Rob Day | September 21, 2005 at 9:18 PM

The intelligent grid pt. 2: Distributed generation and the grid

Following up on the first part of my answer to the questions posed by Matt Marshall, where we discussed why things change slowly at utilities and on the grid.

In his smart column, Matt describes a vision of an electricity transmission and distribution grid that is strengthened by more use of distributed generation sources (hopefully powered by renewables). As he writes:

“Instead of hundreds of power plants, such as giant 1,200 megawatt nuclear power plants, powering our needs, we should have millions of solar powered residences and workplaces—or at least a power source closer to their destination—so that a good fraction of the power doesn’t get wasted in transportation. And that way, a single error at one plant, or cut in an electrical transmission line, doesn’t shut down the power of 2 million people, as it did last month yet again in Southern California. Utilities would have to buy into idea, which arguably is against their interests—they’d lose control.”

So is the lack of an intelligent grid holding back such a vision?  The answer is both yes and no.

What’s holding back distributed generation?

Yes, there isn’t enough use of distributed generation yet. And I would also throw demand reduction into the mix—if the idea is to reduce our dependence on an outdated transmission and distribution grid, even better than generating power close to demand would be not needing it in the first place, or being able to reduce demand instantly in response to tight supply or problems with the grid.

Not all utilities have bought into the concept yet, it’s true. Systems engineers are naturally reticent to deal with the complications that result when thousands of small generation sources start to interact with an already hard-to-control, finely-balanced grid. And some utilities have taken this view in the past and tried to make it difficult for end users to set up distributed generation systems.

It’s important to realize however, that much of the policy framework is in place to enable more use of distributed generation. Across the U.S., federal law requires that anyone be able to sell such excess power at a minimum of wholesale (the price a utility pays) prices.  As this chart shows, in 37 states, some form of “net metering” is allowed by law. Net metering allows anyone who generates more power than they themselves need to sell their excess power back onto the grid at retail (the price you and I pay) prices.

Now, in a lot of these states there are a lot of exclusions and limits, and some states don’t allow net metering at all, so there’s a lot of room for further change. But importantly, in major markets like California (solar and wind net metering allowed for all customers with generation IssueAlerts from Utilipoint, among other sources. But the above should help illuminate that, while there’s certainly room for some policy shifts to encourage the intelligent grid, that’s not the whole story.

Costs and awareness

What really held back distributed generation and distributed “demand response” activities were two things: The cost of the energy produced, and lack of awareness.

Most distributed generation technologies are just now getting to be price competitive with retail electricity rates, and only in the higher priced areas. As the chart on this page shows (scroll down), retail prices vary widely across the U.S. In whatever region you’re located, while it certainly helps ease concerns over over-building a system and thus wasting capacity, you’re really only going to build significant distributed generation capacity to sell back into the grid if the price you’ll receive makes it worth it. So, for instance, in California you need to be able to make the electricity for a net cost of around 12 cents per kilowatt hour or less (yes, this is an oversimplification, but please allow the bigger point…). As this site shows, renewables are now barely reaching this level:

 
• Solar is between 20-40 cents per kwh
 
• Microturbines and some fuel cells are between 10-15 cents per kwh
 
• Wind is between 5-10 cents per kwh, but with large-scale turbines (that few would park in their back yard)
  

For much of the country, these costs are still higher than retail electricity prices.

Furthermore, while net metering policies often allow such distributed generation to be sold back onto the grid at retail rates, if everyone starts doing it, utilities are going to clamor for some relief—they do, after all, maintain the transmission and distribution grid for everyone else, and if they pay for electricity at the retail rate, and sell the electricity at the retail rate, then it gets pretty tough to pay expenses. This then bogs down in a policy and regulatory debate best left to other venues than this site. But suffice to say, it’s likely that the price distributed generators will be able to get for their excess power is likely to go down over time, if distributed generation rises in usage.

But of course, the cost of power by emerging distributed generation technologies is going down rapidly, too. And in many places policies are in place to subsidize them further, as well. Which is why the market for solar, wind, fuel cells, etc. is growing so quickly.

The other real issue is awareness. Companies don’t realize that there are vendors out there now who have developed systems to help them significantly reduce their energy usage at peak-demand times, without them even being able to tell that a change took place. Homeowners simply don’t realize that, by taking advantage of subsidies and net metering, they can often save money in the long run by filling their roof with solar panels (e.g., 10 year payback or better, compared to a 20 year system lifetime), or by putting in another type of grid-tied generation system. Or they may feel that it is an aesthetically unappealing proposition. But this lack of awareness, too, is changing rapidly.

So with policies already somewhat in place, attitudes and awareness changing, and costs coming down rapidly, it’s easy to understand why emerging distributed energy technologies are getting a lot of interest from the venture investing community. And why the intelligent grid is coming, albeit slowly.