The Brookings Institution Energy Security Initiative and The Hoover Institution Shultz-Stephenson Task Force on Energy Policy

Assessing the Role of Distributed Power Systems in the U.S. Power Sector

EXECUTIVE SUMMARY

The U.S. power system is the backbone of the country’s economy. Yet, with growing stress on the aging existing electricity grid, increasing integration of information technology with the power sector infrastructure, and an imperative to reduce the environmental impact of power generation, the system faces an unprecedented range of economic, environmental, and security-related challenges. The situation has given rise to increased interest in the potential for Distributed Power Systems (DPS): a combination of distributed sources of power production, and distributed energy storage. This study examines the economic, environmental, and energy security case for DPS. It finds that increased penetration of DPS has the potential to make a significant positive contribution to the US power system. It also finds a strong case for DPS as a resource for the defensive and offensive operations of the U.S. military.

In general, the economics of DPS are still unproven: using a traditional cost-comparison model, our analysis shows that most DPS technologies are currently uncompetitive when compared with central station fossil-fuel generation. However, in certain regions of the country, some DPS technologies are already cost competitive with large-scale fossil-fuel generation. These include internal combustion engines with combined heat and power; large-scale solar photovoltaic; and medium and community-scale wind generation. The economic analysis also shows that a moderate price on carbon of $30 would increase the competitiveness of some renewable energy DPS applications. Moreover, many DPS technologies, such as solar photovoltaic, are realizing rapid declines in unit costs that are likely to continue with sustained research, development and deployment of such systems. Economic analysis and extensive outreach to power sector stakeholders show that the benefits of DPS are location and time-specific, and that DPS is more valuable in areas with high levels of system congestion or peak demand and no excess capacity.

There is also widespread agreement among power sector stakeholders that existing economic models do not capture the full range of potential benefits that DPS can provide. These include improved efficiency of the distribution system, reduced strain on the grid during peak demand period, greater reliability, environmental and land-use benefits, possible job creation, the harnessing of untapped energy resources, and other region-specific benefits. They also include the security value of DPS, both as a means of decreasing the vulnerability of the civilian grid to disruption and attack, and as a resource for the defensive and offensive operations of the U.S. military. In addition, many stakeholders see that there is insufficient information on the full spectrum of costs and benefits of DPS.

Federal and state policy makers have an opportunity to better capture the economic, environmental, and energy security benefits of DPS through the implementation of policies that correct market failures, provide incentives, remove barriers, and promote the exchange of information and education. To realize the full potential of DPS, the federal government should: set broad energy policies that account for the externalities of carbon dioxide and other emissions; promote sustained technology research and development; conduct research on the impact of DPS penetration on both reliability and security; support DPS-related knowledge sharing and awareness; and use procurement both in the civilian and military sectors to increase DPS competitiveness through increased scale. The U.S. military has a particularly compelling incentive to adopt DPS, which can help it meet its renewable energy and energy efficiency goals; improve the security of power delivery to bases at home and abroad; and provide advantages for expeditionary activities in theater. The military should consider distributed generation and microgrids as an essential part of its electricity generation strategy, and should develop and deploy DPS technologies that increase the efficiency of personnel in theater.

State governments should take a lead in DPS-specific policy making. They should use policy tools that differentiate between DPS systems according to size. For small-scale customer generation, state regulators and energy planners should encourage net metering, reduce technical and non-technical barriers to interconnection, and implement pricing mechanisms that accurately value the power produced from DPS. For larger systems that sell power into wholesale markets, state policy makers should adopt limited financial incentives aimed at increasing the competitiveness of DPS over time. Stakeholders agree that storage and combined heat and power (CHP) have particular potential for improving the efficiency and economics of the U.S. power sector and, therefore, should be priorities for targeted policy support.

The increased penetration of DPS has the potential to make a significant positive contribution to the U.S. power system and to the energy needs of the U.S. military. As policy makers strive to meet the challenges of the power sector in the 21st century in an economic and environmentally responsible way, this paper provides them with a set of options for realizing that potential.