DISTRIBUTIVE GENERATION

1. DISTRIBUTIVE GENERATION REDUCING GREENHOUSE GAS EMISSIONS

2. Author Prepared for Energy Law with Professor Fred Bosselman at Chicago-Kent College of Law, Spring 2005, by Adam Nodzenski anodzens@iit.edu

3. WHAT IS DG? • Varying Definitions • Generally Characterized by: • Generation located at or near point of consumption • Production range from 5kW to 30+MW • From any variety of sources

4. ELECTRICITY DEMANDS OF TOMORROW • EIA (US) predicts 1.8% per year growth in US demand until 2025. • Capacity will need to increase by 281 GW. • IEA (OECD) predicts 2.2% per year growth in world demand until 2030. • Global capacity will need to increase by 4,800 GW.

5. US DEMAND Source: EIA Annual Energy Outlook 2005

6. FUTURE GHG EMISSIONS • Only measuring Carbon Dioxide… • IEA estimates between 50% and 91% growth in CO2 emissions until 2030. • These numbers all suppose central generation (“CG”) as a primary source of electricity.

7. PROBLEMS WITH CENTRAL GENERATION • Inefficient • Transmission and Distribution Costs (“T&D”) • Regulatory Hurdles • Vulnerable • Dirty

8. INEFFICIENT • The best CG plants today achieve 50% efficiency. • This is before line losses • 9% in 2002 • Average efficiency between 30% and 40%

9. T&DCOSTS • Every new CG plant built will require new T&D • New T&D estimated at $1260 per kW1 • Old T&D requires maintenance, repair, upgrade. 1. Optimising Power, Thomas R. Casten and Brennan Downes, Cogeneration and Onsite Power Production, March 12, 2004.

10. REGULATORY HURDLES • Permitting a CG plant is: • A) Time consuming • B) Expensive • C) Unpredictable • D) All of the above

11. VULNERABILITY • Failure of base load plant or its supporting T&D system can cause brownouts and blackouts. • Domino Effect • Tempting Targets for Terrorists?

12. DIRTY • CG is responsible for at least half of GHG emissions in the US • Plants are poorly managed • Because CG design is so varied, it is hard to find the perfect pollution control solution

13. DG: BENEFITS AND SOLUTIONS • Can be more efficient • Lower T&D costs • Fewer regulatory hurdles • Less vulnerable • Can be less polluting • Interconnection • Reliability

14. MORE EFFICIENT? • Efficiency will depend on the type of DG employed • The most efficient DG type is Combined Heat and Power (“CHP”) • More than 65% efficient • This is more than twice as efficient as the average CG plant today.

15. Advantages of CHP • Well suited to commercial and industrial applications • Already 72GW online • Market forecasts 20GW to 40GW of added CHP capacity over next 10 years2 • Eliminates the inefficiency of a separate boiler system. • Ideal for high-rises 2.. High Natural Gas Prices and the Updated Market for CHP, Resource Dynamics Corporation, September 23, 2004.

16. Efficiency of Zero or Low Emission Sources • Fuel cells are more efficient than the average (36% to 40%) • Solar technologies are still very inefficient (15% to 25%), but the fuel is free • Wind generators can be very efficient, but this depends on the wind

17. Efficiency of Other Sources • Micro-turbines (27%) • Advanced Turbine System (36%) • Gas ICE (35%) • Diesel ICE (44%) • In general these technologies are either dirtier and/or less efficient than a CG natural gas plant

18. LOWER T&D COSTS • 10% of traditional T&D costs (backup power from grid in the case of unplanned outages) • If all 281 GW of new capacity in US were to come from DG, that would be over $300 billion in avoided T&D costs3 • Savings to the rest of the world could be in the trillions 3. Optimising Power

19. A Note on Cost to Generate • Costs to generate are still high for solar and fuel cells (around 20 cents/kWh) • Projected 5 cents/kWh in 2035) • Micro-turbines utilizing CHP are nearing competitive costs but still have a little way to go (10-15 cents/kWh) • Wind is very competitive (3-6 cents/kWh), but not a source of continuous power

20. Other Cost Savings • Option value (option of rapidly building capacity) • Deferral value (not having to make T&D investment)

21. FEWER REGULATORY HURDLES • For many smaller DG applications there is no permit system in place • This is not necessarily good • However, capacity can be brought online as it is needed

22. Hurdling Cont. • Regulations aren’t so necessary when we are talking about low or no emission sources. • For all other DG technology forcing permits should be required. • We’ll get into this later.

23. LESS VULNERABLE • DG is grid independent • The grid, because it is set up around base load CG, is not terribly dependent on interconnected DG. • Decentralized nature of DG makes it terror proof

24. POLLUTION SAVINGS • CHP DG that is fueled by natural gas offers low pollution with high efficiency • CHP fueled by diesel or gas may still cause less pollution if high-efficiencies are realized • Renewable and fuel cell sources are frequently best implemented as DG

25. Pollution Costs for CG • Measured as externalities • Between 2 and 4 cents/kWh for fossil fuels • Less for renewables • If DG promotes use of CHP and renewables, we will realize significant savings

26. DG Specific Pollution Problems • Shorter/no stacks • Little/no dispersion • May get resultant hotspots

27. INTERCONNECTION • Interconnection offers prospect of cheaper, more reliable electricity • If managed properly, electricity will only be produced where it is cheapest to do so. • Electricity can be moved around easily as demand increases/decreases • THE VIRTUAL POWERPLANT

28. RELIABILITY • DG provides high quality, mission critical electricity. • The grid can’t get it done. • DG has a reliability value measured in $$$ to consumers

29. Some Other Thoughts on DG • Price spikes for Natural Gas may drive market to CHP • Price drops for NG would make DG very competitive • Renewable fuel costs are stable at 0 cents/kWh • Existing T&D capacity shortages may mean its cheaper to add capacity at end user

30. Cont. • Even with NG price spikes we may not be driven into the waiting arms of coal/nuclear • Coal mining can be terribly destructive • Difficult to get nuclear up and running/sited • Difficulty siting new T&D

31. HOW DO WE GET THE RIGHT SORT OF DG? • The point is to reduce GHG emissions • DG that doesn’t meet this goal should not be encouraged • To that end we can employ a carrot (tax incentive) and stick (permitting) policy • Facilitate interconnection

32. Power of Favorable Regulations • Regulations and protections resulted in CG • In the beginning electricity was generated close to end use and recycled waste heat • Result: Even with some gains in efficiency, plants today are hardly more efficient than they were 60 years ago

33. TAX INCENTIVES • A tax structure that encourages clean DG might include: • No tax on zero/low emission generation equipment sales • No tax on electricity generated from zero/low emission sources • Tax breaks on CHP equipment and electricity sales

34. PERMITTING • Technology forcing permitting for DG is clearly the way to go • Under such a regime, DG equipment would be treated like cars • An emission standard is set • Before the generator can leave the factory, it must comply

35. Elements of a Permit Program • Set emission limits at or below those for the cleanest CG • Implement a certification program to ensure the equipment will meet standards • Randomly test in-use systems • Readjust limits as technology matures

36. California’s DG Permit Regime • Distributed Generation Certification Program (eff. 1/1/2003) • DG units manufactured, sold or leased in CA must comply • Covers only DG that isn’t otherwise permitted • Does not cover zero emission DG • Does not cover DG used for emergency

37. CA Cont. • Sets two standards • The first is for DG not integrated with CHP • The second is for DG integrated with CHP

38. CA Cont.

39. CA Cont. Limits Tighten in 2007

40. CA Cont.How CA Certifies • Manufacturer submits: • Description of DG unit • Maximum output rating • Fuel type • Description of emission control equipment • Emissions test data, supporting calculations, qualitycontrol/assurance information, and all other information needed to demonstrate compliance

41. CA Cont.How CA Certifies • Lays out testing procedures • Certification valid for four years • Fee of $2,500 per certificate • Doesn’t provide for random in-use testing, but allows inspections of manufacturers and retailers and resellers to ensure compliance

42. FACILITATING INTERCONNECTION • Solving interconnection issues may ease investor worries • Common standards mean getting your money back is more of a sure thing • CA has set standards through legislation and rulings by CA Public Utility Commission • Streamlines contractual issues

43. A CALIFORNIA SUCCESS STORY • Occurred before the certificate program • CA decided to shut down Rancho Seco Nuclear Plant • Utility lost half of its capacity • Instead of building new CG, pursued energy efficiency and DG

44. Eureka! Cont. • Invested in all kinds of renewable DG as well as CHP systems • Whatever fit client needs best • Econometric studies show savings of $180 million to region versus the nuclear plant4 4. Natural Capitalism: Path to Sustainability?, L. Hunter Lovins, Natural Resources and Environment, Fall, 2004.

45. CONCLUSIONS • DG can: • Reduce GHGs • Improve efficiency • Enhance reliability • Save money • But only if we: • Promote the right kind of DG with tax incentives, technology forcing and regulatory ease