The Emergence of Low-carbon Distributed Generation and Virtual Power Plants

The deployment of small-scale distributed generation technologies using renewable energy has 2 main benefits for the energy mix: reduction of carbon emissions and generation of energy close to the point of consumption; thus, reducing the need for investment in centralised power generation. Technologies are mostly well established and have seen strong growth recently, albeit from a low base. However, the challenges for the market to move to the next level relate to successful business models. This study looks at the emergence of virtual power plant models as a key enabler for growth.

Strategic Imperative for Small-scale Distributed Generation

•Development of small-scale distributed generation (DG) is primarily driven by two commitments: to reduce carbon emissions and to generate electricity from renewable energy sources closer to the point of consumption. For success, government support is a prerequisite for commercial viability. Countries with a strong support for these technologies witness a higher growth rate, increased awareness of end-user groups, and a noticeable reduction in the amount of carbon emissions from the residential and small commercial sectors.
•Many small-scale DG technologies are well established and are manufactured on a commercial scale, but the biggest issue to be solved before the market truly takes off is how the stakeholders will make money. As the largest stakeholders and owners of the relationships with the end users, utility companies are the crucial participants: As soon as attractive business models are defined, the market will boom.
•In the small-scale DG sector, micro-combined heat and power (CHP) is currently the area where we see much more utility focus and clearer business models. The micro-renewables market is still much stronger in heating technology than in electricity generation. This will change in the coming years, but it helps explain why utilities are tending to focus on technologies that link with heating solutions, because it is a more established market with higher customer awareness and lower dependence on feed-in tariffs (FITs). As far as electricity generation is concerned, in the longer term, solar photovoltaic (PV) has a bright future, but this has yet to excite utility participants at the small-scale level. Solar PV remains the domain of relatively small specialist firms that may well become acquisition targets for utilities in coming years.
•One of the major restraints affecting the adoption of distributed generation is grid interconnection with the utilities. Excess power generated can be sold to the utilities, provided that appropriate grid connections exist and the utilities are willing to purchase electricity from small power producers. In most cases, the terms and conditions given in power purchase agreements (PPAs) are considered to favour the utilities, hence there is little perceived incentive for the developer to invest in these plants. In the longer term, this issue will only be truly resolved when the utilities have more consistently decided the roles they see themselves playing in micro-DG markets.

Scope and Definitions of Small-scale DG

The focus of this market insight is on small-scale distributed generation (up to X MWh/yr), including both electricity generation and CHP. We consider all available low-carbon technology used in DG, including CHP technologies such as micro-CHP units and fuel cells. We also include all renewable energy technologies used in micro-generation, such as solar PV/building-integrated PV (BIPV), solar thermal, small wind, small hydro, and biomass boilers. The application scope is limited to residential buildings (including individual homes, multi-home buildings, and apartments) and commercial office buildings.

Geographic Scope and Global Hot Spots

The geographic scope of this market insight is global. We include all countries in our broad analysis of trends and opportunities, with particular countries highlighted as examples of either high growth or leadership in the development of new business models.

United Kingdom
Sweden
Netherlands
Germany
Italy
Japan

Key CEO 360 Degree Perspectives on Growth in the Small-scale DG Market

Environmental issues and imminent shortages of power-generating capacity are combining to make small-scale DG a very attractive proposition.
Market potential is huge, but winning business models are still not clearly defined. Upcoming years will define who makes money and how.
Micro-CHP is still a small niche market, but it has the highest long-term potential as a DG solution.
Technology and market convergence are attracting new participants, especially those with crucial information and communication technology for effective virtual power plants.
Europe is the most attractive market for small-scale DG, but North America will follow in the short term, and Asia-Pacific (APAC) will offer the highest longer-term growth.

Three Big Predictions

Virtual power plant business models will win within the next Xyears. The deployment of smart technology and the development of micro-grids will be the key enablers.
Distributed generation is poised to take off to a new level, especially in Europe. There is increasing focus on deployment of small-scale renewable energy close to the point of consumption. This will create opportunities for suppliers or micro-generation technologies and require new strategies and business models from power-gen companies and utilities.
Micro-CHP technologies will grow the most quickly. Domestic renewable energy and renewable heating technology markets have underperformed, but the combination of heating with on-site power will resonate more strongly with a much higher proportion of the customer base.

Table Of Contents

Table Of Contents
Executive Summary 3
Market Outlook 9
Distributed-generation Business Models 15
Country Profiles and Case Studies 21
Appendix 37
The Frost and Sullivan Story 39

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