Or can utilities use them offensively?The electric power industry stands poised to move to a fully competitive market. Business realities already imply a broadening of customer choice. At the retail level, direct transactions loom as a near-term prospect for electric utilities.

Coupled with this rising competition comes a growing variety of new, small modular power generating technologies. These new technologies have rewritten the competitive equation, changing the very nature of the utility infrastructure and providing strategic opportunities in the emerging field of distributed generation.

Nevertheless, should utilities consider distributed generation a competitive threat? Could distributed generation erode the utility's customer base? Or will distributed generation allow utilities to exploit the changing infrastructure for competitive advantage?

From Definition to Strategy

Distributed generation denotes the stand-alone or system-integrated generation of electricity in small modular plants (em ranging in capacity from a few kilowatts

to over 100 megawatts (Mw) (em whether by utilities, utility

customers, or third parties. Strictly speaking, the term "distributed generation" embraces, but is broader than, the concepts of on-site generation, self-generation, or cogeneration. (The term "distributed resources" includes both distributed generation and nongeneration alternatives for electric supply.)

Commercially available distributed generation equipment includes natural gas and liquid-fueled internal combustion and diesel engines and combustion turbines. Emerging technologies (em some of which are already available and economic for certain applications (em include solar photovoltaic arrays, fuel cells, microturbines, small Stirling engines, and storage technologies such

as batteries, flywheels, and ultracapacitors.

Nevertheless, the significance of distributed generation extends far beyond simple definitions. It implies a new corporate strategy that can be used offensively, to capture new retail markets, or defensively, to retain existing customers. At the technical level, it can lend support to a capacity-stretched distribution system. A myriad of applications come to mind:

s Meeting growing local peak demands for existing customers without adding transmission and distribution (T&D) upgrades with long payback schedules or new investments in central station generation.

s Serving new commercial, industrial, residential, or remote customers on a T&D system that already operates at near capacity.

s Retaining and adding value to current customer relationships through new, differentiated energy services and improved power quality and reliability.

s Growing new businesses within or outside the utility franchise.

In short, distributed generation can rewrite the competitive equation. The old motto, "low-cost producer wins," still maintains its validity in the bulk-power market within a regulated franchise. But a new credo, "preferred provider prevails," now does a better job of describing the future.

The New Technologies

A few recently improved and new technologies based upon natural gas will play important roles in competitive strategies using distributed generation. (For comparisons as to size, efficiency, and market application, see Table 1.)

Combustion turbines. Technological advancements over the past decade in combustion turbines and combined cycles (electricity from both a gas-combustion turbine and a heat-recovery steam turbine) have eroded the historic economy-of-scale advantage of long-payback, large, central station power plants. Compact turbines based on jet aircraft engine designs (aeroderivative turbines) and proven heavy-frame (industrial) gas turbines are now commercially available in sizes from 1 to 100 Mw, and can be deployed in 12 months. They carry lower operating costs than even a central station plant with a gas-fired boiler. Advanced designs available before the decade is out will offer simple-cycle thermal efficiencies of 45 percent, and projected installed capital costs below $500 per kilowatt (Kw).

Smaller combustion turbines designed as packaged, trailer-mounted power plants can be moved from site to site as peaking-power or grid-support requirements dictate. The local value and benefits of the power as delivered compensate for the typically higher capital cost per kilowatt (relative to conventional central station plants).

Fuel cells. In these hydrogen/ oxygen "batteries," reactants are replenished continually. There is no "charging" cycle, only the production ("discharging") of electricity. Fuel cells offer high efficiency and low emissions.

s Phosphoric acid fuel cells are commercially available at a 200-Kw size and have proven highly reliable in over 70 field applications. Several such units recently passed one year of continuous operation without a forced shutdown. Current prices run about $3,000/Kw (twice what their market value would

support), but higher-volume production could trim prices to $1,500/Kw in three to five years.

s Molten carbonate fuel cells run at a higher thermal efficiency and carry a smaller installed "footprint" for a given capacity. A

2-Mw demonstration plant recently began operation in California. The next-generation commercial plant (3 Mw, year 2000) could fit on the area covered by two tennis courts.

s Solid electrolyte or solid oxide fuel cells are still under development. By 2002, cells in the range of 15 Kw to 3 Mw could serve as small cogenerators in commercial buildings, multi-residential buildings, and megawatt-class, all-electric distributed power systems with efficiencies in the 60- to

65-percent range.

Microturbines. These small combustion turbines (25 to 100 Kw), mass-produced at a low cost, combine the reliability of commercial aircraft auxiliary power systems (onboard electric generation) with some of the design and manufacturing techniques used in automotive turbochargers (e.g., air-supported bearings). In three to five years they could provide reliable, low-maintenance power to meet onsite electric demands in the commercial sector for under $300/Kw. Since they have lower efficiencies (28 to 32 percent), their application could prove vulnerable to significant natural gas price increases.

Industrial Applications

The market potential for distributed generation for industrial applications appears significant. It poses a near-term issue for utilities: How vulnerable is the industrial and commercial customer base to third-party investment in distributed generation?

A 1995 Gas Research Institute study estimated that 24 gigawatts (Gw) of industrial cogeneration will enter service by 2010. Much

of this new capacity will come from combustion turbine and combined-cycle facilities fired by natural gas. Growing requirements by industrial users for electricity and process steam will drive the market, along with their own customers' needs for lower end-product prices, and environmental compliance. The advent of retail wheeling would enhance this market by offering outlets for excess cogenerated electric power from the cogenerator to neighboring retail customers.

The market potential for distributed generation in the industrial sector creates the opportunity for utilities and/or third parties to form "inside-the-fence" energy partnerships with their industrial customers. For example,

Sacramento Municipal Utility District has implemented four cogeneration projects on industrial customer sites as part of a strategy to co-locate generation resources in conjunction with industrial and commercial customers who can thereby benefit from low-priced process steam.

Small Industrial/Commercial Applications

Small industrial and commercial customers face needs different from those of the industrial sector, such as backup generation, peak shaving, premium quality power services, and heat and hot water. For this group of customers, a utility's retail and energy services strategy might feature distributed generation to boost customer satisfaction and loyalty, or to oppose a competitor's strategy designed to market a commodity product.

For example, utility-owned and dispatchable diesel generator sets located at the customer site can increase power reliability for commercial customers whose activities include intensive computer data processing, such as insurance companies, banks, brokerages, and commercial buildings. Jersey Central Power & Light offers premium quality power using commercially available phosphoric acid fuel cells. Enron is using distributed generation technologies to provide energy services to several Kaiser Permanente medical centers in California.

Several urban transit districts

are piloting the use of polymer electrolyte membrane fuel cells in buses to evaluate their life-cycle costs compared to conventional diesel-powered buses. A market study conducted by the Electric Power Research Institute (EPRI) has estimated that small solid oxide fuel cells could serve most of the electric needs of over 900,000 existing U.S. commercial buildings at lower costs than their current utility rates, assuming that projected installed cost targets of $1,100/Kw are realized. The extent to which such markets develop will depend on what happens to retail rates as a result of competition, and on whether exit fees act as disincentives for customers to leave the utility system for a resource offering from another supplier.

Residential Applications

Early experience with deregulation of other U.S. industries and of the electric industry in other developed economies suggests that in a fully deregulated market, electric rates tend to rise for unaggregated residential consumers. Therefore, a logical surmise predicts that some technologies that are uneconomic or marginally economic today (em even distributed generation options that may be uneconomic for industrial or commercial sectors in the next decade (em will develop attractive residential markets (see Figure 1).

Distributed generation sites in densely settled cities or in remote rural areas may become attractive to both the customer and the

supplier, offering power that is highly efficient, environmentally unobtrusive, high quality, low maintenance, unstaffed, and dispatchable. Evolving consumer

values will also influence opportunities in the residential segment; already several utilities have introduced "green pricing" to provide customers with electricity from renewable energy.

Internal Network Applications

The T&D system represents over one-half of the capital investment made by the regulated electric utility industry in the United States. Historically, distribution systems have been planned and built to deliver peak electric demand all the time. Now the business drivers are much different. When a delivery system nears its capacity because of regional load growth or new demand from mandated access for outside electricity producers, it will make sense in a growing number of situations to look for alternative ways to supply the customer during the most costly hours in a year.

At EPRI, we have conducted high-level and utility-specific case studies that demonstrated that distributed generation can provide utility planners with an added degree of freedom in managing T&D assets. In the case studies, nearly every utility system found attractive, high-value applications related to capital investment decisions and load-growth projections.

s In an area of slow or uncertain load growth, distributed generation technologies introduced to defer upgrades to the distribution system (substation, transformer, feeder) can provide significant capital savings and add cash management flexibility.

s In high-power-density, high-growth urban areas, distributed generation technologies can provide opportunities for utilities to remain the "provider of choice" by entering partnerships with large customers to install, operate, and dispatch onsite backup generation.

The Strategic Reassessment

In all likelihood, the strategic role played by distributed generation will depend on the evolutionary pace of wholesale and retail access to electricity, as well as potential disincentives such as transition costs or "exit fees" imposed by regulators. Here are some key conclusions of market assessments developed at EPRI:

s Rapid Transition. A rapid structural evolution to access at the retail level would make major players of "mini-Gencos" and ESCos (energy service companies). Distributed generation would be implemented heavily at customer sites and substations, awarding a 25-percent market share to new electric capacity by 2010.

s Slow Transition. A slow, incomplete structural evolution to wholesale access would make Distcos (distribution companies) the major implementers of distributed generation. Market penetration (em estimated at 10 to 40 percent of new capacity by 2010 (em would depend primarily on whether power producers show aversion to the business risk of adding central station capacity. This scenario appears unlikely, however, because large electricity consumers will probably continue to escalate pressure for direct access (em i.e., the evolution will not be slow.

s Phased Transition. The most likely scenario involves a complete evolution to wholesale access and a slow, phased transition to retail access. The key players will be mini-Gencos, Distcos, and ESCos. Distributed generation will be implemented at customer sites and substations, implying a low-to-modest market share of new capacity additions until 2010.

Regarding the choice of technology, these market assessments emphasize flexibility. They suggest that, in the next decade, distributed generation technologies based on fossil fuels and suitable for peaking service dispatchable by customers or owners (such as internal combustion and engine generators, combustion turbines, and microturbines) could dominate over emerging technologies such as photovoltaic solar, fuel cells, and storage (batteries and flywheels), unless this second group of technologies can achieve significant capital-cost reductions. Market entry of fuel cells would be enhanced by growth in demand for baseload capacity or by rising natural gas prices, which should encourage higher efficiency.

* * *

Although it will never supplant bulk-power generation as the dominant electricity supply and revenue producer, distributed generation offers a higher-leverage, higher-margin business opportunity. In the industrial sector, distributed generation applications using gas turbines will likely predominate through the 1990s. As utilities and ESCos seek to offer differentiated services, distributed generation will play an important role in a portfolio of new services to the small industrial/commercial sectors. Technological advances and cost reductions in fuel cells, solar photovoltaic, microturbines, Stirling engines, and later-emerging technologies like flywheels will create new markets and new energy service business opportunities. As a business strategy, distributed generation offers an asset-management alternative to adding distribution capacity.

Just as distributed personal computing revolutionized business processes and enhanced productivity, distributed generation resources can be applied to improve the delivery of electricity to the end user. t

George Preston, vice president for generation at the Electric Power Research Institute, is responsible for leading all of EPRI's nonnuclear power generation technology collaborative programs, including central station fossil, advanced fossil and hydro plants, renewables, and distributed power supply. Dan Rastler manages EPRI's distributed generation technology research. He has conducted over 20 site-specific client studies of market applicability and the technical and economic feasibility of distributed generation. He is responsible for management and delivery of a variety of EPRI distributed power programs, including state-of-the-art technology assessments; information and software evaluation tools; field testing,

demonstration and applications;

and joint venture R&D investment opportunities.

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