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Published: 9 June 2024
Contributors: Alexandra Jonker

What is distributed generation?

Distributed generation (DG) refers to electricity generation done by small-scale energy systems installed near the energy consumer. These systems are called distributed energy resources (DERs) and commonly include solar panels, small wind turbines, fuel cells and energy storage systems.

Conventional, centralized power plants require electric power to travel long distances over complex transmission lines. Distributed generation systems are decentralized and require little to no long-distance energy transport. DG systems can power individual households and businesses. They can also connect into a microgrid, which is a small-scale grid that powers a localized area, such as a university, hospital or military base.

Distributed generation helps strengthen grid resiliency, decrease the environmental impact of electricity generation and increase energy efficiency. It is also known as dispersed generation or onsite generation.

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What are examples of distributed energy resources (DERs)?

Distributed energy resources encompass a range of energy generation technologies and storage systems. They can run on both renewable energy sources or fossil fuels. Common examples include:


Microturbines are small combustion engines that run on biogas, natural gas, propane and other fuel sources. Most produce between 15 and 300 kilowatts of electricity.

Fuel cells

Fuel cells generate electricity through a thermochemical process commonly using hydrogen. Hydrogen fuel cells can be used in electric vehicles and found in power plants.

Solar photovoltaic (solar PV)

Solar PV uses the photovoltaic effect, the generation of voltage upon exposure to solar energy, to create electricity. A solar panel is a common example of a photovoltaic system.

Wind turbines

DER wind turbines are also known as distributed wind. Distributed wind installations vary in size and electricity generation capacity. They can range from less than 1 kilowatt to 100 kilowatts.

Combined heat and power (CHP)

Also known as cogeneration, CHP is the concurrent production of electricity and heat from a single energy source. CHP technologies can run on both fossil fuels, such as natural gas, or renewable energy-based fuels, such as biomass.


While not as common as other distributed energy resources, distributed hydropower is gaining traction. Most conventional hydropower plants are large and centralized, but new technology is taking advantage of the Earth’s plentiful waterways to make hydropower scalable and easier to deploy where energy is needed.

Battery storage

Battery energy storage systems (BESS) receive and store energy from DERs for later use. They are key to preventing outages when relying on intermittent renewable energy sources.

Electric vehicles (EVs)

EVs can function as distributed energy resources when they are plugged into charging stations. Through vehicle-to-grid (V2G) technology, unused energy stored in the EV’s battery can be fed into a power grid.

What are distributed generation energy compensation mechanisms?

Energy compensation mechanisms reward energy producers for generating self-consumed energy or sending their energy back to the electric grid. They are among several incentives to help offset the high upfront investment of distributed generation power systems. Mechanisms that compensate producers with renewable energy systems at a high value can also support for further clean energy generation and decarbonization.1

There are three main energy compensation mechanisms for distributed generation:

Net metering

This mechanism credits DG system owners for the excess energy they export to the grid. Owners can then use these credits to consume their electricity at any time, not just as it is generated. This makes net metering especially attractive to owners of intermittent power generation systems—such as solar panels or wind turbines—that rely on the right weather conditions.

Feed-in tariffs (FiTs)

FiTs are performance-based incentives that guarantee energy producers above-market prices for the energy they generate and supply to the grid. These are long-term contracts generally designed to encourage the deployment of renewable energy technologies. They gained popularity as support for solar PV systems in the United States and wind farms in Germany and Denmark.2

Power purchase agreements (PPAs)

A PPA is a long-term contract between energy producers and energy buyers. This contract defines the price that suppliers receive for every megawatt-hour (MWh) of energy generated from an energy asset—most commonly, a renewable energy asset. PPAs provide long-term cash flow certainty for energy generation projects and allow distributed generation system owners to take advantage of tax credits.

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What is distributed generation interconnection?

While distributed generation energy systems can be off grid, they can also be linked to local energy grids through interconnection. Interconnection requires support technology such as inverters, which convert direct current (DC) electricity into alternating current (AC) electricity. DERs such as solar PV and wind turbines generate DC electricity, while most energy transmission and distribution occur through AC electricity.

However, there are challenges associated with interconnection. Most electricity distribution systems were not designed for bidirectional flow. This is the flow of electricity from centrally located power plants to consumers and the flow of electricity from consumer-owned DERs into a grid. As such, interconnection can create grid congestion and increase the risk for blackouts. Smart grid technologies, advanced metering infrastructure (AMI), load forecasting and coordination between regulators, grid operators and consumers can help address these challenges.

What are the benefits of distributed generation?

Distributed generation offers several benefits to energy consumers, producers and the environment:

Grid resilience

Climate change has increased the frequency of extreme weather events and natural disasters, which can cause power outages and disruptions. Distributed energy resources enhance power system resilience as backup options for energy generation. DER also provide flexibility for the grid as more renewable energy sources are added, helping to provide backup sources of energy when renewable energy generation is unpredictable and intermittent.

Energy efficiency

Energy transmission can reduce the full generation capacity of power plants and other energy generation systems. This can be largely avoided by moving the generation system closer to the consumer with DERs. Plus, DERs and microgrids are more flexible and responsive to energy supply and demand.


Energy costs are volatile—subject to natural disasters, market conditions and geopolitics. Distributed energy is usually less affected by these price factors and can also come with tax credits and offsets. Additionally, deploying DERs in high-load locations allows electric utilities to delay building new energy generation systems (or offset current ones). This can reduce electric service costs for the entire system.

Environmental impact

Energy from distributed generation is not necessarily renewable energy. However, DG can play a role in advancing renewable energy projects and sustainability goals. Also, energy systems close to consumers can reduce the environmental impacts of energy transportation (such as emissions and ecosystem disruption).

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Resources What is load forecasting?

Load forecasting is the process of predicting how much electricity will be needed at a given time and how that demand will affect the utility grid.

What is solar power?

Solar power, also known as solar energy, is a renewable energy source that uses particles of sunlight (photons) for energy production.

What is wind power?

Wind power is a type of renewable energy that harnesses the kinetic power of wind for electricity generation.

What is a microgrid?

Microgrids are small-scale power grids that operate independently to generate electricity for a localized area, such as a university campus, hospital complex or military base.

What is energy storage?

The ability to store energy can reduce the environmental impacts of energy production and consumption and facilitate the expansion of clean, renewable energy.

What are PPAs?

A PPA is a long-term contract that defines the price that an energy supplier receives for every MWh of energy generated from a renewable energy asset.

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1Energy Compensation Mechanisms for Distributed Generation” (link resides outside ibm.com), The National Renewable Energy Laboratory.

2Feed-in tariff: A policy tool encouraging deployment of renewable electricity technologies” (link resides outside ibm.com), U.S. Energy Information Administration, 30 May 2013.