Avoided Cost Comparison Levelized Cost of Energy ($/MWh)

CHAPTER 1
overview oF distributed Power systems
1.1 DPS in context
For the past century, the U.S. electric power system
has operated predominately on a model of centralized
electricity generation, with power being delivered
to end users via a long-distance transmission
and distribution infrastructure. The original
rationale for the centralized model was economically
compelling. Economies of scale in the construction
of generation assets coupled with the
highly capital-intensive nature of generation and
transmission construction led to the emergence
of local monopolies in the form of franchises responsible
for discrete geographic service. The requirements
to balance loads and ensure reliability
of supply led to the development of an interconnected
system. By the 1950s, the vast majority of
U.S. power demand was served by the electric utility
industry with the exception of a small number
of industries that continued to rely on self generation.
Driven by inexpensive fuels and unlimited
capacity growth, electricity generation grew by
an average of 6.5 percent per year from 1950 to
1960 and by an average of 7.5 per year from 1960
to 1970, creating a robust demand for the output
of the central station power system. 3 As the system
grew, the laws and regulations designed to
3 “The Changing Structure of the Electric Power Industry 2000: An Update,” Office of Coal, Nuclear, Electric and Alternate Fuels, U.S. Energy
Information Administration, U.S. Department of Energy, October 2000. p. 114.
4 Richard Hirsch, “Technology and Transformation in the American Electric Utility Industry,” Cambridge University Press, 2003
aSSESSIng THE ROlE OF dISTRIBuTEd POwER SySTEmS In THE u.S. POwER SECTOR
4
protect the consumer from the natural monopolies
helped to expand the centralized grid model.
The Move to Decentralized Generation
The trends in operating efficiency, cost and size
that supported a centralized power system have
leveled out over the past 40 years. Beginning in
the 1970s, the electric utility industry changed
from one characterized by decreasing marginal
costs to one of increasing costs. 4 The energy crises
and oil price shocks at the beginning and end
of the 1970s, stricter air quality regulations, rising
interest rates and escalating costs of nuclear
power led to increased costs of building largescale
power plants, while a drop-off in the rates
of electricity demand growth made the case for
new additions of such plants less attractive. At the
same time, the market for non-utility generation
also began to open up. The National Energy Act
of 1978, which encompassed the Public Utility
Regulatory Policies Act (PURPA) was enacted
to address a nationwide energy crisis. PURPA
heralded a new era of distributed generators by
enabling small power producers to sell generation
from “qualifying facilities, or QFs” to utilities
without discrimination. Qualifying facilities