When the vast majority of Americans turn on the lights, the electricity is coming from a centralized, fossil fuel power plant.

However, there is a big change on the horizon that will alter that – distributed (also called decentralized) generation. This is when power is produced much closer to where it is used, such as with rooftop solar panels or natural gas-fired combined heat and power systems, including fuel cells and microturbines.

Currently, less than 7 percent of U.S. electricity is generated outside a centrally located power plant. Expanding distributed generation will bring exciting opportunities to increase efficiency, improve our resilience to extreme weather, and reduce greenhouse gas emissions. It will also bring challenges for our existing grid on which we must continue to depend.

These opportunities and challenges were the focus of a discussion I participated in this week at the World Alliance for Decentralized Energy annual conference with WADE Executive Director David Sweet, Duke Energy Chairman James Rogers, and PSEG President Ralph LaRossa.

The first advantage of distributed generation from a climate perspective is efficiency. Up to two thirds of the energy from a traditional centralized plant is lost as waste heat. Distributed generation can be significantly more efficient by capturing this heat and putting it to use — for space or water heating or industrial processes — instead of letting it escape up the stack.

Another benefit of distributed generation is resilience. We have recently experienced a number of costly disruptions to our electricity supply, with Hurricane Sandy as a prime example. But while lower Manhattan was in the dark after Sandy, most of New York University’s campus had electricity, heat, and hot water – thanks to the university’s own combined heat and power plant. Distributed generation is part of the solution to help businesses and communities become more resilient to extreme weather events.

A third advantage of distributed generation is that it can help us transition to a low-carbon economy and reduce our greenhouse gas emissions. Many types of renewable energy – like solar PV – are examples of distributed energy with obvious climate advantages. However, no one wants to be in the dark on a cloudy day. Natural gas powered fuel cells and microturbines, networked with renewable distributed generation in microgrids, can provide needed backup power.

But encouraging distributed generation will disrupt — in fact, is disrupting — the current business model for electricity generation and distribution.

Today’s solar industry is tiny – supplying less than 1 percent of the electricity in the U.S. But the power industry is divided on whether solar is a threat or an opportunity.

An increase in rooftop panels means a decrease in demand for a power utility’s product. Many utilities are understandably concerned that distributed generation will reduce the number of customers in their rate base while they are still paying for fixed assets like transmission lines and existing centralized power plants.
Power isn’t going to be a one-way street anymore, from power plant to home or business. With more end-users creating their own power, and in many instances sending that power back to the grid, we will have to work through a number of issues like voltage regulation and intermittency that affect the safe, reliable service of electricity.

Utilities are grappling with these concerns. According to a recent survey by PricewaterhouseCoopers, 94 percent of electric utilities surveyed globally predict “complete transformation” or “important changes” to their business model by 2030.

But it’s interesting that 82 percent of utilities surveyed see distributed power generation as an ‘opportunity’ versus only 18 percent who rated it as a ‘threat.’

We will need a complete rethinking of business and regulatory models to encourage network investment and allow utilities the flexibility to pursue distributed generation and energy efficiency programs.

But we’ll also need to do more to realize the potential of distributed generation technologies. Steps include raising awareness; working through issues with grid interconnection rules, standby rates, and demand charges; and providing incentives to help consumers and businesses overcome high upfront costs.

We can see positive economic and environmental benefits by carefully considering the necessary business and regulatory changes needed to encourage distributed generation while taking care to ensure affordable, reliable, and sustainable electricity for everyone.