SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 4872 words

COMMITTEE: SENATE FINANCE

HEADLINE: NATIONAL ENERGY POLICY

TESTIMONY-BY: MR. THOMAS J. STARRS, SENIOR PARTNER,

AFFILIATION: KELSO STARRS AND ASSOCIATES LLC VASHON, WA

BODY:
July 19, 2001

Mr. Thomas J. Starrs, Senior Partner, Kelso Starrs and Associates LLC Vashon, WA

MR. CHAIRMAN, MEMBERS OF THE COMMITTEE, LADIES AND GENTLEMEN: My name is Thomas Starrs. I am a senior partner in the energy and environmental consulting firm of Kelso Starrs & Associates LLC, based on Vashon Island, Washington. My consulting practice focuses on the design, analysis and implementation of legal and regulatory incentives for the development of renewable energy technologies, with a focus on solar and wind energy. I also serve on the Board of Directors of both the American Solar Energy Society, a national non-profit membership organization dedicated to advancing the use of renewable energy; and the Schott Applied Power Corporation, one of the largest distributors of renewable energy equipment in the United States. I am the author of over thirty publications regarding renewable energy and distributed energy policy. In addition, I have made invited presentations on energy policy to numerous national organizations, and to legislative committees, public utility commissions, and state energy offices in over a dozen states. This is my first time testifying before the U.S. Senate. The opinions I offer here are my own and not necessarily those of any of the organizations with which I am associated. I very much appreciate the opportunity to testify this morning on this important element of our nation's energy future. OVERVIEW OF DISTRIBUTED GENERATION

Continuing technology innovation is creating new market opportunities for decentralized or 'distributed' power generation. The distributed generation paradigm emerged in the early 1990s out of research suggesting that the use of small- scale electric generating facilities dispersed or 'distributed' throughout the utility network provided technical and economic benefits to the electricity system that were not available from traditional central-station generation.

A number of studies - including several sponsored by utilities - have identified direct, measurable economic benefits of having generation sources located close to the end user.[1] Distributed generation reduces energy losses in transmission and distribution lines, provides voltage support, reduces reactive power losses, defers substation upgrades, defers the need for new transmission and distribution capacity, increases reliability of electricity supply and reduces the demand for spinning reserve capacity.[2] In fact, several studies have concluded that under many circumstances (particularly where the utility's distribution system is operating near capacity) non-traditional distributed benefits are comparable in scale to traditional energy and capacity benefits.[3]

The increasing availability of distributed technologies will provide residential, commercial and industrial customers with economically viable options for using locally-available energy resources to meet their own electricity needs. In addition, I believe the public interest is best served by encouraging the use of solar energy, wind energy, and other environmentally-preferred renewable energy resources in distributed applications.

Where the distributed technology is fueled by a renewable resource, it offers the additional benefit of displacing fossil- fuel generation or other generation technologies with greater environmental impacts. Solar and wind energy are the quintessential distributed resources, allowing homeowners, businesses and industries to capture additional economic value from two natural resources that flow freely and nearly ubiquitously over the Earth. The use of solar and wind energy requires no mining or processing of natural resources, no shipping or pipelining of a fuel, no combustion, and no pollution control. Rather, these resources require only the technology needed to capture and convert the available sun or wind into electricity or other forms of useable energy. Solar electric and wind energy technologies can be located anywhere the sun shines or the wind blows, and can be used to generate power on any scale, from watts to megawatts.

From its modest start in the research and development departments of utilities a decade ago, distributed generation has emerged as one of the most-discussed aspects of the electricity industry. Electric and gas utilities are investing in distributed technologies; venture capital is pouring into companies focusing on distributed generation; and utility regulators are exploring the policy implications of integrating distributed generation into existing electric utility systems.

ADVANTAGES AND DISADVANTAGES OF DISTRIBUTED GENERATION

A recent report from the Worldwatch Institute lists eight benefits of distributed generation (which it refers to as 'micropower' technologies). The following table describing these benefits is from the Worldwatch paper, with an additional column I prepared explaining their applicability to solar and wind energy.

By contrast, there are relatively few disadvantages of distributed generation. The principal one is that distributed generation remains more expensive than central-station generation. For example, while installed cost of new central- station generating facilities is between $500 and $1,000 per kW, the cost of combustion-based distributed technologies ranges from $600 to $1,500 per kW, and the cost of cleaner non-combustion technologies such as solar cells, wind turbines, and fuel cells range from $900 to $10,000 per kW.[1] It appears likely, however, that with mass production the cost of many distributed technologies will drop significantly, making them more competitive with central-station generation.

The second disadvantage of distributed generation is that most fossil-fueled distributed technologies are not currently as clean as their central-station counterparts, which means that distributed generation does not necessarily represent an improvement in the environmental characteristics of the electricity industry. According to the U.S. Environmental Protection Agency, the electricity industry in the mid-1990s was responsible for approximately:

72% of sulfur dioxide (S02) emissions;

33% of nitrogen oxide (NOx) emissions;

32% of particulate matter (PM) emissions;

23% of emissions of mercury, a toxic heavy metal, and

36% of all human-caused emissions of carbon dioxide, the most dominant 'greenhouse' gas.[2]

Innovations in larger-scale generating facilities, such as combined-cycle gas turbines (CCGTs), have resulted in substantial reduction in emissions per kilowatt-hour from these facilities. Unless and until distributed technologies can match the environmental performance of these larger-scale facilities, increased use of distributed generation may not provide any incremental improvement in the environmental characteristics of the electricity industry. For example, recent studies prepared for the California Air Resources Board and the Energy Foundation[3] indicate that the diesel-fueled internal combustion engines used in some distributed applications are 60 - 100 times more polluting than CCGTs. Even fuel cells, when powered by hydrogen extracted from natural gas, may offer little if any environmental advantage over CCGTs.

It is important for policymakers to understand that not all distributed technologies are equal from an environmental perspective, and that among distributed generating technologies, only solar photovoltaic and wind energy systems currently offer clear environmental benefits compared to other newer, more efficient generating resources. Policymakers should recognize and account for the significant differences in the environmental characteristics of various distributed technologies in determining to what extent these technologies deserve support. Rules encouraging the use of distributed technologies without regard for their environmental performance may do a disservice to the public. As a result, public policies should favor those distributed technologies that offer significant environmental benefits relative to other generating technologies.

THE PUBLIC INTEREST IN A DISTRIBUTED ENERGY FUTURE

The transition to a distributed energy future is likely to result in an electricity system that is less polluting and more efficient, reliable, and resilient.

Distributed technologies are the electrical equivalent of the personal computer. Computing power used to be concentrated in large-scale mainframe computers with access via 'dumb' terminals at the end-user's location. The last two decades have seen a near- complete transition to microcomputers or minicomputers, each able to operate independently but also frequently linked to other computers to create electronic networks of information. Similarly, the generation of electric power has been concentrated in large-scale central-station facilities with the power transmitted, for the most part unidirectionally, to end-users. Increased reliance on distributed generation ultimately will result in a complex web of generating sources, with power flowing in multiple directions through the distribution system. Although for the foreseeable future this transition will not be complete, in that distributed generation will supplement rather than replace existing central-station generation, some industry analysts believe that new central-station plants on the order of 1,000 MW (typical of large nuclear and coal-fired power plants) will soon be unheard of.

Much of the promise of the transition to a distributed energy future stems from potential improvements in the efficiency of energy conversion and in the environmental performance of the energy supply system. On-site generation allows the capture of waste heat, increasing the overall systems efficiencies of many combustion and non-combustion distributed technologies, including fuel cells, to as much as 80 - 90 percent. In addition, some distributed technologies - with the exceptions noted earlier - offer substantial environmental benefits relative to existing energy conversion technologies. The Worldwatch Institute notes that micropower technologies that rely on cogeneration and cleaner fuels - either renewable energy or the cleanest of the fossil fuels, natural gas - have 50 to 100 percent fewer emissions, on a per-kilowatt basis, of particulates, nitrogen and sulfur oxides, mercury, and carbon dioxide than traditional fossil-fuel generation.[4]

The threat of human-caused climate change alone is reason enough to encourage the structural changes necessary to support a distributed energy system. Under a business-as-usual approach, the construction of new generating facilities would triple the carbon emissions from the electricity sector in developing nations alone. Widespread adoption of distributed renewable generation could reduce these projected emissions by 42 percent.[5]

A distributed energy future also will help to resolve reliability and power quality concerns. Electricity reliability problems recently have reached crisis proportions, turning energy issues into front-page headlines for the first time in over two decades. Transmission constraints and capacity shortages in some regions have resulted in power disturbances and outages. An outage in Chicago during the summer of 1999 cut power to 2,300 businesses, including the entire Board of Trade on a mid-week afternoon.[6] Supply problems in San Diego contributed to a doubling and even tripling of electricity prices during the summer of 2000.[7] These problems increasingly are seen not as isolated instances, but as indications of a power supply system that has eroded as demand has grown.

Contributing to reliability and power quality concerns are the increasing demands placed on the electricity system by the digital economy. Utilities traditionally sought to provide "three 9's" of reliability - 99.9 percent availability, equivalent to about eight hours per year of outages. However, the proliferation of computers and other electronic equipment that is highly sensitive to even momentary disruptions in power has created a demand for "six 9's" or even "nine 9's" of reliability. The existing distribution system is unable to provide this level of performance, forcing e-commerce companies and other participants in the digital economy to look elsewhere for their reliability needs. Among the options to which they turn is distributed generation, where innovations in power electronics, storage systems, and communications networks have enabled distributed technologies to meet the most stringent needs for power quality and reliability.

BARRIERS TO INCREASED USE OF DISTRIBUTED GENERATION

A recent report prepared for the National Renewable Energy Laboratory describes the barriers to distributed generation encountered in 65 different case studies, ranging from a 300 Watt solar electric system to a 26 MW gas turbine project.[8] I was one of the authors of that report. In it, we identified and described a wide range of technical, business practice, and regulatory barriers encountered by the developers and owners of the distributed generation facilities.

Technical barriers arise from utility requirements intended to ensure engineering and operational compatibility between the utility grid and the distributed generator. Most of these requirements focus on the utilities' safety, power quality, and power reliability concerns. The dominant technical barrier for most distributed generating technologies is the failure to adopt uniform standards for interconnection to the utility grid. Applicable standards for solar photovoltaic systems have been approved by the Institute of Electrical and Electronics Engineers (IEEE 929-2000), the Underwriters Laboratories (UL 1741), and the National Fire Protection Association (NEC Article 690), and these standards have been adopted in over a dozen states, not only for solar electric systems but also in some cases for other inverter- based technologies such as small wind systems, fuel cells, and microturbines. Comprehensive standards for a broader array of distributed technologies have been developed and adopted by several states, including California, Delaware, New York, and Texas. The IEEE is in the process of developing a broader technical standard encompassing all distributed technologies,[9] but this standard is a year or more away from being approved.

Business practice barriers consist of contractual and procedural requirements for interconnection of distributed generation facilities. Among the most common complaints of owners and developers of distributed generation facilities is the absence of simple, standardized procedures among local jurisdictions and utilities for processing permitting and interconnection requests. According to the NREL study, more than 25% of the case studies cited project delays greater than four months. Many facility owners and developers also objected to application and interconnection fees that were seen as arbitrary and disproportionate. In one extreme case, the owner of a single- module solar electric system expected to produce approximately $40 per year worth of electricity was asked to pay up to $400 in application and processing/inspection fees, thereby offsetting ten years' worth of anticipated energy savings.[10]

Regulatory barriers include rate and tariff issues, including the imposition by utility regulators of backup or standby charges on distributed generation facilities; distribution wheeling charges for the delivery of power to wholesale or retail customers other than the utility itself; exit fees to discourage efforts to reduce dependence on utility power through self-generation or even demand-side management; and administratively determined buyback rates that do not reflect the economic benefits of distributed generation or clean power generation. For example, solar energy advocates had to appeal to the California Public Utilities Commission to prevent a utility from imposing a standby charge on net metering customers that would have offset nearly 90 percent of the anticipated energy savings from a 1 kilowatt solar electric system.[11]

Another fundamental barrier to a distributed energy future is the apparent absence among U.S. policymakers of the political will needed to support the infrastructure investments necessary to enable the widespread adoption of distributed technologies. Upgrades to the distribution system are essential for proper integration of distributed technologies into existing electricity networks. However, many utilities, instead of embracing the opportunity to create the electrical equivalent of an "open architecture" system, hesitate to make the necessary utility investments, perhaps fearing the loss of physical or economic control over the electricity system. Similarly, many utility regulators appear reluctant to allocate the costs of bolstering the distribution system among all customers, perhaps fearing the lack of public support for such expenditures. Although these issues are just starting to be addressed among the states, early evidence suggests that much of the cost of making the transition to a distributed energy future will be shouldered by private developers of distributed generation facilities, even while the benefits of a renewed, more resilient distribution system accrue to the public.

COMMENTS ON PROPOSALS CURRENTLY BEFORE THE COMMITTEE

Today's witnesses have been asked to focus their testimony on certain sections of five bills currently before this Committee: S.597, S.388, S.933, S.388 and S.71. In the interest of time, I have further narrowed my testimony to the sections of these bills that are likely to shape the future development of markets for distributed generating technologies. The three topics I will discuss in some detail are the development of interconnection standards for distributed generating technologies, net metering, and business practices.

Interconnection Standards

One of the most significant barriers to the broader commercialization of distributed technologies is the absence of uniform, national technical standards for the interconnection of distributed generating facilities. The problem arises because utilities historically have had substantial discretion over interconnection requirements, and have often used that discretion to develop requirements that vary considerably from one utility to the next without appropriate technical or economic justification. These utility-specific requirements were of relatively little concern for the developers of larger-scale generating facilities, whose projects were big enough that they could justify the cost of hiring consulting engineers and attorneys to negotiate project-specific interconnection requirements for their facilities. For smaller systems such as residential 'rooftop' solar electric systems or farm-scale wind energy systems, these costs are an absolute deal-breaker.

Utilities play a tremendously important role in our society by maintaining the safety and reliability of the grid, and as a result they have legitimate concerns about the interconnection of non-utility generating equipment to their networks. On the other hand, utilities face a conflict of interest because they have an economic incentive to discourage customers from generating their own electricity: the more customers self-generate, the less those customers are buying from the utility.

The solution to this problem is the adoption of national standards developed by appropriate authorities, such as the Institute of Electrical and Electronics Engineers (IEEE), Underwriters Laboratories (UL), and the National Fire Protection Association (which writes the National Electrical Code, or NEC). The states are already pursuing this approach: As Figure 1 indicates, over 20 states have passed laws or enacted regulations requiring the development of standardized interconnection requirements for at least some categories of distributed generating facilities.

I am delighted to see this approach adopted in both S.597 and S.933. Section 603 of S.597 requires the Federal Energy Regulatory Commission (FERC) to establish safety, reliability and power quality rules for distributed generating facilities. It also specifically states that the FERC may prescribe different rules for different classes of facilities, which I think is essential for recognizing the distinction between residential- and small commercial-scale facilities, for which we should be striving to achieve 'plug-and-play' simplicity; and larger commercial- or industrial-scale facilities, for which some project-specific engineering may be appropriate. Section 4 of S.933 similarly calls for the FERC to develop "reasonable and appropriate" technical standards for the interconnection of distributed generating facilities. I commend Senator Bingaman and Senator Jeffords, as well as their co -sponsors, for recognizing the importance of this issue in their bills.

Net Metering

Net metering is a simple, inexpensive, and easily-administered mechanism for encouraging the use of small-scale distributed generation. Net metering allows utility customers to spin their meter backwards when they produce more electricity than they need for their own lights and appliances.

Under existing federal law (the Public Utility Regulatory Policies Act of 1978), utilities are required to interconnect with certain distributed generating facilities, and to purchase the excess electricity produced by those facilities. But under PURPA, the utility purchases that excess electricity at an administratively-determined 'avoided cost' price, which is usually a fraction of the retail price the customer pays for power. Net metering provides a modest economic incentive for eligible facilities by crediting them for this excess electricity at the retail rate.

Net metering policies have been tremendously popular at the state level. Just five years ago, only 14 states allowed net metering, and most of those requirements were adopted pursuant to state implementation of the federal PURPA law. Today the total stands at 34 states, with four new states -- Arkansas, Georgia, Hawaii and Wyoming -- enacting net metering laws just this year (see Figure 2). In most cases, these laws were enacted by legislation (although in a few cases net metering policies were adopted by regulation), and in most cases with broad bipartisan support. In my home state of Washington, for example, the 1998 net metering law passed unanimously in a then-Republican controlled legislature and was signed into law by a Democratic Governor.

Of the bills currently before this Committee, only S.597 currently includes a net metering provision. Section 604 of S.597 requires utilities and other retail electric suppliers to offer net metering service to customers with eligible on-site generating facilities, defined as those using renewable energy resources with a maximum generating capacity of 100 kilowatts for residential customers, and 250 kilowatts for commercial customers.

I respectfully suggest that this Committee revisit the question of these system size limits, which I believe are too large in the case of residential customers, and too small in the case of commercial customers. For residential customers, a size limit of 10 kilowatts should be more than adequate for all but the largest homes. For commercial customers, on the other hand, a limit of 1,000 kilowatts (or 1 megawatt) would be more appropriate. California expanded its net metering law to include facilities up to 1 megawatt earlier this year, and the response has been tremendous, with a number of utility customers pursuing the installation of larger-scale facilities. This size limit also enables the use of utility-scale wind turbines (which typically are sized around 1 megawatt) in distributed applications, allowing large customers to capture some of the economies of scale associated with these larger wind turbines, where they have the wind resources available to support the use of these turbines.

Three other elements of the net metering language in S.597 deserve mention:

First, it includes a provision prohibiting utilities and other retail electric suppliers from discriminating against net metering customers by imposing additional fees or charges, or otherwise treating them differently from non-net metering customers in the same customer class. This is an important provision that should be retained because it prevents suppliers from imposing charges that would circumvent the intent of net metering.

Second, it includes a provision requiring utilities and other retail electric suppliers to provide a carryover credit for any excess generation during a billing period, with the kilowatt-hour credit appearing on the bill for the following billing period. This provision is particularly valuable for resources such as solar and wind energy, which are subject to seasonal variations that may cause customers to produce more than they need to offset their own use in some months, and less than they need in other months.

Third, it spells out specific technical requirements for interconnection of net metering facilities, based on IEEE and UL standards and NEC requirements, which dovetails nicely with the requirement in the bill that interconnection standards be developed for all distributed technologies. These requirements are consistent with those already in place in over a dozen states.

Business Practices

None of the proposals before the Committee address another fundamental barrier to the interconnection of distributed generating facilities: the failure to adopt simplified interconnection agreements and routine procedures for processing interconnection requests. Again, particularly for small-scale facilities, the goal should be to attain 'plug and play' simplicity that eliminates unnecessary delays and inappropriate expenses. Unfortunately, many utility customers across the country have had the experience of contacting their local utility seeking information on interconnection procedures, only to be ignored or rebuffed or otherwise discouraged. In response, some states have explicitly required the development of simplified agreements and specific timelines for the processing of interconnection requests.

For guidance on this subject, I would urge the Committee to consider language in a bill introduced in the House by Congressman Jay Inslee, H.R. 954, titled the "Home Energy Generation Act." Mr. Inslee's bill also includes net metering and interconnection requirements, but goes further in requiring the FERC to develop "consumer-friendly contracts" for the interconnection of distributed generating facilities up to 250 kilowatts (see Section 215(i)). A comparable provision would be an appropriate addition to any bill coming out of this Committee.

Conclusions

Twenty years ago, the telecommunications industry in the U.S. was a cumbersome, heavily regulated business dominated by regulated monopolies that demonstrated little appetite for innovation. Today, the telecommunications industry is highly competitive and highly innovative, with consumers able to choose among a remarkable array of products offered by many different manufacturers. One of the key elements in that transformation was overcoming the telephone utilities' institutional resistance to interconnecting facilities and equipment from competing providers into the wireline network under fair, non-discriminatory terms and conditions.

The electricity industry in the U.S. is in the early stages of a similar transformation. The traditional paradigm of large, central-station generating plants feeding a network of high- voltage transmission lines and local distribution systems in a geographic region, all owned by a single, vertically-integrated company, will evolve in the coming decades to a complex web of interconnected facilities for generating and storing electricity, owned by many different companies and even individuals. The utilities' role will shift to the management of electricity flowing in every direction through the network. Fortunately, this transition has the potential to provide substantial benefits for all Americans, including a more efficient, more responsive, more reliable, and more environmentally-benign electricity system. But our nation's ability to make this transition efficiently and smoothly is threatened by the same reluctance on the utilities' part -- except that it is the electric utilities this time -- to integrating these facilities into their distribution networks. The bills cuurently before this Committee can help overcome this reluctance and encourage the utilities to embrace this new era.

I would like to thank Senator Bingaman and the others members of the Committee for expressing interest in distributed technologies and in demonstrating leadership by proposing specific initiatives to encourage the development of viable, competitive markets for these technologies

Thank you for the invitation to appear before you today. I would be happy to answer any questions the Committee may have.



LOAD-DATE: July 24, 2001