4. Potential Benefits of Distributed Generation

Parties identified potential benefits that could result from wide-spread deployment of distributed generation, including: peak demand reduction; deferral of distribution system equipment and upgrades; increased life of distribution equipment; reduction of utility capital risk; power quality improvements; voltage support; line-loss reductions; increase in reliability; environmental benefits; customer satisfaction; and fuel diversity. Benefits listed in parties' testimony echo those discussed by workshop participants in workshops facilitated by the Energy Division, which resulted in the Distribution System Operations and Planning Workshop Report, issued April 17, 2000. Parties do not agree on whether these benefits do occur.

Parties linked valuation of distributed generation benefits to the utilities' distribution system planning process, citing potential opportunities to provide distribution support services. Several parties submitted testimony on the need for a system to assign value to the perceived benefits. No party submitted a detailed methodology, although Utility Consumers' Action Network (UCAN), Natural Resources Defense Council (NRDC), PG&E, SDG&E and The Utility Reform Network (TURN) each provided principles that could be considered in developing a valuation methodology.

SCE distinguishes potential benefits of distributed generation depending on the parties that stand to receive the benefits. SCE asserts that only distributed generation designed to support the distribution system benefits should be considered by utility in its grid planning decisions. PG&E and SCE contend that many benefits from customer-side distributed generation accrue directly to the customer, without necessarily avoiding any utility costs. SDG&E's discussion of benefits includes only those benefits it considers of value to the utility distribution system.

UCAN and NRDC argue that there is a role for distributed generation to address the peak capacity shortage predicted to face California over the next several years. UCAN acknowledges that pending utility projects to expand transmission import capacity are underway to address system peak demand needs, but points out the long-term nature of completing such construction projects. Besides the capacity strain and reliability implications that excessive peak demand presents on the system, UCAN discusses the relationship of large peak demands on the cost of energy purchased by utilities. UCAN points out that the current availability and flexibility of distributed generation peak shaving technologies such as microturbines, photovoltaics, and wind turbines present potential value both to individual customers and the system by addressing peak demand needs. UCAN states that end users may prefer to make individual investments in onsite distributed generation rather than pay higher distribution tariffs to achieve added reliability. Individual distributed generation customers, by meeting their own needs through self-generation, would at the same time alleviate the demand on the system infrastructure. In addition to customer use, UCAN indicates substation capacity and feeder support as particularly viable areas where distributed generation can reduce system demand and benefit the overall system.

In comments on the predecessor rulemaking, PG&E stated "import constraints and high prices for power over the summer of 1998 sent peak price signals to the market that could, especially if repeated in 1999, provide the economic incentives for the installation of DG as a large `customer-side' peaking resource." (Rulemaking (R.) 98-12-015, Response of PG&E, March 17, 1999, Attachment A, p. 4.) SCE indicates that distributed generation is a solution to the peak demand problem only when high peak demand prices make distributed generation cost-effective. We take official notice of the prices listed on the website of the California Independent System Operator (ISO) which indicate that peak prices in 2000 generally met or exceeded those of 1998, indicating that conditions do support consideration of distributed generation as a customer-side peaking resource.¹

NRDC asserts that distributed generation increases the life of distribution equipment. SDG&E argues that NRDC's assertion is unsupported by any data. SDG&E maintained that it does not benefit from reactive support or from line loss reductions due to distributed generation, as system line losses were accounted for in Power Exchange rates. PG&E, SDG&E, and SCE state that distributed generation alone cannot ensure added value to system reliability, without a form of operational guarantee, or physical assurance. SCE states that the low level of distributed generation deployment to date has not resulted in any avoided distribution capacity costs. PG&E also states that reliability is a customer-specific benefit.

NRDC cites the minimal environmental impact of photovoltaics and wind turbines, and supports the use of fuel cells over central generation. NRDC points out that potential benefits expand beyond the direct value to the utility to include public goods and public interest benefits such as lower environmental impacts, insurance against uncertainties in load growth, and increased power available for sale. In testimony, NRDC identified technologies that are beneficial for the environment as zero emission renewables and "clean" fuel cells. NRDC argues that wind, solar photovoltaic, and fuel cell technologies emit lower amounts of NOx, SO2 , and particulates, making them environmentally preferable to standard combined-cycle central generation plants. SCE recommends that valuation of environmental benefits be performed outside of the Commission, for example, under similar mechanisms to that of the South Coast Air Quality Management District's emission trading market.

PG&E considers distributed generation as an additional support to distribution investments in areas where local loads are estimated to exceed wires capacity for a number of hours per year. SDG&E and PG&E state that grid benefits from distributed generation occur when distributed generation provides a substitute or defers distribution system and equipment investments by meeting utility-specific planning requirements. SDG&E identifies four specific conditions that are required if grid benefits from distributed generation are to be realized: (1) distributed generation must be located where SDG&E's planning indicate a need; (2) distributed generation must be installed and operational within the window of time needed by SDG&E; (3) distributed generation must be of appropriate size to accommodate SDG&E's planning needs; and (4) distributed generation must provide physical assurance.² (See SDG&E, Ex. 54, p. 20. See also, PG&E, Ex. 53, pp. 1-5 to 1-6.)

4.1. Discussion

Although the utilities dispute many of these perceived benefits as being unsubstantiated at this time, most parties agree that distributed generation has the potential to reduce system demand in areas experiencing load growth, and that it should be considered as an option to defer distribution investments. PG&E indicates that solicited distributed generation may also benefit the distribution system by providing voltage support, power factor improvement, and emergency back-up functions. PG&E defines solicited distributed generation as a distributed generation installation based on a utility-identified need. SCE indicates that if the Commission adopts SCE's recommendation for utility-only ownership for distribution capacity distributed generation, there is no need to determine distributed generation value beyond SCE's authorized ratemaking mechanisms.

Based on the record developed in this case, we conclude that distributed generation has the potential to improve, and therefore benefit, system reliability in two primary ways. First, distributed generation has significant potential to reduce system peak demand by serving onsite load. As noted by UCAN, installation of customer side distributed generation has the potential to release existing generating capacity to meet peak demand requirements of other customers. We take official notice of the fact that California's consumption of electricity grew by 4.0% per year (on average) between 1998 and 2000.³ During a period of strong demand growth and tighter supply, distributed generation provides an alternative source of supply to large central station generators to meet a given customer's onsite load. By serving onsite loads, especially during peak demand periods, installation of customer side distributed generation not only can free up generating capacity to serve other loads, but can provide a stabilizing force for peak period prices. These benefits will flow through to all customers without this agency specifically "valuing" such benefits. In particular, these benefits can be captured by incorporating distributed generation into long-term procurement plans. In addition, R.02-01-011 raises the issue of whether departing load customers who utilize onsite distributed generation provide value to the system that should result in a reduction to their cost responsibility surcharge. This proceeding does not provide us with sufficient record to resolve this issue, but deserves further exploration in a successor rulemaking

Second, distributed generation has some potential to defer distribution system upgrades, however such deferrals are time and location limited. The record does not support a finding that distributed generation provides for long-term distribution upgrade deferrals, regardless of ownership of the distributed generation asset, because distribution circuits have a limited capacity to connect additional generation units. In other words, distributed generation, as a substitute for distribution system upgrades is likely to have limited application and be time limited because of long-term growth on the distribution system.

The primary purpose of attempting to identify and value benefits of distributed generation is to ensure that the utility distribution planning process fairly evaluates potential distributed generation solutions relative to traditional wires investments. Most parties agree that the Commission should not establish an administratively determined valuation scheme. In the System Planning section below, we will discuss how utilities should incorporate distributed generation into their distribution system planning. In our opinion, it is not necessary to establish a "valuation" system in order to ensure that distributed generation is properly incorporated into utility distribution system planning.

Identifying unique benefits of distributed generation solutions could help us design appropriate price signals or other incentive mechanisms to encourage installation of distributed generation, if desired. Although we find that distributed generation does have potential benefits, we do not find that these benefits are unique to distributed generation. Rather, we find that potential benefits, such as deferral of distribution upgrades or costs, reduced capital risk, extended service life of existing plant, improved power quality, reduced line losses, var or reactive support, are all benefits which the utility should evaluate in its planning process, regardless of whether the proposed solution is a distribution asset or distributed generation.

As NRDC demonstrated, wind, solar photovoltaic, and fuel cell technologies emit lower amounts of NOx, SO2, and particulates, making them environmentally preferable to standard combined cycle central generation plants. It is unclear, however, that renewable distributed generation offers unique benefits when compared to distribution system upgrades that do not have emissions. Renewable distributed generation does offer unique environmental benefits over fossil-fueled distributed generation for serving onsite loads. However, because the choice of a given customer for its onsite use is not within the jurisdiction of this Commission, we decline to establish a "valuation" process for those benefits. This is not to say that this Commission should not establish policies to promote more environmentally responsible investment choices, only to say that we do not at this time establish a specific valuation process to accomplish our environmental objectives as it relates to distribution system investments. In other forums, for example, R.01-10-024, we are incorporating environmental criteria into our electricity procurement policies.⁴