If distributed generation (DG) has so many advantages, why are there not many more installations in the US? Benjamin Sovacool has studied exactly this question – and concludes that, while its benefits are well understood, the further development of DG is impeded by interwoven social and technical constraints.

The tentative move toward distributed generation (DG) represents a somewhat paradoxical return to the electric utility industry’s roots. Thomas Edison inaugurated the industry in 1882 when he supplied direct-current power to a collection of nearby businesses in the financial district of New York. Because operators could not transmit direct-current power efficiently over long distances, Edison hoped to sell small-scale generation equipment to commercial customers (such as hotels and industrial firms) that had large demands for electricity.

This model, as historian Richard F. Hirsh will tell you, became displaced by one employing large centralized power stations to produce power sent over alternating-current transmission networks. Overcoming the problem of limited distance distribution posed by Edison’s arrangement, the alternating-current approach lent itself better to the economies of scale that became apparent in generating equipment over the next eight decades.

Today, however, the technological basis for the electric utility system remains in flux. Large-scale generation and transmission technologies no longer offer prized economic benefits, and some policymakers and system operators have identified security and reliability threats to a society that increasingly depends on electricity. During the chaotic first years of the twenty-first century, the old and new stakeholders have not yet reached consensus for a new paradigm for the utility system. In such a complicated environment, advocates of DG technologies have seen opportunities to reconfigure the existing electricity environment to their advantage.

Distributed generation in the US

The notion of ‘distributed generation’ refers to both an approach to generating power and a wide variety of physical electricity generators. As an approach, DG entails producing power on-site and close to the end user, emphasizing the deployment of small-scale generating facilities. As a technology, the term DG often encompasses three classes of generators: combined heat and power (CHP) systems that produce thermal energy and electricity from a single fuel source, distributed renewable energy generators such as wind turbines and solar panels, and distributed non-renewable energy generators such as reciprocating engines, Stirling engines, natural gas turbines, microturbines, and fuel cells.

Advocates often portray DG technologies as serving the needs of society because they produce fewer harmful by-products. Some system operators have begun to deploy DG systems to relieve congestion on the transmission grid, and DG technologies can minimize normal transmission losses because they generate electricity close to the end-user. A few of these new technologies even produce power at lower prices than conventional technologies. The greater use of DG technologies could therefore play an important role in the nation’s overall energy and foreign policies.

Yet, despite their promise, such generators still constitute a very small percentage of electricity generation capacity in the United States. While the Department of Energy (DOE) estimates that more than 12 million DG units are installed across the country – with an aggregate capacity of 200 GW – most of these provide electricity only during emergencies when grid-connected power is unavailable.

Even though users operate around 82,000 MW of this capacity for functions in addition to the provision of back-up power (amounting to approximately 8.6% of US generation), less than one percent of industrial DG systems are used to produce electricity to meet peak demand or operate continuously. The Energy Information Administration estimated that, overall, only 0.9 GW of DG capacity operates continually in the US.

Similarly, penetration forecasts using the Energy Information Administration’s National Energy Modeling System project that DG technologies intended to provide continuous power will grow to just 3.0 GW of power in 2025, or 0.25% of total estimated US capacity.

These statistics reveal an interesting inconsistency: if DG technologies possess so much promise, why is it that they are not used more in the US? Furthermore, how can policymakers overcome the barriers facing DG technologies?

The Consortium on Energy Restructuring’s DG Project

As a researcher working for the Consortium on Energy Restructuring (CER) at the Virginia Polytechnic Institute & State University, I had the privilege of pursuing a research project (and, ultimately, a dissertation) designed to answer these two questions. Receiving support from the US National Science Foundation’s (NSF) Electric Power Networks Efficiency and Security program and an NSF Doctoral Dissertation Improvement Grant, my project attempted to look at DG in the United States a little differently.

First, I conducted 62 formal, semi-structured interviews at 45 different institutions (including electric utilities, regulatory agencies, interest groups, energy systems manufacturers, non-profit organizations, energy consulting firms, universities, national laboratories and state institutions). Those interviewed possessed exceptionally diverse educational backgrounds in various fields, such as environmental engineering, business, business administration, economics, engineering and public policy, history, geography, political science, public policy, electrical engineering, law, chemistry, biology, public administration, environmental science, environmental science and public policy, and energy resource management. The intent of the interviews was to represent a broad overview of the interests and academic training of those connected to the electric utility sector.

Secondly, to help understand why utilities and operators so rarely use DG technologies, I viewed the electric utility industry as a technological system, drawing on work done by Thomas P. Hughes. In his seminal Networks of Power: Electrification in Western Society and other works, Hughes argued that the generation, transmission and distribution of electricity occurs within a technological system that extends beyond the engineering realm. He understood such a system to include a ‘seamless web’ of considerations that can be categorized as economic, educational, legal, administrative and technical.

Large modern systems integrate these elements into one piece, with system-builders striving to construct unity from diversity, centralization in the face of pluralism, and coherence from chaos. Managers of the system obviously prefer to maintain their control of affairs and, while they may seek increased efficiencies and profits, they do not want to see introduction of new and disruptive ‘radical’ technologies that may alter momentum and their control of the system.

The study, entitled The Power Production Paradox, revealed three important conclusions: that DG technologies offer many potential advantages over centralized and traditional power plants; that DG technologies remain impeded by a collection of interwoven social and technical constraints; and that such obstacles can be overcome with aggressive and co-ordinated policy action.

Lesson 1: advantages of DG technologies

First, the study found that DG technologies offer comparative advantages to large and centralized plants in terms of efficiency, reliability, and security.

In terms of efficiency, generating power on site can double the efficiency from combined cycle gas turbines and offer lower labour and capital costs. Some DG systems are especially useful for district applications where they can recycle excess waste energy to provide heating and cooling to several buildings. They have the added potential of enabling more reliable and secure electricity in the event of a power outage or disruption (although not all systems can operate when the grid is down).

In terms of reliability, DG technologies can better enable utilities and system operators to stabilize the grid and improve system reliability. Because manufacturers can produce distributed technologies at smaller scale, system operators can situate them almost anywhere, and their modularity means that generators can be deployed to match precisely smaller increments of demand. In contrast to larger centralized plants, DG technologies displace electricity normally produced by a large coal- or natural-gas-fired turbine, backed up by a spinning reserve, and delivered through the power grid to the same location.

In fact, a comprehensive study undertaken by the Energy Information Administration (EIA) found that transmission and distribution losses in the United States averaged almost 7% of gross production (in kWh). The study also concluded that, during hot weather, when power lines stretch and conductivity decreases, losses could exceed 15%. Imagine purchasing a dozen eggs at your local grocery store, but having between one and three eggs break every time you transported them to your home, year after year. In rural areas, transmission and distribution losses get even worse and can exceed 40%.

The International Energy Agency notes, however, that on-site production of electricity can lower electricity prices by more than 30% when displacing transmission and distribution expenses and that deploying DG systems in targeted areas provides an effective alternative to constructing new transmission and distribution power lines, transformers, local taps, feeders, and switchgears, especially in congested areas or regions where the permitting of new transmission networks is difficult.

In terms of security, smaller distributed technologies limit financial risk and capital exposure. Project managers can cancel modular plants more easily, so that stopping a project is not a complete loss (and the portability of most DG systems means value can still be recovered if the technologies would need to be resold as commodities in a secondary market). Smaller units with shorter lead times reduce the risk of purchasing a technology that becomes obsolete before engineers install it, and quick installations can better exploit rapid learning, as many generations of product development can be compressed into the time it would take to build one giant plant.

In addition, outage durations tend to be shorter than those from larger plants and repairs for the more common DG technologies – such as reciprocating gas and diesel engines – often take less money, time and skill. Furthermore, in contrast to the security risks of oil pipelines and refineries, decentralizing energy facilities and providing power through photovoltaic systems, wind turbines and fuel cells helps minimize the risk of accidents and grid failures, and does not require transporting or storing hazardous or radioactive materials.

Lesson 2: remaining challenges are technical and social

The study also revealed that having to manage thousands of dispersed generators is much more challenging for system operators than controlling a handful of large, centralized ones. Naturally, distribution and transmission system operators need to ensure that DG entrepreneurs do nothing that would imperil their ability to maintain the stability of their network. DG technologies must not interrupt the balanced flow of alternating current to support proper grid synchronization.

In addition, DG technologies cannot endanger the lives of people working on the grid by adding power to it when the workers think it has been de-energized, or creating legal liabilities and potential hazards for the public. Moreover, most local distribution networks have been designed as radial grids, meant only to send power in one direction (after they have received power from a transmission station). Utilities and system operators therefore tend to argue that connecting a large amount of DG to the power grid excessively complicates system management.

DG units tend to have a comparatively higher capital cost (per installed kilowatt) than centralized generators. Almost 90% of those interviewed considered ‘cost’ as the single greatest impediment to DG technologies. Notwithstanding all the benefits smaller and distributed systems can offer consumers and communities, their relatively higher installed capital cost makes them too expensive for most residential customers and too risky for most utilities and businesses. Some DG technologies are also becoming more expensive to operate, as they use natural gas as a primary fuel.

As a final technical issue, the environmental record of non-renewable DG technologies operating on diesel, oil, or natural gas is mixed. Centralized power stations are classic ‘point sources’ for pollution, making them classic targets for air quality engineering and regulation because they account for a majority of air pollution and are easier to regulate. Since most non-renewable DG technologies generate electricity close to the end user, their exhaust systems concentrate pollution near the point of combustion, rather than dispersing it through a larger geographic area.

Equally important, but less obvious, are social and cultural barriers. The study found that rather than trying to work with DG manufacturers or local customers to resolve the legitimate issue about standardizing how distributed units interconnect and interact with electric systems, utilities have instead tended to actively block or impede small-scale units from attaching to the grid.

For example, PJM Interconnection – the incumbent service operator responsible for one of the large power grids in the north-east – mandates that customers wishing to interconnect distributed generators to the utility’s transmission network conduct an extensive feasibility study. In addition, Section 36.1 of the PJM tariff requires a $10,000 deposit – regardless of the size, ownership, or location of the connecting generator – for anyone who attempts to interconnect to PJM’s transmission system. This fee, even when refunded, serves as an especially large disincentive for small-scale power generators. In the Pacific north-west, some utilities require all parties seeking to connect DG systems with the utility place a $2 million bond to protect their grid.

As another impediment, most small and large businesses resist investing in and using DG – even those as efficient as CHP technologies – because these technologies are believed to deviate from each company’s core business mission.

While it is true that energy service companies offer a novel way around these impediments (by undertaking responsibility for implementing energy projects and then taking a share of the profits), their services are not widely enlisted. For instance, managers of small businesses remain constrained by limited resources and time, and larger businesses believe that they can best maximize their profits by focusing on non-energy related issues. Most companies do not want to be in the ‘business of making energy’, and would rather use their resources – financial and otherwise – promoting core business activities.

All levels of the business community frequently resist energy projects because they distract personnel from more profitable ventures. Facilities are thinly staffed, running daily at near capacity to meet production goals. Distractions are seldom welcome, and business decision makers are continually making trade-offs between risk, time and money. Even though investments in energy infrastructure may yield an eventual profit, business leaders would rather ‘allocate labour hours to making dollars, not saving dimes.’ Company employees may also be reluctant to admit the need for more efficient energy technologies because they believe such admissions become evidence of ineffective job performance.

Ironically, in the case of DG installations at industries and businesses, the smaller the project, the less likely it will be undertaken, since smaller projects still require almost the same amount of effort to complete as the larger ones.

Consumer and behavioural attitudes linger as a final, more subtle, but equally pervasive impediment. Before the invention of large, expansive electric utility networks, people tended to harness energy inside their home more actively. When the primary fuel for energy in Europe was wood, the consequences of its use were immediate and local. Pollution shrouded cities wherever households combusted wood in large quantities, and forests were felled faster than they regenerated. Over time, expansive woodlands whittled away and the search for substitute fuels sharpened.

However, in the modern electric utility sector, the tendency for power plants to be spatially isolated from population centres dilutes the aggregate impacts of electricity. An ‘out of sight, out of mind’ pattern misleads the public by suggesting that the environmental costs of electricity are less than they actually are. Electricity places unique demands on natural resources, the environment, and the marketplace, yet its delivery segregates these impacts from the population to deliver a product seemingly pure, invisible, clean, and cheap. Consumers, consequently, remain uninformed or apathetic about the portfolio of electricity technologies available to a given utility – and thus go along with the status quo. As long as consumers remain shielded from the true costs of their consumption, they will likely continue to make poor or uninformed decisions about which energy technologies they prefer.

Familiarity also plays an important role in determining which energy technologies public utility commissions and local regulators choose to adopt. Since most Americans refuse to take an active interest in electricity, utilities make decisions for people. The disjuncture between how electricity is made and how it is used – combined with immense technical skill required to manage power plants and an elaborate transmission and distribution grid – has supported the rise of a professionalized elite that desires to maintain control over as much of the utility system as possible. A certain comfort exists with the more ‘traditional’ technologies. Utilities do not want to dedicate the time or resources needed to learn about new technologies.

Lesson 3: R&D strategies must change

Lastly, if one accepts that the impediments facing DG technologies are simultaneously social and technical, or socio-technical, then the nation’s energy R&D strategies need to change significantly. Large-scale technological systems, such as the existing electricity industry, possess significant political, social, economic, and cultural capital. The tension between traditional centralized fossil-fuelled electrical generators and novel DG technologies represents a conflict about the ideas of centralization versus decentralization, consolidated versus dispersed control over electrical resources, conducting business as usual contrasted with considering externalities like efficiency, reliability, and security.

The astonishingly low percentage of DG in the US raises serious questions about American energy policy. It suggests that major legislative mandates of the past thirty years designed to spur work on DG technologies have resulted in only limited success. Despite billions of dollars in research and development, procurement, tax incentives, tax credits, subsidies, standards, and financial assistance, the impediments to a transition to DG technologies remain social and cultural as much as they are technical. Until policy makers target these remaining social barriers in the same way that technical impediments were targeted twenty years ago, the promise of DG in the US will remain unfulfilled.

Instead of continuing to support mostly research and development on refining existing DG technologies and discovering new ones, one option could be to shift government support to efforts aimed at increasing public understanding of energy and electricity policy. The US has already invested billions of dollars in the technical side of the energy problem. It may now be time to target the remaining social barriers in the same way the government has committed resources to promoting technological options.

Dr Benjamin K. Sovacool is currently a Research Fellow in the Energy Governance Program at the Centre on Asia and Globalization, part of the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is also an Adjunct Assistant Professor at the Virginia Polytechnic Institute & State University in Blacksburg, VA, US.
e-mail: bsovacool@nus.edu.sg

Further reading

Hirsh, R. F. (1989). Technology and transformation in the American electric utility industry. Cambridge: Cambridge University Press.

Hirsh, R. F. (1999). Power loss: The origins of deregulation and restructuring in the American electric utility system. Cambridge: Cambridge University Press.

Hughes, T. P. (1983). Networks of power: Electrification in Western Society, 1880–1930 Baltimore, MD: Johns Hopkins University Press.

International Energy Agency (2002). Distributed generation in liberalized electricity markets. Paris: International Energy Agency.

Lovins, A. et al. (2001). Small is profitable: The hidden benefits of making electrical resources the right size. Snowmass, Colorado: Rocky Mountain Institute.

Nye, D. E. (1999). Consuming Power: A Social History of American Energy Technologies. London: MIT Press, 1999.

Sovacool, B. K. (2006). The Power Production Paradox: Revealing the Socio-Technical Impediments to Distributed Generation Technologies. Blacksburg, VA: Virginia Tech (Doctoral Dissertation), available at https://scholar.lib.vt.edu/theses/available/etd-04202006-172936/.

Sovacool, B.K. (2007). Distributed Generation (DG) and the American Electric Utility System: What’s Stopping It? Journal of Energy Resources Technology (forthcoming).

Sovacool, B.K. (2007). Coal and Nuclear Technologies: Creating a False Dichotomy for American Energy Policy. Policy Sciences 40(2) (June, 2007), pp. 101–122.