Distributed Energy: A Disruptive Force

Distributed Energy: A Disruptive Force

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Distributed Energy: A Disruptive Force

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    DE’s Threat to Utilities

    Given the underlying economics, innovation by DE companies, and other market fundamentals, DE’s emergence as a major market player is inevitable. Its growth, while still dependent on specific states and markets, could nevertheless result in significant penetration within a decade. This would disrupt many aspects of the current energy landscape, especially with regard to electric utilities, which face multiple threats from the proliferation of DE in their territories. Perhaps the most important is the vicious cycle of rising rates, increasing costs, and the risk of further disintermediation.

    Every kilowatt-hour that DE either generates or saves is directly removed from the demand on the grid for energy supplied by traditional generation, known as the total net load. When rates are variable, as they are for most of the U.S., a lower total net load means that fewer dollars are collected to support the traditional electrical system. A utility’s costs for maintaining that system, however, do not fall proportionately because of financing expenses and other fixed costs related to infrastructure. (See Exhibit 2.) What’s more, those costs are not covered fully by DE customers unless utilities charge them a fixed fee or implement power standby rates.


    As DE reduces revenue, utilities seek to recoup their costs by raising the rates for traditional customers, creating an implicit cross-subsidy of DE users. And because higher rates, in turn, create incentives for more customers to install their own generation systems, a vicious cycle is formed. In the short term, regulated utilities’ profitability may be protected by decoupling. As rates escalate, however, regulators and lawmakers will likely take into account the greater burden on consumers and be less inclined to protect utilities at consumers’ expense.

    DE penetration has been associated with increased load volatility, which can raise grid-maintenance costs for utilities. At a high enough level of penetration, DE will begin to alter the way energy flows through the networks, creating new patterns for which those networks may not be well designed.

    PV solar installations, in particular, are associated with load volatility. The power that these systems deliver can fluctuate rapidly and unexpectedly as bright sunshine gives way to cloud cover. Also, solar resources are mostly available during daylight hours, not during the late-evening peak-demand period. As a result, traditional load profiles can dramatically change, increasing the gap between peak and off-peak hours.

    How extensively these challenges will translate into additional material costs is unclear, but operational challenges posed by DE are becoming more frequent. Energy storage and related technologies, such as demand management and demand response, may reduce the effects of load volatility—but not without additional cost.