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

John P. Banks, Kevin Massy, Lisa V. Wood, Jeremy Carl, Amy Guy Wagner, Pedram Mokrian, Jelena Simjanovic, and David Slayton


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

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.


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