- Email: [email protected]
Capturing Markets and Delivering Value in the Electric Utility Industry
www.corporate-env-strategy.com
The Value Proposition in Electric Utilities
Capturing Markets and Delivering Value in the Electric Utility Industry Peter Asmus
The electric utility industry is undergoing rapid changes in response to political, economic and environmental forces and expectations. California has become the focal point of debate regarding the ability of our existing energy production and delivery infrastructure to provide the kind of reliability required by corporations so dependent upon electricity for day-to-day operations. At the same time, growing concerns over global climate change is increasing the value of renewable energy technologies. Moving from a central power plant model to a more distributed system featuring a greater diversity of fixed-price renewable fuels offers solutions to an array of energy challenges facing companies in the industrialized world. This fundamental paradigm shift also offers major growth opportunities for companies developing new technologies whose most critical contribution to the global economy and environment may indeed occur in the developing world. Those companies that seize this opportunity to upgrade our aging energy infrastructure in the industrialized world, or foster new approaches to energy in the developing world, may prove that the ultimate corporate environmental strategy lies with distributed renewable energy systems. 䊚 2002 Elsevier Science Inc. All rights reserved.
Peter Asmus is author of Reaping The Wind and Reinventing Electric Utilities, both published by Island Press. He is also president of Pathfinder Communications, a consulting firm offering strategic advice on environmental matters to corporations, local governments and non-profit environmental organizations. Corresponding author: P.O. Box 436, Stinson Beach, CA 94970, USA. Tel.: q1-415-868-9866; fax: q1-415-868-9566; E-mail: [email protected].
Skyrocketing wholesale electricity prices in California, the West, and other regions including New York, are beginning to threaten the viability of companies large and small.
122
The costs of a power outage for manufacturers of computer-related products are enormous since even a few minutes of down time can ruin a day’s worth of manufactured products. For example, Hewlett Packard estimates just a 20-minute outage at a circuit fabrication plant would leave a $30 million debt due to a loss of an entire day’s production. Power outages already cost the US economy $80 billion per year and that figure is likely to go up, not down, in the near future due to the limitations of the traditional central power plant model and the growing dependency of U.S. business on the microchip. The decision of many multinational companies to export manufacturing, assembly and data handling
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
The Value Proposition in Electric Utilities
American Wind Energy Association recently estimated that out of a potential of 140,000 MW of electricity that could be generated from small wind turbines in the US, over 16,000 MW could be feasibly installed to serve electricity to commercial and industrial customers.
activities to emerging market economies with notoriously unreliable grid systems has also increased the susceptibility of these firms to power disruptions. For the first time in a few decades, electricity consumption is going up, not down. In Silicon Valley, for example, electricity consumption has been growing at 5 percent annually over the past few years. Whereas electricity represented only 25 percent of our total energy needs 25 years ago, it will represent half of our energy consumption in just a couple of decades. These statistics underscore the increasing role electricity will play in managing future costs of doing business all around the globe. The silver lining in what has been touted as an ‘‘energy crisis’’ is that we now have the tools and technologies necessary to propel a revolution in energy that mimics, to a large extent, the evolution in scale evident in telecommunications and computer industries. These new technologies — solar photovoltaics, fuel cells and wind turbines — are the equivalent to wireless cell phones and portable laptops that replaced traditional gridconnected phones and huge mainframe computers, respectively.
Early Adopters of Distributed Generation d
d
Businesses such as Fetzer Winery, Neutrogena, Johnson & Johnson, Bentley Mills have all installed solar PV systems to make a statement about sustainability, boost reliability and stabilize long-term power costs. Alameda County is installing the largest solar PV system in the country. By integrating energy efficiency measures, and tapping other sources of state and utility funding, Alameda County’s Santa Rita Jail facility is able to reduce energy consumption by 20% without tapping into its general fund. Small wind turbines are currently the lowest cost renewable electricity source. The
For the first time in a few decades, electricity consumption is going up, not down. d
With the help of state financial incentives, the Rancho Las Virgenes Municipal Water District has installed two fuel cells that rely upon methane from its sewage treatment plant to supply up to 90% of its on-site electricity needs at a cost of 5.5 cents per kilowatt hour. Fuel Cells are an ideal electricity source for businesses. Experts predict that 10 to 20% of commercial and industrial customers may integrate a fuel cell into their energy supply strategy by 2010.
A New Distributed Paradigm Our current energy supply conundrum reveals the limits of the old transmission and distribution grid, which, in turn, is impacting the growth of the digital economy. Our electricity grid, with its emphasis on large polluting and centralized power plants sending power long distances over transmission lines, is an artifact that is over 100 years old. It is dramatically out of sync with information technologies. The architecture of the existing transmission grid is the anti-thesis of distributed networks being made possible by the Internet. And the central power plant and long-distance transmission model is inherently inefficient. On-site distributed generation sources avoid the 7 to 15 percent line loss that plagues the current electricity delivery system. At the wholesale prices witnessed throughout the West over the past year, those
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
123
The Value Proposition in Electric Utilities
losses represents hundreds of millions of dollars.
The highest price registered in California in 2001 was close to $3 per kilowatt hour. w2x A few forward-looking companies are investigating the installation of new cleaner and smarter power sources as a way of generating premium grade clean electricity right on site — without harming the environment and upgrading our energy infrastructure to take advantage of 21st century information and communications technologies. These sources are frequently referred to as ‘‘distributed generation’’ since the sources are distributed throughout a region. These new smaller, cleaner and smarter technologies are slowly transforming the electric utility industry. These ‘‘distributed generation’’ sources, along with sophisticated energy efficiency, storage and management innovations, and next generation power electronics devices, are ideally suited to the precise real-time needs of New Economy companies looking for new ways to cut costs and improve productivity by insuring they have a power supply that is reliable 99.9999% of the time.
A Quick Look At Distributed Power Generation Costs The federal Department of Energy’s (DOE) Energy Information Administration estimates average kilowatt hour cost for the US in 2001 is 8 cents per kilowatt hour. Of course, peak power prices can climb much higher than that. The highest price registered in California in 2001 was close to $3 per kilowatt hour. Here is a rundown of recent estimates of competing distributed power generation technologies. Solar Photovoltaics — The Sacramento Municipal Utility District (SMUD) claims the low124
est cost PV systems in the country. My book Reinventing Electric Utilities, co-authored with Ed Smeloff of the SMUD board, tells the story of a municipal utility district that became financially viable after years of runaway rate increases when it switched from a nuclear-based power portfolio to one emphasizing renewable distributed systems. SMUD purchased the solar PV panels in bulk and took advantage of municipal financing: 10 to 12 cents per kWh if the capital cost of $5,000 to $7,000 per kilowatt is stretched out over a 30-year period of operation. Other price quotes for electricity range from 15 to 30 cents per kWh depending upon a multitude of factors: the quality of the solar fuel; characteristics of the roof; the roof’s position in relation to solar curves; and financing particulars. California’s buy-down rebates cover $4,500 per kilowatt or half of the total installation costs (whichever cost is less). Various other state and federal subsidies can bring cost down to competitive levels at today’s wholesale peak power costs. Fuel cells — These distributed systems rely upon an electrochemical process to convert chemical energy into electricity and hot water, generate electricity at a cost of approximately 10 to 12 cents per kWh, even if fueled with natural gas at today’s record prices. (Capital costs are sky high: $4,000 per kilowatt.) Nevertheless, they have the highest fuel to electricity conversion ratio of all energy sources. They also can generate electricity from wastes such as landfill gas as well as hydrogen, a fuel that may still represent the logical dominant fuel of the future. Wind Power — The capital cost of new wind turbines in the 2 to 3 MW range is lower than nuclear and the same as coal: 1,000 per kilowatt. The cost of electricity from a new utility wind turbine, ranges from 3 to 6 cents ykWh and is expected to fall below 3 cents ykWh within the next five years. These numbers underscore why wind power is the
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
The Value Proposition in Electric Utilities
world’s fastest growing power source. Although wind turbines only generate electricity a third of the year, they tend to produce energy in California when consumers most need it — during summer. A 1.5 cent per kilowatt hour production tax credit was recently extended in the Bush administration’s energy plan, which translates into prices that can fall into the 2 to 3 cent per kilowatt hour range.
ulators imposing a ceiling on what fossil fuel power plant operators charge for their wholesale electricity during times of peak demand and low supply.
Small wind turbines for on-site power generation are more expensive – in the 8 cent per kilowatt hour range. Factor in the buydown rebates in California, however, and the upfront capital cost drop by 50 percent to $1,500 per kilowatt. With recent increases in net metering credits from utilities that link time-of-use rates to time-of-production, the value of grid-connected wind turbines to end-users has increased dramatically.
w3x A recent study by the federal Department of Energy revealed why solar PV technologies are logical solutions to the problem of meeting peak power demands. Seven major outages last year were analyzed from the perspective of the quality of the solar resource during the exact times of the power losses. In all but one of the outages, conditions for optimal solar electricity generation were above 90 percent. Interestingly, solar conditions were close to perfect (99 percent) for generating electricity on June 14th 2000, the day 100,000 customers in San Francisco lost power and Silicon Valley took a $100 million bath due to lost production.
Profiles of Innovators Among the innovators are firms working with owners of approximately one quarter of the nation’s commercial real estate. RealEnergy, Inc., which has offices in Sacramento and Los Angeles, has helped mount of an acre of solar panels representing over 400 kilowatts of on the roofs of City Center, which is owned by Arden Realty, a Los Angeles-based office landlord. Real estate owners, of all people, are now taking the long-term view on electricity reliability and global climate change. ‘‘Our goals are, first, to install equipment that increases the reliability of power systems to our tenants’’, commented Victor J. Coleman, president of Arden Realty, City Center owner. ‘‘Our second goal is to reduce the environmental impacts of dirty electrical generation’’. Though solar PV installations involve high up-front expenditures, RealEnergy CEO Kevin Best believes the costs appear reasonable when spread out over the 20-year life of the equipment. After installation, ‘‘there’s no fuel and no maintenance’’, Best pointed out. ‘‘That’s a price cap in my book’’, he added, referring to the controversy over federal reg-
Among the innovators are firms working with owners of approximately one quarter of the nation’s commercial real estate.
Among the current high-profile fuel cell installations across the country are two 200kilowatt fuel cells manufactured by International Fuel Cells (IFC) at the Durst Organization’s Conde Nast Building in Times Square, New York City. The fuel cells provide the power for the NASDAQ sign, a bit ironic considering the recent run up in stock prices for a growing list of fuel cell development firms. A 1 MW fuel cell system by IFC powers a post office in Anchorage, Alaska and is the largest domestic system in place today. Banks and financial institutions in California may want to take some cues from the First National Bank of Omaha, the nation’s largest privately owned bank. After a disastrous brown-out in 1997 destroyed many of the records kept at a bank that is the seventh largest credit card transaction processor in
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
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The Value Proposition in Electric Utilities
the nation, a fuel cell was installed that now generates all of the power for the bank’s computer and storage devices. The fuel cell has been providing reliable electricity throughout periods of grid outages over the past two years.
The 400-acre Ledgewood Creek Vineyard in Solano County is the first commercial entity to install small wind turbines in California. w4x Fuel cells can also be integrated into waste management systems. Among the more innovative applications of carbonate fuel cells are the following two installations by Danbury, Connecticut-based FuelCell Energy that convert global warming gases into electricity fuels: a 1 MW installation at the King County, Washington municipal waste treatment facility will consume methane-rich vapors called ‘‘digester gas’’ that was previously vented into the atmosphere; a 250 kilowatt system under construction at Harrison Mining Corporation’s coal mine in Cadiz, Ohio, will consume methane produced at the mine, and also previously vented into the atmosphere, as fuel.
Case Study: Alameda County’s Santa Rita Jail The Santa Rita Jail offers proof that solar and energy efficiency is a synergistic blend of technological innovations well-suited to respond to today’s stressed power grid in California. By linking the largest rooftop solar photovoltaic (PV) system in the US explicitly with energy efficiency upgrades and stateof-the-art energy management software, Alameda County is able to reduce peak power consumption by 20% without any expenditure from its general fund. The solar photovoltaic (PV) tiles represent 642 kilowatts of clean peak electrical capacity, the largest solar rooftop system in the U.S. The combination of solar and energy efficiency will save 9 million pounds of carbon dioxide, a global climate change gas, and 2,900 pounds of nitrogen oxides that contribute to urban smog, a primary cause of asthma and other respiratory disease. Net savings to the county based on current electricity rates will average $275,000 annually over the next 25 years or a total of $7 million in savings over the life of the project. Here are some of the innovations that make the Santa Rita Jail such a noteworthy model project that could be replicated at private sector commercial buildings in California: d
The 400-acre Ledgewood Creek Vineyard in Solano County is the first commercial entity to install small wind turbines in California. ‘‘We were trying to figure out ways to reduce energy costs’’, commented manager Rick Wehman, who noted that the vineyard’s power costs had doubled between the year 2000 and 2001. ‘‘We have tons of wind whipping through here everyday. We decided to try generating our own electricity and wind power looks cheaper than solar’’, he added. The two 10 kW machines installed in June 2001 may provide as much as & of the electricity consumed on-site.
126
d
PowerGuard tiles, manufactured by the Berkeley-based PowerLight Corporation, are unique solar photovoltaic tiles that do not require any perforations of the roof. They therefore protect the roof membrane from weather and ultra-violet radiation. These tiles also provide a patented R-11 rigid polystyrene foam roofing insulation. It is this innovative solar PV product that convinced Inc. magazine to rank PowerLight as one of the fastest growing firms in the country. Large electricity savings are garnered by replacing an old inefficient chiller with a new 850 ton high efficiency, variable speed, chiller that does not rely upon the
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
The Value Proposition in Electric Utilities
d
d
CFCs that contribute to the alarming ozone hole in the southern Hemisphere. The new variable speed drive will respond directly to the precise real-time cooling requirements needed to deliver chilled water instead of operating at 100% capacity all of the time. A new computerized energy management system developed by Viron — UtilityVision — automatically reduces power consumption during peaks in response to shortterm fluctuations in solar fuel caused by weather conditions such as cloud cover. For example, if clouds block the sun for 5 minutes on a summer afternoon, UtilityVision will automatically reduce power consumption proportionately so that no additional purchases of expensive peak priced electricity are necessary. Painting rooftops white — known as ‘‘cool roofs’’ technology — is another simple way in which Santa Rita Jail reduces peak power consumption.
In spite of the perception that solar PV technologies are too expensive, the approach used by Alameda County demonstrates that marrying a set of cutting edge solar and energy efficiency and energy management technologies can offer large economic benefits to end-users. Alameda County did not need to authorize any general fund revenues to finance this pioneering solar PV and energy efficiency package. The project attracted over $4 million in state financial incentives designed to promote renewable energy and reduce peak power consumption. The remaining cost balance was already included in the county’s roofing and energy budgets. Approximately 1.8 million kilowatt hours of annual peak electricity consumption are diverted from the grid by the Santa Rita Jail project. These peak savings benefit all state consumers by reducing grid power purchases during times of the tightest supply and highest demand.
Back To the Future The electricity business started out as a competitive neighborhood affair. Thomas Edison’s first central plant served 59 customers that resided on just 12 city blocks! In 1900,
In the US alone, the International Energy Agency projects that deregulated energy markets represent a $220 billion market. 60 percent of the electricity consumed was generated right on site. That figure dropped to 20 percent in 1920 and to under 4 percent in 1980. Advances in Alternating Current allowed for the long distance transmission of electricity. This advance, coupled with the emergence of huge utility companies operating across many state boundaries, helped establish today’s modern electricity grid. In a sense, we need to go back in order to get to the future. w5x Just how big of a business opportunity do these distributed generation sources really represent? In the US alone, the International Energy Agency projects that deregulated energy markets represent a $220 billion market. That is larger than the cellular and longdistance telecommunications markets combined. On a global basis, the potential numbers are staggering. The World Energy Council projects by 2020, the developing world (notably Latin America, Asia and China), will consume more energy than the industrialized world. Some $4 trillion will be required to build the power infrastructures needed to serve the newly electrified. Distributed generation sources that include solar photovoltaics, fuel cells, small stand-alone wind turbines, will be among the prime beneficiaries of these staggering investments in the future of world electricity supply. Since wireless cell phones appear to be dominating telecommunications in the devel-
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
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The Value Proposition in Electric Utilities
oping world, wireless distributed power generation systems may also become the preferred option for power supply in these new electricity markets.
fully include the big names of Silicon Valley, can offer the rest of the world a model of a smart power generation and delivery system that serves both the New Economy and the environment.
Distributed generation sources, when integrated with sophisticated computerized management and energy storage systems, offer reliability insurance during these times of volatility in wholesale power markets. The future of power generation may indeed evolve into a system where smaller, smarter sources will be dispersed throughout the electric grid — and preclude the need for grids in the developing world, where 2 billion people have yet to experience electricity. The future of the electricity industry lies in better planning in transmission, to deliver bulk renewable power generated in remote locations to urban load centers. Nevertheless, the primary focus of policy makers and savvy corporations today should be the fostering of innovation at the distribution grid. Renewable on-site generation, cutting edge energy management software, energy efficiency upgrades, and new energy battery storage systems, are all technologies that smart corporations should be investigating in light of recent volatility in power markets. Bringing the grid into the 21st century offers new opportunities for profit, progress and sustainability. Those firms that recognize the parallels between the evolution of energy and telecommunications and computers will be able to capture markets and deliver genuine value to the economy and the environment. The answer to the current energy mess in California and much of the nation, as well as the rest of the world, is to transform our archaic electricity grid into a catalyst for integrating increasing amounts of renewable resources into our fuel mix. It may be time for forward-looking businesses to invest in these power systems to accelerate their introduction into the distribution grid. These businesses, which one day soon will hope-
128
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
The Value Proposition in Electric Utilities
Capturing Markets and Delivering Value in the Electric Utility Industry Peter Asmus
The electric utility industry is undergoing rapid changes in response to political, economic and environmental forces and expectations. California has become the focal point of debate regarding the ability of our existing energy production and delivery infrastructure to provide the kind of reliability required by corporations so dependent upon electricity for day-to-day operations. At the same time, growing concerns over global climate change is increasing the value of renewable energy technologies. Moving from a central power plant model to a more distributed system featuring a greater diversity of fixed-price renewable fuels offers solutions to an array of energy challenges facing companies in the industrialized world. This fundamental paradigm shift also offers major growth opportunities for companies developing new technologies whose most critical contribution to the global economy and environment may indeed occur in the developing world. Those companies that seize this opportunity to upgrade our aging energy infrastructure in the industrialized world, or foster new approaches to energy in the developing world, may prove that the ultimate corporate environmental strategy lies with distributed renewable energy systems. 䊚 2002 Elsevier Science Inc. All rights reserved.
Peter Asmus is author of Reaping The Wind and Reinventing Electric Utilities, both published by Island Press. He is also president of Pathfinder Communications, a consulting firm offering strategic advice on environmental matters to corporations, local governments and non-profit environmental organizations. Corresponding author: P.O. Box 436, Stinson Beach, CA 94970, USA. Tel.: q1-415-868-9866; fax: q1-415-868-9566; E-mail: [email protected].
Skyrocketing wholesale electricity prices in California, the West, and other regions including New York, are beginning to threaten the viability of companies large and small.
122
The costs of a power outage for manufacturers of computer-related products are enormous since even a few minutes of down time can ruin a day’s worth of manufactured products. For example, Hewlett Packard estimates just a 20-minute outage at a circuit fabrication plant would leave a $30 million debt due to a loss of an entire day’s production. Power outages already cost the US economy $80 billion per year and that figure is likely to go up, not down, in the near future due to the limitations of the traditional central power plant model and the growing dependency of U.S. business on the microchip. The decision of many multinational companies to export manufacturing, assembly and data handling
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
The Value Proposition in Electric Utilities
American Wind Energy Association recently estimated that out of a potential of 140,000 MW of electricity that could be generated from small wind turbines in the US, over 16,000 MW could be feasibly installed to serve electricity to commercial and industrial customers.
activities to emerging market economies with notoriously unreliable grid systems has also increased the susceptibility of these firms to power disruptions. For the first time in a few decades, electricity consumption is going up, not down. In Silicon Valley, for example, electricity consumption has been growing at 5 percent annually over the past few years. Whereas electricity represented only 25 percent of our total energy needs 25 years ago, it will represent half of our energy consumption in just a couple of decades. These statistics underscore the increasing role electricity will play in managing future costs of doing business all around the globe. The silver lining in what has been touted as an ‘‘energy crisis’’ is that we now have the tools and technologies necessary to propel a revolution in energy that mimics, to a large extent, the evolution in scale evident in telecommunications and computer industries. These new technologies — solar photovoltaics, fuel cells and wind turbines — are the equivalent to wireless cell phones and portable laptops that replaced traditional gridconnected phones and huge mainframe computers, respectively.
Early Adopters of Distributed Generation d
d
Businesses such as Fetzer Winery, Neutrogena, Johnson & Johnson, Bentley Mills have all installed solar PV systems to make a statement about sustainability, boost reliability and stabilize long-term power costs. Alameda County is installing the largest solar PV system in the country. By integrating energy efficiency measures, and tapping other sources of state and utility funding, Alameda County’s Santa Rita Jail facility is able to reduce energy consumption by 20% without tapping into its general fund. Small wind turbines are currently the lowest cost renewable electricity source. The
For the first time in a few decades, electricity consumption is going up, not down. d
With the help of state financial incentives, the Rancho Las Virgenes Municipal Water District has installed two fuel cells that rely upon methane from its sewage treatment plant to supply up to 90% of its on-site electricity needs at a cost of 5.5 cents per kilowatt hour. Fuel Cells are an ideal electricity source for businesses. Experts predict that 10 to 20% of commercial and industrial customers may integrate a fuel cell into their energy supply strategy by 2010.
A New Distributed Paradigm Our current energy supply conundrum reveals the limits of the old transmission and distribution grid, which, in turn, is impacting the growth of the digital economy. Our electricity grid, with its emphasis on large polluting and centralized power plants sending power long distances over transmission lines, is an artifact that is over 100 years old. It is dramatically out of sync with information technologies. The architecture of the existing transmission grid is the anti-thesis of distributed networks being made possible by the Internet. And the central power plant and long-distance transmission model is inherently inefficient. On-site distributed generation sources avoid the 7 to 15 percent line loss that plagues the current electricity delivery system. At the wholesale prices witnessed throughout the West over the past year, those
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
123
The Value Proposition in Electric Utilities
losses represents hundreds of millions of dollars.
The highest price registered in California in 2001 was close to $3 per kilowatt hour. w2x A few forward-looking companies are investigating the installation of new cleaner and smarter power sources as a way of generating premium grade clean electricity right on site — without harming the environment and upgrading our energy infrastructure to take advantage of 21st century information and communications technologies. These sources are frequently referred to as ‘‘distributed generation’’ since the sources are distributed throughout a region. These new smaller, cleaner and smarter technologies are slowly transforming the electric utility industry. These ‘‘distributed generation’’ sources, along with sophisticated energy efficiency, storage and management innovations, and next generation power electronics devices, are ideally suited to the precise real-time needs of New Economy companies looking for new ways to cut costs and improve productivity by insuring they have a power supply that is reliable 99.9999% of the time.
A Quick Look At Distributed Power Generation Costs The federal Department of Energy’s (DOE) Energy Information Administration estimates average kilowatt hour cost for the US in 2001 is 8 cents per kilowatt hour. Of course, peak power prices can climb much higher than that. The highest price registered in California in 2001 was close to $3 per kilowatt hour. Here is a rundown of recent estimates of competing distributed power generation technologies. Solar Photovoltaics — The Sacramento Municipal Utility District (SMUD) claims the low124
est cost PV systems in the country. My book Reinventing Electric Utilities, co-authored with Ed Smeloff of the SMUD board, tells the story of a municipal utility district that became financially viable after years of runaway rate increases when it switched from a nuclear-based power portfolio to one emphasizing renewable distributed systems. SMUD purchased the solar PV panels in bulk and took advantage of municipal financing: 10 to 12 cents per kWh if the capital cost of $5,000 to $7,000 per kilowatt is stretched out over a 30-year period of operation. Other price quotes for electricity range from 15 to 30 cents per kWh depending upon a multitude of factors: the quality of the solar fuel; characteristics of the roof; the roof’s position in relation to solar curves; and financing particulars. California’s buy-down rebates cover $4,500 per kilowatt or half of the total installation costs (whichever cost is less). Various other state and federal subsidies can bring cost down to competitive levels at today’s wholesale peak power costs. Fuel cells — These distributed systems rely upon an electrochemical process to convert chemical energy into electricity and hot water, generate electricity at a cost of approximately 10 to 12 cents per kWh, even if fueled with natural gas at today’s record prices. (Capital costs are sky high: $4,000 per kilowatt.) Nevertheless, they have the highest fuel to electricity conversion ratio of all energy sources. They also can generate electricity from wastes such as landfill gas as well as hydrogen, a fuel that may still represent the logical dominant fuel of the future. Wind Power — The capital cost of new wind turbines in the 2 to 3 MW range is lower than nuclear and the same as coal: 1,000 per kilowatt. The cost of electricity from a new utility wind turbine, ranges from 3 to 6 cents ykWh and is expected to fall below 3 cents ykWh within the next five years. These numbers underscore why wind power is the
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
The Value Proposition in Electric Utilities
world’s fastest growing power source. Although wind turbines only generate electricity a third of the year, they tend to produce energy in California when consumers most need it — during summer. A 1.5 cent per kilowatt hour production tax credit was recently extended in the Bush administration’s energy plan, which translates into prices that can fall into the 2 to 3 cent per kilowatt hour range.
ulators imposing a ceiling on what fossil fuel power plant operators charge for their wholesale electricity during times of peak demand and low supply.
Small wind turbines for on-site power generation are more expensive – in the 8 cent per kilowatt hour range. Factor in the buydown rebates in California, however, and the upfront capital cost drop by 50 percent to $1,500 per kilowatt. With recent increases in net metering credits from utilities that link time-of-use rates to time-of-production, the value of grid-connected wind turbines to end-users has increased dramatically.
w3x A recent study by the federal Department of Energy revealed why solar PV technologies are logical solutions to the problem of meeting peak power demands. Seven major outages last year were analyzed from the perspective of the quality of the solar resource during the exact times of the power losses. In all but one of the outages, conditions for optimal solar electricity generation were above 90 percent. Interestingly, solar conditions were close to perfect (99 percent) for generating electricity on June 14th 2000, the day 100,000 customers in San Francisco lost power and Silicon Valley took a $100 million bath due to lost production.
Profiles of Innovators Among the innovators are firms working with owners of approximately one quarter of the nation’s commercial real estate. RealEnergy, Inc., which has offices in Sacramento and Los Angeles, has helped mount of an acre of solar panels representing over 400 kilowatts of on the roofs of City Center, which is owned by Arden Realty, a Los Angeles-based office landlord. Real estate owners, of all people, are now taking the long-term view on electricity reliability and global climate change. ‘‘Our goals are, first, to install equipment that increases the reliability of power systems to our tenants’’, commented Victor J. Coleman, president of Arden Realty, City Center owner. ‘‘Our second goal is to reduce the environmental impacts of dirty electrical generation’’. Though solar PV installations involve high up-front expenditures, RealEnergy CEO Kevin Best believes the costs appear reasonable when spread out over the 20-year life of the equipment. After installation, ‘‘there’s no fuel and no maintenance’’, Best pointed out. ‘‘That’s a price cap in my book’’, he added, referring to the controversy over federal reg-
Among the innovators are firms working with owners of approximately one quarter of the nation’s commercial real estate.
Among the current high-profile fuel cell installations across the country are two 200kilowatt fuel cells manufactured by International Fuel Cells (IFC) at the Durst Organization’s Conde Nast Building in Times Square, New York City. The fuel cells provide the power for the NASDAQ sign, a bit ironic considering the recent run up in stock prices for a growing list of fuel cell development firms. A 1 MW fuel cell system by IFC powers a post office in Anchorage, Alaska and is the largest domestic system in place today. Banks and financial institutions in California may want to take some cues from the First National Bank of Omaha, the nation’s largest privately owned bank. After a disastrous brown-out in 1997 destroyed many of the records kept at a bank that is the seventh largest credit card transaction processor in
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
125
The Value Proposition in Electric Utilities
the nation, a fuel cell was installed that now generates all of the power for the bank’s computer and storage devices. The fuel cell has been providing reliable electricity throughout periods of grid outages over the past two years.
The 400-acre Ledgewood Creek Vineyard in Solano County is the first commercial entity to install small wind turbines in California. w4x Fuel cells can also be integrated into waste management systems. Among the more innovative applications of carbonate fuel cells are the following two installations by Danbury, Connecticut-based FuelCell Energy that convert global warming gases into electricity fuels: a 1 MW installation at the King County, Washington municipal waste treatment facility will consume methane-rich vapors called ‘‘digester gas’’ that was previously vented into the atmosphere; a 250 kilowatt system under construction at Harrison Mining Corporation’s coal mine in Cadiz, Ohio, will consume methane produced at the mine, and also previously vented into the atmosphere, as fuel.
Case Study: Alameda County’s Santa Rita Jail The Santa Rita Jail offers proof that solar and energy efficiency is a synergistic blend of technological innovations well-suited to respond to today’s stressed power grid in California. By linking the largest rooftop solar photovoltaic (PV) system in the US explicitly with energy efficiency upgrades and stateof-the-art energy management software, Alameda County is able to reduce peak power consumption by 20% without any expenditure from its general fund. The solar photovoltaic (PV) tiles represent 642 kilowatts of clean peak electrical capacity, the largest solar rooftop system in the U.S. The combination of solar and energy efficiency will save 9 million pounds of carbon dioxide, a global climate change gas, and 2,900 pounds of nitrogen oxides that contribute to urban smog, a primary cause of asthma and other respiratory disease. Net savings to the county based on current electricity rates will average $275,000 annually over the next 25 years or a total of $7 million in savings over the life of the project. Here are some of the innovations that make the Santa Rita Jail such a noteworthy model project that could be replicated at private sector commercial buildings in California: d
The 400-acre Ledgewood Creek Vineyard in Solano County is the first commercial entity to install small wind turbines in California. ‘‘We were trying to figure out ways to reduce energy costs’’, commented manager Rick Wehman, who noted that the vineyard’s power costs had doubled between the year 2000 and 2001. ‘‘We have tons of wind whipping through here everyday. We decided to try generating our own electricity and wind power looks cheaper than solar’’, he added. The two 10 kW machines installed in June 2001 may provide as much as & of the electricity consumed on-site.
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PowerGuard tiles, manufactured by the Berkeley-based PowerLight Corporation, are unique solar photovoltaic tiles that do not require any perforations of the roof. They therefore protect the roof membrane from weather and ultra-violet radiation. These tiles also provide a patented R-11 rigid polystyrene foam roofing insulation. It is this innovative solar PV product that convinced Inc. magazine to rank PowerLight as one of the fastest growing firms in the country. Large electricity savings are garnered by replacing an old inefficient chiller with a new 850 ton high efficiency, variable speed, chiller that does not rely upon the
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
The Value Proposition in Electric Utilities
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CFCs that contribute to the alarming ozone hole in the southern Hemisphere. The new variable speed drive will respond directly to the precise real-time cooling requirements needed to deliver chilled water instead of operating at 100% capacity all of the time. A new computerized energy management system developed by Viron — UtilityVision — automatically reduces power consumption during peaks in response to shortterm fluctuations in solar fuel caused by weather conditions such as cloud cover. For example, if clouds block the sun for 5 minutes on a summer afternoon, UtilityVision will automatically reduce power consumption proportionately so that no additional purchases of expensive peak priced electricity are necessary. Painting rooftops white — known as ‘‘cool roofs’’ technology — is another simple way in which Santa Rita Jail reduces peak power consumption.
In spite of the perception that solar PV technologies are too expensive, the approach used by Alameda County demonstrates that marrying a set of cutting edge solar and energy efficiency and energy management technologies can offer large economic benefits to end-users. Alameda County did not need to authorize any general fund revenues to finance this pioneering solar PV and energy efficiency package. The project attracted over $4 million in state financial incentives designed to promote renewable energy and reduce peak power consumption. The remaining cost balance was already included in the county’s roofing and energy budgets. Approximately 1.8 million kilowatt hours of annual peak electricity consumption are diverted from the grid by the Santa Rita Jail project. These peak savings benefit all state consumers by reducing grid power purchases during times of the tightest supply and highest demand.
Back To the Future The electricity business started out as a competitive neighborhood affair. Thomas Edison’s first central plant served 59 customers that resided on just 12 city blocks! In 1900,
In the US alone, the International Energy Agency projects that deregulated energy markets represent a $220 billion market. 60 percent of the electricity consumed was generated right on site. That figure dropped to 20 percent in 1920 and to under 4 percent in 1980. Advances in Alternating Current allowed for the long distance transmission of electricity. This advance, coupled with the emergence of huge utility companies operating across many state boundaries, helped establish today’s modern electricity grid. In a sense, we need to go back in order to get to the future. w5x Just how big of a business opportunity do these distributed generation sources really represent? In the US alone, the International Energy Agency projects that deregulated energy markets represent a $220 billion market. That is larger than the cellular and longdistance telecommunications markets combined. On a global basis, the potential numbers are staggering. The World Energy Council projects by 2020, the developing world (notably Latin America, Asia and China), will consume more energy than the industrialized world. Some $4 trillion will be required to build the power infrastructures needed to serve the newly electrified. Distributed generation sources that include solar photovoltaics, fuel cells, small stand-alone wind turbines, will be among the prime beneficiaries of these staggering investments in the future of world electricity supply. Since wireless cell phones appear to be dominating telecommunications in the devel-
P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.
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The Value Proposition in Electric Utilities
oping world, wireless distributed power generation systems may also become the preferred option for power supply in these new electricity markets.
fully include the big names of Silicon Valley, can offer the rest of the world a model of a smart power generation and delivery system that serves both the New Economy and the environment.
Distributed generation sources, when integrated with sophisticated computerized management and energy storage systems, offer reliability insurance during these times of volatility in wholesale power markets. The future of power generation may indeed evolve into a system where smaller, smarter sources will be dispersed throughout the electric grid — and preclude the need for grids in the developing world, where 2 billion people have yet to experience electricity. The future of the electricity industry lies in better planning in transmission, to deliver bulk renewable power generated in remote locations to urban load centers. Nevertheless, the primary focus of policy makers and savvy corporations today should be the fostering of innovation at the distribution grid. Renewable on-site generation, cutting edge energy management software, energy efficiency upgrades, and new energy battery storage systems, are all technologies that smart corporations should be investigating in light of recent volatility in power markets. Bringing the grid into the 21st century offers new opportunities for profit, progress and sustainability. Those firms that recognize the parallels between the evolution of energy and telecommunications and computers will be able to capture markets and deliver genuine value to the economy and the environment. The answer to the current energy mess in California and much of the nation, as well as the rest of the world, is to transform our archaic electricity grid into a catalyst for integrating increasing amounts of renewable resources into our fuel mix. It may be time for forward-looking businesses to invest in these power systems to accelerate their introduction into the distribution grid. These businesses, which one day soon will hope-
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P. Asmus, Corporate Environmental Strategy, Vol. 9, No. 2 (2002) 1066-7938/02/$ - see front matter. 䊚 2002 Elsevier Science Inc. All rights reserved.