Economic Report President

Box 5-10.—The Trend Toward Decentralized PowerGenerationThe trend toward smaller, cleaner, and quieter generatingplants, combined with certain aspects of the physics of electricitytransmission and generation, has led some to claim that the daysof centralized electric power are numbered. Generating electricityfrom a fuel source is never perfectly efficient; some of the energyin the fuel source is inevitably lost in the transformation process.This energy typically takes the form of heat, which can be capturedand used in industrial processes, or as space heating if thegenerator is physically close enough to consumers in need of heat.An electric power plant thus produces two potentially valuableproducts—electricity and heat—for the price of one. The exploitationof these potential economies is called cogeneration.Once generated, electricity typically goes through many stepsbefore reaching the end user. It may be transmitted over highvoltagewires for long distances, after which it must be transformedinto lower voltage to be distributed, and finally transformedagain before being delivered to consumers. On average,some 7.5 percent of the electricity generated is lost through thedistribution chain before reaching the end user. On-site electricitygeneration avoids the greater part of these losses, thus increasingefficiency and lowering costs.In the past, economies of scale in electricity generation and thenuisance of locating loud and polluting plants near homes andbusinesses outweighed this incentive for small-scale local generation.This situation has begun to change, however, as very smallscale plants are becoming more competitive with large-scale generation,and as plants are becoming quieter and less polluting.These changes do not necessarily imply the total demise of centralizedpower. An electric power grid remains an efficient way ofallowing generating plants with different production characteristicsto serve consumers with different load profiles. For example,electricity demand from many businesses peaks during the day,whereas residential demand is concentrated during the morningsand evenings. If each of these groups generated its own electricity,not only would each need to have its own facilities, but each facilitywould spend many hours per day with slack capacity. A singlelarge generating plant can supply the same customers with lesstotal generating capacity. Depending on the size of distributionlosses and the value of excess heat, it would be wasteful to havetwo separate plants, one at the office and another one at home,when one plant could service both loads.215