Electricity, like most commodities, is rarely produced where it is consumed.
In the United States, the majority of electricity is generated at large, centralized power plants and then shipped many miles to cities and towns where it is used. Although this approach enables economies of scale in energy generation, it depends upon long-distance transmission to deliver power to customers.
Shipping and handling costs for energy are significant, and consumers pay these through electric rates. Yet, most decisions about where to purchase new electricity are based on a ‘sticker price’ that only accounts for generation – not transmission. Determining transmission-related costs is an unwieldy task, but setting hard-to-calculate costs at zero is inaccurate and can result in more expensive decisions. Once the hidden costs of transmission are considered, local energy generation offers an economically attractive alternative to centralized generation.
Each year, energy consumers pay billions in shipping and handling charges. Constructing and maintaining massive transmission infrastructure is not cheap. According to the Edison Electric Institute (an association of investor owned utilities), its members alone will spend more than $64 billion on transmission infrastructure through 2016. Major transmission investments like these are also subject to a government-guaranteed return of 11.7% to 12.9%, which ultimately fall on consumers.
Other transmission-related costs are less visible than infrastructure but equally important. For example, moving electricity long distances is inherently inefficient. The further the distance, the more electricity is lost along the way – a process known as line losses. The U.S. Energy Information Administration estimates that, on average, transmission line losses total 7% of all electricity generated – enough electricity to power New York City fourteen times over. This means we must pay for more a lot more energy than we actually need because some will inevitably be lost before reaching us.
Another consideration is that our power system gets congested just like our highways during rush hour. As transmission lines are loaded with more energy, lines losses increase. When transmission lines reach capacity, bottlenecks force grid operators to fire up outdated, inefficient and expensive power plants to meet demand. The result is ‘congestion charges’ for consumers. While the exact amount of congestion charges varies depending on location, Energy Department estimates have put the number around $90 annually for New York City residents.
All told, transmission-related costs – though not included in the ‘sticker price’ – can comprise up to 25 percent of the total price a consumer pays for energy. Luckily, there is an alternative.
Local energy generated on rooftops, parking lots, landfills and other underutilized spaces within built environments does not rely on transmission to deliver power to consumers. As a result, localized energy generation (known as “distributed generation”) minimizes transmission-related costs for consumers.
A May 2012 study by Southern California Edison found that the utility could save $2 billion in system upgrade costs if they guided distributed generation to key locations on its grid. Similarly, Long Island Power Authority – a New York utility – determined that the development of local solar installations could meet rising demand for electricity while saving customers nearly $84 million in avoided transmission costs.
Distributed generation also improves the overall efficiency of the power system. Local energy generation reduces line losses and extends the lifespan of existing transmission infrastructure by minimizing wear-and-tear from use. Importantly, distributed generation creates a stronger, more resilient power system in the face of extreme weather, human error or terrorist attack. Just like diversifying a financial portfolio to mitigate risk, distributed generation diversifies our power supply – in terms of location, size and fuel source.
Prioritizing distribution generation can save consumers money, and we’re beginning to see broader recognition of this fact. Just last month, the Minnesota Public Utilities Commission ruled that building distributed solar projects rather than new natural gas plants is a better deal for energy consumers. The ruling specifically acknowledged the ability of local solar to meet demand on hot summer days without adding to transmission congestion.
Despite growing evidence that distributed generation may be in the best interest of energy consumers, too strong a focus on centralized generation remains. We all must become smarter energy consumers by recognizing that a ‘cheap’ sticker price isn’t always the best deal.