Distributed Generation: The Future of Electricity

How will businesses and homeowners get the power they'll need in an increasingly computer-driven, interconnected world? Think local and small.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

March 11, 2002

Within a decade, the way electric power is generated, distributed, bought and sold will undergo a transformation. The current network of megapower plants serving national and regional grids will be overlaid with a spiderweb of local power generation facilities—everything from microturbines, fuel cells and solar voltaics to local "power parks" that provide not only electricity to nearby businesses but also heat that can be used for industrial applications.

The shift to distributed generation—making power where it's needed—will bring more-reliable service, meaning fewer blackouts, brownouts and power dips that can wreak havoc on computers, machine controllers and digital telecommunications switches and devices. It will also increase demand for natural gas. Most of the new small generators will be fired by natural gas and thus be able to meet stringent air and water pollution standards that are too costly for big coal-fired plants to achieve.

Ongoing changes in the way electric utilities charge customers for power will drive both businesses and consumers to deploy distributed generation facilities. "It's becoming clear that whether you're a customer or a supplier, time-of-day pricing is coming...which means that on a summer day, the prices charged for electricity will be several times what they are in the winter," says Henry Cialone, vice president and general manager of the energy systems division at Battelle Memorial Institute.

The role of utility companies will shift as they morph from megawatt generators to power managers that buy and sell electricity to and from a host of supplier/customers. New companies will spring up to offer businesses distributed power management "solutions" with a host of options, such as the ability to turn quickly to a low-cost supplier at a particular time of the day or discounting rates for interruptible service. Odds are that by 2004 or 2005, most states will allow businesses to use such systems to get off the grid when peak-period prices soar and to sell back electricity at other times—getting paid by having the meter run backward.

The sea change in the electricity business also will create enormous opportunities for manufacturers of distributed power generators. By around 2010, the U.S. residential market alone for these devices will be 25 million units, "and even larger markets exist outside the U.S.," according to the Electric Power Research Institute (EPRI).

Suppliers of local systems that generate heat as a by-product will target manufacturers, photo processors, laundries, bakeries, food processors and restaurants. This new line of business is in its infancy now but will take off within a few years, says Branko Terzic, director of energy and utility services at Deloitte & Touche. "You'll see on-site generation where heat is captured and used for space heating, and, say at McDonald's, it also will be used for frying and broiling."

There will be huge new opportunities for manufacturers of devices to put ordinary companies into the electric power business. Microturbines made by firms such as Capstone Turbine Corp. are practical now, and fuel cells—whose only airborne emissions are harmless water vapor—will be economically practical by around mid-decade, says EPRI.

What's driving the shift to distributed power? More-reliable electricity service, for one thing. It's needed to power the digital devices that are transforming American workplaces and homes. Computer-era industrial and office productivity devices are finicky: A millisecond dip in power can zap computer networks or ruin an entire production run of microprocessor chips.

Distributed generation can provide the kind of power demanded in an increasingly digital economy—DC, or direct current electricity. In today's grid, all electricity is AC, or alternating current. But to power digital devices, AC power must be transformed back to DC, and that conversion can degrade reliability.

In the quest for greater reliability, a market is already developing for "premium power." The "four nines" of electricity service reliability traditionally offered by electric utilities—in which power is assured 99.99% of the time—is no longer acceptable. The bottom line for companies running multimillion-dollar-a-month e-commerce servers or routing electronic banking transactions is becoming "nine nines"—that is, guaranteed power 99.9999999% of the time. Already, power parks have been built in Pennsylvania, Ohio, California and Texas to provide premium power reliability to blue-chip industrial customers, and many more are on the drawing board.

For existing utilities to meet such a reliability standard, they would have to keep expensive backup power stations whirring nonstop and contract with wholesalers for spare electricity. The simple fact is, building more big generating plants and high-capacity transmission lines isn't an option for meeting the future demand for such services.

After the Enron debacle, electric utility companies are finding it harder to raise capital to build Goliath generating projects to supply regional power needs, or even smaller plants built solely to produce power for sale on speculative wholesale markets. The shift in Wall Street sentiment is choking off plans by Calpine Corp., AES Corp. and others to build scores of new generating facilities this decade, says Allen Williams, partner and chair of the regulatory department at the law firm of Foley & Lardner.

Meanwhile, proposals to acquire new high-capacity overhead transmission lines or to upgrade existing lines needed to shift power from region to region are being turned back by state permit authorities sensitive to "not in my backyard" local opposition to the projects. "Getting licenses for new lines is extremely controversial and expensive, particularly where you need multiple state approvals," says Deloitte & Touche's Terzic.

Distributed generation offers a solution for both capacity constraints and the demand for power. Instead of new overhead high-voltage transmission lines and big generating plants, "you substitute a number of small electricity generators close to where the power is needed," Terzic says.

Ongoing deregulation of the electric power industry is opening the door for the creation of distributed power networks to complement traditional electricity grids. On March 4, the U.S. Supreme Court upheld the Federal Energy Regulatory Commission's right to order sweeping changes in the electric power business, including a 1996 rule deregulating wholesale power markets. Twenty-four states now let businesses and consumers choose their electricity supplier, and, California's failed experiment with deregulation notwithstanding, most states will offer power choice by the end of the decade.