Wednesday, August 27, 2014

Threats and Opportunities of Distributed Power Generation

  • Rooftop solar panels aren't the only distributed generation technology that could challenge existing utility business models as it grows.
  • Some power companies see DG as an opportunity and are entering this segment in ways that could prove challenging to their start-up competitors.
Two recent news stories highlighted different ways that utilities and large generating companies are beginning to respond to the emergence of distributed generation (DG) as more than back-up power. Arizona Public Service (APS) is launching its version of potentially the most challenging type of DG for utilities, rooftop solar. Meanwhile, Exelon Corp. announced an investment partnership with a provider of gas-powered fuel cells. The success of such ventures and the evolution of DG will have implications for electrical grid stability and our future energy mix, including the role of flexible, large-scale gas-fired generation.

APS is seeking regulatory approval for a program that might be characterized as free rooftop solar. In effect, they would lease approved homeowners' rooftops for $30 per month, in order to host a total of 20 MW of solar panels that would be owned and controlled by APS. The idea has generated some controversy, partly due to the utility's rocky relationship with the solar industry over issues like "net metering". 

The plan would enable homeowners who might not otherwise qualify for solar leasing from third parties to have solar installed on their homes, although they would apparently still receive their electricity through the meter from the grid, rather than mainly from the rooftop installation. That's a very different model from most DG approaches, though under current market conditions the net benefit to consumers reportedly would match or exceed that from solar leasing.

Exelon's announcement seems aimed at a different segment of the market, and based on a very different technology. The company would finance the installation of 21 MW of Bloom Energy's fuel cell generators at businesses in several states, including California. Bloom made quite a splash when it introduced its "energy servers", including a popular segment on "60 Minutes" in 2010.

Bloom's devices, which come in models producing either 100 kW or 200 kW, are built around solid oxide fuel cells.  At that scale they are too large for individual homes but suitable for many businesses. And because they are modular, they can be combined to meet the energy needs of larger offices or commercial facilities such as data centers. Unlike the fuel cells being deployed in limited numbers of automobiles, they do not require a source of hydrogen gas. Instead they run directly on natural gas from which hydrogen is extracted ("auto-reformed") inside the box.

In that respect, despite their novel technology, Bloom's servers are much closer than rooftop solar to traditional distributed energy, in which a customer owns or leases a small generator to which it supplies fuel. The advantages of Bloom's model are that its servers are designed for highly efficient 24x7 operation, without the expensive energy storage necessary to turn solar into 24x7 power, and with much lower greenhouse gas emissions and local pollution than a diesel generator.

In order to qualify as true zero-emission energy, these installations would need to be connected to a source of biogas, e.g., landfill gas, which effectively creates a closed emissions loop or recycles emissions that would have occurred elsewhere.  Even running on ordinary natural gas, the stated emissions of Bloom's energy servers are roughly a third less than the average emissions for US grid electricity, or 20% lower than the average for other natural gas generation. However, their emissions are over 10% higher than the 2012 average for California's grid.

I find it interesting that Exelon, the largest nuclear power operator in the US and owner of a full array of utility-scale gas, coal, hydro, wind and solar power, would make a high-profile investment in a technology that could ultimately slash the demand for its large central power plants. The company has invested in utility-scale solar and wind power, and as the press release indicated, is already involved in "onsite solar, emergency generation and cogeneration" via its Constellation subsidiary. In fact, it has apparently already achieved its goal of eliminating the equivalent of its 2001 carbon footprint.  However, the press release hints that something else might have attracted them to this deal.

Consider all the changes in store for the power grid. Baseload coal power is declining due to the combination of economic forces and strong emissions regulations such as the EPA's Clean Power Plan. Even some nuclear power plants, which have been the workhorses of the fleet for the last several decades, are facing premature retirement for non-operational reasons. At the same time, grid operators must integrate steadily growing proportions of intermittent renewable energy (wind and solar), along with increasingly sophisticated tools like demand response and energy storage. If any of this goes wrong, electric reliability will likely suffer.

From that perspective, Exelon's small--for them--step into DG also looks like a bet on the future value of reliability--"non-intermittent...reliable, resilient and distributed power." That's a bet even an old oil trader can understand: Uncertainty creates volatility, and volatility creates opportunities. I will be very interested to see how this turns out. 

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

12 comments:

Ed Reid said...

Geoff,

The electric utility industry made a major error when it accepted the concept of net metering. That error had minimal financial impact initially, but that impact has grown as on-site generation market and installed base has grown.

Electric utilities recover only a fraction of their fixed costs and return on investment in the fixed portion of their rates (monthly service charge). The remainder of their fixed costs and return on investment are required to be recovered through the variable portion of their rates (energy charge). This is the underlying reason why utilities under-earn their allowable rates of return during economic slowdowns or periods of milder than normal weather; nad, over-earn their allowable rates of return during periods of strong economic activity and unusually warm simmers or cold winters.

Net metering thus refunds to the on-site generator not only the value of the power supplied to the grid, but also the portion of the utilities' fixed costs and return on investment collected through the variable portion of the utilities' rates. While this provides an attractive return to the on-site generator, it deprives the utilities of a portion of their fixed cost recovery and allowable return; and, in the utilities' next rate cases, transfers that portion of the fixed cost recovery and allowable return to the utilities' non-generating customers.

The solution to this problem is technically simple and politically difficult. Permitting full recovery of fixed costs and allowable rate of return on ratebase through the fixed portion of the utilities' rates is the proper way to achieve this result. The approach of imposing an on-site generation surcharge being pursued by state commissions, such as the Arizona commission, attempt to ignore the underlying cause of the problem, while making the utilities appear greedy and uncooperative.

The state utility commissions are responsible for the rate structures which cause this problem; and, they have it within their power to solve the problem. However, they appear to be less than willing to do so transparently.

Geoffrey Styles said...

Ed,
Sorry for the tardy reply. One of the arguments for net metering on the current basis is that it helps utilities avoid investments in generation and distribution, and thus saves them money. What's your take on that?

Anonymous said...

Geoff,

Utilities earn a return on ratebase, or net physical plant in service. A utility with no undepreciated assets in service thus has no earning potential. Therefore, utilities are not reluctant to invest in physical plant.

The distribution facilities necessary to deliver power to net metering customers are already in place; and, they are used to move power both to and from the customers' meters. In the case of new structures designed to include on-site generation, the utility is still required by regulation to supply all of the power the customer requires, when the customer requires it. Therefore, the utility infrastructure required to serve the customer in not reduced, since it cannot be designed for average consumption, but must be designed for peak demand.

The same situation pertains to generation as well. Generation capacity, whether utility-owned or under contract, must be capable of meeting aggregate customer peak demand.

The situation net metered customers would rather not recognize is that they are making greater use of distribution facilities than non-generating customers, since they are using the facilities to deliver their surplus electricity to the utility; and, they are requiring the utility to instantaneously balance load on the distribution network, to accommodate power deliveries they cannot control.

Generating customers buy and sell a fungible commodity. The price they pay for that commodity and the price they are paid for that commodity should be the same. However, that price should represent only the commodity, not investment recovery and profit.

Geoffrey Styles said...

So in effect the utility should be able to recover the cost of maintaining the assets necessary to distribute the customer's surplus generation and provide backup supply, up to the customer's peak demand, right? I'd like to hear from someone on the other side of the net metering debate why that wouldn't be fair.

Ed Reid said...

Geoff,

Yes. That is the Regulatory Compact under which the utilities made their investments in physical plant and accepted relatively long (`40 year) depreciation periods.

Ed Reid (aka Anonymous above)

Ed Reid said...

Geoff,

The utilities' dilemma, interestingly enough, can be understood by considering the difference between grid-connected and grid-independent on-site generation.

The grid-independent on-site generator requires greater generation capacity, to assure that it can meet total demand, even when generation is unavailable. Storage is also required to time shift excess power available at times of peak generation to periods of low/no generation. The grid-independent generator also requires a more sophisticated power inverter, capable of providing AC frequency control, since the system cannot rely on the grid for frequency control.

Grid-connected on-site generators rely on the utility to provide for all of their needs, with the exception of whatever quantity of power they are able to produce. Effectively, the utility grid offsets the need for additional generation, storage and AC frequency control.

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Micheal said...

Energy provides everything from economic growth to sustainable civilizations. Basically without energy there is no bulk production of food, employment, transport, education or medical facilities Not just the basics of civilization but all the luxury items as well.

Those of us that have energy can't live without it. A sustainable and affordable energy supply is no longer enough. Nations must also strive to have an independent energy supply. Independent energy
supply is when a nation is self sufficient in supplying all of it's own energy requirements; hence it is not dependent on another country to supply its energy or its energy fuel.

Anonymous said...

Zaheer Omar

U.S. utilities see both threat and opportunity in the rise of customer-owned solar systems. Sure, all that new distributed generation could help them avoid building new power plants in the future. But it could also threaten utility business models, unless they’re able to “flip the DG equation” to make it work for them.

RAYMOMD RAMOTHO said...

it is quiet unanimous that solar power systems that could be put in place to distribute energy through a vast area can be cost-effective than the traditional net metering systems which most states have entrenched on its citizens. if only the government could aid in more distribution of solar panels,that could result in world being deemed as clean considering the zero-emission rule manifested globally. this means that firms using or profiting from gas could be the only users of toxicity element in nature and all households could use energy from the sun or other natural forms such as ethanol gas.

Geoffrey Styles said...

Mr. Ramotho,
More unexamined assumptions there than I can shake a stick at. Re solar, please take a look at
http://energyoutlook.blogspot.com/2014/10/calibrating-solars-growth-potential.html

Marco van der Walt (14020140) said...

South African’s need to take responsibility for their own future and the sooner we realise that we cannot be 100% dependant on Government to provide electricity, the sooner we will become creative in finding solutions. Major businesses should take the lead and present government with solutions which is not focused on what do we get out but rather what can we offer. Major businesses invest continuously in new buildings. These buildings should be design to utilise natural resources such as solar energy. Not only will green buildings reduce demand on current Eskom produced energy, but these businesses should be able to push back excess energy into the grid at a nominal fee to enhance available levels. The catch again is to have proper legislation in order to ensure that Government is not reselling energy generated by businesses back to local communities at ridicules prices. These type of models will be costly, but if major businesses are guaranteed that communities will benefit from their effort at reasonable prices, bigger participation will follow.