A national laboratory of the U.S. Department of Energy

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National Renewable Energy Laboratory 

Innovation for Our Energy Future 

Laying the Groundwork: 

Lessons Learned from the 

Telecommunications Industry 

for Distributed Generation 

Preprint 

Alison Wise 

National Renewable Energy Laboratory 

To be presented at the 2008 CTSI Clean Technology and 

Sustainable Industries Conference and Trade Show 

Boston, Massachusetts 

June 1–5, 2008 

Conference Paper 

NREL/CP-670-43015 

May 2008 

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Laying the Groundwork: Lessons Learned from the Telecommunications Industry 

for Distributed Generation 

Alison Wise* 

*

National Renewable Energy Laboratory-U.S. Department of Energy 

1617 Cole Blvd., Golden, CO, 80401, alison_wise@nrel.gov 

ABSTRACT 

The telecommunications industry went through growing 

pains in the past that hold some interesting lessons for the 

growing distributed generation (DG) “industry.” The 

technology shifts and stakeholders involved with the 

historic market transformation of the telecommunications 

sector mirror similar factors involved in distributed 

generation today. An examination of these factors may 

inform best practices when approaching the conduits 

necessary to accelerate the shifting of our nation’s energy 

system to cleaner forms of generation and use. From a 

technical perspective, the telecom industry in the 1990s saw 

a shift from highly centralized systems that had no capacity 

for adaptation to highly adaptive, distributed network 

systems. From a management perspective, the industry 

shifted from small, private-company structures to big, 

capital-intensive corporations. This presentation will 

explore potential correlation and outline the lessons that we 

can take away from this comparison. 

Keywords: clean energy, market transformation, distributed 

generation, telecommunications, public policy 

1 REGULATORY PARAMETERS VS. 

TECHNOLOGY ADVANCES 

Economic regulation has been established as a “last 

resort” (i) for those markets where it is clear that 

competitive outcomes cannot be achieved by market forces;

(ii) where deviation from economic efficiency is deemed 

socially desirable; (iii) where the social and private benefits 

are clearly different, including cases where minimum safety 

standards increase social welfare; and (iv) to allow for 

coordination in technical standards or market equilibria [1]. 

In the case of the telecommunications industry, the 

regulatory measures related to the industry were in parallel 

to rapid advancement in technologies within the industry. 

Similarly, distributed generation technology may be 

evolving in tandem with existing regulatory efforts, and the 

technology itself may be a defining characteristic of the 

way this industry matures. 

The Telecommunications Act of 1996 was crafted to 

promote competition and public interest by enhancing the 

competitiveness of unbundled network elements in local 

exchanges. Yet, this milestone legislation holds just three 

references to the Internet and no legislative direction or 

framework for the most critical of technical advancements 

in the sector: Internet telephony, more accurately Internet 

Protocol (IP)-based telephony or “voice over IP” (VOIP) 

[2]. The Energy Policy Act of 2005 (EPAct 2005) has just 

three sections that amend the Public Utilities Regulatory 

Act (PURPA) of 1978: sections 1251, 1252, and 1254 

relating to net metering, smart metering, and 

interconnection requirements respectively. Each of these 

elements hold an important leveraging point in the 

dissemination of distributed generation, so one could argue 

that this relative lack of legislative attention may signal a 

potential barrier to distributed generation market growth. 

However, the technologies that enable the ability of 

distributed generation to achieve greater market penetration 

continue to advance. 

Twelve years after the approval of the 

Telecommunications Act of 1996, Verizon 

Communications is suing companies that are providing 

VOIP, turning to the courts to decide what was not 

considered in the original legislation. Distributed 

generation, should its technology implementation and 

consumer acceptance mirror the experience of 

telecommunications, may be facing a comparable future. 

2 INFRASTUCTURE ISSUES 

In the most basic of comparisons, the distribution and 

transmission of information and data depended on the 

physical laying of transmission lines from a centralized 

source, relying on the negotiation with government and 

private citizens about land-use issues to provide the 

necessary geographic area to build these conduits. With the 

advent of wireless connectivity, a single federal agency 

created an avenue for an entirely new way to transmit data 

[3]. This invisible infrastructure may not have a replicable 

comparison for distributed generation, but there may be 

other corresponding infrastructure issues. 

It may be an obvious comparison to look at land-use 

issues as they relate to the growing number of distributed 

renewable energy generation systems that are beginning to 

populate our national landscape as well as the transmission 

and distribution (T&D) lines these new facilities require. 

Wind power has grown steadily in recent years and 

increasingly competitive technology such as concentrating 

solar power (CSP) has generated interest in solar power 

plants in the Southwest [4]. But more dispersed technology 

1
2

is gaining market traction as well, with residential and 

commercial solar photovoltaic (PV) system installation 

growing and investments increasing [5]. Electricity 

transmission through our nation’s infrastructure has become 

more congested. The Internet transmission links in the 

early to mid-90s faced similar bottlenecks, with many Web 

sites functioning so slowly they were unable to adequately 

engage in the blossoming digital marketplace. Traditional 

Internet service providers tried to solve this problem by 

simply building bigger pipes in their transmission facilities 

and by enlarging their Web servers. But this solution didn’t 

address the needs of the growing numbers of new 

customers whose applications were using infinitely more 

capacity with video and music. So the market introduced a 

new type of service provider that was able to support local 

groups of users through a hierarchy of cheap computers and 

hard drives, essentially providing a distributed structural 

source to system users. The relatively low costs of 

computing and storage enabled Web destinations to be 

digitally transplanted to locales where demand was highest. 

Competing companies in this space were effectively 

segmented by this new architecture: Companies that could 

afford to provide the new, non-congested experience for 

their customers bought the services of these new providers, 

while the smaller, less-capitalized companies continued to 

rely on the less expensive, but more cumbersome service. 

The potential lesson here for distributed generation rests 

on the principle that users may be willing to pay a slight 

premium to satisfy their needs, especially if the existing 

system becomes less than satisfactory. Additionally, it is 

interesting to note that utilities (the established service 

provider) are addressing their own transmission issues by 

simply adding capacity and building larger facilities. The 

new service providers in this arena are companies that are 

providing generation and storage solutions closer to the 

point of energy consumption. In this analogy, distributed 

generation technology companies are the “data generators,” 

and energy-storage developers are making available the 

energy equivalent of an inexpensive hard drive. 

Whether existing utilities embrace a change in how they 

define their service or whether new entrants capture the 

bulk of this market remains to be seen. However, with 

states increasingly adopting renewable portfolio standards 

that contain “carve-outs” specific to distributed generation 

[6], and with commercial and industrial entities beginning 

to more closely examine the need for reliability (energy 

availability and cost predictability), distributed generation 

may be poised for accelerated growth supported by both 

policy and market factors. 

3 TRANSITION FROM CENTRALIZED 

TO DECENTRALIZED: DEFINING THE 

LOCALE 

The fluctuation of generating and storage of data from 

centralized locations to more distributed ones created much 

debate and discussion around the appropriate and most 

effective location with relation to the end user. If the 

service system was provided from too close to the core, 

end-user reliability and performance were negatively 

impacted. If too many systems were located at too many 

locales (too close to each existing customer) infrastructure 

control became laborious, uncontrollable, and more 

expensive. It initially was the belief of more centralized 

service providers that it would always be too complex and 

expensive to manage a mostly decentralized system. In 

fact, the system that evolved—while admittedly complex—

built on a hierarchy of distributed networks that developed 

alongside the dropping costs of processors and storage 

capabilities. Ultimately, the end user became the repository 

for this capacity. 

Interestingly, more proactive utilities are engaged in this 

same debate about distributed energy solutions. Again, 

taking a cue from telecom, the costs of distributed energy 

components (generation, storage, and management 

software) would need to continue to benefit from positive 

market influences, whether these are a product of better 

manufacturing economies of scale, more aggressive public 

polices, or a combination of both. If we were to experience 

a similar trajectory, distributed applications would have to 

be implemented by consumers at an accelerated pace (this 

may also be in relation to declining established service 

and/or enhanced need for greater reliability). 

But utilities that are required to include distributed 

generation in their energy portfolios are sparking a broader 

discussion about these issues: Should DG be located at the 

substation? Or perhaps at the residence or commercial 

facility? Where are the marginal costs of installation and 

maintenance competitive with DG solutions? How can the 

utility address peak-load issues with a distributed 

generation strategy? As the cost of traditional sources of 

energy become more expensive (at the time of this writing, 

crude oil was approaching $110/barrel) and the costs of 

transmission continue to increase as new infrastructure and 

facilities are continually brought online, battery technology 

and distributed generating capacity may begin to compete 

on costs as well as reliability. That said, certain segments 

of distributed energy technology are growing more quickly 

than others. The next section examines some of these 

market dynamics and looks at the complexity inherent in 

network economics. 

4 MARKET GROWTH AND 

METCALFE’S LAW 

One of the initial reasons for making the comparison 

between the telecommunications industry and the 

distributed generation industry (with a particular focus on 

renewable energy generation and storage) was the 

inapplicability of retail economics analysis to such a 

complex and dynamic market. In particular, an 

examination of the principle in network economics that a 
3

large and high-value network typically has a significantly 

smaller incentive to interconnect with a smaller low-value 

network than the smaller one has to interconnect with the 

larger one can help us gain a better understanding of some 

of the fundamental barriers to growth that distributed 

energy faces. This can easily lead to a refusal by the larger 

high-value network to interconnect, as was evidenced in the 

telecom sector. Similarly, smaller energy producers 

connecting to the larger grid face this resistance; however, 

given reliability issues as well as the environmental benefits 

of cleaner energy, this kind of generation is socially 

desirable. In the face of increasing utility bills and 

increasing concern about climate issues, it may become 

increasingly desirable to consumers as well, 

Metcalfe’s Law states that the value of a 

telecommunications network is proportional to the square 

of the number of users of the system (n2). While the law 

was specifically formulated for communications 

technology, when examined within the context of the 

previous observation about network resistance as applied to 

distributed energy generation, it may hold lessons for this 

sector as well. In other words, if distributed energy 

represents just a small number of operators, it is viewed by 

the larger T&D provider as a burden. The value of this 

small generation capacity is outweighed by the potential 

hassle. However, as the distributed generation nodes grow 

in number—and as they increasingly employ the 

“intelligent” technology that allows the systems to 

communicate their generation capacity back to the grid (the 

larger system)—the addition of each distributed member 

may exhibit this exponential value accretion. 

The significant observation here, however, is that these 

systems must be able to communicate with the larger 

system. This is a slight variance to Metcalfe’s Law, where 

the members of the system need to communicate with one 

another. However, if a distributed energy generation 

system was to completely displace a centralized system, the 

grid itself would be comprised of these distributed 

components and, by necessity, they would communicate 

with one another. In this scenario, Metcalfe’s Law would 

be entirely applicable. When consumer demand is married 

with Metcalfe’s Law, these two forces create synergy that 

accelerates the creation of infrastructure. 

Telecommunications providers grasped this principle; and, 

armed with this knowledge, aggressively pursued capital 

with which to deploy large-scale projects. Distributed 

generation companies may do well to employ this strategy. 

5 INVESTMENT TRENDS AND 

CAPITALIZATION 

Entrants into the distributed generation industry have 

been growing relatively quickly, but these emerging 

players have, up to this point, been numerous but typically 

undercapitalized. Take, for example, the domestic solar 

industry. There are perhaps hundreds of small operators 

offering myriad installation solutions. The Solar Energy 

Industry Association (SEIA) has membership categories 

distinct for contractors and installers, manufacturers, 

distributors, solar business services, financial services, law 

services, and two categories for the technology itself: CSP 

and PV. And, within this membership, almost all of these 

operators most likely offer no storage or maintenance 

solution. An integrated offering that can combine 

generation capability, storage, and management (as well as 

potential financing options) could not only make a case for 

large capital investment but may also be able to break from 

the rest of the competition. 

There are some players that want to accelerate their 

aggregation of capital by positioning themselves as 

“middle men” between utilities and end users for 

distributed generation solutions. MMA Renewable 

Ventures and SunEdison are two examples of firms that 

are taking a progressive approach to the business model. 

But there is still a large opportunity for growth here. 

Indeed, it may be that the emerging interests come not 

from the entrepreneurial start-up community, but from the 

existing larger provider sector. 

The telecommunications service providers segmented 

into their respective markets over the course of roughly six 

years in the mid-’90s. Market leaders in this space tended 

to have good capital resources, had intimate knowledge 

about their customer base, and possessed good projection 

capabilities. They were able to internalize into their 

strategy and operations the impact that cheaper storage and 

the central processing unit (CPU) technology was having 

on their industry. This insight allowed them to position 

themselves 12 to 18 months ahead of their competitors. 

By 2003, virtually all of the smaller players had become 

consolidated under the legacy telecommunications 

companies. 

In essence, the market had invested billions of dollars 

in the creation of a communications infrastructure whose 

companies demonstrated extraordinary capital burn rates, 

modest revenue growth, and generally small customer 

bases. By the time these smaller players had gone through 

all of their capital to open these new markets, larger and 

older companies were able to step in and reap the benefits. 

With this hindsight, it may be wise for distributed 

generation interests to either modify their offerings and 

expand their capitalization to provide integrated solutions 

at a larger scale, or perhaps to explore alliances with 

existing, larger utilities that are looking at entering this 

market. 

The distributed energy market is indeed beginning to 

see an influx of capital. Investments in efficiency 

technologies, storage, and smart distribution grew by 35% 

between 2005 and 2006, according to data from New 

Energy Finance (Figure 1). Investments in individual 

distributed generation technologies also are experiencing 

record growth. The wind industry represented $17.9B in 

2006, solar photovoltaics (including modules, system 

components, and installation) represented $15.6B, and the 

fuel cell and distributed hydrogen market is projected to 

grow from a $1.4 billion industry (primarily for research 

contracts and demonstration and test units) to $15.6 billion 
during the next decade [7]. The question remains whether 

this capital influx will leverage an emerging market that 

could transform the way we engage with our energy 

infrastructure, or whether it is a brief surge of 

technological innovation that eventually will be subsumed 

into a continuing centralized system. 

 

Figure 1: Investment trends for distributed energy industry. 

6 CONCLUSION 

Because technology development relies on complex 

and multiple factors, it is difficult to predict how 

distributed generation will evolve in the near future. 

Emerging players should examine carefully how their 

solutions fit into the existing infrastructure, and how they 

can leverage the tension between consumer demand for 

distributed technologies and the value that new generation 

could have to the public good—especially regarding 

energy security and reliability. The experiences of a 

similar industry can help guide this new and growing 

industry. 

REFERENCES 

[1] Economides, Nicholas, “The Economics of 

Networks,” International Journal of Industrial 

Organization, vol. 14, no. 2, pp. 675-699, 1996. 

[2] For the full text of the Telecommunications Act of 

1996, visit http://www.fcc.gov/telecom.html 

[3] The Economist, June 12, p. 26, 2004. 

[4] Renewables 2007: Global Status Report, Renewable 

Policy Network for the 21st Century (REN-21) 

www.ren21.net

[5] Global Trends in Sustainable Energy Investment, 

United Nations Environment Programme and New 

Energy Finance Ltd. 2007 

http://sefi.unep.org/fileadmin/media/sefi/docs/publi

cations/SEFI_Investment_Report_2007.pdf 

[6] For details on state approaches to DG, visit: 

http://go.ucsusa.org/cgibin/RES/state_standards_search.pl?states=All&cate

gory3=&category7=&category8=29&category32=

&category39=&category43=&category51=&submit

8.x=19&submit8.y=8 

[7] Clean Energy Trends, Clean Edge Inc., March 2007 

www.cleanedge.com 

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14. ABSTRACT (Maximum 200 Words)

The telecommunications industry went through growing pains in the past that hold some interesting lessons for the 

growing distributed generation (DG) “industry.” The technology shifts and stakeholders involved with the historic 

market transformation of the telecommunications sector mirror similar factors involved in distributed generation today.

An examination of these factors may inform best practices when approaching the conduits necessary to accelerate 

the shifting of our nation’s energy system to cleaner forms of generation and use. From a technical perspective, the 

telecom industry in the 1990s saw a shift from highly centralized systems that had no capacity for adaptation to highly 

adaptive, distributed network systems. From a management perspective, the industry shifted from small, privatecompany structures to big, capital-intensive corporations. This presentation will explore potential correlation and 

outline the lessons that we can take away from this comparison. 

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NREL; clean energy; market transformation; distributed generation; telecommunications; public policy; Alison Wise 

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