The electric power industry in the United
States is undergoing fundamental changes--from being an industry dominated
by regulated monopolies that own entire electricity systems (vertical integration)
to one featuring a mix of competitive electricity generation companies,
common-carrier transmission organizations, and regulated distribution companies.
Spurred by technological advances and a public policy strategy at the federal
and state levels, those changes are transforming both wholesale and retail
power markets. At the wholesale level, independent power producers now
generate more than 14 percent of the nation's electricity for sale at market-based
rates to utility distribution companies.(1)
At the retail level, 23 states and the District of Columbia have already
passed legislation or issued regulatory orders supporting the ability of
customers to choose their electricity suppliers.(2)
(See the appendix for a brief summary of the history of electricity market
organization in the United States.)
One of the powerful forces driving that transition in market structure
has been advances in electricity generation technologies that have reduced
the costs of smaller-capacity systems--generally those under 2 megawatts.
(see Box 1 for an explanation of the characteristics of
electric power.) Technologies such as microturbines are available in
capacities under 100 kilowatts (roughly the size of an automobile engine).
Large-scale power plants (100 megawatts or greater), which are typically
used by vertically integrated utilities, no longer have significantly lower
costs than smaller plants do. That change has weakened one of the main
rationales for maintaining electric power production as a regulated monopoly--namely,
that the exclusive franchise was necessary to fully exploit the savings
in generation and transmission costs from large-scale, centrally located
power plants.
Box 1.
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Electricity Basics |
The basic unit of electric power is a watt, which is a rate of producing
or consuming energy. A typical lightbulb, for example, consumes electricity
at the rate of 75 watts, or 75 watt-hours of electricity in one hour of
operation. One kilowatt is 1,000 watts. The average household in the United
States uses almost 12,000 kilowatt-hours (12 million watt-hours) per year.
A power plant with a 1-megawatt capacity (1,000 kilowatts), operating continuously
(8,760 hours) for a year would generate enough electricity to supply approximately
750 households. (A different way to understand what those units of electricity
represent is to relate them to horsepower, another measure of power. A
kilowatt is roughly equivalent to 1.3 horsepower; a 1-megawatt plant is
equal in power to approximately 10 medium-sized automobile engines.)
Another characteristic of electric power is voltage, which is a measure
of electromotive force. Electricity is usually generated and transported
at very high voltages (more than 100,000 volts). Electric voltage is lowered,
by a series of transformers in the substations and on feeder lines close
to where it is consumed, until it reaches 120 volts (in the United States)
at electrical outlets in a typical household.
In the United States, the electric power system generates a form of
electricity, termed alternating current, in which voltage oscillates in
a regular cycle. The frequency of that cycle is 60 times per second, referred
to as 60 hertz. Electric motors and other devices in the United States
are designed to use 60-hertz alternating current. If the electric current
deviates significantly from that designed frequency, it can seriously damage
motors and appliances.
At any time, the amount of electric power (the number of watts) that
is being consumed on a utility network (the system of generation and consumption
points connected by wires and other transmission equipment) must be nearly
equal to the amount of power that is being generated. The voltage and frequency
of the current will adjust according to physical laws to maintain a balance.
If a sudden change in consumption occurs without an adjustment in generation
(or vice versa), the voltage will change, possibly damaging equipment throughout
the network. Certain types of generators have controls that automatically
adjust output to match consumption. Utility networks also have many protective
devices that minimize any damage from a rapid change in voltage. For example,
electric fuses or circuit breakers automatically cut off electricity when
they detect a large voltage change caused by, say, a lightning strike or
short circuit that could damage equipment.
Electricity consumption at any point in time is referred to as the load.
On a typical utility network, the load fluctuates continuously as customers
start and stop their equipment. Network operators continually adjust production
to match those fluctuations. When consumption is low, they use plants that
are designed to run continuously at a low operating cost. As consumption
rises, they add production from other plants--whose operating costs are
higher--that are designed to start and stop and adjust output quickly.
In periods of extremely high consumption, they use older plants that are
less efficient and even more expensive to operate. As a result, the cost
of supplying an additional unit of electricity (the marginal cost) typically
rises as consumption increases. That cost depends on many factors, including
the characteristics of available power plants, the price of fuel, and the
location of plants relative to the places where electricity is consumed.
An electric power system has two major functions--generation and transportation
(see the figure below). The United States today has approximately
750,000 megawatts of generating capacity, most of which comes from large
commercial power plants with capacities of more than 100 megawatts. Those
plants are powered largely by coal or other fossil fuels, although nuclear
and hydroelectric power also account for a significant portion of capacity
and annual output. In 2000, those plants produced a combined total of 3.8
trillion kilowatt-hours of electricity.
The transportation of electricity is typically broken down into transmission,
which is the high-voltage transport of electricity over long distances,
and distribution, which is the transport at lower voltages over the last
few miles to the point of consumption. No clear line divides the two components,
but transmission networks in the United States typically have at least
two electric paths between any two points (a loop configuration), whereas
the distribution system has a single path between the substation and the
consumer (a hub-and-spokes configuration).
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An Electric Power System
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![Graphic](docimages/45xx/doc4552/455204.gif) |
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The first entities to take advantage of those cost reductions in a significant
way have been certain independent power producers, or businesses that generate
electricity primarily to sell to the utilities. Most of those producers
use generation units with capacities in excess of 1 megawatt. But the cost
reductions extend to even smaller generation units (less than 1 megawatt),
many of which are suitable for producing power to serve small businesses,
commercial buildings, and homes. That development has added one more dimension
to the effort to capture the benefits of competitive markets in the electric
power industry--the prospect that local small-scale generation could compete
with electric power from large, central power plants.
In contrast to the power supplied by utilities and many of the large
independent producers, which is often generated away from population centers
and moved over extensive transmission and distribution networks, small
customer-owned generators are sited at or near the locations where the
electricity is used. Those small generators are often not fully integrated
with the utilities' electricity networks, which produce power around the
clock or on demand from central dispatching stations--although the prospects
for fuller integration of such distributed generation with the grid may
be desirable.(3)
Policymakers have an interest in the future of distributed generation,
not only for the cost savings it can provide to the homes and businesses
that produce it but also for the cost savings and additional reliability
that it may be able to offer to the entire electricity market. Distributed
generation may play a larger role, along with demand-management techniques
and further innovations in wholesale and retail markets, in reducing the
cost of electricity when traditional supply is tight or market demand is
strong. For example, distributed generation may offer retail customers
greater flexibility to alter their demand for electricity in response to
hourly changes in prices (real-time pricing), thereby promoting the efficient
operation and stability of energy markets as they become increasingly competitive.
Some observers expect distributed generation to play a role in the commercial
development of renewable energy and high-efficiency technologies, adding
the associated environmental and safety benefits.
The prospects for distributed generation will be strongly influenced
by the outcomes of several policy initiatives. Specifically, the wider
adoption of distributed generation and its associated benefits may depend
significantly on the structure of deregulated electricity markets, in which
the federal government plays a central legislative and regulatory role.
Recent legislative proposals considered in the Congress have contained
provisions--for example, requirements for nondiscriminatory interconnection
with the grid and real-time pricing of electricity--that would directly
affect the viability of distributed generation. Also, the federal government
has taken an active role in developing and commercializing renewable energy
technologies, some of which are well-suited to distributed generation.
This paper analyzes distributed generation by answering four general
questions:
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What are the current state of and prospects for distributed generation
technologies, particularly in comparison with the conventional supply of
electricity? (Chapter 2 addresses that topic.)
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What are the benefits and risks of a wider adoption of distributed generation
in a restructured electricity market? (See Chapter 3.)
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What are the barriers to adoption and efficient use of distributed generation
technologies? (See Chapter 4.)
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What legislative, regulatory, and administrative initiatives can help lower
those barriers while avoiding or limiting the downside risks of greater
reliance on distributed generation? (See Chapter 5.)
1. |
Department of Energy, Energy Information Administration,
Electric Power Annual 2000 (August 2001), Table 1, available at www.eia.doe.gov/cneaf/electricity/epav1/yearinreview.html#tab1. |
2. |
Department of Energy, Energy Information Administration,
Status of State Electricity Industry Restructuring Activity--as of February
2003, available at www.eia.doe.gov/cneaf/electricity/chg_str/regmap.html.
According to Energy Information Administration statistics, retail choice
is available to some or all of the customers (or will soon be available)
in 17 states and the District of Columbia. In the remaining six states,
retail competition has been delayed or suspended. |
3. |
The grid refers generally to a self-contained
local or regional network of electric power plants and the high- and low-voltage
power lines and transformer stations that deliver the power generated by
those plants to customers. |
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