Clean and efficient local generation – what US regulators need to do to deliver it

The US has the technology to meet the projected growth in electricity loads with local generation that would also cut fuel use, capital costs, emissions and ongoing costs. What is missing is a set of regulations to overcome the significant obstacles to the deployment of cleaner, local energy generation. Tom Casten suggests some new regulations.

Although technology and fuel options have improved substantially, today’s regulations continue to promote remote central generation that transmits US electricity to consumers through extensive radial transmission and distribution (T&D). The resulting supply system is severely suboptimal, and the excessive costs, fossil fuel use, and emissions exacerbate many societal problems.

CHP system at SC Johnson’s manufacturing plant in Washington State (Northern Power Systems)
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Power plants located far from energy users cannot recycle byproduct thermal energy, which limits the average net conversion of fuel to delivered electricity to only 33%. By contrast, local generation that recycles wasted energy, in contrast, can achieve energy productivity of from 60%-97%.

Switching to such local generation, using proven technology, could eliminate approximately 40%-60% of today’s fossil fuel use, criteria pollutant emissions, greenhouse gas emissions, capital and retail power costs compared with the current US grid. Unfortunately, regulations largely discourage the deployment of local generation.

Market forces, which normally drive every business towards economically optimal production, have failed to improve the nation’s electric productivity for nearly five decades. Figure 1 shows that the net delivered US electric efficiency rose from 3% in 1900 to 33% by 1959, and has then failed to improve for nearly 50 years.

Figure 1. US electric efficiency, 1900-2005
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The ovals and rectangles depict US$2.0 billion of actual projects my companies have built since 1977 that achieve double to triple the efficiency of the US grid, proving that the technology exists to do a much better job.


The Federal Energy Regulatory Commission (FERC) is charged with assuring a reliable, cost-efficient system of interstate commerce in electricity and gas, and has broad regulatory powers over the electrical transmission systems. Yet today’s regulations – which were crafted to use the available technologies and fuels of the 1900 to1960 period – unwittingly block optimal deployment of current technologies and fuels. As a result, the US electric system, based on electricity generation from large remote plants, suffers from excessive line losses, declining reliability, unnecessary capital expenditures and the inability to recycle byproduct thermal energy.

A microturbine for a US commercial site. Such microgeneration can avoid T&D line losses of 9% (Ingersoll Rand)
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A new system that optimally uses today’s technologies and fuels would mainly rely on local generation that recycles industrial waste energy into power and local-fuelled generation that captures the inevitable byproduct heat to displace boiler fuel. Compared to the current system, this optimal system would require less capital for T&D, and would instead move fuel to points near energy users. It would also have line losses of only 2%-3% versus today’s average line losses of 9%. The optimal system, with many relatively small generating plants, would provide reliability with only 3-5% redundant capacity, versus the current system’s need for 18% redundant capacity.

Thanks to recycling wasted energy and avoiding line losses, this optimal system would burn roughly 17 Quads less fuel per year, reducing US fossil fuel use and greenhouse gas emissions by 20%. Finally, this optimal system would lower the overall costs of power to consumers by about 40%, and it would reduce the health and environmental costs associated with electric generation. Therefore, local generation, using today’s technology and fuels, can reduce fuel use, the amount of power flowing through the grid, line losses, future capital investment, and the need for redundant capacity.

Some pundits, assuming that markets induce optimal economic behavior, cite the lack of local generation as proof that central generation is more economic. But economists have clearly specified the conditions needed for markets to work their magic, and these conditions do not exist in the world’s largest industry – the generation and delivery of electricity. Market forces are hampered by antiquated regulatory policies at the Federal and State levels that strongly skew investment towards more expensive, less reliable, and more polluting central generation.

These regulatory policies have resulted in a US system with the following characteristics – over 92% of US electric generation comes from remote central plants that lose an average of 9% of generated power in line losses. These remote generation plants, unable to recycle the byproduct thermal energy, burn twice as much fossil fuel as a local generation plant that recycles its waste heat to displace boiler fuel.

The central generation approach requires massive capital for T&D systems to transmit and distribute power, which raises consumer rates versus a system of local generation closer to loads. A 1999 study by Arthur D. Little for the US DOE estimated that, on average, a kilowatt of new transmission and distribution capacity from central plants to users required capital investment (corrected to 2007 dollars) of $1400/kW, with vastly higher costs for customers in urban areas. By contrast, local generation avoids 90%-95% of the T&D investment and reduces line losses to all customers. Building new transmission faces very tough, often fatal barriers, and the US grid growth has not kept pace with load growth since 1984. As a result, the US grid is increasingly vulnerable to extreme weather, human failure, and acts of terrorism.

Between 2000 and 2004, over 200 large area power interruptions occurred that cut service to more than 500,000 persons per blackout. The largest, in August 2003, affected over 50 million people in the Northeast. Current studies estimate capital investment needs of $50 billion to restore historic reliability if the country continues to rely on central generation. This investment will raise electric rates to all consumers, but will do little to reduce line losses or improve generation efficiency.

A World Alliance for Distributed Energy (WADE) model tried to determine the impact of meeting load growth with mixes of central and local generation for satisfying US electric load growth through 2020. Scenarios ranged from all expected load growth with new central generation to little local generation to meet load growth. Inputs and outputs were average capital costs, fuel efficiencies and use, emissions and varied line losses for local, near load, or remote power generation. The results were interesting.

For example, while local generating plants cost more per kilowatt of capacity than central generation, total system investments are far less because all-local-generation avoids roughly $450 billion of T&D investments. Capital costs fall as local generation supplies higher percentages of expected load growth. But what of power costs to the consumer? Within certain assumptions, the total retail costs for new power decline by around 30% with increasing local generation. The difference would be even greater if the rising costs of new coal power plants had been taken into account.

The model also showed that, in total, incremental CO2 emissions fall from 720-400 million tonnes/year or less as local generation increases as a proportion of total load growth.


To think about what policy changes FERC could implement to induce clearly superior local generation that recycles wasted energy, one must first understand why markets do not deploy more local generation in the current regulatory climate. The summary answer is that the status quo includes three types of barriers to efficiency.

Monopoly electric distribution utilities have lobbied for these barriers, fought to keep obsolete policies in place, and worked tirelessly to discourage local generation that might reduce power sales through their monopoly protected grids. Regulators have worked to remove some barriers, such as excessive interconnection requirements, but they have largely failed to modernize old rules to match current technology and fuel options. The three types of barriers to efficiency include:

  • Outright barriers – policies that block or severely penalize local generation.
  • Value deniers – policies that prevent local generation from capturing the value it creates.
  • Playing field tilters – policies that create differential advantages for central generation versus more efficient local generation.

Outright barriers to local generation are common

  • To balance thermal and electric sales and to achieve economies of scale, optimal local power plants often produce more thermal energy and more electricity than the host user requires. These local power plants can build steam, hot water and chilled water pipes under public streets to sell the recycled thermal energy at retail prices.
    However, all fifty states have century-old bans on private electric wires that cross any public property. This restriction gives electric distribution monopolies a big weapon against local power entrepreneurs. Local generators that want to provide power to a host with facilities on both sides of a public street, or to optimize a new cogeneration plant by selling to several local electric users, face two options: either they can sell their power for wholesale prices that are 30-50% of the local retail rates, or they can ask the electric distribution monopoly to move their power across the street to other retail users. The charges for moving electricity across the street, if the service is even offered, are predicated on uneconomic postage stamp rates that reflect the cost of moving electricity across the entire state.
  • Utilities have also helped enact absolute bans on any local generation except by the host. Fifteen states ban a third party from selling power to anyone but the utility. In these states, a third-party-owned power plant, located on a manufacturing host’s premise, can only sell power to the local utility, typically at 30%-50% of the cost the utility charges the host for the power, even though the power flows to the host without ever entering the T&D system.
  • State public service commissions nearly always approve rates for backup electric power based on the assumption that the local generation plant will fail during peak grid load. Commissions accept the spurious utility arguments that they must maintain 100% backup of all generation and wires for every local generator, and they are thus entitled to charge the same demand charges as those to an electric user with no local generation. Yet the odds of all three generators in a typical cogeneration plant failing at the exact system peak are about one in six million.
  • FERC and some states have attempted to standardize interconnection requirements, but the utilities continue to delay and over-specify interconnection as a way to discourage local generation, and most commissions are ill-equipped to debate the utilities’ technical arguments.

Value deniers are equally common barriers to efficiency

They prevent local generation from receiving compensation for the system benefits that such generation creates.

  • Local generation receives no benefit for slashing the need for transmission and distribution wires, as the power flows to the nearest users and reduces the grid power flows, thus reducing line losses to all users. Pundits, including the Electric Power Research Institute (EPRI), spell out the financial, environmental, and reliability advantages of micro-grids being fed from both ends of the wire, but very few jurisdictions offer any of this benefit to local generators. Recent actions by two ISOs, PJM and the New England ISO, provide some locational value to local generation and have proven that such benefits induce system efficiency and savings.
  • Local generation that recycles wasted energy doubles the productivity of fuel and thus cuts criteria pollutant and GHG emissions in half compared to conventional central generation, but it receives no benefit. In fact, local generators are denied an environmental permit unless they achieve the latest current ‘Best Available Control Technology’ (BACT) emissions, even though the bulk of the central generation units were built before the Clean Air Act amendments and are allowed to emit under grandfathered rights.
  • Local generation, because of the large number of relatively small units, requires less redundant generation and transmission capacity. Recent studies at Carnegie Mellon University show that a system of many local generators with 3%-5% redundancy would provide the same system reliability as the current system of large central generators with 18% redundancy. At the low end of $2500/kW of central generation and associated T&D, every new kW of local generation would avoid $250 of societal investment in redundancy, but a local generator receives no benefit. Full local generation across the US would eliminate the need for 100 gigawatts of generation and associated T&D – saving $250 billion of total capital.

Playing field tilters

These are barriers that provide differential advantages to existing or new central generation versus local generation.

n Ratepayers guarantee profits on all investments in central generation and associated wires and transformers. When FERC deems a new transmission investment prudent, it effectively promises future rates that will generate sufficient operating profits to repay lenders and provide a return on equity capital. Local generation is not included in rate base and receives no comparable guarantees. The host or third-party power provider bears the total risk of local generation investment, which makes obtaining capital more expensive or sometimes impossible.

  • All costs of interconnecting central generation to the transmission system go into rate base and are borne by, and indeed guaranteed by, electric users. By contrast, regulators make more efficient local generators pay for their interconnection to the grid, even though the local generation plant provides strong net benefits to other electric users. A study carried out at the University of Massachusetts found that a new kilowatt of local generation capacity in Boston created net benefits to other rate payers of $365/year. The study analyzed the true costs of the host facility’s distribution and generation backup, as well as the values from avoiding line losses, T&D capital, and generation. Even after the study was introduced in rate proceedings, the Massachusetts commission allowed a standby rate of $135/kW of generating capacity – creating a $500/kW swing from the projected societal value to the rate charged the local generator. This regulation has kept Boston ‘local generation free’.
  • Clean Air Act amendments of 1976 grandfathered the rights to emit pollution to existing plants and placed the full burden of cleaner air on new plants. EPA denies permits to new plants unless they install controls that reduce emissions to the currently best available control technology, but these cleaner new plants then sell power at the same prices paid to dirty plants that do not face such costs (The Clean Air Interstate Regulations and Clean Air Mercury Regulations, effective in 2009, begin to remove part of the emissions advantage of older central plants, but they still do not relate emission limits to useful energy output).


The suggested FERC actions to achieve optimal local generation are as follows:

  • Set wholesale rates that compensate local generators for reducing line losses and curtail the need for additional investment in T&D wires, substations and capacitance and inductance equipment. Local generators deserve to obtain value for the benefits they provide.
  • Require RTOs/ISOs to calculate and compensate local generators for reducing the number of redundant generators and T&D. Wholesale rates need to reflect the benefits such distributed facilities bring to an RTO’s overall reliability.
  • Require utilities to interconnect to all generation, regardless of size or location, at their expense. Add these costs to the rate base of the transmission or distribution utilities. These additions to rate base will be substantially less than the capital saved by avoiding new T&D.
  • Grant a federal exemption to state laws that ban private wires to any local generation plant that FERC deems will ease T&D constraints. By allowing qualified local generators to install private wires that move power to nearby retail electric users, FERC would match its current regulation of natural gas transmission, which allows gas users to apply for a tap on an interstate gas pipeline and construct a private gas pipe crossing public streets. It is unlikely that this policy change will spur new wires construction, but it will create an honest negotiation about the value of moving power across the street in an existing distribution wire. The ability to legally install a private wire places an economic limit on the distribution utility’s charges for use of its wires and lets the market optimize.
  • Require all transmission and distribution utilities to bid out all capacitance and inductance services, so allowing local generators to supply power factor correction and voltage stabilization in lieu of ratepayer-guaranteed investments in capacitance and inductance devices.
  • Require all ISOs to allow local generating plants to bid on spinning reserve, priced to the locational needs of the ISO, regardless of the generator’s size.
  • Offer long-term power contracts, tied to heat rates but adjusted for fuel prices, to local generators that displace the need for new T&D. Consider the impact on the public of the default case, which is to approve and rate-base all new T&D investment. To supply load growth without new local generation causes FERC and state commissions to force ratepayers to amortize new transmission services. Instead, FERC should give the same long-term contract to efficient local generation that eases congestion.


This analysis presents good news and bad news. The good news is that proven technology could satisfy US electric load growth with local generation that slashes fuel, capital, pollution, greenhouse gas emissions and retail power costs. The bad news is that regulations and regulatory practices create significant barriers to local generation and largely block the deployment of clean, local technology.

We have provided suggestions for FERC actions that address key barriers to efficiency and begin to level the playing field between inefficient central generation and efficient local generation. FERC, by modernizing regulations and regulatory processes, can play a significant role in reducing the cost and environmental impact of future power generation.

Thomas R. Casten is the Chairman of Recycled Energy Development, Westmont, Illinois, US.

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