distributed generation as generation plants connected to the distribution system. Published in Energy & Environment, volume 15, No pp

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1 A survey of solutions and options for the integration of distributed generation into electricity supply systems Michael ten Donkelaar, Energy research Centre of the Netherlands (ECN) Abstract. Since a number of years the role of distributed generation (DG) technologies, connected directly to distribution networks, is emerging because of its expected flexibility in increasing generation capacity, its environmental benefits, and due to advancements in technology development. DG facilities are now connected at sites that were originally not meant to connect a large number of power generation facilities. This can increase the burden on the distribution network in terms of stability and power quality. At the same time existing network regulation does not enable a proper valuation of costs and benefits. Two European research projects aim to tackle these issues from a both technical and socio-economic viewpoint. The conclusion is that to facilitate a major increase of the DG share in electricity supply systems, a proper allocation of costs and benefits between different functions in the electricity system (generation, trade, transmission / distribution, consumption) will be necessary. Keywords. Electricity infrastructure, distributed generation, distribution networks, allocation of network costs and benefits 1. Introduction The electricity supply system in Europe has been developed during the past 50 years into a pre-dominantly centralised system. Electricity is mainly produced in large power stations and transported over a transmission network, sometimes over considerable distances, and passed down through a distribution network for delivery to the customers. However, recently there has been a revival of interest in connecting small-scale power generation plants, mainly small-scale renewable energy sources (RES) and combined heat and power (CHP) plants, to the distribution network or at the customer side of the network. This type of generation is also known as distributed or embedded generation 1. The growing interest in distributed generation (DG) has been triggered by four major developments: Technological developments in the field of generation and distribution technology Liberalisation of the electricity markets, leading to stronger market competition and unbundling of generation and distribution facilities The increasing importance of security of energy supply and the need for diversification of energy sources. The adoption of international environmental targets (such as the Kyoto Protocol and the Renewable Electricity Directive) strongly influencing fuel choices for power generation. All together these developments create opportunities for a gradual increase of the contribution of DG technologies that are better equipped to meet the requirements of future electricity systems. An increasing share of distributed generation influences the arrangement of the power system. This is especially the case for renewable energy sources that have a much lower energy density than fossil fuels and so generation plants are smaller and geographically wider spread. For example wind farms must be located in windy areas, while biomass plants are usually of a modest capacity due to the cost of transporting fuel of a low energy density. These smaller plants, typically of less than 50 MW in capacity, are then connected into the distribution system. In many countries most of the new renewable generation plants are planned not only by the incumbent utilities, but developed also by new entrepreneurs. They are therefore not always centrally dispatched but generate whenever the energy source is available. In countries where the share of DG has been rapidly growing, the electricity networks are facing new challenges in terms of network stability and power quality, complicating 1 Directive 2003/54/EC concerning common rules for the internal market in electricity defines distributed generation as generation plants connected to the distribution system.

2 the tasks of network operators. New technologies have to be developed to keep the electricity network running in an equally reliable way. The current cluster of DG projects within the Fifth Framework Research Programme aims to tackle all technical, socio-economic and institutional barriers that DG is facing currently. This paper gives the preliminary results of two ongoing DG research projects 2, SUSTELNET and DISPOWER, and addresses the issues of allocating benefits and costs of DG between market parties in the liberalised electricity market. The SUSTELNET project analyses the opening up and regulation of distribution networks, necessary to ensure active participation of RES and DG in the liberalised electricity market. The DISPOWER project supports the transition of electricity supply systems towards more decentralisation through integration of technical options, solutions and approaches. In this paper the preliminary results of the socio-economic research within the DISPOWER project so far are presented. In Section 2 of this paper the integration of large amounts of DG in electricity networks is analysed. Then, in Section 3 an overview is given of the economics of DG, analysing the network-related costs and benefits, which is part of the output of the SUSTELNET project. Section 4 gives an overview of the preliminary results of the DISPOWER project, the technical possibilities for integrating large amounts of DG with support of new (ICT)-technologies. 2. Technical options and constraints for DG To meet future sustainability targets, it is expected that the share of DG, especially RES, in electricity supply will increase significantly. If this occurs, DG should become a mature power generation source. This would require technological adaptations of the electricity system as well as changes in economic regulation. Integration of large amounts of DG In some countries, the contribution of DG in electricity supply has remarkably grown during the last decades. For example, in the Netherlands, approximately 27% and in Denmark approximately 35% of the power (on a yearly basis) is supplied by DG. In fact, these hybrid supply systems were developed before the electricity markets were liberalised. Nielsen (2002a) reviewed technical options and constraints for integration of distributed generation in electricity networks. The review is largely based on a case study of largescale DG deployment in Western Denmark. In this area 1621 MW local CHP and 1900 MW of wind turbines have been introduced in a system with a minimum demand load of 1150 MW and a maximum demand load of 3800 MW (see Figure 1). Wind power is of an intermittent nature and the output of CHP units is mostly connected to local heat demand and this makes it much more difficult to balance supply and demand of electricity in Western Denmark. Although it appeared technically possible to have such a high DG penetration in a conventional grid, strong international connections were necessary to balance such a system with a high level of intermittent DG sources. The risk of serious network failures has increased since. The mixture of production and consumption in the same local networks has made the operational tasks more complicated, particularly under emergency conditions such as extreme peak load situations. 2 More information about the SUSTELNET and DISPOWER projects and the DG cluster can be found on the respective websites: and

3 international international international 400 kv 150 kv 60 kv kv low voltage 4 primary power stations (1,488 MW) 4 primary power stations (1,619 MW) 17 local power plants (568 MW) 50 wind turbines (32 MW) 711 local power plants (1,053 MW) 4,938 wind turbines (1,868 MW) Figure 1: Production capacity at each voltage level in Western Denmark The costs of network reinforcement in the existing distribution network, which is required due to connection of CHP plants and wind turbines in the Western Denmark area, have risen dramatically from 1992 to 2001 (Hindsberger et al. 2003). The extra investments made represent more than DKK 630 mio (of which DKK 400 mio. is due to wind power). This corresponds to DK 300,000 per MW for wind power and DKK 500,000 per MW for CHP. In general, wind turbines and local CHP plants have displaced central units, which are being decommissioned, as they are no longer commercially producing electricity. These central production units used to have a major role in balancing supply and demand in the Danish electricity system. This means that the major balancing units disappeared in areas where the need for balancing capacity is growing due to an increase of small and often intermittent power sources. This balancing must then be effected by the local CHP plants and the wind turbines. Eltra, the Western Denmark TSO, is therefore working on getting these services from the DG operators through changing the regulation, the requirements set-up for new units, and through support to R&D in technical solutions. The role of ICT technologies in integrating DG To minimise the risk of serious network failures and to be able to improve the economical optimisation of electricity networks it is important to recognise that distribution networks can no longer be seen as passive appendages to the transmission networks. The entire network must be operated as a closely integrated unit and for this purpose a number of technical improvements have to be implemented. In these future electricity networks the role of information and communication technologies (ICT) will certainly increase. Nielsen (2002b) has also reviewed the role of ICT in network management and market operations. Communication is a necessary tool for the operation of the electrical networks, as well as for administrative purposes. From being a limiting factor, the increasing communication capacity now provides possibilities for operating the electrical network in a different, and quite often, more efficient way. The establishment of electricity markets has had major implications for network management. One aspect of this is the increasing need for exchanging information between the network operators, the power exchange and the market players. The Transmission System Operators, for example, must treat all players neutrally and in a non-discriminatory way. All the information given to one player must also be given to another player. Information and Communication Technology has been a necessary tool to support the operation of the electricity market and this development has made sophisticated ICT applications become feasible. Examples of such ICT applications are: SCADA, the Supervisory Control and Data Acquisition system is concerned with providing the system operator with real-time information and the control of remote facilities in order to operate in the most reliable, efficient and economical manner. PANDA, the Plan And Data Acquisition System is concerned with providing the market operator with schedules, measurements and the ability to make settlements. Recent developments in ICT technology make in possible to integrate both applications into one system making it possible to combine (real-time/day ahead) price and production data.

4 The active networks vision One of the visions for future electricity systems 3 is presented by van Overbeeke and Roberts (2002) in their paper Active networks as facilitators for embedded generation. They foresee that passive distribution networks as we know them, have to evolve gradually into actively managed networks. From their viewpoint this is both technically and economically the best way to facilitate DG in a deregulated electricity market. The basis for their vision is the recognition that the existing technical and regulatory structure of distribution networks is incapable of supporting the evolution of the power system further. This means that the network must not be considered as a power supply system. The network is a highway system that provides connectivity between points of supply and consumption. Furthermore, it must be recognised that a network interacts with its customers, and is affected by whatever loads or generators are doing. The structural solution proposed is based on the following concepts: Interconnection switch from thinking in one-directional to bi-directional flows The use of local control areas or cells, enabling local network areas to act as independent islands System services are specified attributes of a connection and will be considered as such. 3. DG values When connected to the network distributed generation facilities present certain values (benefits or costs) to the network. Before a possible change towards a more decentralised electrical system can be achieved, these benefits and costs have to be achieved in economic terms. This is not a simple task especially because one has to have in mind that there are short term and long term effects to an electricity network system. When DG connects to the distribution grid, it generates for the Distribution Network Operators (DNOs) operational and capital costs that are paid via the respective network tariffs. However, a number of the benefits or costs they generate are not always considered. In order to achieve a level playing field between centralised and distributed power generation, all these values of DG should be recognised, assigned if possible a monetary value and be allocated between DG operators and DNOs. Furthermore, longterm and short-term values should be considered separately. The recognition and assignment of a monetary value can sometimes prove difficult because not all values are always individually measurable. It should be also stressed that in many cases values can be positive (benefit) or negative (cost), depending on the particular situation. Values of DG can generally be separated in two broad categories: those that are capital related and those that are operational related. Moreover, the values can also be separated into whether they are inside or outside the network. Within each category and subcategory there can be a range of different values to the DNOs, the customers and the society as a whole. Each value tends to be highly technology-, site- and time-specific; they do not necessarily apply equally or at all to every individual DG case! Table 1 shows a number of possible values raised by DG to the electricity system (Scheepers & Wals, 2003). Table 1: Examples of different DG values 4 Capital Operational Attributed to network Distribution capacity cost deferral. Voltage support. Reactive power. 3 Nielsen (2002a) also mentions other alternatives such as the micro-grids concept developed by EPRI. 4 Other important benefits of DG, although technology-specific, are reduction of CO 2 emissions and reduction of air pollution. These benefits are often the main reason for supporting DG in many European countries, but fall outside the scope of this paper.

5 operator. Engineering costs saving. Connection costs. Outside network. Metering. Reserve capacity. Avoidance of overcapacity. Line losses. Balancing. Values can also be short-term or long-term, depending on the timeframe in which the benefits or costs arise for the DG or DNO. For example, avoided network losses are short-term benefits DG generates for DNOs. On the other hand, avoided network investments (distribution capacity cost deferral) are long-term benefits. It is important to draw a distinction concerning the time frame of the DG values in order to construct a level-playing field between DG and centralised generation. Detailed description of DG values Below a detailed overview is presented of DG values, separated into capital and operational values as described by Leprich & Bauknecht (2004). Capital values are mainly related to the generation and distribution facilities: Distribution capacity cost deferral, the development of small-scale DG facilities near a load can postpone necessary investments in additional distribution and transmission capacity. DNOs can benefit from these new DG facilities as it can reduce their investment costs in upgrading or extending the distribution network. Connection costs The connection of the DG plant to the distribution network incurs expenses regarding connection lines and grid upgrade, depending on the location of the DG facility. When choosing the location of a DG facility close to an existing grid this may reduce connection costs. Metering Metering of DG production presents a cost that is allocated outside the network, and can be attributed to the DG operator. The costs for a management and control system that collects automatically metering data and provide control signals to the DG plants should, however, be attributed to the DNO. Reserve capacity when installing a large capacity of intermittent DG sources (e.g. wind and PV generators) a certain backup of power needs to be available. DG that is 'controllable', such as CHP plants that can be operated independently from heat demand, can contribute to reserve capacity. Avoidance of overcapacity avoidance of overcapacity or at least reduction of reserve margins compared to more centralised systems. Operational values, distributed generation can reduce costs in the operation and maintenance of the distribution system. Values regarding engineering costs include: Reduction of losses DG can reduce system losses by reducing the current flow from the transmission system through the transformers and conductors on the distribution system. Voltage support - DG can provide voltage support in areas of the distribution system that suffer large drops at high loads, replacing voltage regulators and line upgrades. DG can also regulate voltage by balancing fluctuating loads with generation output. Reactive power support, DG can help balance reactive power flows on a distribution system with both real and reactive power injection. Balancing There might be a need for additional balancing power because of the intermittent character of some DG sources (such as wind or PV systems). Generally, the ability to balance the distribution system depends on the way that a DG generation facility is controllable and can present a burden or a benefit to the distribution system. Especially with respect to the energy related values one has to differentiate between intermittent and controllable DG contributions. The more controllable and hence reliable they are the higher is their economic value.

6 Allocation of DG costs and benefits Within current electricity regulation frameworks, incentives to change the design and operation of distribution networks are often lacking. A sustainable electricity system that is economically efficient only results from electricity network regulation that provides generators with correct economic signals. In other words, costs and benefits induced by DG should be recognised, allocated and valued properly. A new approach in the allocation of costs and benefits will be required, targeted first of all at the role of the DNO as the owner/operator of the distribution network. Regulatory incentives need to be designed to encourage DNOs to consider costs and benefits of all network users (including DG) related to network services. This should enable DNOs to operate the network efficiently and sustainable in the long term. Mitchell (2002) argues that, in order to achieve a more sustainable regulatory system, the distribution regulatory framework should be based on an overall charging and incentivisation package of three equal and linked parts: shallow connection charges, Use of System Charges with entry and exit charges, and performance based incentives. A shallow connection charge in conjunction with an entry charge, plus performance standards, should provide the most economic incentive for appropriate connection from the perspective of the DNO. With the entry and exit charges, the DNOs could send locational signals to generators, to site or to suppliers to reduce demand. This should reduce their overall costs of designing and operating the network, which should give them further reason for supporting DG. The position of the DNO DNOs in the current electricity supply industry are passive organisations, whose sole objective is the provision of distribution network services, mainly transport of electricity. The operation of the system and provision of ancillary services is generally done by the Transmission System Operators (TSOs). However, if the expected increase in DG wants to be successfully accommodated in the electricity system, electricity networks should reconfigure into active networks, where DNOs evolve from this passive organisation into more active actors. In other words, DNOs should become active and innovative entrepreneurs that would facilitate and profit from the connection of DG into the system. By doing so, and because DNOs would receive the benefits DG creates, they would on the one hand be provided with incentives to connect DG and, on the other hand, provide the correct signals to generators and consumers in order to efficiently manage the network. 4. Technical options towards DG integration To integrate DG on a much larger scale as has been realised until present, new regulatory approaches have to be combined with technical options and solutions to better streamline the contribution of DG in the network. Within the socio-economic research task of the DISPOWER project an inventory has been made of these technological solutions and practises that improve implementation of distributed generation and renewable energy sources. For this purpose a questionnaire has been developed and distributed among more than 120 DG experts in Europe. This resulted in a number of 30 questionnaires in return, analysing a broad scale of new technological solutions, options and approaches leading to an improvement of the integration of DG sources into the electricity network. The aim was not to provide a complete inventory of relevant technologies but to gain insight in the technical solutions and practices towards DG integration. The experts were asked to present a technological solution or practise enabling a smooth integration of DG into distribution networks. Furthermore, the questionnaire was seeking answers to possible ways of allocating costs and benefits. The returned questionnaires resulted in an overview of different technologies, varying from planning and design tools to devices to improve power quality. Among the proposed solutions a significant number of new technologies were related to ICT and data communication,

7 making use of power lines or telephone / TV cables. The main benefits of the proposed technologies recognised by the experts were: Avoided investment costs Avoided electricity purchases Increased sales of DG electricity The main parties benefiting of the technologies were DG operators and DNOs, in some cases also system operators and consumers. According to some respondents it was difficult to answer which party would benefit the most, as it would depend on the way the solution would be implemented. In a number of cases the party investing in the technology, e.g. the DG operator or the DNO, is not the only one benefiting from the technology. In this case a transfer of benefits and costs related to the proposed technology will have to take place. The respondents proposed a number of options to deal with this transfer: Increase or reduction of the network tariff (meaning connection charges or use of system charges) Increase or reduction of the system charges (charges of the system operator for balancing, reserves, ancillary services) Changes in electricity prices, through changes in the commodity prices or the introduction of feed-in tariffs. Later in 2004, the DISPOWER project will analyse the costs and benefits of some concrete solutions and practices towards integration of DG into distribution networks. This should support DNOs, DG operators and other stakeholders to operate the network in a cost-effective way and also value the costs and benefits of DG in a correct way, leading to a creation of a level playing field between all types of electricity generation. 5. Concluding remarks The work on both the SUSTELNET and DISPOWER projects is still in progress, but based on the existing research conducted so far it can be concluded that: The existing regulatory framework is sub-optimal in terms of valuation and allocation of costs and benefits of DG among different stakeholders A more sustainable network regulatory system, taking into account all DG values, should be developed incentivising DNOs to connect DG, but in such a way that it improves network operation. Specific ICT applications and other network technologies can improve the operation of the distribution network but also support a better and fairer allocation of costs and benefits of DG. Acknowledgement. This paper is based on preliminary results of the ongoing European research projects SUSTELNET and DISPOWER. Both projects are supported by the European Commission under the 5 th RTD Framework Programme within the thematic programme Energy, Environment and Sustainable Development. This paper does not represent the opinion of the European Commission. Neither the European Commission, nor any person acting on behalf of the Commission, is responsible for the use that might be made of the information arising from the SUSTELNET and DISPOWER projects. References Hindsberger, M., Bach, P. -F, Nielsen, J.E., Varming, S., Gaardestrup, C., (2003), Active Networks as a tool to integrate large amounts of distributed generation, Paper presented at the conference Energy Technologies for post Kyoto Targets in the Medium Term, Risø, Denmark, May Leprich, U., Bauknecht, D., (2004), Development of benchmark criteria, guidelines and rationales for distribution functionality and regulation, final report for the SUSTELNET project, March 2004.

8 Mitchell, C., (2002), Response to Ofgem s update on structure of Electricity Charges, University of Warwick, Nielsen, J.E., (2002a); Review of Technical Options and Constraints for Integration of Distributed Generation in Electricity Networks; Eltra; Nielsen, J.E., (2002b), Review of the Role of ICT in Network Management and Market Operations; Eltra; Van Overbeeke, F. and Roberts, V. (2002), Active Networks as facilitators for embedded generation, Cogeneration and On-Site Power Production, online magazine; Scheepers, M.J.J., Wals, A.F., (2003), New approach in electricity network regulation: an issue on effective integration of distributed generation in electricity supply systems, Paper presented at the Market Design Conference Stockholm, June 2003.