Is Distributed Generation a Threat to Traditional Utilities?

Emergent technologies, such as wind and solar, have given rise to distributed generation, a form of energy production that creates electricity from many small sources, independent of the larger grid. This small-scale, microgrid development marks the first time since the inception of the electrical age that the dominant role of a central electric grid has been challenged.

This decentralized form of power has certainly caused a paradigm shift among consumers over how they view customer-grid interaction, realizing that they can produce and transmit energy without relying on a large grid. With up to 20% of the electrical generating capacity in the US coming from DG, mostly in the form of backup generators, peaker plants, remote wind, and roof-top solar PV, the microgrid mindset is fast becoming a major part of our energy infrastructure, with the potential to change the way we delegate energy use going forward

But is distributed generation an actual threat to traditional utilities, or is it an important piece of the energy security puzzle? What energy policy makers, consumers, and utility companies need to assess at this point, is how disruptive could DG become if it continues to grow, and how this could affect our ability to continue operating at peak efficiency as a nation.

The benefits of distributed generation are certainly abundant. It allows for an alternative to large-scale grids that many find attractive, offering a few advantages that cannot be ignored. While it is true that breaking up transmission lines into smaller groups does decrease the efficiency of the larger grid, it does offer a robust defense against failures and external changes that would otherwise cripple consumers, along with a precipitous decline in configuration costs.

Another consideration is the potential for innovation. Massive systems move slowly, and are sometimes resistant to change, stifling progress in the areas we need it most. DG offers diversification to the centralized system, opening up opportunity for many ideas to influence major advancements in energy.

Not only will DG serve to protect the consumer from huge utilities crowding out the market and killing competition, it also puts power in the hands of the individual. allowing for energy autonomy and a reduction in reliance on a grid.

With a bevy of positives attached to such systems, the larger issue at hand is if it can truly become a viable alternative to centralized power structures. Yes, centralized architectures are fragile to failures and external factors, and expensive in the configuration phase, but will a move to a greater proportion of distributed generation hurt the majority of consumers, negating the advantages?

The most glaring issue that arises from distributed generation has to do with economies of scale. According to the well-known microeconomics concepts, enterprises can obtain huge cost advantages by increasing scale. By growing in size, fixed costs are spread out over more units of output, commonly leading to higher operational efficiency and lower variable cost.

Consequently, this makes the financial attractiveness of DG quite low in the eyes of large-scale utilities. Because of this, much of the growth in distributed generation over the past decade has been on the customer-owner side, making it somewhat hard to quantify how effective it would be on a greater scale.

Further, state and federal regulations will certainly complicate the operation of DG going forward, potentially raising costs to a level that adds a financial burden. Interconnection standards could help this, but no plans are currently on the table. Expensive maintenance and support issues, theft of equipment, and weather issues are also caveats to consider when implementing DG.

These financial considerations also lead to the other big issue regarding distributed generation. The economics do not favor the poorest among us, the ones who rely heavily on central energy to maintain their quality of life.

Those capable of using DG can do so, likely to their financial advantage, but partly because of their willingness to go off-grid, the base electric rates that utilities charge will rise. Low earners will get hit with these rate increases because they have no alternative. Without certifiable benefits of DG on a state or national scale, this is a big risk to take, and could lead to energy disparity and an undue burden on large segments of our growing population.

Since it lacks the wide-scale appeal on a  financial or legislative level, DG, at this point in its evolution, has been most productive as a supplement to electric system planning and operations, rather than a competitor.

Working in conjunction with utilities can reduce peak loads, provide ancillary services, and improve power quality. Reliability also increases when consumers take part in demand response programs, giving utilities some extra power when they need it, and receiving financial incentives for their services. But this dual system will only reach its potential when we improve transmission technology.

In order for distributed generation and traditional utilities to coexist in a mutually beneficial way, we need to discover better ways for renewables, the drivers of DG, to interact with traditional grids. Distributed generation was partly the result of the difficulty incorporating alternative energy sources into legacy electrical infrastructures, particularly with regard to transmission and distribution, so it may be a solution to this issue that finally allows DG and traditional energy grids to interact in the most effective manner.

Either way, distributed generation  and microgrids will continue to be a valid energy solution under certain conditions and for certain types of customers. The process will continue to evolve as renewables become more important, and we should encourage this. Once transmission and smart grid tech reach the point where they need to be, with the basic economics offering an attractive entry point, we will likely witness a truly symbiotic relationship between traditional utilities and distributed generation, to the benefit of the vast majority of energy consumers.

Until then, we must grow DG in a way that complements the larger grid, rather than fracturing it. This will serve to maintain efficiency in the medium term, while providing ample opportunity to improve and build upon such a potentially critical aspect of our long-term energy security.

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