Market and regulatory incentives for cost efficient integration of DG in the electricity system

Abstract

Achieving the European target of 20% reduction of greenhouse gases in 2020 relies for a major part on increasing the share of renewable electricity generation, and more efficient fossil fuel based generation in combined heat and power installations. Most of these renewable and CHP generators are smaller in size than conventional power plants and are therefore usually connected to distribution grids instead of transmission grids. Different support schemes for renewable energy sources (RES) have been successfully implemented and have resulted in a rapid growth of distributed generation (DG). IMPROGRES scenario analysis shows that the installed capacity of DG in the EU-25 is expected to increase from 201 GW in 2008 to about 317 GW in 2020. A large part of this increase will be made up of more variable and less controllable renewable energy sources like wind and photovoltaics. The increase of those „intermittent? renewable energy sources does not only change the generation mix, but also influences other sectors of the electricity supply chain, especially markets and networks. There is a recent tendency towards the implementation of more market-based financial support instruments such as the feed-in premiums currently applied in Denmark, the Netherlands and Spain. Such subsidies on top of the electricity prices create an additional incentive for flexible DG units to follow demand patterns by generating electricity when prices are high. This process of market integration stimulates DG to become more responsive to the overall electricity generation and demand situation. While the process of market integration of DG has started, network integration of DG in distribution networks has not yet received sufficient attention. Integration goes beyond merely connecting new DG units, by including whenever possible the potential of DG in improving system operation by reducing network losses or preventing system peaks. Network operators also have to deal with more fluctuating power flows and frequent situations in which electricity production exceeds demand and has to be exported to other regions. These issues are likely to result in barriers for further DG development, if network integration is not improved. The EU-funded IMPROGRES project (Improvement of the Social Optimal Outcome of Market Integration of DG/RES in European Electricity Markets)1 has analysed the impacts of large-scale deployment of distributed generation for the whole electricity supply system. As the viewpoint of society is taken, impacts outside the network are also included. But the primary focus in IMPROGRES has been on the integration of distributed generation in distribution networks. All electricity generation in distribution networks is included as DG. Part of this DG consists of renewable electricity generation (RES), while the non-renewable part mainly consists of Combined Heat and Power (CHP) generation. In order to take due account of the interactions between different electricity system segments, the analysis assesses the impact on the total supply system for three distribution networks in Germany.