Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6

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1.2 History of the Emergence of Distributed Generation

A Brief History of the Emergence of DG Technologies in the United States

Among a set of five laws proposed by Carter and passed by Congress (albeit in greatly diluted form), the Public Utility Regulatory Policies Act (PURPA) of 1978 had the most far-reaching—and least intended—consequences for power companies.  It spurred creation of radical technologies; it began the process of deregulation; and it challenged the control held by power company managers.  In the process, the law helped change the momentum of the utility system.

A related provision of PURPA also spurred research on environmentally preferable technologies that used water, wind, or solar power to produce electricity.  More successful than anyone originally anticipated, PURPA prompted work that cut the cost of power produced by solar photovoltaic panels by about 70 percent between 1980 and 1995.  More significantly, it contributed to work that lowered the cost of power produced by wind turbines;  by 2002, the average cost of wind-produced electricity dropped to under 5 cents per kWh, a cost that compared favorably with electricity produced by conventional utility plants burning natural gas or coal.

These smaller-scale generation technologies challenged the established paradigm of the utility industry (and many other industries) that previously relied on large-scale equipment to produce economies of scale.  Now, it appeared, power plants producing modest amounts of electricity proved economically viable.  Moreover, since they were smaller, they required less time to build, and they put less capital at risk during a period of rapid price inflation.  Finally, they matched the slower growth rate of consumption more appropriately:  with growth rates remaining under 3 percent per year, consumers needed smaller increments of power to match their demand.  Had utilities continued to build their traditional behemoths, huge chunks of power would remain unused when the plants were completed.  Small scale, indeed, looked beautiful.

This unintended experiment with competition suggested to influential regulators and legislators in the 1980s that more competition would benefit stakeholders in the electric utility industry.  (Not coincidentally, competition had already begun in the airline, telecommunications, and natural gas industries.)  Some academics and politicians wondered if utility regulation still had merit, seeing that a traditional justification of government oversight—the fact that power companies constituted natural monopolies—no longer appeared valid.  After all, if nonutilities could produce power as cheaply as could utilities, then the big power companies no longer deemed recognition as natural monopolies.  And if they were not natural monopolies, they no longer deserved special status as noncompetitive entities that required regulation.  Why not permit increased competition to thrive outside the realm of the PURPA-inspired generation companies?

Already feeling their control of the system threatened by pressures resulting from implementation of PURPA, utility managers had more to fear.  After the Gulf War focused attention again on the cost and security of energy supplies, Congress passed the Energy Policy Act of 1992.  The legislation sought to employ competitive forces to increase domestic fuel production and to improve the efficiency of energy use.  One provision gave states the option of opening up their transmission network to use by competitors.  The network would serve as a common carrier so any electricity producer could sell power to any customer.  Essentially, the law gave states the right to begin competition on the retail level.  During the late 1990s, several states (with California being among the first) passed legislation that established competitive retail frameworks for power.  By September 2001, 23 states (and the District of Columbia) had passed similar legislation, while regulatory bodies in several other states had reduced their oversight and had introduced market forces into the system.

The restructuring process, stimulated by PURPA and pursued by advocates of market forces, meant that momentum in the utility system had been altered, largely because utility managers lost control of “their” system.  For almost a century, managers commanded the huge-scale, incrementally improving conservative technologies that produced and distributed electricity.  But in recent decades, they began facing competition from entrepreneurial companies that employed small-scale fossil fuel and renewable energy technologies.  In 1992, nonutility companies controlled 1.5 percent of the nation’s total power capacity; that number rose to 34.7 percent in 2003.  In addition, power company managers lost the benefit of traditional regulation, which protected companies from competition on the basis of their claim—now challenged—to natural monopoly status.  At the same time, managers lost support from those stakeholders who previously buttressed them:  financiers, equipment manufacturers, and educational institutions adapted to the changing environment and found new opportunities serving the needs of the growing number of nonutility companies.

Assuming some of the political and economic power that managers once held, other stakeholders began making new waves.  Environmental advocates, for example, gained impressive standing in the legislative process that led to creation of restructuring laws.  While supporting deregulation in general, they fought for (and in many cases won) provisions in laws that guaranteed funding for renewable energy and energy-efficiency initiatives.  In California’s version of restructuring, for example, utilities earned the right to receive payment from customers for building what turned out to be expensive power plants during the era of regulation, but which would have little economic value in an era of competition (called “stranded” assets).  But environmental advocates won provision for expenditures on energy efficiency work, renewable energy technologies, and for development of research on new technologies that had not yet shown commercial viability.

As stakeholders began renegotiating their positions in an altered utility system, the California electricity crisis of 2000 and 2001 created a sense of chaos.  Subsequent blackouts in the Midwest during 2002 and in the Northeast and Canada during 2003 contributed further to that disharmony.  In California, where one utility declared bankruptcy as a result of the crisis, the state suspended competition altogether and expanded its control of the wholesale market.  Such events caused policy makers in other states to reconsider their previous enthusiasm for restructuring and to slow down plans to introduce market forces.  At the same time, the Federal Energy Regulatory Commission proposed new initiatives in response to the 2003 blackout that may give it greater control over the increasingly fragile-looking transmission grid.  That grid has witnessed serious underinvestment since the 1990s as utility companies and nonutility entrepreneurs remained concerned in an uncertain policy setting about how the grid will be employed and which stakeholders will profit from its use.
The unsettled state of affairs in the power system has provided opportunities for advocates of environmentally-friendly and distributed-generation technologies.  Taking advantage of the flux within the utility system, especially in states with strong traditions of politically astute environmental advocates, activists won passage of laws for funding of renewable energy and small-scale generation technologies.  Customers paid into “public benefit funds” (also known as “system benefit funds”) regardless of which company (a traditional utility or nonutility company) provided them with electricity.  And in eighteen states (plus the District of Columbia), advocates convinced legislators to enact laws creating “renewable portfolio standards” that required all competitive power companies to produce (or to purchase) a certain amount of power coming from small-scale, renewable resources. 

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