Navigating the global landscape of distributed energy resources: opportunities, challenges, and legal considerations

Mehmet Feridun İzgi
Balcıoğlu Selçuk Ardıyok Keki, Istanbul
fizgi@baseak.com

The core concept of distributed energy is to generate electricity where it is consumed, optimising network investments, and reducing transmission losses. Generating electricity at the point of consumption primarily serves to reduce the network investment costs for transmission and distribution system operators. Moreover, by aligning production with consumption in the same location, it mitigates the energy losses that typically escalate with extended transmission and distribution distances. While this model is designed to optimise the use of primary energy sources and offers significant efficiency advantages, the implementation of distributed energy systems presents considerable challenges.

Theoretically, almost all primary sources such as natural gas, hydraulics, coal, waste heat, solar, biomass, wind, and even small-medium scale nuclear reactors (SMNR) can be utilised to establish distributed energy systems. However, when considering the goals set out in combating climate change, issues relating to scalability and the feasibility of installation near points, it is inevitable to place solar energy at the centre of distributed systems. For instance, combustion-based resources such as natural gas and solid waste are less likely to be preferred for distributed energy systems due to their negative impact on climate change. SMNRs face limitations relating to their scale, while coal is constrained by both climate change concerns and scale issues. Additionally, primary sources such as wind and hydroelectric power are less favoured for distributed energy systems due to the low likelihood of these sources being located at the same site as the consumption point therefore requiring transmission lines. Given its widespread availability at nearly every consumption point, its flexibility in terms of scale, ease of installation, operational simplicity and its gradually decreasing costs, solar energy stands out as the primary source for distributed energy systems.

As a primary energy source, solar power is often available at investable levels at nearly every point of consumption. On the other hand, a solar power plant (SPP) designed to meet all or a significant portion of the consumption may require substantial space, depending on the size of the consumption. Consequently, the available space at the consumption site (such as building rooftops or gardens) may not be sufficient. This space requirement constitutes a key disadvantage of solar systems in the face of all their advantages and poses a significant challenge that needs to be addressed in the context of solar energy. The issue becomes even more pronounced when the space required for a facility to meet the needs of large consumers also increases. In fact, this constraint may sometimes obstruct investments that could cover a significant portion of the total consumption. One potential solution to this problem is to use land located at a certain distance from the consumption point for a facility designed to meet self-consumption needs. Correspondingly, the revised regulations for unlicensed electricity generation now allow such self-consumption facilities to be established at a distance from the consumption point. Accordingly, this has introduced the possibility of setting up facilities in various locations by connecting to a substation situated independently of the distribution region and the consumption point. While these models can address the space requirements, it is crucial to note that the need for network transmission components for the production facility moves the model away from the core principles of distributed generation. As stated above, the core objectives of this model are to reduce network investments, avoid idle capacity investments and minimise system losses. However, the more transmission components are incorporated in the model, the further it deviates from the core principles of distributed generation.

As a principle, electricity generation is generally regarded as a public service. Consequently, various legal systems grant companies authorised to generate electricity the power to request expropriation for both production facilities and network investments. However, in decentralised models, this situation is slightly different. The principle of generating electricity at the point of consumption necessitates that production activities primarily address self-consumption needs. As a result, in facilities designed for self-consumption, the focus is primarily on individual benefits, with public benefits being secondary and indirect. Therefore, in the distributed electricity generation model, it may not be possible to acquire the right to use the land required for both the facility site and the transmission lines through expropriation by public authorities (ie, in Turkey, expropriation is only granted for licensed facilities). Even if acquiring the site for the facility is possible, obtaining rights to land for overhead or underground transmission lines is likely to encounter significant challenges. In order to resolve this issue, a swift dispute resolution mechanism that protect the landowner’s property rights, while preventing malicious attempts to obstruct investment, may be considered. Examples of specialised dispute resolution mechanisms similar to arbitration may be found across various fields within legal systems.

The financing of distributed energy facilities also warrants discussion. Given the relatively high costs associated with these investments, determining how consumers will finance them and secure loans is a critical issue. While the possibility of generating revenue by supplying excess electricity to the network can attract investors, the variability of income and its dependence on multiple factors may not provide the certainty that financial institutions require. Ensuring that the plant owner receives income based on a government-guaranteed pricing mechanism could enhance the appeal of such systems to potential financiers.

Finally, considering the complexity of investing in and operating electricity generation facilities, investors in distributed energy projects are often consumers or consumer groups with limited experience in electricity production investments. Addressing this information asymmetry can only be achieved through innovative and creative business models, supported by regulatory frameworks that clearly define these models and mitigate uncertainties.