For the last five years, industry, nonprofits and government entities have been producing reports that describe the unrealized potential of distributed generation to improve the environment, the economy, and energy security of our country. One of these efforts was the U.S. Department of Energy’s Combined Heat and Power Roadmap, which called for a doubling of capacity of combined heat and power systems in the U.S. by 2010. Another high profile effort to catalogue the benefits of DG was Amory Lovins’ seminal book, Small is Profitable, published in 2002. Named ‘Book of the Year’ by the Economist magazine, Lovins’ work outlined 207 benefits of distributed generation systems.

These works along with many others in the field found an attentive audience in Northeastern government leaders. While some states entered 2003 with firmly established pro-DG agendas, all would emerge with DG near the top of their state’s list of priorities.

Keys to DG
With a few exceptions, regulators and legislators tended to follow a basic four-point pro-DG implementation model:

• Emissions Permitting – Many DG systems are in a size range for which state air regulators have traditionally not been concerned due to their low levels of penetration. With the rapid growth in DG, new emissions standards are needed to protect and improve local and regional air quality.
• Interconnection Standards and Procedures – The greatest market entry barrier for DG historically has been its inability to gain approval for interconnection with a utility’s grid. Having technical standards in place and basic business procedures for fees and time-lines codified is crucial to ensure success of DG markets.
• Electric and Gas Rates – Many existing electric and gas rates discriminate against customers that install onsite generation, through the use of ratchets, penalties and other forms of virtual rate increases. It is necessary for regulators to restructure rates such that they adequately reflect not only the costs of DG to the utility and other ratepayers, but also the benefits.
• Incentive Programs – States have realized that while regulations may be rewritten in a few months, business practices and institutional philosophies evolve at a much slower rate. Therefore, public incentives in the form of direct payments, tax credits and tax exemptions are necessary as a bridge to defray the costs imposed by deep-seated market biases against decentralized resources while market reforms are underway.

Emissions: Giving Credit Where It’s Due
Creating special standards for the emissions from DG systems is one of the first challenges many states contend with when trying to establish a robust DG market. The presence of emissions standards serves a dual purpose of protecting air quality and streamlining the often burdensome permit application process.

With new DG emissions standards either approved or under review, New York, New Jersey, Massachusetts and Connecticut all took this critical step in 2003. Most importantly, all four of the states have proposed (or adopted) output-based standards, which is a method of calculating emissions that provides credit for the high efficiencies associated with technologies that employee thermal recovery.

Patterns for Connection
Also in 2003, Northeastern states pushed ahead with efforts to create standards that would allow DG systems to interconnect with utility grids. As documented in great detail in the 2000 report by the National Renewable Energy Laboratory, “Making Connections,” exorbitant and lengthy interconnection costs and delays, as well as outright rejected interconnection applications, have been the leading causes of failed DG projects for many years.

In particular, Massachusetts and Connecticut each created formal proceedings for the creation of interconnection standards for all utilities. Initial drafts of both sets of standards are expected to be released in the first half of 2004. New York took an even braver step forward on interconnection by releasing proposed standards in late 2003 that, if approved, will increase the size limit on the state’s current standards from 300 kVA to 2 MW affording those in the state who want to install DG some of the most progressive standards in the country.

The Rating Game
State utility commissioners also were quite busy this year revamping their electric and gas rates to better accommodate DG. Again, New York has led the region on rate reform measures, adopting special gas transportation rates for DG systems and standardizing state-wide electric standby rates for DG that include exemptions for certain combined heat and power systems and renewable resources. Both rates are set to take effect in early 2004.

Massachusetts followed with a decision to defer consideration of utility-proposed changes to the state’s already attractive standby rates that could have severely cripple the rate of DG investment. And the Department of Public Utility Control in Connecticut joined its neighboring states by committing to open a proceeding in 2004 to examine current utility rate treatment of customers with onsite generation.

Jump-Starting the Generators
While equitable and fair rate design is essential, nothing brings development to a state like cold, hard incentives. New York and New Jersey affirmed their belief in this approach in 2003 by offering several very attractive programs. To compliment the existing tax exemptions on equipment and gas sales for combined heat and power systems New Jersey began a process in late 2003 of creating a direct incentive program (cash payments) for combined heat and power that is modeled after the very successful California Self-Generation Program. The planned promulgation of this new program is early 2004.

Not to be outdone by its sister state to the southwest, the New York State Energy Research and Development Authority – the state’s public benefit fund guardian – awarded roughly $15 million in direct payments towards DG project costs. This funding release was followed by an announcement in late 2003 that a similar round of funding would be released again in the first half of 2004.

New York
In addition to these four market fundamentals – emissions, interconnection, rates and incentives – New York has distinguished itself as the regional leader in promotion of DG through a few other very critical market initiatives. In the spring, the New York Independent System Operator, which is charged with managing the state’s wholesale markets, adopted a new pricing curve structure for its installed capacity markets, or ICAP. The resulting payments for DG located in heavily congested areas such as New York City are approximately $9/kW per month.

A second action taken in the state to reward DG for its ability to help relieve congestion in load pockets was the pilot program created by the Public Service Commission in cooperation with Con Edison, which established a structure for compensating DG systems for the value they create in deferred distribution upgrade costs. Combined, these two programs signaled an even more advanced level of commitment on New York’s part to integrating DG into the fundamental architecture of the state’s energy infrastructure.

New Wave
While vestiges of a hundred years of utility thought based on the central-station paradigm will continue to delay an unconditional industry-wide embrace of DG for several more years, the wave of change in 2003 is already attracting new DG companies to the region.

A recent study on the market potential for combined heat and power in New York State estimated that 8,500 MW of additional DG capacity still exists in that state alone. Given average costs of DG installations this market potential represents roughly $17 billion in investment in local economies by the private sector, and this point is not lost on state leaders throughout the region who likely will be taking even more bold actions in 2004 to tackle some lingering market barriers for DG.

Reprinted with thanks from:

http://www.energypulse.net/centers/article/article_display.cfm?a_id=635