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DG offers many advantages that regulators might support. DG provides an opportunity to save money through lower energy production costs, reduced investment in the T&D system, system reliability enhancements, improved reliability for a particular customer, or a combination of these factors. DG may provide an opportunity to reduce pollution depending on the technology choice and application. DG provides customers with more choices for meeting their specific needs, such as including provision of power quality for sensitive loads.

However, few explicit regulations exist that pertain to DG applications. Presently, DG installations must either comply with regulations applicable to large central power generating units or meet with regulations designed to facilitate energy conservation through renewable power or cogeneration. DG has thus become a major customer concern in deregulated states.

Customers (manufacturers, energy providers, and large energy consumers) would like to see a number of DG regulatory issues resolved. Doing so would greatly increase their ability to plan for, build and use DG equipment. The issues may be categorized as:

Interconnection standards    Siting, certification and permitting

Access, metering and dispatch    Disco ownership of DG

The establishment of interconnection standards is imperative for technology design and mass production of DG units to proceed cost effectively. Customer issues include a) what technical interconnection standards should be adopted, b) whether to allow precertification of DG equipment using product type tests, c) whether engineering analysis of T&D system reliability and safety is necessary for each and every DG project, d) the charges to set for interconnection and use of the T&D system, and e) application and enforcement of the guideline requirements.

Current interconnection application forms and processes are lengthy and make it relatively expensive for a small power producer to apply for connection to the grid in both dollar and time delay costs. Currently, product certifications and type tests are not acceptable under most PUC rules. If they were, a particular DG generation unit could be permitted and inspected assuming uniform technical characteristics for the generator instead of requiring case by case site specific installation review for each unit. The cost of site reviewing each DG installation may make a DG option noncompetitive.

To enable emergency or peak shaving use of backup generators requires both simpler interconnection regulations and changes in federal regulation that prevent backup generators from being connected to the grid due to safety and system reliability concerns. Old rules, based on the limits of 1940’s technology, prevent emergency generators from being directly connected to the electric grid. They can operate only by interrupting power to the entire facility, then restarting and supplying power to priority loads. New rules, reflecting modern realities and technology would allow emergency generators to routinely carry part of the electric load, thus easing pressure on overworked cables and transformers. It may be necessary for FERC to set such new emergency power interconnection rules.

There are related unresolved technical issues that go beyond interconnection standards. For example, after completing interconnection, dispatch of DG generation requires both a control system on the generator and a communication system that can initiate DG start up in real-time. The control may be under the auspices of either the customer, Retailco, Disco, or the ISO, depending on contractual arrangements.

Interconnected DG units pose T&D system integrity and reliability issues for the Disco. Safety is also an issue when DG is capable of backfeeding into the T&D system during a power outage. For these reasons, PUCs are considering whether each DG unit must continue to be approved by the Disco on a case by case basis. No consensus has been reached in these deliberations. If Disco approval is required, DG interconnection costs will be relatively high compared with connecting a central power station.

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Regulated variables when siting a power plant of any size include air quality, fuel supply, noise and safety. These same issues affect each DG installation. However, government policies that specifically deal with DG as a choice for meeting energy needs are limited in most states. Communities have not made DG an integral part of their long-range energy infrastructure plans. A lack of DG technical performance data and no precertification process for equipment slows regulatory reviews. Taken together, these factors create an uncertain climate for DG when it is proposed as a development.

Two major siting, certification and permitting concerns that have been raised are a) how to deal with the requirements of multiple local jurisdictions and different permitting agencies, and b) what might be the aggregate effects of locating multiple units in a common geographical area.

Many DG technologies have substantially lower environmental impacts than the generation infrastructure they will offset or replace. Many PUCs are concerned about the environmental characteristics of DG technologies and have adopted policies that support the use of environmentally preferred DG such as renewables or fuel cells by allowing net metering for these technologies.

The success of DG projects can hinge upon overcoming the challenges presented by siting, environmental compliance and permitting. In short, environmental regulations and permitting can be a barrier to DG, adding costs that can burden the economics, and even prevent projects from going forward. Where DG is being installed, it is being confronted by the following conditions:

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Access, metering, and dispatch issues determine whether to allow DG access to the grid, and if so, how to meter and pay for access. Guaranteed access is not spelled out in all states. And costs are a point of contention. DG installers often feel they pay too much while Discos feel their costs are not being covered. To date, there has principally been just discussion on these issues, but a report produced for the National Association of Regulatory Utility Commissioners (NARUC) released in April 1999 provides some options for state regulators to consider.

A more level playing field is established when the benefiting party pays incurred costs. As DG customers use the T&D system in new ways, e.g. being connected to the grid for either supplemental or backup power, new methods of assessing cost responsibility need to arise to accommodate this new environment. Discos charge to cover a) T&D system costs, b) system reliability, and c) for engineering DG siting studies. Typical fees being considered to cover these costs include:

If standby charges are set too high, users may respond by installing multiple, smaller generation units to provide their own redundancy and peaking, and thereby avoid standby charges entirely. This could lead to inefficient levels of investment in both T&D and DG.

Buy-back charges are also being negotiated that determine how much a Disco will pay for excess DG generation, under a buy/sell metering arrangement. If the Disco can benefit from dispatch of the DG generation during peak periods this may influence how high buy-back rates are set.

There are trade-offs in the cost setting debate between overall system integrity/reliability and the ability of DG manufacturers to compete. Built in to this are considerations of whether a PUC wants to subsidize DG consumers at the cost of non-DG consumers, perhaps as a matter of social or environmental policy.

There is also debate as to whether power generated with DG equipment should be subject to CTC or stranded costs. Proponents argue that DG is new generation and has no relationship to previous power production, so it should be exempted. Opponents argue that all generation should pay stranded costs so that everyone pays equally for previously generated costs and use of the T&D system.

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Disco DG ownership is a controversial issue. If regulated distribution companies are allowed to own or operate DG equipment, then they return to the generation business. In many states generation was just deregulated. It is paradoxical that a regulated company would again generate power, even if at the behest of the ISO or for ancillary distribution services. DG ownership remains an issue that continues to be debated in deregulated states but there are no regulations or draft rules on the topic in any deregulated state.

Without regulations allowing Disco ownership, Discos are creating joint ventures and working with DG manufacturers to proceed with DG development, but not customer programs. By doing so, Discos are hedging their bets in case regulations are issued that permit ownership so they can compete more fully in the DG arena. Many Disco are also planning to use DG for ancillary services, provided explicit prohibition are not promulgated.

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