by Bob Shively, Enerdynamics President and Lead Instructor
My first job in the utility industry was as a cogeneration engineer with Pacific Gas and Electric Company (PG&E). PG&E was years behind schedule in getting its nuclear power plant Diablo Canyon online and needed new 
generation capacity quickly. My team’s job was to find good candidates for installing cogeneration[1] and demonstrate to the customer the economics associated with making the investment.
A number of larger customers installed cogeneration units, and, by the late 1980s, PG&E was buying power from more than 2,500 MW of cogenerators — more capacity than Diablo Canyon! Many old timers were cynical, but the younger members on our team were optimistic that a distributed generation (DG) revolution was underway and would rapidly change the industry paradigm of centralized generation.
It didn’t happen. Low variable-cost nuclear power soon became available as Diablo Canyon came online, and PG&E’s interest in encouraging cogeneration waned. I moved on to a number of other jobs, and when I later heard a utility executive say that “distributed generation is always the next big thing, decade after decade” I chuckled and thought maybe he’s right.
The problem was that utilities built their systems with centralized generation for a reason – the principle of economies of scale. With the technologies available, it didn’t make sense for every customer to have its own power plant except when the customer’s heat loads were very closely matched to generation needs. Stand-alone DG without cogeneration typically had heat rates of 12,000 Btu/kWh or higher while centralized gas combined-cycle generators could get heat rates down to 8,000 Btu/kWh or lower.
A higher heat rate means you have to burn more fuel to get the same amount of power, so this placed DG at a big disadvantage to the larger utility power plants. And fuel costs for DG were higher too since owners of DG have to pay for the cost of gas distribution unlike utility power plants that typically take gas off a high-pressure transmission line, or, even worse, have to compete with coal units that have an even lower cost of fuel.
Only recently has the dynamic potentially changed thanks to the significant reduction in costs for distributed solar photovoltaic (PV) generation[2]. Now in regions with good sunlight, high utility rates, and government incentives, PV installations can be funded through customer savings relative to the cost of utility power. And in some regions PV manufacturers are promising to be economic even without incentives[3]. In California, overall distributed PV generation is about 2,000 MW[4] or the equivalent of another Diablo Canyon.
Current distributed generation in the U.S. is approximately 5% of total generation. In a recent survey by Black and Veatch[5], utilities were asked the amount of distributed generation they expected to see by year 2020. About one-third of respondents expected 5% or less; over 40% expected 5 to 10%; just over 15% expected more than 10%; and 8% responded they didn’t know. So clearly utilities aren’t sold on the idea that change is coming quickly. But, had utilities been asked 10 years ago whether gas generation would surpass coal generation, most would have said no. And, as we’ve discussed elsewhere, that transformation is occurring.
So, besides the price tag, what are the barriers to more DG? The largest barriers involve regulatory and technical issues. The current electric distribution system is not designed for much DG, so grids will need to be redesigned and upgraded if DG is going to grow. And until that occurs, utilities may restrict the amount of DG connected to their systems[6]. Other key issues include the price that customers are paid for power that flows back onto the grid and the price for stand-by service that customers pay so that the utility is able to serve the customer’s load when the DG system is down.
So whether we will see significant growth in DG in the near feature is debatable. In addition to the PV “wildcard”, numerous entrepreneurs are trying to create cost-effective DG using other technologies. Two interesting examples include the fuel-cell-based Bloom Box[7] and design guru Dean Kamen’s Stirling Engine generator[8].
One thing we can say is that those closest to the industry often fail to see big changes until they are obvious, so while there is a lot of installed infrastructure that suggests our electric grid will stay mostly centralized, it is not implausible that a rapid DG revolution could occur.
References:
1. Cogeneration is the production of electricity using steam created from waste heat from an industrial process or the use of steam from electric power generation as a source of heat. It is also often called Combined Heat and Power or CHP
2. For a discussion of PV cost reduction, see Enerdynamics’ Insider “Is the Photovoltaic Industry Living Up to Its Hype?” available at http://marketing.enerdynamics.com/Energy-Insider/2011/Q4Renewables.htm
3. See for instance: http://www.businessinsider.com/citi-the-solar-age-is-dawning-2013-5
4. See Black and Veatch 2013 Strategic Directions in the U.S. Electric Utility Industry, p. 44 available at: http://bv.com/reports/2013-electric-utility-report
5. See ibid, p. 44
7. See: http://www.bloomenergy.com
8. See: http://www.oninnovation.com/videos/detail.aspx?video=1900&title=Stirling%20Engine%20Demo%20
Enerdynamics 