The Challenge of Distributed Generation

Change from decentralized forces is impacting many industries including publishing, music, organizational hierarchies and more. Emerson’s Douglas Morris, a member of the power and metal & mining industry teams, looks at its impact on electrical power providers.

Emerson's Douglas MorrisRenewables are clean sources of electricity and are a big part of the growth of distributed generation (generally considered power sources with a capacity of less than 20 MW). It used to be that solar panels were more of an environmental statement because there wasn’t a financial incentive to install them, but now, particularly in locales with financial incentives, more and more homeowners are installing rooftop photovoltaic (PV) panels with the goal of saving money.

Source CleanTechnica.com – Solar PV Module Prices Have Fallen 80% Since 2008, Wind Turbines 29% – http://jimc.me/15jWRwU

The boon for homeowners has not been the same for generation providers, though, because what started as an alternative to electricity provided by utilities has turned into a developing threat to the traditional utility business model because these companies were not built to handle some of the complexities of distributed generation (DG). I am not going to get into the intricacies of operating reserves and power factor management so I’ll refer you to this ICER Renewable Energy and Distributed Generation report if you’d like more detailed information.

DG, including solar, is being now being looked at by power using corporations to supplement or even supplant utility provided power. While this is financially advantageous to these users, it can be detrimental to generation companies because industrial/commercial facilities are the largest users of electricity.

Source: Center for Climate and Energy Solutions – Retail Sales of Electricity to Ultimate Customers, Total by End-Use Sector(2010) – http://jimc.me/17aS7gL

If these users move to produce more of their own electricity, utility companies would make less money…this revenue stream is important for maintaining existing generation and transmission assets. To compound this, overall use of electricity in the United States is shrinking.
Source:U.S. Energy Information Administration-Electricity Data Browser-http://jimc.me/15k0KC7

Source:U.S. Energy Information Administration-Electricity Data Browser-http://jimc.me/15k0KC7

In the end, a barrier to development may end up being the difficulties associated with connecting an industrial user to the existing power grid. Ken Silverstein does a more detailed review of this situation in this EnergyBiz article, Distributed Generation: Causing Utilities to Sweat over Reliable Electric Service.

To add interest to this topic, I happened upon something this week in the Wall Street Journal that may fall under the “if you can’t beat ‘em, join ‘em” camp. American Electric Power (AEP) is one of the largest utilities in the United States and is looking at DG as a potential business opportunity by entering the market for installing rooftop solar panels. “On its face you would look at it and say distributed generation is a threat,” said Nick Akins, chief executive of American Electric Power, in an interview. “But on the other hand we see it as an opportunity because our business is changing. There’s no getting around it.”

Where this goes, who knows, but with shrinking demand for electricity, utilities must look for innovative ways to tweak their traditional business models.

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