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I ocalized on-site electric power generation was once Blithe dominant source of electricity in the United States and a driving force in the later stages of the industrial revolution. During much of the early and mid 20th century, there was a gradual long-term trend away from localized electric generation and toward the use of electricity generated at central utility stations and distributed over a nationally linked power grid. However, over the past two decades, non-utility generation (NUG) in the form of on-site electric cogeneration and independent power generation has re-emerged as a driving force in the evolution of electric industry deregulation.

NUG market share is now significant and is rapidly growing with the trend toward free market competition in electric generation. Regulated public electric utilities will likely continue to maintain somewhat exclusive rights and obligations for the transmission and distribution (T&D) of electricity. However, they will also likely become only one of numerous competitors in the area of power generation and sale.

The ability of independent power producers (IPP) and local facilities with on-site generators to sell electric power as the low-cost producer has been enhanced by federally mandated open access to transmission services for wholesale wheeling. This has occurred in stages. In the period following the Public Utilities Regulatory Policies Act of 1978 (PURPA), power sales could be made to the local electric utility at either its avoided cost or through competitive bidding. After the Energy Policy Act of 1992 (EPAct 92), open access was provided to transmission services for wholesale sales in interstate commerce. On the horizon and already in effect in certain states, retail wheeling allows NUGs open access for retail — or end use — sales.

Still, the long-term impact of industry deregulation on on-site generators is far from clear. On one hand, on-site generators will have increased flexibility in system design and operating strategies. The cost of standby, or backup, power is no longer a major economic obstacle to on-site generation projects as in the past. No longer bound only to one buyer — the local electric utility, the ability to sell excess power in a competitive market should also enhance project economics for many on-site generators.

On the other hand, competition has and should continue to reduce the cost of electricity in general. Large consumers, particularly those with high-load factor electricity requirements and those with on-site generation options, will continue to enjoy low-cost power. This means that while on-site generators will have free market opportunity to sell excess power, they will do so in a highly competitive environment.

Inside-the-fence electric generation (localized generation for on-site use) will still maintain certain advantages. One advantage is the avoidance of T&D costs for purchased electricity. Even with cost-of-service based rates, T&D services remain a significant cost factor — one that may vary widely depending on a facility's usage pattern, physical location on the distribution system, and the extent to which utility stranded investments in generation capacity are recovered through T&D tariffs. Another advantage is the potential operating cost savings that can be achieved through application of baseloaded cogenera-tion or strategic deployment of generation capacity during periods when prices are at their highest. Even if rarely used, on-site stand-by generation capacity can be used to support low-cost interruptible power purchases. Finally, on-site generation is a potentially profitable internal investment opportunity.

NUG Classifications

The two traditional classifications of NUGs have been Qualifying Facilities (QF), as defined by the Federal Energy Regulatory Commission (FERC), and IPPs. A third classification, established by EPAct 92, is Exempt Wholesale Generators (EWGs). Some additional classifications are partial requirement (inside-the-fence) generators and independent self-generators.

Qualifying Facilities, as established by PURPA and defined by the FERC, are small power producers or cogen-erators. Small power producers are defined as facilities that use biomass, waste, or renewable resources to generate electricity. They are limited by size and ownership standards. Cogenerators are facilities that produce electric power and useful thermal energy by the sequential use of energy from one source of fuel. They, too, are limited by ownership, operating, and efficiency standards.

QFs may generate power, interconnect with the utility grid, and purchase power from the utility grid, all with non-discriminatory treatment. QFs can sell power to the local utility, to another utility, or, in some cases, to another facility on a retail basis. QFs have open access to utility transmission services for wholesale wheeling and, where allowed by individual states, for retail wheeling at non-discriminatory transmission rates.

Independent power producers (IPPs) may or may not be cogenerators. Their decision to maximize power production or to recover thermal energy for process type use is application specific. Like QFs, IPPs have certain ownership restrictions, but they are not given all of the benefits and protections provided to QFs, such as the right to purchase power from the local utility and the right to sell to the utility at the utility's avoided cost. Like QFs, IPPs can sell power to the local utility, to another utility via wholesale wheeling, or, in some cases, to another facility via retail wheeling, with the same right of open access to transmission services. An IPP may also use a portion of the generated power on site.

Exempt wholesale generators (EWGs) are similar to IPPs, except that they are exempt from certain ownership restrictions that apply to QFs and IPPs. Both QFs and IPPs are exempt from several Public Utilities Holding Company Act (PUHCA) and Federal Power Act (FPA) regulations if they meet ownership restrictions limiting public utility company participation. EPAct 92 amends PUHCA and FPA to allow public utilities to own or operate all or part of an EWG. Like QFs and IPPs, EWGs can sell power on a wholesale basis, but unlike QFs and IPPs, EWGs cannot participate in any form of retail wheeling.

Partial requirement (inside-the-fence) generators generate power for internal use, as well as purchase additional power from the utility grid. They do not, however, meet QF certification criteria. Often, these are peak-shaving systems, which eliminate the most costly blocks of purchased electricity. The utility is not obligated to interconnect or supply power to these facilities at non-discriminatory rates, but it may do so anyway as part of a negotiated agreement. If the self-generating facility has other competitive options, such as generating all of its own power or becoming a QF, and the utility values the facility's remaining load, it may be willing to sell power to the partial requirements customer. With the advent of retail wheeling, partial requirements customers may find access to less costly supplemental power and may, at times, export power to other retail consumers.

In addition, there are utility-sponsored peak-shaving programs by which the utility controls, via contract or incentive mechanism, the customer's use of on-site generation equipment. Utility incentives might include rebates, rate reductions, or a payment arrangement based on the customer's level of availability to interrupt service. The utility may also provide similar payments for the customer to export power to the grid upon request. Generally, actual hours of operation are limited and, in some cases, emergency generators are used. These programs allow the utility to reduce capacity requirements or to retain load by providing a customer with an economic alternative to expanded self-generation.

Independent self-generators operate total energy plants that are isolated from the utility grid. This category was more common prior to the 1978 PURPA legislation when utilities could deny service to self-generators. Today, total energy plants are most often used at facilities in remote locations or extremely large facilities operating large power plants. These facilities might also be cogener-ators or other IPPs that export power. Total energy plants may also be economical for facilities with good heat/electric balance, or special power reliability requirements.

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