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Long-term Investment Signals Related to Distributed Generation
a report by
Philip Vogel
Research Associate, and Chair, Management Science and Energy Economics, University of Duisburg-Essen
Electricity markets have changed significantly during the last few have been insignificant and have not been analysed in detail, but with
ransmission & Distribution
T
decades and, as a result of global warming, will continue to change the increased spread of DG sources it becomes more important to take
markedly in the years to come. In recent years, there has been a steady advantage of the specific benefits of different technologies and to
liberalisation of the electricity industry with the monopoly elements of determine the appropriate long-term investment incentives for
transmission and distribution separated from the competitive elements planning the grid and the generation sites.
3
In this article, a brief
of wholesale markets and retailing. One of the most important resulting overview of the costs and benefits of DG units is given, and some of
changes is a shift towards distributed generation (DG). This presents the core issues in terms of incentivising DG sources are addressed.
opportunities arising from a more environmentally friendly diversified
generation mix, but also presents challenges because of reduced Costs and Benefits of Distributed Generation
economies of scope in planning the generation and transmission of In the literature on DG, numerous costs and benefits of decentralised
electricity. Until now, electricity has mostly been generated by large- technologies that influence the design and economics of the power
scale fossil fuel power plants that transport power from remote market are described. The most important benefits and costs are
locations towards centres of demand. The whole value chain of categorised in Table 1.
electricity supply was organised in a rather centralised way. This means
that the usage of large-scale technologies offered lower average The main benefits of DG units are straightforward. They offer
generation costs than the usage of small-scale technologies, and that electricity and partial heat close to the customers and are used for
transmission and generation could be well matched by one integrated manifold energy-based applications. At the same time, these services
institution. However, the increasing importance of environmental are produced with smaller/zero amounts of fossil fuels and lower/nil
impacts, most notably fossil-fuel-related greenhouse gas emissions, has CO
2
emissions than conventional generation. Simultaneously, DG
changed the economics of generation planning. Environmental sources are more capital-intensive than conventional generation and
concerns have made small-scale technologies such as combined heat need higher amounts of investment. Increasing needs for GHG
and power plants (CHPs) or renewable technologies more attractive. At abatements have been turning the economics slowly towards DG
the same time, numerous energy policies (e.g. permit trading or feed-in units. In this context, it is important to stress that different
tariffs) aim to shift relative energy prices in order to make small-scale technologies offer different amounts of fuel and CO
2
reduction levels
energy technologies more financially attractive. Some of the evolving and that they should be evaluated with their potential for reduction.
technologies are categorised under the label of DG. There is no single The most economic way of doing so is choosing market prices for
generally accepted definition of DG, but it is commonly agreed that DG valuing the produced electricity and CO
2
reductions, because these
units are characterised by small-scale generation up to a given limit (e.g. give proper signals in relation to the value of the produced energy.
50MW) and that DG is attached to the low-voltage grid.
1
Only those technologies that offer the most attractive combination of
investment and variable costs should be implemented. Ideally, CO
2
This definition covers a wide range of technologies, including solar prices consider the scarcity of CO
2
in the longer term, thereby
cells, small-scale wind turbines, micro-CHPs and smaller power plants, reflecting the need to limit the global increase of temperatures to 2°C.
some of which are environmentally desirable and some of which are As long as no realistic CO
2
cap is defined, it might be legitimate to use
not. Hence, a general recommendation concerning DG is difficult to subsidies or feed-in tariffs to promote efficient and renewable but
achieve, because the very specific characteristics of each technology immature distributed technologies. The decision as to which
have to be considered. Furthermore, not only the generation technologies should then be promoted, and to what level, should be
technology, with its specific fuel and carbon dioxide (CO
2
) emissions, is based on economic considerations, which implies that those
of relevance, but also the very specific site where the DG unit is located, technologies with fewer emissions should be promoted more
because a decentralised generation source interacts with the heavily. However, in the longer term a market-driven evaluation is
distribution grid and affects long-term planning of the distribution, needed to give efficient incentives for technology selection on a level
transmission and conventional generation assets.
2
So far, these effects playing field.
Another aspect of DG planning is the impact on system services. Today,
Philip Vogel is a Research Associate and Chair of Management Science and Energy
system services are used to balance deviations from scheduled demand
Economics at the University of Duisburg-Essen. His research interests are the modelling of
electricity markets, integration of distributed and renewable energy sources and energy and supply so that reliable electricity output with a stable frequency
policy. He graduated in economics from the University of Cologne with a focus on energy
can be delivered. Here, it is necessary to distinguish the technical
and environmental economics.
properties of DG units. Some tend to increase the need for system
E: philip.vogel@uni-due.de
services, e.g. small-scale wind turbines and head-driven CHP units,
while others might be used to offer flexibility, e.g. CHP units with heat
© TOUCH BRIEFINGS 2010
84
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