Centralized and Decentralized Power Generation

Centralized and Decentralized Power Generation

As the date for peak oil looms large in the future, traditional methods of power generation are being reevaluated to determine if they are the optimal approach. Innovations in technology have introduced improved micro-sized wind turbines and more efficient solar photovoltaics and in a growing number of cases, the centralized generation of power is being supplemented and even replaced by decentralized power generation sources. Indeed, in some cases, businesses and consumers are generating more power than they are using and are selling their surplus electricity. This paper provides a discussion concerning the respective advantages and disadvantages of centralized vs. decentralized power generation, including a description of the importance of feed-in tariffs for decentralized power generation. Finally, a summary of the research and important findings about the advantages and disadvantages of centralized vs. decentralized power generation are provided in the conclusion.

Review and Discussion

Centralized and Decentralized Power Generation

Advantages and Disadvantages of Centralized Power Generation. One of the most significant advantages of centralized power generation systems is potential economies of scale that can be realized. In addition, other costs associated with power generation such as maintenance and repair are typically less in centralized operations because these facilities can employ full-time on-site personnel for these functions (Cohen, 2001). In addition, there are a number of other less discernible but still economically important advantages to having centralized power generation systems, including overall management. In this regard, Cohen emphasizes that, “Furthermore, the economic value [of centralized systems] must be assessed within the context of the entire mix of generation facilities connected to a grid. Centralization facilitates the management of all facilities in a coordinated grid” (2001, p. 337).

One of the major problems with having such a highly connected and centralized electricity grid is system reliability (Bluvas, 2007). The electricity grid is so interconnected that a localized threat, such as a natural disaster, terrorist attack, or generation failure, can have catastrophic national effects. Another problem with our current system is the hidden costs or externalities that are associated with its operation. In the electricity generation context this means, “the price charged for electric power is lower than it would be if the costs of externalities were internalized.” Distributed generation helps solve both these problems by encouraging local generation and allowing a realistic vehicle for the introduction of renewable generation resources, thereby reducing externalities (Bluvas, 2007, p. 1589).

Advantages and Disadvantages of Decentralized Power Generation. Because energy transmission costs add significantly to the cost of electricity to end users, keeping power generation sources geographically proximate just makes good business sense, but there are some other advantages and disadvantages that are associated with decentralized power generation that are also less visible. For instance, with respect to photovoltaic power, there are some fundamental technical and economic differences between distributed and centralized power generation that limit the amount of power that can be generated by modest applications. For instance, according to Cohen, “Distributed systems reduce the need for transmission and distribution of electricity, although they do not eliminate it because distributed users will still buy some power from the central system” (p. 337). Likewise, Purpura (2008) emphasizes that, “Renewable energy generation sources must be monitored and managed around the clock and efficiencies dictate that the system will need to be fully automated” (p. 3). Despite these constraints, as the supporting technologies improve, it is clear that one of the main advantages of decentralized power generation will be reduced costs and even a potential profit for micro-system users. As Cohen points out, “Distributed systems eliminate the need to assemble tracts of land for large generation installations, and the transactions costs connected with measuring and billing for power. Such systems offer better opportunities for using the heat created by collecting sunlight, such as by heating water” (2001, p. 337). Taken together, it is clear that centralized and decentralized energy production systems have significant advantages and disadvantages, but there are some other issues involved in this analysis that must be taken into account and these are discussed further below.


The traditional centralized generation of power is still the most important part of the energy grid, but the need for more efficient method of generation and delivery has forced the energy industry to restructure over the past decade (Blumsack, 2007). The less discernible costs that are associated with power generation are known as external costs. In this regard, Gohlke, Thomas, Woodward et al. (2011) report that, “On the one hand, access to a centralized power source is necessary to gain many of the benefits of clean power. On the other hand, though, depending on the way power is generated, new risks may be introduced that are not reflected in the market price, often referred to as external costs” (p. 822). Recent estimates of these external costs place the total as high as $120 billion in the United States for 2005 alone (Gohlke et al., 2011). There are also some physical limitations to existing technologies that prevent economies of scale from being realized. For example, Cohen (2001) points out that, “Unlike conventional energy sources, there is no economy of scale in the acquisition of solar energy . . . A large, centralized solar plant produces energy no more cheaply than a small one (apart from minor savings in maintenance costs)” (p. 337). Consequently, smaller and micro-generation approaches appear to represent the optimal blend between centralized and decentralized energy production methods (Cohen, 2001). As Cohen advises, “With transmission costs eliminated or at least greatly reduced, the small plant is by far the most efficient way to deliver the energy. [In the past], distributed photovoltaic technology was not consistent with the natural monopoly rationale for public utilities, which is that electrical energy is most efficiently generated in large facilities serving thousands of users” (2001, p. 337). This is changing, though, and distributed generation is becoming an increasingly popular alternative for many regions in the United States (Hester & Gross, 2001, p. 70). There remains a need for improved efficiencies for many of these technologies to become competitive with centralized power generation systems, but current trends suggest these will be achieved in the near future (Hester & Gross, 2001). According to Hester and Gross, “Technological improvement, further deregulation, sporadic energy shortages, and environmental concerns will facilitate overcoming inertia and other barriers” (2001, p. 70). These observations are congruent with the preponderance of the literature review wherein the move towards decentralization is clear. For instance, Flavin and Dunn (2001) conclude that, “Today’s dominant energy model is centralized, large-scale and focused on increasing supply, its successor will be decentralized, downsized and directed toward meeting demand” (p. 167).

Feed-In Tarriffs

The decentralization of energy production has introduced a pricing mechanism known as feed-in tariffs that are intended to encourage renewable energy development (Barclay, 2010). To date, feed-in tariffs that have been considered successful have generally demonstrated the following characteristics:

Utilities are required to purchase all power under a specified “standard-offer contract,” which usually lasts 20 years and the rate per kilowatt hour (kWh) is fixed and guaranteed for the contract period;

The rate schedules decline each year by some percentage, called “tariff degression” which reflects assumed increases in each RES’ technological efficiency and reward early entrants and power generators that contract in year one receive higher rates than those that contract in year two, and so on;

Rates are different for different types of renewable energy reflecting the underlying costs (i.e., rates for wind are generally lower than for solar photovoltaic);

There are different rates for different geographic locations, and/or “on the ground” versus “located on a building” users; and,

Larger capacity sources have lower rates than smaller ones, reflecting a need for larger incentives for smaller facilities to be financially viable (Barclay, 2010, p. 36).

As of 2009, ten states in the United States were considering implementing feed-in tariff regulatory mechanism comparable to the tariffs adopted by eighteen of the European Kyoto Protocol countries, but these mechanisms still face constitutional challenges (Ferry & Laurent, 2010).


The research showed that today’s dominant energy model remains the centralized, large-scale energy production approach that is focused on satisfying increasing demand in an efficient fashion. The research also showed that the move is on to decentralized energy production through smaller production facilities and so-called micro-systems that supplement and even replace traditional sources of energy. Taken together, it is reasonable to conclude that the successor to today’s large-scale centralized energy production will be decentralized, downsized alternatives that are designed to meet peak demands in a more efficient ways.


Barclay, R.A. (2010, Summer). Feed-in tariffs: Too much of a good thing? Management

Quarterly, 51(2), 35-37.

Blumsack, S. (2007, January 1). Measuring the benefits and costs of regional electric grid integration. Energy Law Journal, 28(1), 147-150.

Bluvas, K. (2007, Fall). Distributed generation: A step forward in United States energy policy.

Albany Law Review, 70(4), 1589-1592.

Cohen, L.R. (2001). The technology pork barrel. Washington, DC: Brookings Institution.

Ferry, S., Laurent, C. & Ferrey, C. (2010, Winter). Fire and ice: World renewable energy and carbon control mechanisms confront constitutional barriers. Duke Environmental Law & Policy Forum, 20(1), 125-133.

Flavin, C. & Dunn, S. (2001, Fall). A new energy paradigm for the 21st century. Journal of International Affairs, 53(1), 167-168.

Gohlke, J.M., Thomas, R., Woodward, A. et al. (2011, June). Estimating the global public health implications of electricity and coal consumption. Environmental Health Perspectives,

119(6), 821-825.

Hester, E.D. & Gross, A.C. (2001, July). Micropower. Business Economics, 36(3), 70.

Purpura, C. (2008, Winter). The smart utility will be a connected utility. Management Quarterly,

49(4), 2-5.

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