Benefits and costs

The variety of technologies and possible deployment arrangements highlight that a set of issues needs to be considered when assessing the potential benefits and costs of an increased share of DG (including micro-generation) in the electricity system. This subsection explores in more detail two likely benefits of DG: lower carbon emissions and increased energy security. These are then discussed in terms of expected costs for new generation capacity and network upgrades. The discussion identifies some potential conflicts between energy policy objectives and notes that the net benefits of DG are strongly context specific.

Natural gas based CHP plants generally have lower carbon emissions compared to the average grid supply mix. For example, micro CHP in the UK could reduce carbon emissions for an individual household by 20 per cent as compared to the average UK grid supply (Watson et al., 2006, p. 10). Even compared to very efficient combined CCGT power plants, emissions are still lower and performance superior over the facilities' lifecycles (Pehnt and Fischer, 2006). Carbon reductions will, however, strongly depend on the operational environment.

Large carbon reductions require a high overall efficiency with full use of the heat output, so there needs to be sufficient local heat demand. The construction of a heat supply system for district heating is most attractive for new residential areas, since it is far more costly to retrofit a heat supply network. However, in new residential housing where the requirement for heating has been reduced to a minimum through high energy efficiency standards, demand could prove insufficient to justify investment in a district heating system. Instead, heat demand can be covered by renewable energy sources such as solar thermal or ground source heat pumps.

Greenpeace (2005) estimates that emissions from UK household energy use could be cut by up to two-thirds using decentralised energy. Approximately ten per cent of the electricity generated in centralised power plants is lost on the way to the domestic user through transmission and distribution lines. By generating close to the point of use DG reduces these losses and improves overall system efficiency. While DG based on renewable energy sources is effectively carbon neutral, total emissions savings will also depend on the location of the technologies. For example, micro wind turbines are likely to provide significant carbon savings in rural areas, but are less suitable for urban environments where wind speeds are insufficient (Watson et al., 2006).

DG can also enhance energy security. Using renewable energy sources and more efficient fuel conversion can reduce the need for fossil fuel imports. A more diverse mix of supply technologies, in terms of the number of power plants installed and technologies deployed, also increases the resilience of the electricity system1. Scenario studies have shown that excluding large and centralised nuclear- or fossil-fuelled base load capacity can improve security (for example Watson et al., 2004).

This does not necessarily mean that distributed energy futures are inherently more secure. However, it does indicate that power systems that include a large expansion of DG can deliver large emission reductions while operating at least as securely as centralised systems (SEG, 2007a). While natural gas based CHP plants will be affected by gas supply shortages or price changes and volatility, biomass CHP plants are largely independent from fuel imports. Fuel flexible Stirling micro CHP allows switching from gas to biomass fuel, and thus to further energy security, provided sufficient renewable energy sources are available.

These potential benefits of DG (and other social benefits discussed in Chapter 10) need to be assessed against the required investments in new generation capacities and network upgrades. It is impossible to quantify these costs here in any detail. Capital costs per unit of installed capacity are likely to be higher than for central power plants under current conditions, whereas project specific investment costs (resulting from lengthy planning procedures) and operating costs (such as fuel costs) are in general lower. Overall less complex planning procedures and relatively short construction periods tend to fit better within a liberalised market framework where investors are interested in short-term returns on their capital.

Experiences of costs for network upgrades in countries that have accommodated a high share of DG in their supply systems give an indication of the potential indirect cost implications. While a DG location close to an existing grid may reduce connection costs, it may entail costs for reinforcing the grid. If DG generation exceeds local demand, additional grid capacity is required to export electricity to the transmission grid, for example. This is the case in Germany, where recent rapid growth and regional concentration of wind power has stretched network capacity (Burges and Twele, 2005).

Costs need to be compared to the network costs of new centralised plants. A study carried out for Greenpeace (2006) concludes that a UK decentralised energy system would be cheaper than a continued commitment to a centralised system. Looking at a 20-year period between 2003 and 2023, the study's 'decentralised scenario' (with 75 per cent of the new generation capacity being DG) is projected to save around £1 billion (US$2 bn). This is mainly due to a reduction in transmission and distribution costs. While this analysis indicates the potential benefits, it uses a rather static approach not including the costs for the transition from the current centralised system to a decentralised system. A similar modelling exercise for the UK 2007 Energy White Paper also came to the conclusion that transmission and distribution infrastructure costs are generally lower under a DG scenario, while plant capital costs are expected to be higher (DTI, 2007a, p. 85). However, more robust analysis is still required to assess the net benefits accurately.

In practice additional costs for network changes are highly case specific. While an expansion of DG can lead to higher network costs, it may well result in net benefits from the network operator's perspective in terms of deferred investments and reduced peak loads. This will depend on both the DG installation and the network in question.

The Danish case highlights that in order to fully exploit the benefits of DG, while at the same time reducing potential negative effects, adapting the electricity infrastructure is of central importance. Negative effects such as decreased system security occur if investments are merely embedded in existing centralised electricity infrastructures. Simultaneous changes in the generation mix and the network considerably decrease potential system risks resulting from an increased share of DG. Section 9.2 analyses the challenges involved. Section 9.3 then goes on to suggest changes in institutions, processes and instruments that may help to enable the required adaptations.

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