Distributive Generation in the California Market

Industry faces uncertain future supplies and counterproductive public utilities

By Jack Urso

In February 2003, California energy regulators implemented a plan to encourage the growth of distributive generation (DG). Pat Wood, chairman of the Federal Energy Regulatory Commission, endorsed DG to be included in planned standard market design rules, improving the connection and efficiency of regional power grids. Concurrently, the California Public Utilities Commission (CPUC) authorized US$55.4 million in upgrades to San Diego Gas & Electric Co's energy transmission system to reduce the load on the Southern California power grid and provide capacity for future power supplies from Mexico.

The California Energy Commission has defined DG as "electric generation connected to the distribution level of the transmission and distribution grid usually located at or near the intended place of use (California Energy Commission, Distributive Generation Strategic Plan, June 2002, pg. 2)".

The benefits of DG in the California market are obvious. Small, energy efficient, customer-owned generator stations close to the commercial and residential user provides increased reliability in a region that has experienced rolling blackouts, volatile energy pricing and future uncertainty of their power market. Yet, there is evidence that public utility companies have been slowing the growth of DG in California. 

"Its no secret that the utilities see DG as a threat"

While the generation of electricity has been deregulated in the California market, T&D (transmission and distribution) still remains very much a monopoly of the public utility companies. The utility companies receive cost recovery for their distribution system and the more DG there is the less cost there is for them to recover. To offset the revenue lost when large, energy-hungry industrial sites go with DG, public utilities have lobbied the state's energy commission and legislature to institute standby fees. The standby fee is a retainer paid to the utility company in case a DG unit goes down and power from the external grid must be supplied.

The California Manufacturers & Technology Association (CMTA), however, has countered that the standby fees do not reflect the true cost of "standing by" to provide a service that is rarely needed.

"Its no secret that the utilities see DG as a threat," said Joe Lyons, Energy Policy Director for the CMTA. "These burdensome standby fees for service which we almost never receive. There ought to be some kind of accounting for the fact if our DG units go down utilities will come in and service, but the standby fee ought to reflect the actual cost to serve. Itís higher than it should be and makes some DG units uneconomical."

Contributing Costs

Gas turbines are less expensive when compared with other types of DG equipment. Combustion turbines capital costs vary from $300-$1,000 per kilowatt and generally increase as power output decreases. While combustion engines tend to cost more than reciprocating engines, the larger they are the less they comparatively cost. Heat recovery capabilities for cogeneration raises capital costs by $100-$200 per kilowatt. Including other balance-of-plant components, a mid-size gas turbine with a heat recovery unit will cost $1,000-$1,200 per kilowatt. There has been a less than 5-percent increase in these costs over the past five years (California Energy Commission, Distributive Generation Strategic Plan, June 2002, pg. 3).

Legislation and Regulation

Current regulatory efforts include an exit fee proceeding at the CPUC. Essentially a direct-access customer cost proceeding, it also would effect departing load customers. Additionally, on bundled rates there is the Southern California Edison PROACT (Procurement Related Obligations Account) proceeding which will effect rates for bundled customers in the Southern California Edison service area.

Two bills passed by the state legislature in 2001 (AB29X and SB5X) provide $105 million for clean distributed energy and renewable energy. Most of the money however is intended for photovoltaics, wind and geothermal power, small hydropower facilities, digester gas and landfill gas and will not support diesel-fueled systems. Only $10 million has been slated to retrofitting existing diesel- and natural gas-fired units with low NOx technologies, including microturbines.

Current CMTA-sponsored legislative efforts targeting industrial energy issues in California for 2003 include the following:

SB 46: Standby Fee Exemption for Distributed Generation Units would extend the deadline for the installation of DG units under 5 MW deadline from June 1, 2003 to June 1, 2005 in order to retain eligibility for the waiver of standby charges until 2011.

SB 1015: Standby Fee Exemption for Distributed Generation Units, which would counteract the utility standby charges that make some DG projects economically nonviable by waiving standby fees until 2011 for DG units larger than five megawatts.

Departing load is essentially distributive generation and named so because the power is leaving the grid. Exemptions to departing load charges have been extended to those companies that meet the definition for clean and ultra clean power generation, which means solar, wind and fuel cells. At this point those technologies are insufficient to provide all the power requirements for industry, yet it is the so-called non-clean or non-ultra clean DG that contributes the most to reducing the load on the power grid as well as providing excess power back to the grid.

Future Industrial Power Supply

For the short term, industry in California can be cautiously optimistic about electricity supplies. Although the state relies heavily on energy imports, especially hydropower, the snow and rain California and the Northwest received this winter will ensure sufficient supply for demand for 2003. The picture after 2003 is harder to discern.

One major factor affecting the stability of future power supplies is the fact that investors aren't currently putting their money into building new power plants. Lost megawatts from cancelled or tabled power plants in California in 2001 totaled over 10,000 MW, followed by a further loss of over 9,000 MW in 2002 (Bay Area Economic Forum, California's Energy Future: A Framework for an Integrated Power Policy, November 2002, Pg. 3). At this pace, there is some concern whether California will be able to meet its future industrial power needs when the economy recovers.

"People simply aren't investing in new power plants, mainly because of the credit crunch," said Lyons. "Its hard to borrow money from Wall Street with the regulatory uncertainty and the fact that wholesale prices are low, its hard to get the credit extended from Wall Street to build new power plants."

At the height of the power crisis in California wholesale energy prices peaked at $390/MWh in December 2000, falling to $29/MWh one year later and leveling off at $40 MW/h as off 2003 (Bay Area Economic Forum, California's Energy Future: A Framework for an Integrated Power Policy, November 2002, Pg. 1).

Once California's power crisis of several years ago passed, so did interest in expanding power generation capacity. Unfortunately, investors' interest in building power plants won't go up until wholesale energy prices go up first, however, this in itself provides the potential for another energy crisis. Considering the time it takes for a full start up, including the permit process, construction and financing, several years could go by. If investors wait until demand increases before increasing capacity and overall weakness to the supply situation will persist. 2006 and 2007 will be a crucial time for the power supply in California. The more industrial DG is encouraged, particularly for those units over 5 MW, the more power from the grid will be available for residential and commercial use.

"There seemed to be some appreciation for the benefits of DG for supply reasons, for reliability reasons, to prevent black outs, but as soon as the crisis ended, or as soon as the perception that it was a crisis ended, we went back to business as usual," noted Lyons.

Coming Events

According to the California Energy Commission's Distributive Energy Resources Guide (available online at www.energy.ca.gov) current trends in DG resources include:

Additionally, DG units utilizing natural gas could potentially generate 20-percent of the power generated nationwide by 2020.

Meanwhile, while state legislators, industry representatives and public utility officials wrangle over the nuances of various bills and regulatory efforts problems lurk on the horizon. After reducing demand by 9-percent in 2001 following the power crisis, Silicon Valley's peak load is back at 2000 levels. (Bay Area Economic Forum, California's Energy Future: A Framework for an Integrated Power Policy, November 2002, Pg. 3).

With a weakened economy, a struggling stock market and a war affecting oil prices (and the "trickle" down effect on other energy markets), there seems little to encourage new power plant construction. At the same time, skyrocketing federal and state budget deficits have reduced the financial resources available to public services, creating a situation where utilities may be less inclined to lower the high standby fees that have slowed down the spread of DG in California. A combination of new power plant construction by the utilities and the growth of DG among power-hungry industries are required to stem off another energy crisis in California.

March 2003