Distributed Energy: What Lies Ahead

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Distributed Energy What Lies Ahead?

• PILLSBURY WINTHROP LLP
• 2004 GLOBAL ENERGY CONFERENCE
• SAN ANTONIO, TEXAS
• JUNE 12, 2004

ROBERT W. GEE PRESIDENT GEE STRATEGIES GROUP LLC
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What is Distributed Energy (DE)?

• Distributed generation (DG)
• Small electricity generation facilities lt 50 MW
• Located on the distribution system close to the
  point of consumption
• Includes micro-turbines, fuel cells, internal
  combustion engines and small gas turbines
• Combined heat and power facilities emergency
  back-up 95 percent of customer-owned generation
  in U.S. today
• But also will include
• End use enabling technologies
• Load management applications
• Sensors/nodes to smarten grid intelligence

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Driving Forces Behind DE/DG

• Decline in cost of renewable high-efficiency
  technologies suited for households small
  businesses
• Competition for wholesale power opened
  possibility for sales of customer-owned power
  during peak periods in real-time markets
• Commercial Industrial customers placing
  increased reliance on high-quality power
• Opposition to siting of new transmission capacity
  drives search for alternatives

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Benefits of Distributed Energy/Generation

• In real-time markets, could be more cost
  effective in meeting peak demand than additional
  central station power
• If operating costs lower than central station
  power, could reduce wholesale prices
• Enhanced system flexibility could increase
  reliability
• If supply increased and customer demand more
  flexible, power price volatility could be reduced

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Risks of Distributed Energy/Generation

• Reliability could decrease if system operators
  unable to manage greater number of generation
  inputs
• Retail power price could increase if
  ratepayer-funded investments required to maintain
  power quality
• Proliferation of fossil-fired DG potentially
  poses threat to air quality
• Migration of customers off grid poses threat of
  embedded cost shift to remaining utility
  customers
• Escalating fuel costs of fossil-fired generation,
  reducing spark spread for DG

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The Story Thus Far. . .

• DG deployment has been halting owing to barriers
  failure to meet financial expectations
  (insufficient pay back rates)
• Market support nosedived following dot com bust
• DG has struggled to find successful business
  models
• Market penetration impeded by slowed or
  regressive restructuring policies

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Major Barriers to Distributed Generation

• Contractual technical interconnection
  requirements for equipment protection and safety
  to ensure power quality
• Utility tariffs requiring surcharges for standby
  service
• Environmental permitting requirements of local
  governments restricting installation and
  operation of generating equipment
• Average cost pricing of utility services

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Contractual and Technical Interconnection Issues

• DG developers claim contractual issues used to
  impede interconnection
• Lack of common technical interconnection
  standards raises cost of manufacturing
• Progress on developing some technical standards
  (i.e., IEEE 1547) helpful but not sufficient
• FERC proposal to mandate national standards for
  small DG (lt20 MW) spawns opposition from certain
  states and co-ops, and concerns about state air
  quality standards

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The Standby Charge Tariff Debate

• Utilities seek to recover fixed costs associated
  with continued obligation to serve
• DG-owning customers seek to avoid charges, and
  want credit for benefits they provide to system
  (enhanced reliability, transmission capacity
  avoidance)
• Larger issue pace and scope of industry
  restructuring
• DG deployment looks to success of competitive
  markets and ability of customers to purchase in
  real-time power markets
• Will regulators be willing to unbundle services
  further and expose customers to actual costs
  through deaveraging?

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Is There a New Dawn for Distributed Energy?

• DGs enhanced security reliability advantages
  now spotlighted following NE-MW power blackout
• Since August 14, DG market has rebounded (so far)
• Development of new energy control technologies
  and smart management systems likely to benefit
  DG deployment
• Vision Plug and Play DG a key part of a
  seamless Smart Grid energy load management
  system
• Smart Grid touted by foundation-funded think
  tanks, but vision needs embrace of federal and
  state policymakers

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A Non-central Station Perspective of the Future
Source CA Energy Commission
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An Even More Aggressive View
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Robert W. Gee President Gee Strategies Group
LLC 7609 Brittany Parc Court Falls Church, VA
22304 703.593.0116 703.698.2033
(fax) rwgee_at_geestrategies.com www.geestrategies.co
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