Energy 2.0

Economics of Distributed Generation and Renewable Energy Sources

Posted on: July 26, 2008

Distributed Generation (DG) and Renewable Energy Sources (RES) have attracted a lot of attention worldwide. Both are considered to be important in improving the security of energy supplies by decreasing the dependency on imported fossil fuels and in reducing the emissions of greenhouse gases. Distributed generation refers to the local generation of electricity and, in the case of a cogeneration system, heat for industrial processes or space heating etc. The economics of DG and RES depend on many factors. The main cost items are the initial investments, fuel costs, energy prices (electricity and heat) and the cost of connecting to the grid. Biomass generally gives the lowest cost electricity of all RES-based options, with onshore wind and hydro capacity coming second and solar cells being the most expensive.


The term ‘renewable energy sources’ refers to ‘everlasting’ natural energy sources such as the sun and the wind. Renewable energy systems convert these natural energy sources into useful energy (electricity and heat). RES are often related to electricity generation, but the generation of heat for space heating (geothermal energy solar collector) etc. is also feasible. However, this Note considers only RES that are related to the generation of electricity (RES-E). Accordingly  renewable energy sources include:

_ Hydro power (large and small)

_ Biomass (solids, biofuels, landfill gas, sewage treatment plant gas and biogas)

_ Wind

_ Solar (photovoltaic, thermal electric)

_ Geothermal

_ Wave and tidal energy

_ Biodegradable waste.


For distributed generation, DG mostly refers to systems that generate electricity (and possibly heat) and this text is limited to electricity-related DG. Generally, distributed generation takes place close to the point where the energy is actually used.


Other features of DG include:

_ Not centrally planned and mostly operated by independent power producers or consumers

_ Not centrally dispatched (although the development of virtual power plants, where many

   decentralised DG units are operated as one single unit, infringes on this definition)

_ Smaller than 50 MW (although some sources consider certain systems up to 300 MW to be classed as DG)

_ Connected to the electricity distribution network which, although it may vary by country,


Generally refers to the part of the network that has an operating voltage of 240/400 V up to 110 kV. Most renewable energy systems are also distributed generation systems, although large-scale hydro, offshore wind parks and co-combustion of biomass in conventional (fossil fuelled) power plants are exceptions.


Distributed Energy Resources refer to distributed electricity generation and electricity storage (near to or at the load centre) with a value greater than grid power (e.g. emergency power). Combined heat and power generation (CHP), also referred to as cogeneration, indicates the joint

generation and use of electricity and heat. Generally, a portion of the electricity is used locally and the remainder fed into the grid. The heat, on the other hand, is always used locally, as heat transport is costly and involves relatively large losses. Generally, distributed generation based on fossil fuels is also cogeneration as the local use of ‘waste’ heat is an important benefit of DG. Typical uses of DG are:

_ Domestic (micro generation: electricity and heat)

_ Commercial (building related: electricity and heat)

_ Greenhouses (process related: electricity, heat and carbon dioxide for crop fertilisation)

_ Industrial (process related: electricity and steam)

_ District heating (building related: electricity and heat through heat distribution grid)

_ Grid power (only electricity to the grid).


The economic feasibility of distributed generation and renewable energy systems depends on many things. Investments are important, as are the fossil fuel prices and the market price for electricity. The latter two are, of course, related. The market price for electricity will depend heavily on fuel prices as long as conventional fossil fuelled power plants dominate the market. Costs can be grouped as initial costs (before operation) or continuing costs (during operation) and as fixed costs (independent of the usage pattern) or variable costs (dependent on the usage pattern).

The income from DG and RES is mostly related to selling electricity (and heat in the case of cogeneration). Additional cost benefits might be grid related services (e.g. balancing, deferred grid investments, avoided grid losses) or environmental subsidies and taxes. These subsidies and taxes are generally aimed at stimulating the clean generation of electricity. Examples are green certificates or higher feed-in tariffs for electricity generated from RES, tax reductions for investments in CHP and RES, CO2 taxation and carbon credits.


The cost of electricity from DG and RES is calculated by using a net present value method. In this  calculation, the value of money over time is taken into account by using a certain discount percentage to value future income and expenses. This discount percentage includes the normal interest rate for borrowing money and a risk premium depending on the risk profile of the project. Fluctuations in fuel prices and the electricity market impose risks as do the weather conditions (e.g. wind speed for wind parks). The long-term durability of subsidies for RES is another risk item.


The connection of DG (including RES-based DG) to the grid is an important item and many current projects cover this subject . The liberalisation of the electricity market and the separation between electricity supplier and network operator , where the electricity supplier operates in a liberalised market and the network operators in a regulated market, have drawn attention to the subject of connecting DG to the grid (costs, barriers, benefits).


Due to the predomination of centralised power, electricity grids are laid out rather uniformly as a top-down supply system. The transmission grid (operated by the transmission system operator or TSO) is a high voltage grid for high power flows. It operates typically at voltage levels higher than 110 kV. This high transmission voltage reduces grid losses. Interconnections are made at the transmission grid level and large power stations are directly connected to the transmission grid. The boundary voltages that define the distinction between high, medium and low vary according to country so typical values are used in this description. The distribution grid can be divided into a high voltage distribution grid (typically 60-110 kV), a medium voltage distribution grid (typically 10-50 kV) and a low voltage distribution grid (240/400 V). Distribution grids are operated by distribution network operators (DNOs).


Distribution grid operators have an obligation to connect users to the grid and to ensure the security of supply. They are also responsible for the power quality from the grid. The grid code that describes both the obligations of the DNOs and the obligations of generators connected to the grid (e.g. control characteristics, fault current contribution, etc.). Generally, a DNO is obliged to connect a compliant generator to the grid on application.


Depending on the size of a DG/RES system, the DNO may require the connection to be at a particular voltage level. Connection charging might be ‘shallow’, ‘deep’ or somewhere in between. Under a deep approach, a generator owner is required to pay all the costs involved in connection, including reinforcements further up the grid. With shallow charging, only the connection to the nearest grid access point is chargeable.

2 Responses to "Economics of Distributed Generation and Renewable Energy Sources"

Discuss Energy Environment Issues :
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Very informative piece. I’m associated with Recycled Energy Development, a company that does cogeneration in particular, though we’ll do anything that slashes greenhouse emissions profitably. EPA and DoE estimates suggesting that recycling energy at industrial facilities could reduce our greenhouse emissions by 20%. And of course, the greater efficiency gained by turning waste heat into power would bring down energy costs.

The reason more of this isn’t being done is that regulations tend to protect the profits of monopoly utilities — which are grossly inefficient — while preventing the emergence of more efficient alternatives. That’s what we really need to change. Our energy industry would change dramtically.

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