It is time to recognize – and properly reward – the generation of power on-site, particularly where high-efficiency CHP or waste heat is used, argues Thomas R Casten. In fact, power generated locally has more value to society than centrally generated power, but is seldom rewarded for this.

Contrary to conventional wisdom, all megawatts (MW) are not equal. Recent research demonstrates two game-changing conclusions.

A 50 kW ‘recycled energy’ unit installed by Recycled Energy Development (RED) at a university in Pittsburgh, PA

First, one megawatt-hour (MWh) generated near users with a distributed generation (DG) plant can, depending on grid location, displace 1.2 to 1.45 MWh of centrally generated (CG) power. Second, each peak MWh from DG can displace 2 MWh to 2.25 MWh of peak transmission and distribution (T&D) and CG power. Now consider the efficiency gain. Good CHP running thermally matched is up to 80% efficient, while the average central generation plant has a 33% delivered efficiency. DG megawatts avoid multiples of CG megawatts. This is a game changer.

Installing 80 GW of well-placed DG could reduce US electricity costs by $21 billion to $36 billion per year, free transmission lines to carry over 100 GW more renewable energy, and cut overall US greenhouse gas emissions by 4.4%. In other words, DG is cheaper and cleaner than central generation, and facilitates more renewables.

This insight triggers amusement (and frustration) about current political debates, with candidates arguing about whether to push for cleaner or cheaper energy. In fact, all should be asking why the obsolete regulatory system discourages DG, blocking both cleaner and cheaper energy.


DG power is significantly more valuable than centrally generated power for several reasons.

First, DG power flows directly to the nearest users, regardless of who purchased the power, thus bypassing long wires, repeated transformation, associated line losses and capital investments.

Because DG power reduces the remaining flow of power from remote central plants, it reduces entire system line losses by as much as 45% of the total DG output, on average. This avoids a great deal of fuel, pollution and cost.

An 800 kW dual turbine system ready for shipment from RED’s sister company, Turbosteam

Second, on-peak DG or demand reduction slashes the need for T&D and for peak generation. During peak hours, each DG megawatts can displace over 2 MW of CG power and free up 2 MW of T&D capacity. The Federal Energy Regulatory Commission chair Jon Wellinghoff recently noted a danger of over-investing in transmission ‘if we don’t break down the non-economic barriers to putting in distributed generation’.

Third, CHP DG recycles waste energy. CG plants dump up to 70% of the energy in the fuel they burn into lakes and rivers, and it is not economical to deliver that thermal energy more than about three miles (5 km). Consider the two 800 MW Indian Point nuclear plants in Peekskill, NY. The waste heat these plants dump in the Hudson River could displace the entire thermal needs of Manhattan, 30 miles to the south.

Topping cycle CHP plants convert 60–90% of the input fuel to useful energy, while bottoming cycle CHP plants recycle industrial process waste heat and consume no incremental fossil fuel. Both forms of DG then displace 1.2 units to 1.45 units of 33% efficient central generation.

Finally, DG decreases grid vulnerability to extreme weather, operator error and terrorism. In the past two decades, massive blackouts occurred because of cascading generator trips after wires were lost to tornados, ice storms, hot weather and operator errors. A mid-western tornado in 1997 caused prices to spike to over US$7000/MWh. Sagging transmission wires in Ohio ended up cutting power to 50 million people, while operator error recently blacked out most of Southern California. Terrorists could cause the same failures to a CG-based system. Each added DG plant reduces the potential for spreading area blackouts.


Society could reap rich rewards from deploying-strategically placed DG. Carnegie Mellon University research shows that 80 GW of strategically-placed DG could cut US line losses in half. These grid-modelling studies show how DG power displaces multiples of CG power, and could avoid massive investment in new wires and peak generation.

DG units can also supply balancing reactive power to further increase transmission capacity and cut line losses. Flows of electricity create magnetic and electric fields – reactive power. The good news is that electric and magnetic fields cancel each other out, eliminating losses. The bad news is that the two fields constantly fluctuate and are seldom in balance, with resulting lost power.

DG units can easily produce whichever type of reactive power is needed to continuously balance the reactive power at the business end of the wires, further reducing losses. Moreover, such DG reactive power does not degrade as system voltage decreases. Grid operators make massive investments in capacitance and inductance banks to provide some balance, but these devices degrade as voltage sags, giving them little value during a cascading system loss. However, current policies seldom pay DG units to generate balancing reactive power.

The huge costs of line losses are largely overlooked. During the last decade, US line losses averaged 236 TWh per year, equivalent to the annual consumption of California. Line losses cost consumers about $24 billion in 2010 and needlessly increased carbon dioxide emissions. Eliminating half of those losses with new DG could save billions and reduce pollution.

In summary, deploying 80 GW of strategically-placed DG would:

  • cut peak US generation and transmission requirements by 100–120 GW, and avoid another 10 GW of reserve generating capacity;
  • reduce US carbon dioxide emissions by approximately 290 million tonnes, (4.4% of 2010 emissions);
  • avoid $95 to $260 billion of capital investment over ten years.

On the last point, 10% load growth with conventional central generation will require 96–120 GW of new central generation and its associated wires, and $335–420 billion of new capital investment. But 80 GW of DG can supply the same 10% load growth with only $160–240 million of new capital investment, and cut line losses by $12 billion per year.


The practice of regulators and system operators to treat all megawatts as equal skews decisions against DG.

Consider an Ohio project to recycle waste heat from kilns that produce lime. We designed a plant that would make steam with lime kiln exhaust to produce 9 MW of clean electricity. The kilns operate around the clock so the project would generate about 70 GWh per year of fuel-free electricity, half used by the kiln and half flowing to nearby electric users.

Because of the mill risk – generation depends on continued lime production – the project’s capital is expensive. The project makes economic sense with a power sales contract paying $85 to $90 per MWh.

The currently least-cost central generation plant is a combined-cycle gas turbine with associated T&D lines, which will require $75–80/MWh, including the cost of transmission capital. Centrally generated power seems $10/MWh cheaper than power from the lime kiln waste energy recycling. But all MWh are not of equal value. It will take about 1.3 MWh of the central gas turbine power to replace each MWh of lime kiln DG power, so the CG alternative actually will cost society more than $100 for each MWh of DG it replaces, which now represents a $10–15/MWh premium.

This plant has not been built, blocked by yesterday’s conventional wisdom that all MWh are equal. However, Ohio Governor Kasich recognized the problem and has signed a new law that allows recycled energy to satisfy the state’s renewable portfolio and efficiency standards, which should bring cleaner and cheaper power to Ohio residents, as well as help its manufacturing base stabilize and grow.

But this is a happy exception to the obsolete treatment of all megawatts as equal. There are about 100 North American lime-producing facilities and only one plant currently captures and recycles its waste energy.

Table 1 summarizes the savings potential of each MWh from recycling lime kiln waste energy, prompting three observations:

  • The lime kiln DG project will not be built unless it receives some of the societal value it creates.
  • Investment becomes attractive at 80% of the cost of equivalent CG power, leaving $20/MWh to share between end users and distribution utilities.
  • The table does not include any value for avoiding fossil fuel and reducing carbon dioxide emissions.


Currently, many regulatory jurisdictions treat DG megawatts as equal and then further penalize DG, effectively blocking the least-cost societal option.

First, states like Colorado make it illegal for any sale of power by a third party, even when the plant is on the host property. Manufacturing hosts are not in the power business and are loath to expend bandwidth and capital to generate their own power. Colorado made an exception for solar generation, but continues to ban recycling of waste energy by third parties unless they sell to the local monopoly, which discourages such generation with low purchase prices.

Next, many regulators approved steep backup rates for all DG, predicated on the idea that a DG plant could be out of service during the system’s peak hours. These charges pay the grid to maintain 100% backup capacity. This logic falls apart for a system of multiple DG plants. For example, 100 separate 10 MW DG plants, each with a 2% probability of an unscheduled outage, will have a statistical availability of 980 MW or 98% during the system peak. Outdated rules, unfortunately, force DG to pay 50 times more for backup than its statistical cost.

A final DG hurdle is utilities’ near universal opposition to all local power. Under current regulations, DG reduces utility profits in three ways:

  • First, utilities receive no financial reward for reducing line losses or fuel costs.
  • Second, DG plants cut the need for new rate-base investments in T&D and new generation, thereby decreasing future utility profits.
  • Third, DG power sold directly to a consumer cuts utility sales and profits under current regulatory architecture.

Not surprisingly, utility managers erect every possible hurdle to DG.


The power industry burned three units of fossil fuel to deliver one unit of electricity in 1960. Fifty-two years later, the industry still burns three units of fossil fuel to deliver one unit of electricity – the unintended consequence of treating all megawatts as equal.

Grid delivered efficiency is stagnant because of severe upper limits to the percentage of electricity that can be produced with each unit of fuel. Electric-only generation efficiency approached the physical limits for coal plants by about 1955. Marginal technological improvements since 1960 have been consumed by the added parasitic requirements of pollution control, leaving net delivered efficiency frozen at 33% efficiency.

But physical limits do not prevent DG plants from doing two jobs with one fire – generating both useful heat and power.

The best CHP plants achieve economic efficiency of greater than 100%, because each unit of recycled exhaust heat displaces up to 1.3 units of boiler fuel. But the inevitable by-product – heat from electricity generation – cannot be used unless the generation is local. To increase efficiency, move the system to distributed CHP. It is that simple.


New research on the value of DG is a game changer. It shows how society can move to cleaner and cheaper energy, while reducing grid vulnerability. By recognizing that all megawatts are not created equal, policymakers can offer appropriate value for the benefits supplied by distributed power plants and still reduce the cost of delivered power.

DG is a key component of a sustainable energy system. Besides avoiding line losses and enhancing grid stability, DG lowers fossil fuel use and greenhouse gas emissions, and enables more renewable energy generation. DG can make local manufacturing more competitive and thus preserve and grow quality jobs. Finally, every new DG plant reduces the grid’s vulnerability to extreme weather conditions and terrorism.

Current regulatory paradigms stand in the way. Fixing them will soften or eliminate utility opposition to DG and trigger massive rewards to society.

Policymakers need to recognize the differential economic and environmental value of megawatts and MWh from strategically-placed DG, and then share those benefits among DG developers, electric utilities, and end users, enabling emerging competitive markets to work their magic. The resulting surge in efficient DG will benefit all stakeholders, while also reducing the emissions of criteria pollutants and greenhouse gases.

Thomas R. Casten is chairman of Recycled Energy Development, Westmont, Illinois, US, and author of Turning Off the Heat: Why America Must Double Energy Efficiency to Save Money and Reduce Global Warming.

More COSPP Articles
Past COSPP Issues