Industry 101 | Smart Grid Aspects: Distributed Generation

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Distributed generation is energy generated by small devices near the end user. These systems are known as distributed energy resources (DER). The traditional electric grid network in the United States consists of bulk generation located far away from the concentrated customer base.  This configuration is known as centralized energy, and a large transmission network is needed to transport this generated electricity long distances to the customer. In contrast, DER systems are known as decentralized energy sources because they are small, independent generators located near the consumer load. DER systems are often renewable energy sources such as photovoltaic systems, wind turbines, geothermal systems, small hydro units, biomass sources, or biogas generators. Distributed generation does not have a standard definition, but it is commonly accepted that DERs are less than 100 megawatts (MW) in size. However, they are usually less than 50 MW in order to fall below the maximum voltage accommodated by the distribution network.



Distributed GenerationAt the end of the 19th century, during the development of the electric grid, distributed generation accounted for all of the nation’s electricity needs in the form of direct current (DC) equipment, and only small pockets of the U.S. had access to electricity. The first commercial power plant was the Pearl Street Station in Manhattan. It was a central generation station that was still localized with its customer base. The development of alternating current (AC) technology allowed electricity to be safely transported over much longer distances, and this capability allowed for the creation of the centralized generation and transmission system of the 20th century. The demand for electricity grew exponentially during the early 1900s. Large generating units were developed to meet those needs, and economies of scale lowered the cost of providing electricity to end users.

However, the second half of the 1900s experienced a leveling off of energy growth. Rising fuel prices and uncertain markets spurred research into alternative energy generation methods. In the mid-1990s, research from the past decade had produced economically-viable methods of small-scale electricity generation that could compete with the cheap electricity generated from large scale equipment. Additionally, the Energy Policy Act of 1992 sought to bring competition to the power industry, a concept previously unheard-of in this industry of natural monopolies, and this policy gave non-utility and private investors motivation to implement distributed generation technologies.

Today, some states have deregulated, wholesale energy markets, and many offer incentives to the end user for generating their own energy and exporting surplus electricity to the grid. During 2012, $150 billion was invested in distributed generation, and out of the total amount of new generating capacity added that year, distributed generation accounted for roughly 39 percent.  As distributed generation and smart grid technologies advance, central and distributed generation sources will integrate and complement each other to produce a safe, reliable, environmentally-sensitive, economically-sound electric grid.



Distributed generation technologies can take many forms. They can be mobile, such as generators on large ships, but we will focus on the impact of stationary DER modules that supplement energy from the centralized power grid.  Units can be connected to the grid or kept off-grid and can be used for continuous, peak, or backup power.  Furthermore, distributed generation looks different

Distributed Generation Gridto industrial and commercial customers compared to residential users. Organizations are more likely to own small localized power plants, while individual energy consumers will own singular modules like a small solar panel array. Power plants on the local level can be connected directly to the public grid and produce electricity that is sold to the market, or kept off-grid and produce electricity used solely on-site. End user DERs are most often connected to the grid from the customer’s side of the meter rather than islanded, and only surplus energy that the customer cannot use is placed on the public grid. The former type can generate up to 100 MW of power, while the latter usually generate less than 10 MW. In contrast, the average coal power plant has a power output of 500 MW, and the power output of a typical nuclear power plant is 1000 MW.  The most common types of distributed generation are described below.

Currently, wind turbines produce the most power from renewable resources, excluding hydro. Wind power is appealing because it does not require fuel and is therefore unaffected by fluctuating fuel costs. No forms of pollution are generated from wind turbines, and the ratio of power generation to operating cost is very favorable compared to other generation sources.  However, wind turbine installation has high initial costs, and the energy production is unpredictable and volatile.

Solar power systems are the most common DERs among residential owners because photovoltaic or thermal panels can be installed on the roofs of homes.  The power output of these units can be customized to fit the budget and energy needs of the individual customer. The standard stationary solar panel has no moving parts and therefore, requires less maintenance than other generators. They require no fuel and are quiet, unobtrusive additions to a residential home.

Cogeneration, or combined heat and power (CHP), allow industrial businesses to capture and utilize heat from their processes that would have otherwise been wasted. The average efficiency of fossil fuel generation is 35-37 percent, and about two-thirds of the lost energy is wasted heat. CHP systems can recapture this heat for use in the industrial process and space or water heating. Efficiencies of 90 percent can be achieved with the addition of CHP.

Fuel cells use chemical reactions to convert fuel into energy as opposed to the combustion method. They consist of a cathode and anode with an electrolyte in between to allow charges to travel from one to the other. Water, heat, and carbon dioxide are the only emissions of fuel cells which make them a cleaner energy source than other fossil-fuel power sources. Their high efficiency, low noise, and quick installation make them an appealing alternative, but they have high initial costs, require frequent maintenance, and still rely on fossil fuels.



Centralized power plants are often old and have outdated equipment that produce large amounts of greenhouse gas emissions, and the concentrated nature of their emissions can drastically harm the ecosystems around the power plants. Most of the distributed generation in the U.S. comes from renewable energy sources and has significantly lower emissions than traditional coal power plants, which is a positive benefit for environmentally-concerned customers.

Some industrial and commercial companies look to distributed generation as a way to ensure constant power with zero interruptions and better power quality.  The Electric Power Research Institute (EPRI) estimated that power disturbances caused a loss of $119 billion in revenue for U.S. companies in 2007. Furthermore, 4 – 9% of electricity is lost due to old transmission technology and grid overload, and the electricity that does reach the customer often has poor power quality – that is, the electricity has fluctuations in voltage. Customers can limit their need of an expansive transmission network by investing in DER systems to use as backup systems or in parallel with the grid.

By providing localized power to the end user, distributed generation can reduce the electricity demand needed from bulk generation and remove some of the load from transmission lines, which is especially beneficial during peak times of demand. It is costly for utilities to produce and supply energy during peak demand.  They have to utilize extra power plants that might not be as efficient as their other generation sites, and the grid is often congested and overloaded. In some places, distributed generation can reduce enough peak demand from utilities that power plant and transmission expansions and upgrades are not needed to keep up with demand.

Limiting the need for new transmission and power plant investments is a significant motivation for the development of distributed generation technologies. Large power plants require significant capital investment, and fluctuating market conditions lead utilities to be cautious when making decisions to build new generation. Furthermore, building a new power plant increases a utility’s generation capacity by a large factor, but energy consumption has been increasing only moderately in recent years. This disconnect means utilities risk generating excess amounts of electricity, wasting valuable resources, and waiting several years to generate a return on their investment. On the other hand, DER systems allow the total generation capacity to be increased incrementally.

Lastly, centralized, fossil fuel-dependent energy networks present some security risks that can be mitigated by distributed generation. A large power plant presents a target for cyberattack groups and similar organizations that would prove disruptive to its customer base.  It would not be easy to quickly recover from grid failure if a large power plant were damaged and taken offline. Having many small generators located near consumption reduces criminal targets and gives the grid flexibility to respond to outages throughout the grid. Furthermore, distributed generation incorporates energy production from a variety of sources, including renewable energy.  By diversifying the power source, the economy is less sensitive to price fluctuations and fuel shortages.



First and foremost, a grid with significant amounts of distributed generation needs smart grid technologies in order to manage grid operations, maintain power quality, and balance the generation from all these sources with overall demand.  Some of the required capabilities include forecasting energy demand and availability of renewable energy generation, optimizing control of network switching, calculating generator schedules against controllable loads and storage capacities, and protecting communication and grid data across the network.

One of the biggest tasks to be tackled by the smart grid is the integration of unpredictable energy sources. This need is especially relevant to distributed generation because many DER systems contain renewable energy sources that are intermittent.  The uncertainty of how much variable distributed generation the grid can handle is a factor that potential owners and investors have to consider. The main mitigation of this risk is the addition of energy storage units to DER systems. This addition allows excess energy to be stored and used at a later time.  Currently, the most common form of electricity storage is lithium ion batteries, but size and cost are still restrictions that make energy storage an area that needs further development, though it is worth noting that the cost of these batteries is decreasing.

Furthermore, the capital investment required upfront for DER systems often puts them out of reach for the average residential consumer. Even if customers can afford DER systems, many states do not offer monetary compensation to customers who export their surplus energy back to the grid, which creates a much longer period of time before these customers see the return on their investment. Moreover, electricity customers in the U.S. are not typically encouraged to take an active role in managing their electricity use, so this lack of knowledge does not promote the adoption of small DER systems among residential customers. The customers are uncertain about what local regulations apply and what steps they need to take to connect a solar panel or other energy source to the grid.

All in all, distributed generation is a growing sector of electricity generation. More businesses and residential customers are choosing to supplement their services from their utility with localized generation. While DER systems are not likely to replace centralized power stations any time soon, their presence introduces new challenges that will alter utility operations and business processes. Not only will the utility have to invest in smart grid technology, it will have to redefine its relationship with the customer.  Despite these challenges, distributed energy resources will contribute to a more resilient, reliable electric grid that benefits utilities and customers alike.


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