A Preliminary Analysis of the Economics of Using Distributed Energy as a Source of Reactive Power Supply (2006)

A major blackout affecting 50 million people in the Northeast United States, where insufficient reactive power supply was an issue, and an increased number of filings made to the Federal Energy Regulatory Commission by generators for reactive power has led to a closer look at reactive power supply and compensation. The Northeastern Massachusetts region is one such area where there is an insufficiency in reactive power compensation. Distributed energy due to its close proximity to loads seems to be a viable option for solving any present or future reactive power shortage problems. Industry experts believe that supplying reactive power from synchronized distributed energy sources can be 2 to 3 times more effective than providing reactive support in bulk from longer distances at the transmission or generation level. Several technology options are available to supply reactive power from distributed energy sources such as small generators, synchronous condensers, fuel cells or microturbines. In addition, simple payback analysis indicates that investments in DG to provide reactive power can be recouped in less than 5 years when capacity payments for providing reactive power are larger than $5,000/kVAR and the DG capital and installation costs are lower than $30/kVAR. However, the current institutional arrangements for reactive power compensation present a significant barrier to wider adoption of distributed energy as a source of reactive power. Furthermore, there is a significant difference between how generators and transmission owners/providers are compensated for reactive power supplied. The situation for distributed energy sources is even more difficult, as there are no arrangements to compensate independent DE owners interested in supplying reactive power to the grid other than those for very large IPPs. There are comparable functionality barriers as well, as these smaller devices do not have the control and communications requirements necessary for automatic operation in response to local or system operators. There are no known distributed energy asset owners currently receiving compensation for reactive power supply or capability. However, there are some cases where small generators on the generation and transmission side of electricity supply have been tested and have installed the capability to be dispatched for reactive power support. Several concerns need to be met for distributed energy to become widely integrated as a reactive power resource. The overall costs of retrofitting distributed energy devices to absorb or produce reactive power need to be reduced. There needs to be a mechanism in place for ISOs/RTOs to procure reactive power from the customer side of the meter where distributed energy resides. Novel compensation methods should be introduced to encourage the dispatch of dynamic resources close to areas with critical voltage issues. The next phase of this research will investigate in detail how different options of reactive power producing DE can compare both economically and functionally with shunt capacitor banks. Shunt capacitor banks, which are typically used for compensating reactive power consumption of loads on distribution systems, are very commonly used because they are very cost effective in terms of capital costs. However, capacitor banks can require extensive maintenance especially due to their exposure to lightning at the top of utility poles. Also, it can be problematic to find failed capacitor banks and their maintenance can be expensive, requiring crews and bucket trucks which often requires total replacement. Another shortcoming of capacitor banks is the fact that they usually have one size at a location (typically sized as 300, 600, 900 or 1200kVAr) and thus don't have variable range as do reactive power producing DE, and cannot respond to dynamic reactive power needs. Additional future work is to find a detailed methodology to identify the hidden benefit of DE for providing reactive power and the best way to allocate the benefit among customers, utilities, transmission companies or RTOs. With the hidden benefits discovered, it will be easier for the policy maker to re-assess the value of reactive power and to form a sound competitive market for this service. Along with the capability of DE to provide local reactive power, a market needs to exist to promote the operation of DE to regulate voltage and net power factor. There are a number of potential benefits that have been identified including capacity relief, loss reduction, improved system reliability, extended equipment life, reduced transport of reactive power from the G&T, and improved local voltage regulation and power factor. An attempt has been made using very simple data and cases to quantify these benefits. Only the model of a larger and more detailed distribution system with DE can truly give a full picture of the benefits that reactive power from local DE can provide.