European Utilities and Distributed Generation - A Slow Love Affair?

June 5, 2002
The European Distributed Generation (DG) market is clearly set on a course of expansion. It will see robust growth over the next few years as smaller-scale energy generation applications are ultimately more reliable, efficient, cheaper and environmentally friendly than conventional power plants. All DG technologies, with the possible exception of some gen-sets, run on cleaner fuels and benefit therefore

The European Distributed Generation (DG) market is clearly set on a course of expansion. It will see robust growth over the next few years as smaller-scale energy generation applications are ultimately more reliable, efficient, cheaper and environmentally friendly than conventional power plants. All DG technologies, with the possible exception of some gen-sets, run on cleaner fuels and benefit therefore from low emissions; in addition, transmission losses for DG plants are generally well below those associated with the centralised generation model.

Utility Options

European utilities will have a crucial role in shaping the future development of DG. So what are the possible scenarios? Utilities have two basic options of engagement or non-engagement. Specific options might include:

  • Impose some form of disconnection charge or charge for the stranded assets, should a large proportion of the consumers decide to leave the grid. This would reflect a desire to continue to produce electricity along the centralised generation model and not become involved in DG.
  • Allow consumers to leave the grid and generate electricity on-site, but to manage the process for them and thus avoid losing the customer base. In this case, utilities are taking the opportunity to provide not only electricity but energy services (the operation and maintenance at the customer's site) and transforming themselves into decentralised providers.

Utility View

Based on a recent survey among Europe's utilities, we gauged their views on the current state and future development of DG. The chart below, for example, outlines the key disincentives that are seen as hampering DG adoption in Europe. The two leading disincentives are the price advantage of central generation and the ongoing power industry liberalisation and deregulation process. The former point includes the fact that the externalities of conventional power generation, such as increased air pollution, are generally not included in its pricing. Proponents of DG often argue that fossil fuel-based generators are not charged adequately for the pollution they cause.

Elsewhere, we have analysed the perceived future importance of different capacity ranges across the different DG technologies. The chart below provides an illustration for the renewables technologies. In the wind power arena, for example, installations above 1MW are now clearly favoured among utilities, whereas in the solar photovoltaics market the opposite is true, a reflection of the fact that large installations in this market are still very rare. The same analysis is also available for all other DG technologies, such as gen-sets, stirling engines, fuel cells and micro gas turbines.

Conclusion

Preliminary results indicate everything but a revolutionary change in the power generation landscape to take place in the near future. For a broad majority of utilities, DG is a complementary niche rather than an alternative way of producing power that would gradually be able to replace central power plants. Most utilities, therefore expect relatively low growth rates for DG, at least over the next few years.

Whilst utilities are hardly enthusiastic over growth prospects, DG is still taken very seriously in terms of utilities' own participation in this market. A majority of respondents believe that ignoring this market, which after all has excellent potential in the medium and longer term, could be an expensive mistake, seeing as DG will play a greater role in an increasingly diverse energy market. Many utilities either already have DG interests or are keen to get involved. Those that want to enter are very careful, however, in terms of timing of market entry, picking the right technology partner and similar issues. This means that utilities' engagement in DG is more likely to follow the path of a serious long-term relationship rather than a short-lived affair.

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