The first power generation system in New York was a decentralized combined heat and power (CHP) unit which supplied energy locally. Today, after 90 years of dominance of central power, decentralized energy (DE)1 is making a comeback. MICHAEL BROWN highlights some of the market drivers which may influence developers over the next few years – and suggests that the age of DE may very soon be upon us.

‘The old shall become new and the new shall become old.’ This phrase captures very neatly some of the changes taking place in the electricity sector today. We can say with some certainty that central power has probably already peaked in terms of its share of the global electricity market. The decline has already slowly started and will accelerate as DE and on-site power generation become increasingly competitive. At present, central power dominates world electricity markets. WADE has estimated, in its 2002 World Survey of Decentralized Energy – 2002/03 (see COSPP November-December 2002), that electricity from DE systems accounts for only 7% of all generation – central power accounts for 93%.

Many parts of the world suffer from an excess capacity in power generation. The development of new plants has almost completely dried up in many parts of Europe and North America, although markets for new capacity in developing countries are more buoyant. This follows a period of rapid capacity expansion in the 1990s, which showed many of the hallmarks of a cyclical boom leading, sure enough, to a bust from 2001. This market pause may last five years or more, with electricity price signals for new capacity development not showing green until 2005 or later. When they do, what are the relative prospects for central and decentralized energy generation?

ALL-IMPORTANT COST

The all-important issue is one of cost. For DE advocates, including the World Alliance for Decentralized Energy (WADE), the economic benefits are the ultimate justification. Demonstrating the cost advantage is challenging because it is hard to get a clear financial view of the real costs of all aspects of central power generation, in particular the costs associated with transmission and distribution.

WADE Chairman Tom Casten, and his colleague Marty Collins from Private Power, have developed a robust economic model which seeks to identify the optimal means of meeting new electrical capacity requirements in the future. In essence, it compares the costs of future capacity development based on DE with that based on central power.2 The model has been developed and refined following an extensive process of review and critique. For the moment, it has been applied to the US only, and WADE will run the model for other countries and regions in coming months.

A means to promote innovative technologies

The US needs a new means to regulate air pollution, one that will reward the more efficient operation of electricity-generating technologies and encourage the introduction of innovative energy processes. The nation’s current regulatory approach – using ‘input-based emission standards’ – measures emissions based on fuel inputs into the plant. Unfortunately, this method pays no attention to how much electricity or heat is provided and it therefore fails to reward efficient production. In contrast, writes SUSAN FREEDMAN, an ‘output-based’ approach would reward those generators producing the same amount or more energy while emitting fewer pollutants.

Output-based standards could advance an array of innovative power technologies that offer enormous potential to improve efficiency and enhance the environment. One such technology, CHP, allows for the productive use of much of the waste heat from electricity production, which accounts for about two-thirds of the energy used to generate electricity. With a growing demand for electricity and the bulk of America’s power plants at retirement age, the US faces a unique opportunity to clean the air. Unfortunately, CHP and other innovative technologies face environmental barriers. Only output-based measurements can capture the total efficiency provided from a single source of fuel producing both electricity and thermal energy.

As states and the federal government address electricity restructuring and ways to mitigate pollutants responsible for acid rain, ground-level ozone, and climate change, output-based emission standards are gaining attention. Adopting such standards could help advance the nation’s mutual goals of cleaning the air, protecting public health and welfare, and providing affordable, reliable and secure supplies of energy.

ALREADY IN USE

An output-based approach may not be well-known, but it is not a new concept. Such measurements already are used to limit emissions in other regulated sectors in the US. In the transportation sector, for instance, vehicle emissions are monitored on a grams-per-mile basis. In September 1998, the US Environmental Protection Agency (EPA) revised its New Source Performance Standards (NSPS) for utility and industrial boilers from a fuel-input to an electricity-output basis in order to regulate nitrogen oxide (NOx) emissions. CHP systems were also to be treated on an output basis. In a memorandum issued in October 2001, EPA’s Office of Air Quality Planning and Standards advanced the use of output-based standards for CHP systems in order to determine whether they constituted a ‘new source’ under certain permitting conditions.