The economics of decentralization

While acknowledging the efficiency advantages created by local generation that recycles waste energy, skeptics tend to assume that economies of scale make central generation more cost effective. Indeed, the reported average cost of all new central generation plants built in 2004, including base, intermediate and peak load plants, was US$890 per kilowatt of capacity, which was 25 per cent less than the estimated average cost of new decentralized plants. But this US$890 ignores the capital costs of required additional transmission, distribution and redundant generating capacity for emergencies. Transmission is already in short supply, and it is difficult to gain approval to site new transmission lines. Numerous power interruptions since 2000 have flagged problems with existing transmission systems in the US and Europe, and many developing countries experience daily blackouts as transmission capacity is rationed among users. Satisfying load growth

Figure 20.1 Combined heat and power production (or distributed energy - DE) as a percentage of total power, by country

Source: World Alliance for Decentralized Energy, 2005.

with new central generation requires additional investments in transmission and distribution that average US$1,380 per kilowatt of capacity (Little, 2002).

The cost of connecting local generation to the grid seldom exceeds 10 per cent of the cost for transmission and distribution (T&D) from new central generation facilities. Locally generated power flows directly to the user, freeing grid capacity. It should be noted that utility requests for standby rates typically claim much higher costs to connect a single local generator to the grid because these calculations assume that a single local generator will fail at the precise moment of system peak load, requiring the utility to build or dedicate sufficient grid capacity to supply 100 per cent of the user's peak load. Such analysis is of little relevance as any single local plant is likely to be lost in the noise. Policy considerations should focus on the costs of interconnecting multiple local plants inside each distribution system because the simultaneous failure of multiple independent distributed generators is highly unlikely.

Table 20.1 compares the total capital costs of new central and local generation facilities. The third data column shows that total capital costs to remotely generate and deliver one new kilowatt of peak load are 170 per cent of the total capital costs of locally generating the same power. Basically, the economies of scale created by large central plants are overwhelmed by the added transmission and distribution costs.

The fourth data column of Table 20.1 deals with another significant capital-cost difference. Line losses from remote generation to users averaged 9 per cent in the US in 2004, but peak losses are much higher because line losses tend to vary with the square of current flow and with ambient temperature, and are thus much higher during summer peak loads. Peak hour line losses from remote generation plants range from 20—30 per cent, depending on the system and the distance power must travel to users. Boston Edison's last application for a change

Table 20.1 Capital required to provide an incremental kilowatt ofpeak load power


Transmission & distribution

Total/kW of new generation

KW per kW load

Costs/kW of new load

Central generation






Local generation






Savings (excess) of


( $1242)




central versus local


Central generation






capital as a

percentage of local

generation capital

in electric rates that was approved by the Massachusetts regulatory commission claimed losses from generator to consumer of 22 per cent. Using this estimate, one kilowatt of new load capacity will require 1.22 kilowatts of new central generation and distribution capacity. By contrast, net line losses from local generation seldom exceed 2 per cent. If a local plant generates power in excess of site needs, that power will flow backwards, towards central generation plants, reducing line losses.

Achieving system reliability also requires some redundant generation and grid capacity. An electric system composed solely of large central plants must have backup capacity for failure of the largest plant or for failure of the wires transmitting power from that plant to load centers. A recent Carnegie Mellon study found that a system of smaller generation units with 3 per cent to 5 per cent spare capacity would be just as reliable as the current central generation system, which has 18 per cent spare capacity (Zerriffi, 2004). Thus, as multiple distributed local generators come online, the overall need for spare generating capacity will diminish.

Considering all these factors, Table 20.1 shows that more than twice the capital cost is required to serve load growth with central generation as compared to serving the same load with local generation. Put another way, serving one year's US load growth of 14 million kilowatts with central generation will require US$21 billion more capital investment than serving that growth with local generation.

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