DG within liberalized electricity markets

ECONOMICS OF DISTRIBUTED GENERATION

Distributed generation has some economic advantages compared to power from the grid, particularly for on-site power production. First, on-site power production avoids transmission and distribution costs which otherwise amount to about of 30% of the cost of delivered electricity. The possibility of generating and using both heat and power generated in a CHP plant can create additional economic opportunities. Distributed generation may also be better positioned to use low-cost fuels such as landfill gas.

Against these advantages, unit capital costs per kW are higher for DG than for a large plant. Fuel economy is lower, unless used in CHP mode, and DG uses a more limited selection of fuels. For photovoltaic systems, operating costs are very low but high capital costs render it uncompetitive with grid electricity.

The relative prices of retail electricity and fuel costs are critical to the competitiveness of any DG option. This ratio varies greatly from country to country. In Japan, for example, where electricity and natural gas prices are high, DG is attractive only for oil-fired generation. In other countries, where gas is inexpensive compared to electricity, DG can become economically attractive - see Figure 2.


FIGURE 2. Ratio of retail industrial fuel to electricity prices in selected jurisdictions. Source: IEA statistics

Conventional economic assessments of generating options tend to understate the value of DG's flexibility to the owner of generating plant. Many DG technologies can be very flexible in their operation, size and expandability. A DG plant can operate during periods of high electricity prices (peak periods) and then be switched off during low price periods. The ease of installation of DG also allows capacity to be expanded readily to take advantage of anticipated high prices. Some DG assets are portable. They can literally 'follow the market'. New analytical techniques, such as 'real option valuation', can quantify the economic value of flexibility.

In addition to this technological flexibility, DG may add value to some power systems by delaying the need to upgrade a congested transmission or distribution network, by reducing distribution losses, and by providing support or ancillary services to the local distribution network.

Policies and programmes update

The visibility of CHP in the US has increased a great deal in the last five years, and a powerful network of advocates has emerged to help create a significantly friendlier attitude to CHP - particularly at state level. However, while much progress has been made on the environmental front and on dismantling legislative barriers to CHP, many challenges remain, particularly around utility company attitudes - as R. NEAL ELLIOTT, ANNA MONIS SHIPLEY and ELIZABETH BROWN report.

Five years ago, the United States was preparing for the Kyoto meeting of the United Nations' Framework Convention on Climate Change. Efficiency advocates in government, industry, and the public interest sector were seeking technology responses to climate change that could provide significant reductions of domestic greenhouse gas (GHG) emissions. Two studies prepared by nonprofit research groups (Alliance et al. 19971; Bernow et al. 19972), along with another study prepared by five national laboratories for the US Department of Energy (Interlaboratory Working Group 19973) identified CHP as one of the most important technology responses to climate change, with the potential to provide almost 10% of the GHG emission reductions in the US required under the Kyoto agreement.

These studies, together with activities by CHP market leaders, captured the attention of the Clinton Administration. In his October 1997 speech on climate change at the National Geographic Society in Washington, DC, President Clinton said: 'We must unleash competition in the electricity sector to remove outdated regulations and save Americans billions of dollars. We must do it in a way that leads to even greater progress in cleaning our air and delivers a significant down payment in reducing greenhouse gas emissions. Today, two-thirds of the energy used to provide electricity is squandered in waste heat. We can do much, much better.'

Clinton went on to acknowledge that conventional electricity generation is inherently inefficient, converting only about a third of a fuel's potential energy into usable energy. Furthermore, he stated that CHP is not just a climate change strategy. Because of its inherent efficiency, CHP represents an economically attractive strategy for addressing energy supply requirements in many sectors of the economy, while also helping to address local and regional air quality concerns.

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