Distributed generation (DG) is the use of small electrical power generation equipment (typically less than 30 Megawatts) located near consumers and centers of electricity demand. The practice of meeting energy needs with decentralized or distributed generator units is increasing in the U.S. Distributed generation provides reliable electric power and allows businesses to save on electricity costs by using their distributed generator units during high-demand peak periods when power is most expensive. DG helps utilities in avoiding the need to build new central power plants or to use outdated, inefficient plants. Of course, distributed generation will not replace large scale, transmission grid generation, but it has a very important contribution to make in meeting new electricity needs. DG should be a big part of our national energy strategy. The growing distributed generator market can improve air quality and reduce greenhouse gas emissions if clean and efficient technologies are used. However, we should discourage the use of highly polluting emergency backup diesel generators that degrade local air quality. Emissions of greenhouse gases and criteria pollutants from DG technologies range from zero (renewables and hydrogen) to quite high when fuel oil is used at high capacity. Consequently, the expansion of DG may lead to higher levels of pollution unless states can create a framework that recognizes and encourages clean and renewable technologies.AAEA believes that hydrogen fuel cell generators are the best environmentally friendly technology for distributed generation. Demand for on-site hydrogen generators should increase in the coming years. The on-site hydrogen generator combines flexibility, environmental benefits and meets customer needs. New catalytic materials and high-pressure proton-exchange membrane electrolyzers will enhance productivity. Diesel and gas powered DG engines cost less up front, but newer technologies (fuel cells, solar panels) are becoming more affordable every day. An excellent example of a clean fuel cell DG system can be found in New York’s 22nd Precinct Police Department station in Central Park, which supplies 200 kilowatts of electricity. The system, a joint venture of the U.S. Department of Energy, the Department of Defense, the New York Power Authority, and private partners, began operating in April 1999.The majority of distributed generator units exist in industrial plants, such as petrochemical plants and refineries, not in utilities or everyday businesses. Many businesses require a steady, uninterrupted supply of power. But today’s electrical system was not designed to achieve that standard. On-site power at industrial facilities or distributed generation in commercial or even residential locations can be the most efficient means for increasing the reliability. The gap between generation capacity and demand is shrinking and according to the North American Electric Reliability Council, the spare available capacity margin was a mere 19% in July of 2003. That is not sufficient and as demand increases, system reliability is compromised.Energy consumers, providers, and policy-makers no longer view distributed generator units as only emergency back-up systems, but realize that distributed generator units can help alleviate pressure on the grid. Distributed generator units can fill in the gap and help in avoiding emergencies. Some utilities see distributed generator units as a means to avoid expensive capital projects. Both the cost to construct power plants and to erect transmission and distribution lines is enormous. This is why utilities view distributed generation makers as their partners—not competition. However, monitoring, metering, equipment quality and compatibility and integration into the grid are still hurdles for utilities and distributed generator operators. The technology to install and manage both emergency and routine distributed generator units for on-site use is easier, more affordable and the technology is improving.Industrial and commercial customers must remain connected to the utility grid. Even when power companies are not transmitting electricity, they must still have capacity available to provide backup services. Utilities must defray the cost of keeping that power in reserve—an expense that customers with on-site generation are paying for and one that they think is unfair. In some cases, if electricity stops for even a tenth of a second, it can cost thousands of dollars in losses for sensitive industries. Power blips are inevitable on the grid, so on-site generation acts as an insurance policy. Again, in such circumstances where a company takes no electricity from the utility grid, it must still pay thousands of dollars a month just in case it is needed. There is no accepted standard for how to interconnect with the grid. The Federal Energy Regulatory Commission is currently addressing this issue through a ruling due out in 2004. Equipment makers have no customary prototype from which to allow industrials to switch back and forth between power taken from the grid and power generated by on-site facilities. That has diminished the economies of scale that manufacturers might otherwise achieve.Examples of DG systems are described below:Fuel cells: Fuel cells are not just for cars. Fuel cell powered generators currently range from $4000 to $5000 per kilowatt. To help offset high costs, installation of this technology can be partially subsidized due to its zero emissions. Fuel cells lack broad acceptance due to cost, application constraints, and size limitations.Microturbines: These low-output, small-footprint machines are typically natural gas driven. The wide variety of available output ratings (30-400 kilowatt) makes these units ideal for small businesses, homeowners and as an alternative heat source. Natural gas: Combined heat and power (CHP), natural-gas-fired engines cost anywhere from $400 to $900 per kilowatt, depending, again, on size requirements. These generators run at higher temperatures than diesel and can help provide building heat or power an absorption chiller, driving down operating costs. In such cases, distributed generator units can operate at one or two cents per kilowatt lower than purchased power. Reciprocating engine (diesel or gas): This is the most widely used form of on-site generation, representing 75% of the world’s generators. Reciprocating engines remain among the most affordable, reliable, responsive, efficient, and proven forms of on-site generation available today. Costs vary from $200 to $1200 per kilowattThe costs of distributed generator units are being offset on a number of fronts, the most notable being local incentives offered by state governments. It is difficult for U.S. utilities to meet rising demand and a number of states have incentive programs that reward customers for efforts that relieve pressure on the grid or return power to it. Leading the growing trend are two states that have self-interest in promoting energy efficiency due to their power constraints—New York and California.The New York State Energy Research and Development Authority (NYSERDA) offer financial rewards for generator installations and enhancements to encourage New York commercial and industrial customer participation in load reduction or demand response programs. These incentives are based largely on the level of allowable emissions of new replacement generation and the locations of facilities. For customers that meet the appropriate criteria, NYSERDA incentives could cover as much as 70% of project costs. On the West Coast, the California Public Utilities Commission (CPUC) has designed a similarly rewarding program. The CPUC offers incentives through its Self Generation Incentive Program for installation of new on-site generation that supplies all or a portion of a facility’s energy needs. The program will award $125 million a year through 2004 to California businesses and offers incentives for specific distributed generator technologies used for load reduction.In addition to government support, many utilities and regional operators have instituted progra ms that provide financial rewards for customers who help reduce demand in the face of extreme strain on the electric supply system. Most often, customers are rewarded with favorable electricity rates in exchange for “interruptible” service.Progress Energy of the Carolinas and Florida, for example, offers customers “Premium Power” services that consist of distributed generation, uninterruptible power supplies, and related equipment—all owned and operated by the utility.DTE Energy Technologies offers the “energynow” on-site power systems program to provide distributed generation products and related technology to commercial and industrial customers. They have begun to deploy distributed generation technologies, such as fuel cells, micro-turbines, and internal combustion engines, into the marketplace.