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What Can Distributed Generation Do For the Grid?

A thought experiment suggests how much rooftop solar could reduce transmission and distribution costs.

California and other locations are moving to renewable energy at high speed. But even in these forward-leaning areas, there is still an active debate about which renewables and where. Part of that debate centers on the role of distributed generation (DG), which almost exclusively means rooftop solar. (Batteries are storage, not generation, but I will get to them shortly.)

The benefits and costs of DG continue to be debated, a topic I have written about here a number of times. (If you are suffering from insomnia, try my blogs from 2013, 2015, 2015 again, 2016, and 2016 again.) Per kilowatt-hour (kWh), rooftop solar costs more than power generated from large-scale solar farms, but advocates argue there are advantages that such a simple comparison misses. Among the first they mention is the savings in transmission and distribution costs that result from generating electricity at the location where it is used, a topic that Lucas dug into in June 2018.  Lucas discussed some research that looks at specific circuits of a specific utility and studies what the savings might be. That research found that the grid benefits were substantial in a few locations, but were quite small for the grid overall.

Today I want to take a macro approach, looking at just how much the savings could be for the entire grid.

To begin with, building a grid is very expensive. The US has spent trillions of dollars on its own grid. But those are sunk costs; nothing we do now will recover any of that money.   So, those costs are not relevant when asking whether to build additional distributed versus grid-scale renewables going forward. Similarly, the country has sunk billions into rooftop solar that’s already installed, including some very expensive projects during the technology’s nascent stage, which is also irrelevant for policy going forward.  The critical question now is: how much of the expenditures that the country is likely to make on the grid in the future could be avoided by installing more distributed solar in the future?

One guide that I have heard referenced by two different leaders in the rooftop solar industry is the estimate that the US will have to spend $1.1 trillion over the next 25 years to maintain, expand, and modernize its grid. The source is this 2015 DOE report (page 3). That’s a daunting number, but 25 years is also a long time, and a lot of electricity. (National expenditures on many things are impressive over 25 years: if current trends hold, it looks like the US will spend about $0.9 trillion on cheese in the next 25 years.)

Let’s assume that the $1.1 trillion number, adjusted for inflation, applies today for the next 25 years. Next, let’s ask how much of that grid investment could be avoided if we were to install enough additional rooftop solar over the next couple decades to provide 10% of the kWh that otherwise would have been produced by grid generation. A very generous estimate is 10%. That would mean that moving a given additional proportion of total generation to rooftops would reduce the needed grid investment going forward by the same proportion. There are two fundamental reasons the savings would likely be much smaller:

  1. The grid exhibits significant economies of scale. If every customer were to consume twice as much electricity, it would not require twice as much investment in the grid. Conversely, if every customer were to consume half as much – or if half of all customers were to drastically cut their consumption from the grid – it would not cut in half the level of investment we need going forward.
  2. Nearly all customers with rooftop solar, even if they generate as much as they consume, still use the grid extensively, and every second of the day. A residential system without batteries (still the vast majority of new systems) will export a large share of the power it generates into the grid when the solar panels are generating more than their consumption, and the household will import substantial quantities from the grid when they are consuming more than their panels are producing. That will be a smaller factor for solar with batteries, but it won’t go away. Once the batteries are charged, customers will again be exporting into the grid. And on long stretches of cloudy/rainy/smoky days, they will be depending on imports from the grid. In fact, while a solar customer with some batteries will surely do less electricity exchange with the grid, it is not at all clear that they would want to make do with any less service capacity on their wire.

So, an assumption that replacing X% of customer energy demand from the grid with distributed solar generation would reduce the need for grid investment by X% greatly overstates the true savings. But let’s go with it anyway for a minute.  If that were true, how big would the savings be? The answer is 1.2 cents per grid-generated kWh that is displaced by rooftop solar.1 (Calculation details in that footnote.)

In other words, if rooftop solar PV otherwise had the same attributes as grid scale solar PV, but allowed grid investment to be reduced proportionally to its production, that would enhance its value by about 1.2¢/kWh. In reality, the number would be much smaller for the two reasons explained, almost certainly well under one cent per kWh.

To put this calculation in context, 2019 non-partisan estimates put the midpoint unsubsidized levelized cost for residential rooftop solar at 20¢/kWh, for commercial/industrial rooftop solar at 11¢/kWh, and for grid-scale solar at 4¢/kWh. That’s a big gap. Savings on transmission and distribution isn’t going to fill more than a tiny fraction of it.

Of course, savings on transmission and distribution aren’t the only consideration in comparing rooftop to grid-scale renewables. One that has grown in importance and attention since I last discussed the topic is resiliency, at least when the system includes batteries. Still, it is worth pointing out that, just as with a gasoline generator, the benefits of that resiliency flow primarily to the customer with the solar, which is not a compelling argument for preference in public policy.

None of this is to say that rooftop solar can’t ever be a winner for society. In some areas, grid scale renewables are not feasible due to a lack of land availability (an advantage of rooftop real estate) or barriers to building transmission or distribution. As a result, in specific locations, distributed generation can be more cost-effective. But we aren’t building rooftop solar in the specific locations with those constraints! We are building them anywhere that any home or business owner benefits privately, even if grid scale renewables would be much more cost-effective for society.

Anyone who is paying attention understands that the planet is warming and we need to stop burning fossil fuels. But to do that in a politically sustainable and equitable way, we also need to find alternatives that are cost-effective for society as a whole. We got into this mess through individual choices that don’t account for the impact on others in society. I believe that we can only get out of it with solutions that do account for those impacts.

Despite my anxiety about national politics, I’m still mostly tweeting energy news/research/blogs @BorensteinS

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas

Suggested citation: Borenstein, Severin. “What Can Distributed Generation Do For the Grid?” Energy Institute Blog, UC Berkeley, September 28, 2020, https://energyathaas.wordpress.com/2020/09/28/what-can-distributed-generation-do-for-the-grid/

1 I assume that there is no growth in demand over 25 years (which biases upward the savings per kWh), so I divide the $1.1 trillion investment by the 2015 consumption of 3.900 trillion kWh times 25, which yields $0.0113/kWh in 2015 dollars.  Inflating that figure to 2020 dollars using the all-urban CPI gives $0.0123/kWh.

Severin Borenstein View All

Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. He chaired the California Energy Commission's Petroleum Market Advisory Committee from 2015 until its completion in 2017. Currently, he is a member of the Bay Area Air Quality Management District's Advisory Council and a member of the Board of Governors of the California Independent System Operator.

26 thoughts on “What Can Distributed Generation Do For the Grid? Leave a comment

  1. Good piece. I always enjoy your writing. I understand that rooftop PV is not as cost effective as utility-scale, but it does have advantages:
    1. Less environmental impact. Utility-scale solar covers vast swaths of desert or other land. The roofs are already there or will soon be constructed.
    2. Rooftop solar with batteries provides resiliency. In October 2019 Pacific Gas and Electric, shut off power to 2.7 million residential and commercial customers in northern California to reduce the possibility of its transmission and/or distribution lines causing wildfires. More and more residential customers are installing storage with their PV systems.
    3. In many other states (outside of California), rooftop solar may be the only option for building owners to clean up their electricity use. Furthermore, the avoided emissions from rooftop solar are higher in these areas because the grid is so dirty, for instance in Indiana where over 90% of electricity is generated with coal and gas.

  2. “Among the first they mention is the savings in transmission and distribution costs that result from generating electricity at the location where it is used, a topic that Lucas dug into in June 2018. Lucas discussed some research that looks at specific circuits of a specific utility and studies what the savings might be.”

    I suggest reading the extensive set of comments on that June 2018 post. The commentors come to a very different set of conclusions about the avoidable costs on the T&D system using California specific data.

    “A very generous estimate is 10%.” What is this statement based on? We’re already seeing numbers at least his high in California, and well past this in Hawaii and Australia. Given that most of the new T&D will be installed to meet demand from new development, if that is nearly net zero from on site generation and it has sufficient storage, then the amount of new transmission investment could be quite small. Even if the plug load growth is 1% a year, over 25 years, that amounts to almost 30%. And that ignores rooftop solar on existing buildings.

    Your footnote is using postage stamp and average cost pricing. That $1.1 trillion doesn’t just come out of nowhere–its intended for load growth. If you’re assuming that there’s no load growth, then you also need to include all of the costs of replacing and maintaining the grid which is multiples of that figure. The correct method is to calculate the marginal/incremental cost for your calculation. For the CAISO region, you can take the CAISO transmission rate and planning studies over a sequence of years to estimate that incremental charge for transmission. Note that the current CAISO TAC has risen 85% from 2012 and its calculated on an average cost, not incremental, basis. The current TAC is $12.6053/MWH, so that’s the minimum savings that can be realized. Even if I assume that 100% of the state’s renewables were installed since 2012, I come up with an incremental cost of $16/MWH for transmission alone, and that’s a gross underestimate. If it’s 75% of the total renewables, the incremental cost is $21/MWH.

    As for distribution, the correct method is to look at differences in load growth and associated distribution investment by substation or circuit. (The utilities have this data that I see in their general rate cases.) Then associate that difference in load growth and investment with differences in solar rooftop distribution (EVs will also have to be accounted for.) Until I see these types of studies, I can easily construct a counterfactual based on data that I’ve seen and used over the years.

    BTW, I agree that we can do a better job of locating solar rooftops more cost effectively with location specific pricing and incentive differentials. But that’s not happening yet.

  3. I live in a Community Choice Energy served area (San Mateo County) where the local electric portfolio manager is closing in on 100% carbon free wholesale annual volume matching portfolio. So one more rooftop solar system, e.g. a dozen partially shaded panels at a slightly sub optimal azimuth and tilt means the CCE loses some load and does not have to write a Power Purchase Agreement (PPA) with 9 similar panels on sunny selenium compromised land in a Central Valley county. About 1/2 of one panel’s output might’ve been lost to transmission and distribution losses (5%-8%) but the remaining 8.5 sunny panels worth matches the local annual generation amount of the dozen rooftop panels. This illustration shows it takes fewer watts of utility scale project panels to match the locally available annual energy output of the common incremental local rooftop panels.

    The reason private parties in 100% Renewable Policy Standards (RPS) territories should pursue rooftop solar is simply for their private wallet benefit. It’s also true outside of California where many utilities just buy or take the RECs from customers rooftop solar to decrease utility requirements to add utility scale renewables. (no additionality there either)

    If someone wants to help with the climate problem, they should efficiently electrify their transportation, space heating and water heating regardless of whether they feel like good or bad solar candidates. It’s that easy. And there Amp Diet methods of choosing lower draw devices or controls to avoid needing to upsize electric panels and avoid adding to grid bloat.

  4. “One guide that I have heard referenced by two different leaders in the rooftop solar industry is the estimate that the US will have to spend $1.1 trillion over the next 25 years to maintain, expand, and modernize its grid. . . . (National expenditures on many things are impressive over 25 years: if current trends hold, it looks like the US will spend about $0.9 trillion on cheese in the next 25 years.)”

    But!!! That cheese has a “service life” of about one day, whereas investments in the grid should yield benefits over decades. As much as I like both cheese and electricity, another comparison might be more helpful. 🙂

    • The answer to all questions is grid storage. Distributed grid storage (at sub-stations, etc.) allows localized load-leveling – which allows substantially lowering “peak loads.” There is already a system for every regional grid operator which functions like a stock exchange, with both “stock” (immediate use energy” and “options” (guaranteed prices for contracted kWhrs during a particular period). Eventually this system will simply grow – assigning route-leg costs for each segment of the grid electricity from a supplier must travel to reach a bidder as well as storage/release costs. For example, consider a simple two leg grid A – B – C, where there is some type of generation at each node. It may actually be cheaper overall for B to sell, say, solar to A rather than consume it locally, instead buying some from C for local use because the cost to transmit from C to A may be prohibitive in cost and losses.

      The more storage penetrates the markets and markets are able to analyze daily costs by node of the grid, the more we will optimize use of the sum total of resources available.

  5. Solar panels are still on an exponentially declining price trajectory, dropping in cost by half about every 3.5-4 years. Some day we will hit the limits of physics, but today is not that day. Very soon, it simply won’t make sense NOT to include solar on most rooftops.

    Batteries are declining exponentially too, just at a slower rate (about every 6.5 years). By 2028 +/1 a year or so, together solar plus batteries will compete directly with fossil fuels in 24/7 applications without subsidies. Once parity is passed, nobody will want to buy new fossil fuel plants anymore. 6-8 years after that it will make economic sense to replace EXISTING fossil fuel plants as well, and the only obstacles will be financing and manufacturing capacity. By about 2050,the use of fossil fuels for energy will have effectively disappeared for the same reasons we stopped buying steam engines and typewriters.

    • Well written piece. The only point that was missed was maintenance. DG requires the facility be monitored, maintained and optimized by the owner. They will generally contract out the service, but they need to pick up the phone and know when to do ut. Utility scale facilities have 24-hour monitoring, on-site/ near-site maintenance and facility optimization. The uptime for DG is likely to be terrible compared to utility scale and degrade much faster. I expect there will be a number of Zombie installations due to owners lack of funds or ability to keep their facilities at the level used in most forward looking projections.

      • “Well written piece. The only point that was missed was maintenance. DG requires the facility be monitored, maintained and optimized by the owner. They will generally contract out the service, but they need to pick up the phone and know when to do ut. Utility scale facilities have 24-hour monitoring, on-site/ near-site maintenance and facility optimization. The uptime for DG is likely to be terrible compared to utility scale and degrade much faster. I expect there will be a number of Zombie installations due to owners lack of funds or ability to keep their facilities at the level used in most forward looking projections.”

        Thank you. Yes, there are certainly maintenance costs. I’m not certain I’ve correctly interpreted your acronym “DG,” but I presume it has to do with privately owned and operated business or single family home installations. Certainly their maintenance will be more ad-hoc, but so long as they stay connected to the grid I don’t really know that it will be an issue to most. Anyone going off grid would, I presume, want some kind of redundancy if they lack the skills to DIY. On the other hand, when we speak of these things we tend to speak in terms of what is deployed today – yet the bulk of new installations will be an even newer generation of equipment even more reliable and hopefully simpler than today’s solutions. I also expect that “smart meters” will be able to detect and isolate “zombie units” as well. I would not be surprised at all to learn that local installations typically go 5 years hands off without any problems, if not more.

        I don’t pretend to have all the answers. My study of the technology has been focused on the trends, which are paralleling most other technology curves. Unlike a single technology, such as “steam engines,” both solar and battery technologies are classes – with many, many different technology trees within them largely indistinguishable to end users. Thus, while one technology matures and reaches the limits of its capability, such as Nickel Metal Hydride, another takes its place as a young technology with room for further improvement as has been the case with Lithium Ion. We are now so close to “price parity” for renewable that the probability of NOT getting there is probably lower than the probability of a large asteroid wiping out a major city.

  6. I agree that both the T&D benefits and the resilience benefits of distributed solar+storage are very site-specific and that only the T&D benefits accrue to the rest of the utility customers. This argues for a modest utility incentive to cover the T&D benefits. Ideally, that would be targeted to where there are real T&D constraints, especially considering the difficulty of siting new transmission. The resilience benefits can be very large, however, considering that almost all of the outages are caused by disturbances in the T&D system so no amount of centralized generation helps with that problem. It sounds like we would agree that utility customers should decide for themselves how much that resilience is worth to them. It is certainly a lot larger in California where outages are becoming commonplace than in places with smaller climate challenges.
    Dr. Peter Lilienthal
    Founder, HOMER Energy by UL

  7. I believe that Severin’s math is about right, for the values that it measures.

    But some important things are missing, and we need to acknowledge those.

    First, there is the psychic income that people derive from either having solar on their own home, or seeing solar panels in their neighborhood. These values do not accrue only to the owners of the solar systems. I do know that the presence of solar affects people’s psyche. While I am an economist, my dad was a psychologist, and in his later years, we had a discussion about the psychic effect of distributed solar versus centralized nuclear as two low-carbon options. His perspective was interesting: solar produced a calming effect, and nuclear a stressful effect. Those are real values.

    Second, while the majority of California solar systems do not have storage, that has definitely changed in Hawaii and Australia, where the solar penetration is much greater than California (4X for Hawaii; 6X in parts of Australia). In those places, batteries are a common part of distributed solar. Increasingly, these systems are being built to off-grid standards, meaning with the actuation of a manual or automatic transfer switch, these buildings can island and serve their own needs. That provides a resilience value. For a quick tour of this, see: https://youtu.be/o_UdDflHz-o

    Third, in some places there is simply not enough available land for central solar to provide all that is needed. The evaluation done for Oahu, for example, found that rooftop solar was an essential part of the “100% renewable” energy mix of the future. That value is harder to defend when the vast deserts of Southeastern California, Nevada, and Arizona yawn outside the sprawling cities near the coast. Unless you are a desert tortoise or Spiny lizard whose habitat is changing.

    I’m sure others will contribute other values. But in the end, I think Severin is basically correct: it will be very hard to bridge the gap between (using my cousin, Lazard’s, unsubsidized values) four cent central solar and ten to twenty cent distributed solar.

    • Another value that can be included soon when we have the technical issues ironed out is emission free stand by power that adds resilience. A corollary is that we may be able to greatly reduce fire risk by removing rural distribution lines and setting up microgrids instead.

      I’ll also note that rooftop solar in other nations such as Australia and Germany is much cheaper than in the US. If that gap is closed then the difference disappears. LBNL has looked at this issue.

    • One other very important value addition of solar rooftop: storage can be acquired at very little cost by using an EV sitting in the parking lot or driveway. The incremental cost to the EV is small as battery life is extended (and used EV batteries can be repurposed.) And there’s fewer line losses. That value alone could be $20 to $40/MWH.

    • “ His perspective was interesting: solar produced a calming effect, and nuclear a stressful effect. Those are real values.”

      I like the notion of bringing the value of propaganda into the discussion. You are correct to note that nuclear is seen adversely while solar is seen positively – yet, at least by today’s technologies, exactly the opposite is true in reality. Nuclear is safer and cleaner than today’s solar, that is fact. With the notable exception of Chernyoble,(sp?), far more people die or are injured making, installing, and servicing solar than were ever harmed by nuclear – and the list of other impacts could fill volumes. The “calming effect” you note is, in modern parlance, called “virtue signaling.” It is the smug feeling of satisfaction that you are superior to your neighbors for what you have done. However, most home solar systems were installed thanks to incentives which have literally transferred wealth from the poor to the well to do.

      Here is a fascinating notion – how about we as a nation commit ourselves to promoting “propaganda” for the next generation which promotes the harsh, cold facts of reality and ennobled reason over feelings? Think what we could accomplish….

    • Jim,
      Thanks for putting “100 percent renewable” in quotes for the Hawaii case. What must be 100% by 2045 is total renewable generation (including distributed) divided by net sales of the utility. That number has a potential range of zero to infinity. 100% would not be a binding constraint if the utility were minimizing cost.
      Jim

      • Jim is correct, the Hawaii “100% Renewables” has a mis-matched numerator and denominator.

        The numerator is utility sales. That excludes both line losses and on-site generation consumed on-site.

        The denominator is “renewable electricity production.” That includes both utility-supply and customer self-supply. The latter is growing, particularly as a growing number of customers are finding that their on-site batteries never drop below 30%, and an increasing number (including personal friends of mine) have elected to disconnect from the grid and stop paying the utility $25/month minimum bill. The day will come when the state is unable to calculate their progress — as there may be no state-accessible metering data on thousands or tens of thousands of homes and businesses that choose to island with solar plus storage.

        Rocky Mountain Institute warned of this in 2014, with their “Grid Defection” study, which found it was cost-effective already (in 2014) for commercial customers to go with solar, storage, and backup generation. I expect we will see more of that in the next decade. https://rmi.org/insight/economics-grid-defection/

        The players in Hawaii are well aware of this. Legislation to correct the error is pending. In my personal opinion, that fine detail about 2045 can wait a few years before it needs to be resolved. And I have no doubt that the Hawaii legislature will tidy up this bit of accounting carelessness (Politics are a little lopsided in The Aloha State: the State House or Representatives is 46 Democrats and 5 Republicans; Senate is 24 Democrats and 1 Republican).

        Think of it as an 85% target as written; the state is at less than 30% now. They have a lot of paddling to do before they sight land, and need to start looking for a good harbor at which to land.

  8. Another cogent post Severin. Did you get a chance to read the “Why Distributed?” essay that Scott Burger, Sam Huntington, Ignacio Perez-Arriaga and I wrote in IEEE Power and Energy Magazine in 2018? Makes many of the same clear points about the need to clearly weigh the incremental benefits of distributed solar vs the incremental costs due to lost economies of unit scale. See https://ieeexplore.ieee.org/document/8643507/

    Or for a direct author’s link to PDF via Dropbox: https://www.dropbox.com/s/n0chspj36jwx4mi/Why_Distributed-IEEE_Magazine-Burger_et_al_2019.pdf?dl=0

  9. What about the incidence of costs? Shouldn’t we care more about *who* is paying for investment in the grid and *who* is benefitting from any avoided or deferred shared assets on the grid? The difference in levelized costs of solar at different resources is only one input into a much more nuanced analysis that’s needed to understand the socially optimal solar deployment policy.

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