Gas and grid measures support decentralized energy in the US

David Sweet

This column will focus on a couple of provocative energy regulatory developments in the US from Washington. The first has to do with the release by the Department of Energy (DOE) of its preliminary report concerning production of shale gas. Earlier this year President Obama had asked Secretary of Energy Chu for an advisory report on shale gas and the production process known as hydraulic fracturing (fracking). Reasonably priced natural gas supplies are critical to the development of CHP and decentralized energy projects. The revolution in shale gas production has led to rapid expansion of gas production and a lower and more stable commodity price.

The DOE report drew fire from environmental groups as well as industry, which means that perhaps the panel is not too far off the mark from where it needs to be to assure that these supplies are produced safely, cleanly and in a manner that allows the US economy to take full advantage of this new found wealth. Regulation of shale gas production in the US is accomplished through a combination of federal, state and industry oversight. There have been highly publicized allegations regarding water contamination and sloppy production practices that need to be addressed in a meaningful way. The DOE report should go a long way in making these production practices even safer and more transparent.

The other key regulatory development has to do with transmission planning and cost allocation. One of the ongoing challenges for decentralized energy is that the true system-wide benefits of decentralized power are not usually accounted for in the decision process. The WADE Economic Model attempts to quantify some of these benefits, such as the avoided investment in transmission and distribution facilities and carbon dioxide reduction, and often finds that decentralized energy is in fact less expensive than the centralized alternative when the full cost impact is examined.

In a major regulatory shift announced by the US Federal Energy Regulatory Commission (FERC), this situation may soon be partially addressed. FERC recently issued a landmark policy order that has the potential to create opportunities for grid-scale renewable projects as well as smaller-scale distributed generation, energy efficiency investments and other ‘non-wires’ alternatives to the construction of new transmission facilities.

Order No. 1000 significantly changes how interstate electric transmission companies plan to meet their system needs and how they allocate costs to their customers. The order requires each ‘public utility transmission provider’ to work within its transmission planning region to create a regional transmission plan that identifies transmission facilities needed to meet reliability, economic, and public policy requirements (such as state mandated renewable portfolio standards). The net effect is that transmission costs will be allocated more widely and the benefits of local power production will need to be considered as a realistic alternative to the buildout of new transmission.

As in most cases, the issuance of a generic policy pronouncement is only significant if it is carried forward and implemented effectively on a system by system basis. Every transmission utility will need to participate in a regional transmission planning process and submit a filing to show how it is in compliance with the requirements of the order. If proponents of decentralized energy projects are to capture the benefits of the new rule they will need to make sure that it is implemented according to its letter and spirit.

The net impact of both developments should be overwhelmingly positive for decentralized energy. The trend for power production is clearly moving away from centralized coal generation and towards natural gas and distributed power projects. In fact, California has announced a goal of 12 GW of locally produced energy by 2020. While more policy changes will be needed to reach such lofty goals, these are important steps along the way.

David Sweet
Executive Director, WADE

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