What Is Distributed Generation? Definition & Guide

Key Takeaways

Distributed generation (DG) produces electricity at or near the point of use, reducing reliance on long-distance transmission infrastructure
Rooftop solar is the most common form of DG, but it also includes community solar, small wind, fuel cells, and combined heat and power (CHP)
DG reduces transmission and distribution (T&D) losses, which typically account for 5–10% of total generated electricity
Behind-the-meter DG can offset both energy charges and demand charges on commercial electricity bills
The U.S. has over 40 GW of distributed solar capacity as of 2025, growing at roughly 20–25% annually
Accurate site-level modeling is critical for DG projects because production depends heavily on local shading, orientation, and consumption patterns

What Is Distributed Generation?

Distributed generation refers to small-scale electricity generation systems located at or near the point of consumption. Instead of relying on large centralized power plants that transmit electricity over hundreds of kilometers through high-voltage transmission lines, DG systems produce power where it is needed — on rooftops, at commercial facilities, within neighborhoods, or at the edge of the distribution grid.

The defining characteristic of DG is proximity. A 10 kW rooftop solar array on a home, a 500 kW solar carport at a warehouse, a community solar garden serving 200 subscribers, or a natural gas microturbine at a hospital are all forms of distributed generation. What they share is a direct connection to the local distribution network rather than the bulk transmission system.

Distributed generation is not just a technology shift — it is an architectural change to how electricity systems work. Instead of one-way power flow from plant to consumer, DG creates a two-way grid where consumers also produce. This fundamentally changes how solar professionals must approach system design, interconnection, and financial modeling.

Types of Distributed Generation

Most Common

Rooftop Solar (Residential)

Systems from 3–15 kW installed on residential rooftops. Typically grid-tied with net metering, these systems offset household electricity bills and export surplus energy to the grid. The fastest-growing segment of DG worldwide.

High Value

Commercial & Industrial DG

Systems from 50 kW to several MW installed on commercial rooftops, carports, or adjacent ground mounts. These systems can offset both energy charges and demand charges, and typically achieve higher self-consumption ratios due to daytime load alignment.

Subscriber-Based

Community Solar

Shared solar installations (typically 1–5 MW) where multiple subscribers receive bill credits proportional to their share. Enables solar access for renters, apartment dwellers, and buildings with unsuitable rooftops. Over 6 GW installed in the U.S. as of 2025.

Resilience-Focused

Microgrids

Self-contained energy systems combining DG sources (solar, batteries, generators) with local loads that can operate independently from the main grid. Common at hospitals, military bases, and campuses where power continuity is critical.

Distributed vs. Centralized Generation

Understanding where DG differs from conventional centralized power plants helps solar professionals explain value propositions to customers and stakeholders.

Feature	Distributed Generation	Centralized Generation	Impact
System Size	1 kW – 10 MW	100 MW – 2,000 MW	DG matches load scale, reducing overbuilding
Location	At or near consumption	Remote sites, far from load	DG avoids T&D infrastructure costs
Transmission Losses	Minimal (0.5–2%)	Significant (5–10%)	DG delivers more usable energy per kWh generated
Capital Structure	Smaller, modular investments	Large, lumpy capital expenditure	DG can be deployed incrementally as demand grows
Build Time	Days to months	Years to decades	DG responds faster to market demand
Grid Resilience	Adds redundancy, enables islanding	Single point of failure risk	DG reduces cascading outage risk
Customer Economics	Offsets retail electricity rate	Sells at wholesale rate	DG captures higher per-kWh value for the owner
Permitting	Local AHJ, simpler process	State/federal, environmental review	DG has lower regulatory barriers

Calculating the Value of Distributed Generation

The full value of DG extends beyond simple energy production. Solar professionals and project developers should account for all value streams when modeling DG project economics.

DG Value Stack Formula

DG Value = Avoided Energy Cost + Avoided Demand Charge + Avoided T&D Losses + Grid Services Value

Each component of the value stack:

Avoided Energy Cost: The retail electricity rate displaced by on-site generation. This is the primary value driver for most residential and commercial DG systems.
Avoided Demand Charge: For commercial customers on demand-rate tariffs, DG can reduce peak demand charges if production coincides with peak load periods. This can represent 30–50% of total bill savings.
Avoided T&D Losses: Because DG produces electricity at the point of consumption, it avoids the 5–10% energy losses that occur during transmission and distribution from centralized plants.
Grid Services Value: DG systems (especially those with battery storage or smart inverters) can provide voltage support, frequency regulation, and capacity during peak demand. Some utilities compensate DG owners for these services.

Market Trend

In several U.S. states and European markets, distributed solar is now growing faster than utility-scale solar. According to SEIA, distributed solar accounted for over 40% of new U.S. solar capacity additions in 2024. The trend is driven by rising retail electricity rates, declining module costs, and customer demand for energy independence. For solar installers, this means the addressable market for rooftop and commercial DG continues to expand.

Practical Guidance

Distributed generation projects require site-specific analysis that goes well beyond utility-scale design. Here’s role-specific guidance for DG professionals:

Model site-specific shading accurately. DG systems are installed in built environments with nearby buildings, trees, and obstructions. Use shadow analysis software to quantify losses at each panel position.
Size systems to the consumption profile. Match DG system capacity to the customer’s load profile and applicable net metering policy. Oversizing creates diminishing returns in net billing markets.
Account for roof constraints and setbacks. DG rooftop designs must respect fire code setbacks, structural load limits, and AHJ-specific requirements that do not apply to ground-mount utility projects.
Use accurate financial modeling. Pair production estimates with the customer’s actual rate schedule using a generation and financial tool to calculate realistic payback and ROI.

Verify interconnection requirements early. DG systems must meet utility interconnection standards. Submit applications before installation begins to avoid commissioning delays.
Check transformer capacity. Multiple DG systems on the same distribution transformer can cause voltage rise issues. Confirm available hosting capacity with the utility.
Install smart inverters where required. Many jurisdictions now require IEEE 1547-2018 compliant inverters that can provide grid support functions like volt-VAR control.
Document everything for AHJ inspection. DG installations face local building and electrical inspections. Prepare permit packages, line diagrams, and equipment spec sheets in advance.

Quantify the full value stack. Do not sell on energy savings alone. Include demand charge reduction, T&D loss avoidance, tax incentives, and potential grid service revenue in your proposals.
Address energy independence. DG paired with storage gives customers backup power and reduces grid dependence. This resonates with both residential and commercial buyers.
Use visual proposals with site-specific data. Show customers their actual roof layout with panel placement, shading analysis, and production estimates using solar design software.
Explain interconnection timelines. Set customer expectations on the full project timeline, including utility review and meter installation, which can add weeks or months to the process.

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Grid Integration Considerations

As DG penetration increases on distribution circuits, solar professionals need to understand the technical challenges and solutions:

Voltage regulation. High DG penetration can cause voltage rise on distribution feeders, especially during periods of high production and low load. Smart inverters with volt-VAR and volt-watt functions (per IEEE 1547-2018) help mitigate this.

Reverse power flow. Traditional distribution grids were designed for one-way power flow. DG can cause reverse flow on feeders, requiring utility protection systems to be updated.

Hosting capacity. Utilities publish hosting capacity maps that show how much DG each circuit can accommodate before triggering upgrades. Check these maps before proposing large commercial systems to avoid unexpected interconnection costs.

Islanding protection. Grid-tied DG systems must disconnect during grid outages to protect line workers. Anti-islanding protection is built into all UL-listed inverters, but microgrid systems with intentional islanding capability require additional controls and utility coordination.

Pro Tip

When designing DG systems for commercial customers, always request the utility’s hosting capacity data for the specific feeder. A system that exceeds the available hosting capacity may trigger a costly distribution upgrade study, adding months and thousands of dollars to the project timeline.

Sources & Further Reading

Frequently Asked Questions

What is the difference between distributed generation and utility-scale solar?

Distributed generation systems are small-scale (typically under 10 MW) and located at or near the point of consumption, connecting to the local distribution grid. Utility-scale solar farms are large installations (50 MW and above) built in remote locations that sell power wholesale through the transmission grid. DG offsets retail electricity rates for the host customer, while utility-scale sells at wholesale prices. For solar installers, DG projects require site-specific design with shading analysis and roof constraints, whereas utility-scale involves large ground-mount arrays on open land.

How does distributed generation reduce electricity costs?

DG reduces costs through multiple mechanisms. First, on-site generation displaces electricity purchases at the full retail rate. Second, for commercial customers, DG can lower peak demand charges by reducing the maximum power drawn from the grid. Third, DG avoids the 5–10% energy losses that occur during long-distance transmission and distribution. Finally, excess generation can earn credits through net metering or net billing programs, further reducing utility bills.

Can distributed generation work without net metering?

Yes. While net metering improves DG economics by crediting excess production, DG systems remain viable without it. The key is to maximize self-consumption — sizing the system to match on-site load and adding battery storage to shift production to high-use periods. In markets without net metering, commercial DG systems with high daytime loads often achieve strong returns because most generation is consumed on-site rather than exported.