Policy & Regulations

The Rise of Distributed Generation

Issue 6 and Volume 119.


If a tree falls in the woods but EPA regulations state that it is too small to be counted as a tree, does it make a sound?

Over the past decade, several key market influences have led to an increased interest in and installation of distributed generation (DG), cogeneration, combined heat and power, and microgrids. The combination of today’s low natural gas prices and the increasing cost to utilities for environmental compliance has created an environment in some parts of the country where traditional utility customers are considering and installing local generation assets. These key energy cost drivers are compounded by customers’ desires for greenhouse gas reductions, environmental certifications (LEED, etc.) and increased resiliency and reliability. Add to this the fact that recent air permitting rules exempt many DG projects, and DG can or could become the next best thing to build.

The generation assets considered vary depending on the balance of electricity, heating, and cooling needs. Typical distributed generation systems are driven by combustion turbines, gas fired reciprocating engines, or microturbines, coupled with waste heat recovery, to create hot water, steam, chilled water, or a combination of these. These 2 to 50 MW systems compare favorably in efficiency (60-80%) with overall utility market heat rates (35-45%) and state of the art combined cycle plants (45-55%).

Ownership and execution strategies for distributed generation vary as well. Many traditional large electric utility customers such as college campuses, hospitals, business parks, and manufacturing facilities typically operate large centralized heating and cooling plants. Therefore, adding electric generation assets to existing or planned plants to improve efficiency, reduce emissions, and add resiliency is not a large departure from their current operating profile. However, recent trends indicate that these traditional clients are interested in concentrating on their core business and outsourcing the ownership, operation, and maintenance of these types of facilities.

Although many customers continue to operate facilities with generation assets, several entities have entered this outsourcing market over the past decade, such as investment banks, independent power producers, investor owned utilities, and public utilities. Traditional customers are requesting these entities to design-build, own, operate, and maintain (DBOOM) these facilities. This strategy creates an energy partnership with the utility, customer, and design-builder. There are several key advantages to this ownership and operating structure for customers and utilities.

EPA consistently uses the same threshold for applicability of its strictest rules for electric generation sources: “a generator that sells the greater of 219,000 megawatt (MW) hours per year and one-third of its potential electrical output to a utility distribution system.” In layman’s terms this is an individual generator that sells more than 25 MW from the combustion of fossil fuels. This definition is found in the Acid Rain regulations, proposed Clean Power Plan (CPP), the Clean Air Interstate Rule (CAIR) and the Cross-State Air Pollution Rule (CSAPR). The CPP is just beginning its legal challenges, however, CAIR and CSAPR have finished all legal reviews. The result is that CAIR is dead (and we shall speak of it no further) and CSAPR has been determined viable. Acid Rain rules limit emissions of nitrogen oxides (NOx) and sulfur dioxide (SO2) and require reporting on carbon dioxide (CO2). CSAPR regulates emissions of NOx and SO2 as a means of controlling ground level concentrations of ozone and particulate matter less than 2.5 microns in diameter (Pm2.5). The CPP regulates carbon dioxide (CO2).

The proposed Clean Power Plan (CPP) will cause a shift in U.S. energy generation from coal to natural gas. But DG units that sell less than 25 MW per unit (not per plant) will not be subject to CPP, Acid Rain or CSAPR. This means that DG systems constructed to power on-site facilities or units sized under 25 MW each that sell all their power to the grid are exempt from many onerous air pollution regulations that affect large combined cycle and boiler utilities. This is quite an incentive for the construction of DG resources.

Businesses, manufacturing facilities, hospitals, universities and a host of other entities continue to look for ways to improve reliability, reduce costs, simplify operation, reduce environmental impact, and increase earnings. Large central station combined-cycle and simple-cycle units still dominate power plant additions; however, distributed generation has become a key consideration for those considering new generation.

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