Distributed Power in the United States: Prospects and Policies

Distributed Power in the United States: Prospects and Policies


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Scholars from the Brookings Institution's Energy Security Initiative and the Hoover Institution's Task Force on Energy Policy offer recommendations for ensuring the security and sustainability of our electricity system now and for future generations through the greater deployment of distributed power systems (DPS). Their report provides a comprehensive survey of the current technology and policy landscape of DPS and offers suggestions for its most effective use, along with warnings on its possible pitfalls.

Product Details

ISBN-13: 9780817915841
Publisher: Hoover Institution Press
Publication date: 03/01/2013
Edition description: 1
Pages: 272
Product dimensions: 5.70(w) x 8.60(h) x 1.00(d)

About the Author

Jeremy Carl is a research fellow at the Hoover Institution and a member of the Shultz-Stephenson Task Force on Energy Policy, whose work focuses on energy and environmental policy, with an emphasis on energy security, climate policy, and global fossil fuel markets. In addition, he writes extensively on US-India relations and Indian politics. George P. Shultz is the Thomas W. and Susan B. Ford Distinguished Fellow at the Hoover Institution, and has had a distinguished career in government, in academia, and in business. He lives in San Francisco. Strobe Talbott is a foreign policy analyst and a diplomat. He is a former Deputy Secretary of State and a former journalist with Time magazine, and he is the president of the Brookings Institution think tank. He lives in Washington, DC.

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Distributed Power in the United States

Prospects and Policies

By Jeremy Carl

Hoover Institution Press

Copyright © 2013 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
ISBN: 978-0-8179-1586-5



1.1 DPS in Context

For the past century, the U.S. electric power system has operated predominately on a model of centralized electricity generation, with power being delivered to end-users via a long-distance transmission and distribution infrastructure. The original rationale for the centralized model was economically compelling. Economies of scale in the construction of generation assets coupled with the highly capital-intensive nature of generation and transmission construction led to the emergence of local monopolies in the form of franchises responsible for discrete geographic service. The requirements to balance loads and ensure reliability of supply led to the development of an interconnected system. By the 1950s, the vast majority of U.S. power demand was served by the electric utility industry with the exception of a small number of industries that continued to rely on self-generation. Driven by inexpensive fuels and unlimited capacity growth, electricity generation grew by an average of 6.5 percent per year from 1950 to 1960 and by an average of 7.5 per year from 1960 to 1970, creating a robust demand for the output of the central station power system. As the system grew, the laws and regulations designed to protect the consumer from the natural monopolies helped to expand the centralized grid model.

The Move to Decentralized Generation

The trends in operating efficiency, cost, and size that supported a centralized power system have leveled out over the past forty years. Beginning in the 1970s, the electric utility industry changed from one characterized by decreasing marginal costs to one of increasing costs. The energy crises and oil price shocks at the beginning and end of the 1970s, stricter air quality regulations, rising interest rates, and escalating costs of nuclear power led to increased costs of building large-scale power plants, while a drop-off in the rates of electricity demand growth made the case for new additions of such plants less attractive. At the same time, the market for non-utility generation also began to open up. The National Energy Act of 1978, which encompassed the Public Utility Regulatory Policies Act (PURPA) was enacted to address a nationwide energy crisis. PURPA heralded a new era of distributed generators by enabling small power producers to sell generation from "qualifying facilities," or QFs, to utilities without discrimination. Qualifying facilities were accorded the right to sell energyor capacity to a utility; the right to purchase certain services, such as back-up power, maintenance power, and interruptible power from utilities; and relief from certain regulatory burdens.

Under the terms of PURPA, utilities subject to federal regulation were required to purchase electricity from QFs at "avoided cost," the cost the utility would have to pay to generate the electricity itself. While the Federal Energy Regulatory Commission (FERC) created a set of rules for the implementation of PURPA, the interpretation and implementation of PURPA — and particularly the "avoided cost" calculation — was left to the discretion of the states and their public utility and public services commissions. The consequence of this state-level implementation was a patchwork of varying policies for the integration of QFs into the power generation mix. Generous "avoided cost" levels led to the policy proving so popular in California that the state suspended its PURPA system in 1985 due to surplus supply from operators of QFs. PURPA implementation, together with associated tax incentives, contributed to the addition of 12,000 MW of geothermal, small-scale hydro, solar, wind, and biopower generation facilities through the 1980s in the United States, more than half of which were in California. In most other states, however, PURPA was not enacted with such enthusiasm and FERC acknowledged the uneven nature of the policy's implementation. California's interpretation of PURPA provided the basis for many current "feed-in tariff" policies, through which utilities offer fixed-price, fixed-term contracts for power generated from specified sources.

While the early 1980s saw a spike in the number of small-scale power producers, the requirement for small generators to sell their power at a state-determined "avoided cost," combined with falling natural gas prices, made many of the long-term QF contracts uneconomic relative to centralized generation.

Several other legislative and regulatory developments in the following decade continued to support distributed generation. The Energy Policy Act of 1992 began the process of opening access to interstate transmission lines to independent power producers, thereby creating a competitive wholesale electricity market. The move to deregulate (or restructure) retail electricity markets in the late 1990s gave an even larger boost to distributed generation. By 2000, fifteen states had enacted restructuring legislation that challenged the dominance of large utilities by enabling smaller power producers to compete for retail customers.

In the past decade, several factors have combined to hinder the development of centralized power generation while increasing the attractiveness of distributed generation. According to IHS CERA, the cost of constructing new power plants increased 131 percent between 2000 and 2008, owing in large part to rising raw material and labor costs, a shortage of skilled and specialized engineers, and a global increase in demand for similar equipment and services. New large-scale generation has also faced several non-financial obstacles. New coal facilities are threatened both by new environmental regulations on greenhouse gas (GHG) emissions and potential increased generation costs if carbon is priced. Pending EPA regulations for sulfur dioxide (SO), nitrogen oxide (NO) and mercury (Hg) may shut down substantial portions of coal-fired power in the United States while causing many remaining coal power assets to require costly retrofits. Water usage rules also threaten to impede the build-out of large-scale generation plants, evidenced by the federal ban on "once-through" cooling, which has had a negative effect on new power plant construction. Even for cleaner-burning natural gas, regulations and rules on emissions have created considerable uncertainty. A potential rebirth of new large nuclear facilities in the United States, already in doubt owing to financial and regulatory concerns, has been thrown further into question amid public safety concerns after the Fukushima disaster in Japan.

Large scale renewable generators also are facing severe challenges of land use and transmission capacity. Generators located in remote regions where renewable resources are abundant — such as wind resources in the plains of Wyoming, Montana, and the Dakotas and solar in the Mojave Desert — will require the construction of significant amounts of new transmission infrastructure to reach load centers. According to the Electric Power Group's report for the California Energy Commission, it takes eight to ten years to permit, construct, and build a new high voltage transmission corridor. Environmental considerations are also an issue for such projects: large solar projects in the desert have faced strong opposition to their land use and impact on endangered species, while proposed wind farms have faced local opposition on environmental and aesthetic grounds.

At the same time that large-scale generation has faced an increasing number of challenges, advances in technology have increased the competitiveness of small-scale generation by further driving down the cost of modular power-generation and storage systems and enhancing the options for communications between small generators, utilities, and end-users. New grid technologies including real-time metering, communication, and storage devices have increased the potential for networking energy sources at a community level.

Federal and state-level efforts to incentivize and mandate the build out of lower-carbon power generation capacity have added to the economic attractiveness of many DPS applications through loans, grants, tax incentives, portfolio standards, and other mechanisms. Interest from the private sector, which is more likely to consider investments in DPS than in large generation owing to lower capital costs and greater innovation potential, has also helped make DPS more attractive. Finally, new markets mechanisms also are being considered that will enable distributed generators to compete with larger incumbent sources of generation. Grid operators such as PJM, New York Independent System Operator (NYISO) and California Independent System Operator (CAISO) are considering changes to allow distributed loads and storage resources to provide ancillary services competing with natural gas generators.

1.2 Definitions

Distributed power systems (DPS) are a combination of distributed sources of generation (often termed "DG") and distributed storage. They are also referred to as distributed energy resources (DER), dispersed generation, embedded generation, and on-site generation. There is far more existing literature on the definition of distributed generation than on distributed storage. The definition of distributed generation is informed by three principal considerations: the nature of the generator's output, its location, and its size. There is substantial variation in the definition of DG as illustrated by examples from the following organizations:

Institute of Electrical and Electronics Engineers: "the generation of electricity by facilities that are sufficiently smaller than central generating plants so as to allow interconnection at nearly any point in a power system."

North American Electric Reliability Corporation: "a generator that is located close to the particular load that it is intended to serve. General, but nonexclusive, characteristics of these generators include: an operating strategy that supports the served load, and interconnection to a distribution or sub-transmission system (138 kV or less)."

United States Congress: "an electric power generation facility that is designed to serve retail electric consumers at or near the facility site."

International Council on Large Electricity Systems (CIGRE): "not centrally planned, today not centrally dispatched, usually connected to the distribution network, smaller than 50–100 MW."

For the purposes of this study, DPS are defined as:

Selected electric generation systems at distribution level voltages or lower whether on the utility side of the meter or on the customer side; and distribution-level electricity storage applications.

This definition is explained below according to its constituent parts.

"Selected electric generation systems ... and distribution-level electricity storage applications": This study focuses on an exclusive subset of technologies that constitute the most significant components of DPS applications. As with the general definition of DG, the technologies that qualify for consideration are diverse. Ackermann et al provide an excellent overview of the electricity-generating technologies that can be considered as DG (see Figure 1.1).

For the purposes of this study, the definition of DPS technologies has been reduced to a set of eight applications that constitute, in the view of the research team, the principal elements of distributed generation and storage. These applications are a combination of renewable and fossil fuel generation sources.

Solar: Systems that use either solar photovoltaic technology to convert sunlight directly into electricity or solar thermal technology to concentrate solar heat to drive a turbine for electricity production.

Wind: Systems that use wind-driven turbines to create electricity.

Combustion Engines: Reciprocating engines, spark-ignited, or compression-ignited piston-driven engines that run on natural gas or liquid fuels and generate electricity.

Microturbines: Combustion turbines that convert fuel (usually high-temperature, high-pressure gas) into mechanical output, which is then converted into electricity. Most commonly comprise a compressor, a combustor, a turbine, an alternator, a recuperator, and a generator.

Combined Heat and Power (CHP): Applications, located near the point of consumption, that simultaneously produce useful thermal heat and harness process heat for the production of electricity. (It should be noted that CHP is not included in Ackerman's description, as it is an application rather than a specific technology — see Section 1.3 for more details).

Micro Hydropower: Applications that use flowing water to create mechanical energy, which is then converted to electricity.

Fuel Cells: Electrochemical devices that convert a fuel source (such as methane or hydrogen) into electricity.

Storage: Both electrochemical devices that convert electricity into chemical energy and then reverse the process for the provision of power (i.e., batteries); and devices that convert electricity to potential mechanical energy (compressed air, pumped water), to be reconverted to electricity when required. (See Section 1.3 for more detail on DPS technologies.)

"... at distribution level voltages or lower": One of the most challenging definitional tasks in discussing distributed generation is the scale of applications. As the definitions above show, some organizations prefer to address the scale question in terms of nameplate capacity while others prefer to address the issue from the perspective of the point at which applications connect to the grid. This study adopts the latter definition, focusing on applications that are situated close to load.

1.3 Overview of DPS Technology

Distributed generation — the process of generating electricity at small scale in the vicinity of the load center — is an established concept and one with a long history. Even after the advent of alternating current transmission lines and increases in turbine efficiency that made large, centralized power generation possible, electricity consumers found numerous uses for distributed generation. Industrial customers have long relied on on-site generation to harness more economic sources of power than those available from the grid, while facilities with critical power needs such as hospitals and military installations have relied on on-site generation for back-up generation. As stated above, this study focuses on eight distinct DPS technologies, which are explained here in greater detail.


Solar energy is the most abundant form of energy in the world: the solar energy striking the Earth's surface in one hour is equivalent to the total global energy consumption for all human activities in one year. The United States has some of the world's highest solar energy potential. The solar industry has recently made substantial breakthroughs on cost, with some solar panels now below the $1/peak watt.

The United States is poised to continue to be a global leader in solar installations in the coming years and has shown historically strong growth by more than doubling its new installed capacity from 2009 to 2010. With 956 megawatts (MW) of new solar system installations in 2010, the U.S. solar market ranked fourth globally. The $6B U.S. industry employs an estimated 100,000 according to the Solar Energy Industries Association. The major challenge that the industry faces is that of scale. By the end of 2010, the United States had 2,593 MW of installed solar capacity; to place this figure in perspective, it is equivalent to one-third of the capacity of the Grand Coulee Dam (7,079 MW peak).

In addition to ever decreasing costs and increasing efficiencies of the actual solar panels, new improvements in balance-of-system costs such as inverters, power electronics, and wiring alongside financing and installation will continue to drive up the performance while at the same time reducing cost of distributed solar energy.


Wind power has become the most widely adopted renewable generation resource in the United States, accounting for 26 percent of all new electric generating capacity in 2010. The industry grew by 15 percent in 2010 to 5,116 MW of new wind installations, bringing total capacity in the United States to over 40 GW. Between 2000 and 2010, wind generation capacity increased at an average annual rate of 150 percent. The cost of wind power has continued to drop such that wind power on an installed capacity basis is often competitive with conventional generation technologies. However, the output of wind turbines is dependent on local atmospheric conditions and cannot be dispatched like fuel-driven generation technologies. This creates high variability in power output onto the grid and in turn poses operational challenges for transmission and distribution systems.


Excerpted from Distributed Power in the United States by Jeremy Carl. Copyright © 2013 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents

Abbreviations ix

List of Figures and Tables xiii

Foreword George P. Shultz Strobe Talbott xv

Executive Summary xvii

Acknowledgments xxi

Introduction 1

Expert Forum 6

Chapter 1 Overview of Distributed Power Systems 9

1.1 DPS in context 9

1.2 Definitions 14

1.3 Overview of DPS Technology 17

1.4 Functional Risks of DPS Technology 33

1.5 DPS Deployment Trends 35

Expert Forum 40

Chapter 2 Economic and Environmental Cost-Benefit Analysis of DPS 43

2.1 Costs and Benefits of Distributed Generation 43

2.2 Results of Cost-Benefit Comparison 49

Expert Forum 54

Chapter 3 Security-Related Benefits of DPS 59

3.1 Energy Security and the Civilian Grid 59

3.2 Energy Security in the U.S. Military 65

3.3 Summary 71

Expert Forum 73

Chapter 4 Current DPS Policy Landscape 79

4.1 Federal Legislation 80

4.2 State-Level Legislation 89

4.3 Local Rules 104

4.4 Other Recent Policy Initiatives 105

4.5 Summary Observations 109

Expert Forum 110

Chapter 5 Policy Research Findings 119

5.1 Drivers and Benefits of DPS 120

5.2 Costs and Barriers 125

5.3 Policymaker Roles 137

5.4 Policy Mechanisms 141

5.5 Other Major DPS-Related Issues 150

Expert Forum 156

Chapter 6 Conclusions and Recommendations 165

6.1 Summary of Findings 165

6.2 Recommendations 169

Annex 1 Cost-Benefit Analysis Model Assumptions 191

Annex 2 Stakeholder Survey 197

Notes 203

About the Authors 225

About the Hoover Institution's Shultz-Stephenson Task Force on Energy Policy and the Brookings Energy Security Initiative 229

Index 231

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