1. Assessing Market Barriers to Distributed Generation
Backup Rates and other Misleading Questions
Thomas R. Casten Chairman
World Alliance For Decentralized Energy ,
March 28, 2003

2. 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?

3. 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

4. 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

5. Capital Cost, CG versus DG
Item
NEW CG
NEW DG
Average cost per kW
$700
$1200
Average trans. cost per kW
None
Total Capital cost per kW
$1800

6. 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

7. 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

8. 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

9. 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

10. 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

11. Results – Optimizing Generation of Incremental Heat and Power

15. Average 2000 Retail Price- 6.9 cents / KWh

19. 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

20. 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

21. 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

22. 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.

23. 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

24. 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

25. For more detail, go to www.privatepower.net or to www.localpower.org
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