The North American electric grid suffers from aging infrastructure and requires significant capital investment to modernize the system and allow the smart grid of the future to be built. Such a grid will use advanced electric delivery technologies, distributed intelligence, and a robust communications and controls architecture to support efficient market operations, boost grid reliability, and enable the twenty-first century's information economy to flourish. Energy planners and policy officials need to take a fresh look at distributed-energy resources and the potential role they could play in the modernization of the electric grid. In certain applications, distributed-energy technologies offer a least-cost energy solution for utilities and customers today. Technical, economic, regulatory, and institutional barriers, however, interfere with greater consideration and more widespread use. Effective research and development programs, aimed at lowering costs and improving reliability and performance, could lead to expanded opportunities for the installation of cost-effective distributed-energy equipment.

The electric system provides reliability by ensuring that supply meets demand every minute of the day, every day of the year. Because of the lack of cost-effective electric storage, balancing electric supply with demand occurs in real time and is managed by grid operators in more than 140 control centers across North America.

As documented in the National Transmission Grid Study and other publications (and as supported by the president's National Energy Policy), the North American grid is suffering from numerous congested corridors and aging equipment. Growth in wholesale electric competition has strained the ability of grid operators to manage the system efficiently and ensure that decisions result in reliable power for both local customers and those in neighboring systems or regions. This strain is evidenced in the number and magnitude of recent blackouts and brownouts.

The portfolio of options available to grid operators to achieve a proper supply-demand balance includes electric generation, transmission, distribution, and demand-side technologies. Distributed-energy resources are a class of technologies that can be deployed in a flexible manner at virtually any point on the grid. They can be installed by utilities and customers in a wide variety of profitable applications:

• Utility companies can install them to augment electricity supply and provide ancillary services (e.g., gensets near substations for voltage control, VAR [volt-amperes reactive] support, and peak shaving power).
• Customers can install them to lower energy costs, boost onsite power quality and reliability, and reduce environmental emissions (e.g., combined heat and power plants, district energy systems, onsite generation, and rooftop photovoltaics).

As a result of these advantages and the increasing number of units being deployed across the country, electric-system planners need to be aware of distributed energy to properly forecast loads and resources. In addition, grid operators need to be familiar with it so they know the extent of resources at their disposal to dispatch during times of system need, including the amount of peak load that can be reduced in response to price or other demand-response signals.

The economics of distributed energy determines how extensively the resource will be used, by either utilities or customers. Such distributed-energy devices as industrial turbines, microturbines, natural-gas engines, batteries, fuel cells, and photovoltaic panels would be used more extensively if their installation and operation costs were lower and their efficiency, reliability, and durability were higher.

Even in those instances when today's technologies are cost-competitive, however, institutional and regulatory barriers typically raise the cost (and hassle factor) of installation and operation. These barriers include a lack of uniform interconnection standards, expensive environmental siting and permitting processes, and utility regulatory and pricing policies that favor the status quo and keep potential revenue streams for distributed-energy developers hidden from such services as voltage regulation and VAR support, spinning reserve, power quality, and outage protection. As a result, distributed-energy developers are struggling to develop profitable business models and often are thwarted by a regulatory framework that does not reward innovation or prudent risk-taking.

The Role of Distributed-Energy Resources in the Electric System

Electric-system operators could make more extensive use of distributed-energy resources than they do today. Utilities could install distributed-generation units in congested areas of the grid and operate them during peak periods. These units also could be used to defer capital expenditures in transmission and distribution equipment in certain areas to free funds for allocation to grid construction projects where the needs are greatest. Utilities also could involve their customers to a greater extent through expanded use of demand-response programs and pricing strategies that encourage customers to shift demand from peak to off-peak periods. Table 1 provides a few notable examples of utilities that currently use distributed-energy systems.

Customers also could be using distributed-energy resources more to their benefit. Those with both thermal and electric energy needs could install combined heat and power systems, which reduce the need for utility base-load power, or thermally activated heating and cooling devices, which reduce the need for utility peaking power. Customers with needs for ultrahigh reliability, such as silicon chip manufacturers, could install onsite generation to ensure that power is available whenever they need it. Customers with strong environmental values could install distributed solar or wind energy to reduce the emissions produced from the combustion of fossil fuels. Table 2 provides a few notable examples of customers currently using distributed-energy devices.

Potential Policy Solutions

Much activity already is under way at the federal and state levels to address the barriers to the expanded use of distributed-energy resources. Federal efforts, for example, currently focus on research, development, and demonstration of next-generation distributed-energy technologies. These efforts are led by the United States Department of Energy (DOE) and involve public-private partnerships to leverage federal taxpayer investments with those of US and private companies. This research, development, and demonstration activity is critical for lowering costs and improving efficiency and performance and is aimed at delivering even more (financially, environmentally, and technically) attractive distributed-energy equipment to the marketplace.

There also is some federal activity by the Federal Energy Regulatory Commission and the Environmental Protection Agency to develop regulatory solutions for grid interconnection barriers and environmental siting and permitting issues. DOE supports these efforts by conducting outreach and education programs with state energy and environmental officials and standards-setting bodies, such as the Institute of Electrical and Electronics Engineers, to raise awareness, provide unbiased analysis and information, and support implementation.

State efforts focus on addressing local needs and opportunities. These efforts are piecemeal, however, and are under way only in a handful of the larger states that traditionally have been among the most active in addressing energy issues (e.g., Texas, California, New York, and Illinois). DOE, through the State Energy Program and joint activities with such organizations as the National Association of State Energy Officials, the National Association of Regulatory Utility Commissioners, and the National Governors Association, supports state efforts to address regulatory and institutional barriers to distributed-energy development. In addition, DOE closely coordinates its research and development with state agencies, such as the New York State Energy Research and Development Authority, the California Energy Commission, and the Association of State Energy Research and Technology Transfer Institutions.

For these federal and state activities to have a more substantial impact on grid modernization in the near term, they need to expand to cover more regions of the country, and their pace of implementation must be accelerated. To do this, funding for these types of activities needs to increase. Efforts to leverage federal resources, strengthen existing programs, and establish new public-private outreach programs need to be pursued more aggressively.

There is a range of potential economic incentive packages that could be implemented at the federal and state levels to boost the financial attractiveness of investments in distributed-energy equipment. These include investment tax credits and accelerated depreciation schedules.

Author PATRICIA HOFFMAN is with the US Department of Energy. Authors Richard Scheer and Brian Marchionini are with the Power Systems Division of Energetics Inc. in Washington, DC.

DE - March/April 2004