Without question, distributed energy resources (DER) are recognized by most federal and state policy-makers as an important part of America's energy future. The Bush administration's National Energy Policy (May 2001) outlines a course of action for America to take that will increase energy supplies, modernize conservation, strengthen the economy and national security, and protect the environment. The National Energy Policy specifically recommends that combined heat and power (CHP) systems be part of the portfolio of solutions and that legislation "encourage increased energy efficiency through combined heat and power."

State governments widely agree that DER provides important benefits to many stakeholders. The State of California provides its citizens with the following insight:
"It is generally accepted that centralized electric power plants will remain the major source of electric power supply for the near future. DER, however, can complement central power by providing incremental capacity to the utility grid or to an end user. Installing DER at or near the end user can also in some cases benefit the electric utility by avoiding or reducing the cost of transmission and distribution system upgrades.

"For the consumer the potential lower cost, higher service reliability, high power quality, increased energy efficiency, and energy independence are all reasons for interest in DER."
It is clear that from the White House to Congress to state capitals, DER and particularly CHP systems are an important part of America's energy future. The electric power industry remains in transition with an intended outcome of competition in a formerly restricted and regulated environment. Although the events of September 11, 2001, have definitely slowed down our nation's economic growth and increased stress on its electric grid, the energy issues and events of past years will resurface in time. September 11 also refocuses our attention on national security in its many forms—from our health, safety, and welfare to our ability to compete. The importance of DER systems increases as the nation focuses on its internal security.

• Homeland Security. Less dependence on central power generation means fewer major terrorist targets, such as nuclear power plants, need to be protected. Furthermore, if the unfortunate should happen to a power plant or series of transmission lines, supermarkets, pharmacies, restaurants, and hardware stores could continue functioning due to the DER systems, which now can provide energy when the grid is down, added for economic operating reasons. Healthcare facilities, instead of using their dirty standby generation (perhaps for a very long time in the event of a power plant incident), could save money year-round and also operate for significant periods of time without severely polluting the air.
• Food Safety. Supermarkets, food processing and distribution centers, and restaurants must refrigerate food. DER can economically help protect the food supply and delivery system.
• Reliability. Electricity disruptions over the past several years are well documented, and future demand of global competition and e-commerce will increase customer need for high reliability.
• Power Quality. Brownouts are becoming commonplace as grid reserve margins sag. Even minor power anomalies can permanently damage digital equipment and appliances.
• Energy Density. E-commerce is creating a new level of electricity demand with high energy requirements to service digital transactions, in turn creating high power requirements for feeder cables in urban centers that usually do not have capacity.
• Grid Congestion. Limited transmission capacity, coupled with siting difficulties in expanding transmission capacity, decreases both electricity availability in certain areas and line efficiency.

Uncertain Future
If the preceding is true, why have we not seen adoption of DER systems throughout the country? Widespread use of CHP and clean distributed generation (DG) technologies require the development of new market rules and procedures for the generation, transmission, and distribution of electric power. The development of broader markets might be facilitated—or conversely hampered—by local, regional, and federal laws, as well as by guidance regarding the siting, permitting, and codes applicable to CHP and clean DG. Federal, state, and local public policy changes are still needed to reduce the hurdles that are restricting the economic adoption of CHP. Significant regulatory issues that remain unresolved include:

• standardizing requirements and minimizing costs of interconnection with the electricity distribution system,
• revising methods for assessing tariffs for distributed generators to better account for actual costs and offsetting system benefits,
• streamlining the air permitting process for demonstrably clean CHP, and
• ascertaining and eliminating unreasonable obstacles in local codes and citing and permitting issues as they relate to CHP.

Transforming the energy industry remains a function of federal and state policy-makers and those entities that provide energy solutions. We trust that the DER benefits recognized in the past will prevail in policy development of the future. But this is not enough. Technology transformation also must progress so when the policy changes are complete, there will be second-generation DER technologies, application know-how, and business models available to service the market.

Marketplace transactions view DER/CHP purchases in real time and thus use current knowledge to evaluate possible risks and rewards. Today's market value of DER/CHP cannot be properly valued; therefore, first- and second-generation systems will not be developed without federal support because of the following:

• Energy Price Volatility. Installation of DG, thermally activated technologies (TAT), and CHP systems involve 10- to 20-year capital investments requiring return-on-investment decisions. With uncertain energy prices, the risk of change is perceived to be greater than the status quo.
• Confusing and Uncertain Market Rules. The outcome of the Federal Energy Regulatory Commission's Standard Market Design and Small Generator Interconnection rule-makings is not certain. State public utility commissions, International Organization for Standardization, regional transmission organizations, and air-quality board rules and regulations are also in flux. The marketplace cannot value energy transactions; therefore, the status quo continues.
• Technology Immaturity. Current generation of clean DER technologies necessary to ssure energy security and economic stability in the future (largely 1 MW and less in size) are either emerging, adapting, or requiring significant integration engineering within CHP systems and with the application base. This means the first and even second offerings will not, by their nature, be fully developed. The marketplace understands this risk and is reluctant to experiment in uncertain times.

Today's uncertain energy markets require strategic partnering and leveraging technical data to develop solutions to complex applications. Therefore, consortia approaches have emerged over the past few years as methods for various parties to leverage their research, development, and application verification investments.

Manufacturing, financing, sales, project management, and service of DER/CHP systems are even harder to develop in uncertain times. When it comes to DER technologies (DG, TAT, and CHP equipment and services), advanced or novel approaches are required and, in the case of CHP systems, integrators and new business models are needed. For example:

• Difficulty of Change. Most manufacturers make products to meet today's market needs, and it is very difficult to spend time and money transforming an existing design to meet future energy requirements. For example, the fundamental design of lithium bromide (LIBR) absorption chillers utilizes the same basic form and function as the design that was offered 50 years ago. LIBR absorption chillers are large, heavy, and costly devices that can dramatically benefit from advanced technology. However, the current American absorption chiller market is too small to consider the radical redesign necessary for future CHP system requirements. On the other hand, the Japanese market, spurred by the Ministry of International Trade and Industry to levelize electric and gas demand cycles, is large enough to warrant ongoing research and development investment in this area.
• Ahead-of-the-Curve Investments. Furthermore, manufacturing investment to serve future market needs is "up front" or ahead of the market that places enormous risk on manufacturers and system integrators. In the case of CHP, there are few system integrators in place to make the packaged CHP systems required to assure reliability, functionality, performance, and cost. Therefore, leveraging is essential.

Time to Act
To ensure that second-generation DER technologies, application know-how, and business models will be available to service the market when the policy changes are made and the inevitable and urgent electric grid infrastructure need arises, we must accelerate and leverage our DG technology and TAT development and CHP integration and application know-how immediately. The question is, how should we respond?

Recent history provides the answer to this question both generally and specifically. The general answer can be found in a variety of Department of Energy (DOE) reports including the CHP Roadmap for industry, the BCHP Roadmap for buildings, and the Strategic Plan for Distributed Energy Resources. These industry-led consensus reports all focus on the need for consortia approaches to policy, market, and technology advancements. These documents also recognize the benefits derived from letting each consortium member contribute in areas of strength. For example:

• Government and national laboratories are strong in policy creation and technology development.
• Utilities understand delivery and interconnection issues.
• Manufacturers focus on product development, operation, and service.
• Electronic supply companies provide system integration and life cycle business models.
• National accounts provide load understanding, replicability, and test sites.
• Associations bring important market focus, national account relationships, and technology transfer mechanisms.

In recent years, three entities have emerged as catalysts in opening DER markets and applying first-generation equipment and systems at the national level. These are the American Gas Foundation's National Accounts Energy Alliance (NAEA), Oak Ridge National Laboratories (ORNL), and DOE's CHP Application Centers. (The Midwest CHP Application Center has been operating across an eight-state region and successfully developing larger CHP projects. The United States Combined Heat & Power Association is also important but usually focuses on federal policy-making to remove barriers from market entry.) Each of these efforts requires thorough assessment of its efficacy and the communication and leveraging potential of its respective role.

NAEA recognizes that ORNL and the CHP Application Centers need to offer communication and support to national accounts and other potential users of DER technologies. NAEA is working closely with the engineers at ORNL to develop solid approaches to offer its national account members for future test and verification projects. The following paragraphs outline the understood working focuses of each entity and strongly support these other efforts.

NAEA is a public/private partnership designed to use the unique building cycles found only within the national account industry to rapidly perform field test and verification on newly emerging technologies and systems to discover and correct the inevitable technical and application problems before these technologies become widely deployed.

NAEA is the first "postderegulation" partnership in which national account energy managers have offered their facilities as test sites, have requested DOE's developmental assistance, and are willing to share their knowledge with competitors and the nation at large. NAEA staff has weekly contact with key energy managers from five target markets for DER/CHP systems, including supermarkets, restaurants, retail, healthcare/hospitals, and hotels.

NAEA has developed a portfolio of national account projects, which are yielding invaluable equipment, systems, interconnection, load matching, operations, and maintenance information. These will be actively shared with the leaders within the aforementioned five market segments, manufacturers, systems integrators, utilities, DOE, ORNL, CHP Application Centers, and other interested parties.

NAEA is developing significant application knowledge and actively sharing it with all participants, including DOE, ORNL, and other energy partners, to improve equipment and system designs and business models to better serve its national account client base. The strong bond between NAEA staff and its national account and utility members combined with its extensive knowledge base of developing low-cost and fast-track test and verification projects ensure timely growth. This in turn leads to a greater likelihood of having second-generation DER/CHP systems ready when the barriers are down and the market needs DER/CHP solutions.

Many lessons were learned during the three years it took to form NAEA. We need significant and frequent communication with energy managers, should seek qualified projects, and should manage test and verification sites. These relationships, networking opportunities, project developments, execution lessons, and technology transfer channels have grown into a strong body of knowledge and experience. NAEA believes that its efforts will continue to expand the universe of successful pathways for DER/CHP and requests that the federal government continue to partner this important energy program with industry.

WALTER WOODS is managing director of commercial markets with the American Gas Association in Washington, DC.

DE - Nov/Dec 2003