity avoidance) Larger issue: pace and scope of industry restructuring DG deployment looks to success of competitive markets and ability of customers to purchase in real-time power markets Will regulators be willing to unbundle services further and expose customers to actual costs through deaveraging?

10 Is There a New Dawn for Distributed Energy? DG’s enhanced security & reliability advantages now spotlighted following NE-MW power blackout Since August 14, DG market has rebounded (so far) Development of new energy control technologies and “smart” management systems likely to benefit DG deployment Vision: “Plug and Play” DG a key part of a seamless “Smart Grid” energy load management system “Smart Grid” touted by foundation-funded think tanks, but vision needs embrace of federal and state policymakers

11 A Non-central Station Perspective of the Future Source: CA Energy Commission

12 An Even More Aggressive View

13 Robert W. Gee President Gee Strategies Group LLC 7609 Brittany Parc Court Falls Church, VA (fax)