The Debate over Distributed Generation

    January 12, 2015 8:40 AM by Russell Ray, Chief Editor, Power Engineering

    As electric utilities reel from significant revenue losses caused by the growth of distributed generation – power produced outside the grid by homes and businesses – power professionals remain deeply divided over the breadth of DG’s impact on centralized power.

    The division was plainly evident last month at POWER-GEN International 2014, where the debate raged in the conference rooms and hallways of the Orange County Convention Center in Orlando, Florida.

     “This is definitely creating a potential threat for utilities,” said Nisha Desai, vice president of Distributed Generation for NRG Energy. “The ones that are forward looking can turn this into an opportunity. The ones that don’t embrace it will certainly see their business models challenged.”

    The growing use of distributed generation is cutting into utilities’ profits and their ability to pay for the up-keep of power lines, substations and generation equipment. The result: Higher rates for consumers and more customers leaving the grid. The blogosphere is ablaze with dark narratives that place utilities in an economic “death spiral” created by advancements in DG and consumer demand for cleaner homegrown energy.

    John Easton, vice president of International Programs for the Edison Electric Institute and a former assistant secretary for the Department of Energy, said the predictions of a utility death spiral are farfetched.

    “Some people believe the utility is dead,” Easton said during the plenary session at POWER-GEN. “This is over a 100-year-old industry. I think it will transform. It simply will not die out.”   

    Kim Greene, chief operating officer of Southern Company, one of the largest investor-owned utilities in the U.S. with 4.3 million customers, said the company is well equipped to adapt to this “disruptive force” for investor-owned utilities.

    “We are trying to create the right infrastructure and rate structure so that those customers who choose to use distributed generation are not being subsidized by the customers who don’t,” Greene said. “We are also adding several hundred megawatts of solar. So even for those customers who are getting power the way they traditionally have, solar now is a more significant part of that mix.”

    Mauricio Gutierrez, chief operating officer of NRG Energy, the largest independent power producer in the U.S. and a leader in DG development, said the opportunities for collaboration between centralized and decentralized power providers are abundant.

    “I think there is a way competitive energy companies and the utility space can work collaboratively,” Gutierrez said. “They can be partners. I don’t think it’s an either or.”

    Meanwhile, global consulting firm Accenture released an eye-opening study last month that measures the financial impact of the continued growth of distributed energy resources. According to the study, the growth of DG and energy efficiency could cause the revenues of U.S. utilities to plunge by up to $48 billion a year by 2025. During the same period, demand for power could fall by more than 15 percent as more homes and businesses produce their own power.

    The more likely impact on U.S. utilities would be at the lower end of the scale at around $18 billion a year, Accenture said. “This is because adoption of energy efficiency and distributed generation will become possible without subsidies,” said Valentin de Miguel, Accenture’s global managing director of Smart Grid Services.

    The study also included a survey of utility executives around the world. The survey included this question: Do you believe the concept of a “death spiral,” where your customers migrate off the grid or use the grid only as a backup, will materialize? A whopping 66 percent of U.S. executives said they believe the utility death spiral will materialize, while three percent said it is a significant risk that would impact a large percentage of their customers. Thirty-four percent did not believe the death spiral would materialize.

    However, despite reports of a looming death spiral for utilities, Accenture’s research shows that such a scenario is unlikely and would be too costly for a large number of consumers.

    The surge in DG is significant, but some utilities and states are making progress in modifying their business models to reflect the increasing use of DG. Claims that DG will lead to the death of centralized power are outdated. The industry has moved on and is adapting to the needs of consumers by developing more solar power.

    What do you think? Contact me at russellr@pennwell.com. Follow me on Twitter @RussellRay1. 

Russell Ray

The Power Points blog, written by Russell Ray, Editor-in-Chief of Power Engineering, covers all forms of power generation, including coal, gas, nuclear and renewable. It examines a wide range of issues and advancements in pricing, policy and technology. You can follow Russell on Twitter @RussellRay1.

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