Distributed Generation to the Rescue?
Crude oil prices are at a twenty year high and natural gas supplies in North America
are expected to be tight this winter. Meanwhile, fuel price protests in Europe only underscore
remarks made by an official of
Deutsche Banc Alex. Brown to CNBC this week.
While commenting on recent and impressive price gains in energy stocks, the investment official
stated that the global energy situation is far more serious than most people realize and is
likely to remain so for at least the next five years.
So, while politicians in Europe and North America wrestle with what is shaping up to be
one of the most difficult and protracted policy issues of the 21st Century, EVWorld decided to
see what part, if any, distributed generation might play in helping not only clean up
emissions but also bring greater efficiency to the business of electricity generation.
Ritchie Priddy is an experienced distributed generation marketer and is now part of
Louisiana State University's new Center for Energy Studies where he specializes in
distributed generation issues.
While commenting on recent and impressive price gains in energy stocks, the investment official stated that the global energy situation is far more serious than most people realize and is likely to remain so for at least the next five years.
So, while politicians in Europe and North America wrestle with what is shaping up to be one of the most difficult and protracted policy issues of the 21st Century, EVWorld decided to see what part, if any, distributed generation might play in helping not only clean up emissions but also bring greater efficiency to the business of electricity generation.
Ritchie Priddy is an experienced distributed generation marketer and is now part of Louisiana State University's new Center for Energy Studies where he specializes in distributed generation issues.
Priddy: Distributed energy resources, or DER, are small-scale generation technologies that are typically sized at the capacity level of 20 megawatt (MW) or less. These technologies are small, flexible, mobile, and highly efficient. They are revolutionary in that they provide the antithesis to the past electric power generation paradigm that "bigger is better." Technological innovations, favorable input fuel availability and price, growing pressures for lower-cost and higher-quality power have all helped to facilitate interest in DER.
There are a number of DER technologies that are either commercially available, or near commercial development. These technologies include reciprocating engines, microturbines, fuel cells, wind turbines, and solar photovoltaics. Currently, reciprocating engines are the most mature small-scale power generation technology on the market. Their significant popularity is based upon availability, low capital cost, modest exhaust emissions, extended service intervals, long service lives, and well-developed sales and marketing infrastructure.
Microturbines and fuel cells are two emerging technologies that are attempting to challenge the reciprocating engine market. Microturbines are essentially mini-jet aircraft engines that are based upon the same aerospace technologies that revolutionized the larger combustion turbine market of the electric power industry over the past 20 years. Fuel cells, on the other hand, facilitate a chemical process that acts like a big battery, making rather than storing electricity. Unlike many energy conversion processes, fuel cells generate electricity in a continuous, direct process, thereby reducing excessive energy losses. Solar photovoltaics (PV) are another potential DER opportunity, but unfortunately high costs have limited their commercial application to only remote and marine usage.
Additionally, emerging technologies such as flywheels are beginning to be heavily invested in.
EVWorld: What are the forces driving it?
Priddy:The two primary forces behind DG are electric restructuring and technological innovation. If you look at past efforts at deregulation you will almost inevitably find that technological innovation played a large role. In regard to the electric industry you have to realize that there has been very little technological innovation in generation equipment in the last 20 or 30 years.
Regulation stifles innovation and productivity. Numerous studies by academics and research institutes alike have repeatedly shown that U.S. electric utilities have not improved their productivity since the 1950s. Moreover, the dominant generation technology is based on the steam turbine, which has seen few efficiency improvements since the 1970s. There was no reason to improve operations. These regulated monopolies have had little incentive to take advantage of technological advances that can double today's average efficiency for power, or triple that efficiency when waste heat is recovered. As a result, traditional power companies burn at least twice as much fuel (and produce twice as much pollution) as necessary. Tina Kaarsberg, Julie Fox Gorte, and Richard Munson, "The Clean Air -- Innovative Technology Link: Enhancing Efficiency in the Electric Industry," (Washington D.C.: Northwest-Midwest Institute, 1999), pp. 5-8.
EVWorld: What is the current state of technology today?
Priddy: Reciprocating engines are by far the most common technology deployed in DG applications, followed by turbines. Microturbines are in commercial production now and as more units are produced the price per kw will continue to fall. We are already seeing a big price drop in solar photovoltaic systems and wind turbines, and the price of fuel cells are dropping as well. On the horizon I'd say that flywheels offer a lot of promise in that they can actually store power. Also, a lot of R&D efforts are going into the hybrid fuel cell-turbine.
As you see air emissions tighten up you'll find that diesel equipment sales will probably suffer, depending upon where you are. Turbines are becoming much cleaner and the DOE has several programs that are designed to push the efficiency and emissions criteria for most dg equipment. Obviously for wind, solar and other renewables there are no such concerns.
Wind turbines are being deployed rapidly in such places as west Texas, and that is being driven primarily by mandates. For instance, the Texas restructuring bill mandates that up to 2,000 mw of renewable power be on line by 2008. Additionally, there are great opportunities for biomass generation in the Texas panhandle.
EVWorld: Where does DG make the most economic sense in today's energy marketplace?
Priddy: There are all types of potential customers for DG, and a lot depends on the size and load factor for each one, as well as location. One utility may fight it more than another. I would argue that the high load factor customer such as a paper mill is an excellent location for a DG plant. Chemical plants and refineries are good locations as well. But, perhaps the question should be which situation is best -- baseloading or peakshaving?
A lot of folks insist on baseloading equipment, that is, setting dg equipment to provide all of the power for a facility. However, utilities will fight these efforts, after all, they don't want to lose one of their best customers to self-generation. They argue that that forces the costs up for everyone. High load factor customers (that is, customers who use a lot of power all of the time) are more likely to look at baseloaded operations. And, vendors typically push for this application in order to get a quicker payback on the customer's investment.
But, quite frankly, I strongly believe that the first markets for DG equipment to emerge is going to be as peakshavers. Utilities are less likely to fight these applications, and many have even designed rate structures that encourage this application -- Unicom and TXU come to mind as two of the most innovative. These types of applications are typically either a high load factor customer that can shave its peak during the onpeak period of the day (with the help of a good dg rate) or are low load factor customers such as irrigators who use a lot of power during the onpeak periods of the year.
However, a dg developer must be very careful in working with utilities. Utilities still have the upper hand. I hear a lot of horror stories about utilities making life miserable for DG customers and vendors. So, there are still lots of barriers.
EVWorld: What are the current economic and regulatory obstacles to wider introduction of DG? How closely bound is the growth of DG to the fate of utility deregulation?
Priddy: I would say the biggest economic obstacles are first costs of equipment. Generation equipment is not cheap. A good reciprocating engine with a generator may be $600 per kw or more installed. As more equipment is produced the costs will come down, but right now it is a detriment. From my own sales experience I would say that the cost needs to be no higher than $500 per kw for most applications.
As far as regulatory barriers are concerned I would say that the most obvious barriers are a lack of standards. Right now utilities in most states can require just about any piece of equipment they can think of to have ridiculous standards or redundancy on them. This drives up costs and delays or kills projects. So, regulators need to adopt standards that can streamline products and procedures.
I would also argue that in many cases regulators simply rely on utilities to tell them what they are doing. That is dangerous in that there is no oversight. But, the whole point of deregulation is the removal of many regulations. So, it's a double-edged sword. Many utilities know how to play that game and win more often than not.
EVWorld: Given the removal or reduction of these impediments, how distributed could DG become?
Priddy: I would say that if all of the barriers were removed than yes, the market could take off and you'd find a lot of DG equipment placed throughout the most obvious areas. However, other non-utility or regulatory-related barriers exist. For instance, I am concerned that too many vendors are so wrapped up in their own sales efforts that they end up becoming obstacles in moving the market forward. By that I mean too often they will not team up to fight obstacles. There are a lot of companies and technologies out there and yet they find it difficult to work together to push the market open. I find that particularly true with some of the renewable folks.
In other situations I have seen vendors become too closely associated with utilities. I find that disturbing in that in many cases vendors put themselves in a position where the utility is their sales force. Having been a utility marketer for both electric and gas companies I can safely say that utility marketers are not the most innovative or productive people in the world. Their track record is really not all that spectacular. I see that changing as deregulation comes into play, but many vendors fail to realize that people still love to hate utilities. And, when you count on others to get you access to customers you leave yourself exposed.
So, to answer your question, I see more sales potential with obstacles removed, but that does not mean everyone will own their own generation equipment. If it is too much of a hassle people won't be interested, even if it saves them some money. Obviously, that mindset will be proportionate to the amount of money that can be saved or made.
EVWorld: Will there come a time when homeowners and small businesses become net energy producers instead of just consumers?
Priddy:I don't see that happening for several reasons. First of all, why invite the headaches of trying to sell power back to the grid. You have to mess with interconnections (there is no standard yet), utility politics, regulatory obstacles, etc. Second, most homes average about 10 to 15 kw, max, for most of the year. Third, I am a strong believer, that if there are a lot of hassles no one will do it, even if there are a lot of savings and even profit to be made. It's just not worth it to most people. Besides, energy is not a core competency for most people or businesses. Why bring on the headaches.
EVWorld: Who are the key players today in the DG business and who are the up-and-coming players?
Priddy:There are more and more players in the DG business today, but the big ones that come to mind are the Caterpillars, Cummins, GE, Capstone, Honeywell and those types. However, I’m watching a few others that could become big players. Some are still private, and not quite ready for the market. I particularly am interested in a small upstart company in the SF Bay area that could have the winning microturbine. I've been there several times and I believe in what they are doing. They have some venture capital now and are getting some beta units out.
I also watch Plug Power and Active Power, but there are more and more companies coming on line. And, some of the most innovative are the little guys who can figure out ways around obstacles. Unfortunately, some won't survive.
EVWorld: Given the energy problems this summer in California, many are predicting that deregulation of the utility industry will be slowed or even turned back. What role, if any, could DG play in this situation?
Priddy:I've been following the California situation pretty closely, and I talk to utilities as well as some consumers out there. I believe strongly that those problems were brought upon themselves. After all, how long does it take to permit a plant in California? No one wants a generator in their backyard and no one is willing to permit transmission lines either.
The price caps concern me, and I think will only serve to further stifle competition and deregulation moves. However, I think that if done properly that dereg will work. But, we must all accept the fact that not every consumer will benefit from deregulation. Low load factor customers will always pay more, unless there is some sort of artificial protection. That's the case with most residential customers. They vote.
But, I don't think that other states will make the same mistake California has. And, I think most legislators and regulators in California will eventually see that people want choice -- they just want it done properly.
As far as what role DG could play in I would look at two scenarios: First, if deregulation continues in California I would think that there will continue to be some growing pains in the short term. I would market dg as peak shavers to most customers (but they have to be very clean out there so that means microturbines and fuel cells in the shortrun, solar and wind in the longer term, as well as cleaner turbines). As peak shavers DG can play a role in keeping peaking power prices down. But, you have to have innovative rate designs from the utilities to encourage this. I don't see them doing that without a great deal of encouragement from the regulators and legislators. There are a few utilities that I am aware are actively engaged in this. But, my experience is that most utilities right now fall into the "love it to death" category in terms of DG. This is just a delaying tactic until they can set the stage where they will benefit from DG.
Second, if deregulation is turned back out there I would still think that DG could play a role and I would go after the baseload market. Turn back now means a lot of turmoil for a longer period of time, and that means continued shortages. Customers have a lot more market power (no pun intended) out there than they realize. Yeah, they vote and legislators want to capture their votes, but perhaps the legislators and environmentalists are exerting the wrong pressures on the right parties.
EVWorld: Where is DG going in the next five or ten years?
Priddy: The billion dollar question right now is what has to be done to get the market going. I don't see that anyone has the answer to that. Last month I was at the headquarters of one of the world's largest equipment manufacturers and the marketing director for the dg lines pulled me aside and asked me what it would take to get it going. I left there realizing that these guys had nothing more to offer right now than any other manufacturer, other than staying power due to their financial strength.
I would say that in order to get the market going dg promoters, regardless of who they are, must work together to overcome a lot of barriers put up by regulators and utilities are the most noteworthy. As I said before, utilities still have the upper hand in DG. Until they embrace it I think there will be more delays. That concerns me because a lot of the early market entrants don't have the staying power of some of the larger manufacturers. Its to the utility's advantage to delay the market until they know they can benefit.
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