Distributed Generation

03 June 2013 03:59 PM | #Market Research

For most of the history of electricity generation power has been produced from large centralised sources. Typically powered by coal, gas and nuclear; it would be extremely inefficient to power each home and business with an individual supply. However, the introduction of mass-market renewable energy options has liberated people from the generator-supplier-consumer chain.

Centralised generation is the historical model: a few large point-sources of power, linked around the country via a national or regional network. Distributed generation involves on-site power generation that could potentially provide all the necessary power for a single building. The most common settings of distributed generation are normally found in rural communities, where it is expensive and inefficient to connect to the national grid. The Outback in Australia and remote villages in Africa are good examples, where solar and wind power can provide heat and electricity.

More frequently though consumers already attached to the grid are beginning to generate their own power, with concerns over prices and the environment. This could be through photovoltaic panels to generate electricity, solar hot water for heating or anaerobic digestion for heat and power. Although the upfront costs may be high, the payback period is normally in the region of 10 years, through lower utility bills. The introduction of feed-in-tariffs (FiT) should encourage further uptake of renewable generation, guaranteeing a price for any electricity fed back into the grid. Scandinavian countries and Germany have pioneered distributed energy generation in recent years, with massive uptake and many communities aiming to become carbon neutral in the next few years.

It is difficult for many to remove themselves completely from a central supply. Concerns over intermittency of renewable supply prevent total self-sufficiency. In this model when the demand is not met by the on-site generation, electricity can be drawn from the grid. When on-site generation exceeds the demand though, the surplus is fed back into the grid at a higher price than that which is drawn out. The two-way flow of power can produce strains on the grid and are difficult to manage with existing infrastructure. Because of this a next-generation grid infrastructure has been proposed: the smart grid.

Additionally, it may be desirable to become energy self-sufficient and not depend on a grid for support. This will undoubtedly require further investments in energy storage technologies. These technologies provide back-up power when required, for instance on a shady day PV panels will produce little power.

In urban areas it is often uneconomical for each household to invest in separate generation systems, so community schemes are popular. In these cases the electricity generated may not feed directly into any one property but instead will be fed into the local distribution network and the profits from selling this electricity given back to stakeholders. Extra revenue can be obtained on sufficiently large systems through the sale of Renewable Obligation Certificates (ROCs). ROCs are provided, dependent on the technology, to the generator for producing 1MWh of electricity and can then be sold to utilities, who must supply a certain proportion of their electricity from renewable sources.

For domestic customers, the size of the generation technology will be small, restricted by cost and space issues. However, industrial parks are increasingly starting to generate their own electricity through renewable energy. Importantly, feed-in-tariffs will not support systems larger than 5MW and the RO will be the main source of external income.

Investment drivers

In order to increase the popularity of distributed generation, the cost must come down. For photovoltaics the cost has been falling rapidly but is still uncompetitive with grid supply. Investment in manufacturing technologies is driving the cost reduction. There is also a lot of investment flowing into ‘thin-film PV’, a mass-produced product that is relatively cheap but suffers from lower efficiencies.

The electricity network regulator, Ofgem, is spending £6.5 billion upgrading transmission networks in readiness for the smart grid, enabling two-way flow of electricity.

The introduction of feed-in-tariffs in April 2010 is set to increase demand for small scale renewables. However, large up-front costs are needed to be overcome for the mass-market to invest for long-term returns.

The Renewables Obligation increases each year, encouraging further investment in renewable generation in order to meet the targets set. Without further investment the supply will not meet demand, pushing the prices of ROCs up until it then becomes more economic to construct further renewable energy capacity.

Policy drivers

The Code for Sustainable Homes encourages installation of energy saving technology such as smart meters and renewable generation, with all new homes required to be zero-carbon by 2016.

Feed-in-tariffs, covered by the Energy Act 2008, will be introduced in April 2010 for all electricity generation smaller than 5MW, guaranteeing a fixed price for electricity fed back into the grid. The purpose of the FiT is to encourage uptake of renewables by improving the rate of return on an investment.

The Renewables Obligation sets a lower limit to the amount of electricity that utilities must source from renewables. Each year the RO raises in line with government commitment targets. For 1MWh of electricity produced the supplier receives 0.5-2 ROCs depending on technology, which are sold on to utilities as proof of matching their commitment.

The Climate Change Act 2008 has set legally binding CO2 emission reduction targets of 80% by 2050 and 34% by 2022. Renewables do not emit CO2 over the course of their operational lifetime, reducing the carbon intensity of our electricity supply and contributing to emission reductions.

Renewable energy is exempt from the Climate Change Levy: a charge for each MWh of electricity consumed in non-domestic situations in order to encourage industry to source electricity from renewable means.