Generation: Big or Small?

Fortnightly Magazine - September 15 1996

Generation: Big orDistributed power may turn

heads, but economics points

to central plants.

By Joseph F. Schuler, Jr.

By 2010, distributed power technologies will make up as much as 30 percent of new electric generation.

So says a 1996 study prepared for The INGAA Foundation, Inc.: Natural Gas Use in Distributed Power Generation Applications.

For its part, the Energy Information Administration (EIA) predicts that 175 gigawatts (Gw) of generation will be added in the United States through 2010. If just 20 percent comes from small-scale plants, distributed generation will account for 35 Gw.

But talk to the engineers, distributed-power experts, manufacturers, power-plant packagers and suppliers, and power marketers working in new technologies and you'll find that few agree with the official predictions. Distributed generation's role as a firm power source (em for now at least (em will take a back seat.

Economics will be the driver in the choice of generation, and every unit will need to meet the mark (em whether it puts out 4 megawatts (Mw) or 400 Mw. What's the mark? From $200 to $450/Mw to install; about 2 cents per kilowatt-hour (¢/Kwh) to operate.

Economic factors will determine the route of new generation after what most agree is three years of remaining capacity. These factors include stranded-cost recovery, exit fees, and wholesale and retail access to electricity.

Fuel costs will be paramount. In fact, two market observers predict the (distant) return of nuclear power. Such plants would be technically flawless, the result of experience in foreign countries where nuclear power is still being installed.

Those that construct large plants or buy "packaged plants" will range from independent power producers (IPPs) to power marketers using generator sets to boost customer savings during peak periods.

Mason Willrich, chairman of EnergyWorks, a joint venture of PacifiCorp Holdings, Inc. and Bechtel Enterprises, says the future generating infrastructure will be very different.

"That's a no-brainer," he says. But he notes that many millions have been invested in plants fast becoming obsolete. And energy policies have not fostered the investment needed to fill the coming gap.

"With the technology that's out there, the pace of innovation needs to be speeded up. And you've got utilities and regulators, together, suppressing it." That means the United States is losing time, since the developing nations offer a "clean slate" for business.

But Willrich believes the construction cycle will return here. When it does, he predicts a balance in the size of plants: "I don't see us going back to 1,000-Mw nuclear plants, or to coal. From the standpoint of central station, I think we need to think of hundreds of megawatts, not thousands."

Willrich describes the central station of choice as combined-cycle cogeneration or just combined cycle, depending on natural gas prices.

But before that happens, says Bill Thompson, a senior business development partner for Black & Veatch, "consolidate" and "bulldoze" will be the watchwords. It will take at least three years, he warns, for the market to absorb the "bubble of electricity" created by FERC Order 888, which opens the wholesale transmission grid.

"I think we're going to bulldoze down a lot of inefficient plants." Thompson's company, working with Commonwealth Edison Co.,

currently focuses on options for a power plant that combines high labor costs with 13.5¢/Kwh electricity.

Builders of new technology had better remember that they'll be competing at tomorrow's prices, not today's. Thompson points to gas plants his firm built in the Northwest: "Four cents a kilowatt-hour, and now they're shut down. ... They're not competitive anymore. And they were just finished.

"The competitiveness of power is falling so fast, the bottom will be somewhere around a penny and a half to two cents per kilowatt-hour."

Renewables certainly won't hit the economic bull's-eye.

"We can't play with new technology that doesn't compete," Thompson says. "No wind power that only works part-time. No fuel cells that are $7,000 a kilowatt. We can't do that. We're going to have to find a technology that will compete with today's fuel cost."

He says IPPs will play the largest role in installing future plants (em as much as 70 percent of the market. Large utilities, or disaggregated generating companies, will form subsidiaries to either build or buy. And they'll build for many reasons, Thompson says, not least of which might be to get out from under strict union rules or unfavorable long-term coal and gas contracts.

"There's all kinds of reasons why the business is taking a different shape," he says.

Industrials will continue to use the threat of cogeneration as a "better rates" negotiating tool with utilities. That, too, will slow the pace of new generation.

Bob Kennel, national accounts vice president for LG&E Power Marketing, says "new generation now is very carefully being considered. [It's been] sort of delayed by the major utilities ... approached by people like us in a very careful manner, with selected locations around the country but not many plants."

LG&E has joined as a knowing partner in "phantom" industrial cogen projects, the most visible one for DuPont. "After we had signed our letter of intent with DuPont two years ago, they were able to get a very good cogen deferral rate from Carolina Power & Light Co. that saved them $6 million a year," Kennel says. "And we have been willingly used at times to take a look at cogen. And there were people who did studies to get a slightly lowered rate.

EES North America

"However, I think retail access, particularly for the industrials, is coming fast, and we're telling our clients: Don't build cogen now. There's no reason to build cogen right now."

Kennel says he sees new generation kicking in, in different places and at different times, around the turn of the century.

"We recognize that any new generation is going to have to compete in wholesale power

markets, because we do see a really open market out there."

One reason behind the open market is power marketing. LG&E is in the middle of it. It claims to be the largest of the utility-affiliated power marketers in the country.

It's also getting experience for the future. Over the past 13 years, LG&E has started up 22 projects: natural gas-fired cogen as well as wood-fired, coal-fired, and even wind plants.

One of its most recent planned projects involves Reynolds Metals, the aluminum manufacturer. The tentative order is for a 300-Mw plant that could be as large as 800 Mw, with most of the output being merchant power.

Kennel says distributed power will make inroads "when we get down to retail. I don't see it in the wholesale market."

Thomas A. Robertson, fuel cell division manager for Stewart & Stevenson Services, Inc. (S&S) says his company (em which packages turbines, fuel cells, and other equipment (em has higher hopes for distributed power.

S&S gas-turbine and cogen equipment work has been flat because customers are waiting to see how deregulation falls out. "We have more proposals out on the table and under serious consideration right now than we've ever had in the company in the history of the gas turbine division," he says. "And these are not just lightly considered proposals. These are ones where funds have been set aside and we're a

serious contender for the award. But nobody's getting the award domestically right now."

Fuel cells will fit into niche markets where gas turbines run into siting problems due to noise, emissions, or some other reason, Robertson says. ONSI Corp., a leading fuel-cell manufacturer, has effectively done away with permitting problems in the Southern California Air

Quality Management District by winning a blanket exemption for one of its products.

Robertson says utilities have been active partners in demonstration programs and want to stay involved in fuel-cell development. They have memberships on commercialization and development boards.

The current high cost of fuel cells (about $1,000/Kw installed for a gas-turbine model) hinders acceptance and development. But Robertson says the U.S. Department of Energy's fuel-cell rebate program (em which reimburses $1,000/Kw, or up to a third of total project costs on units between 100 and 3,000 Kw (em has helped considerably.

S&S was working with ONSI and the National Rural Electric Cooperative Association on a 200-Kw trailer-mounted demonstration unit.

"I guess what's going to draw people to distributed power is the opportunity to provide additional savings," Robertson says. "Cost is going to be the main issue."

Distributed power will make inroads when central systems need upgrades, says John Swanson, electric power generation marketing manager for Caterpillar, Inc.'s North American division. It will also come in handy when systems can't handle peak demands. "Maybe you put in a generator, either at a customer site or a substation to boost the grid," Swanson says. "You end up with small steps instead of one large step."

He says Caterpillar will still have its interruptible power business, because not all states are taking the same view of retail deregulation.

Regulators will make interruptible and curtailable power an opportunity in areas of some states.

Then there will be new markets.

"We've seen power marketers going after medium-size industrials or commercial users, using generator sets as a part of that cost-reduction strategy," Swanson says. "Maybe even using a gas engine chiller on peak and electric chiller off peak to provide savings."

That type of business is threefold: It allows the power marketer to establish a relationship, get more business, and boost demand for Caterpillar products.

But it's too early for distributed power to serve as a firm-power source, Swanson admits. "On our product, the driver for it being firm power is how many hours you can operate a year, based on your site emission constraints."

Caterpillar's diesel generator sets cost from $350 to $450/Kw installed, and cost about 8¢/Kwh to operate, based on a $1/gallon fuel cost. The company's natural gas engines can generate power at about 4.5¢/Kwh.

As you can imagine, Westinghouse Electric Corp.'s perspective on generation's future is very different, although it too has its finger on distributed power, such as fuel-cell technology. John Reker, market analysis manager of the company's power generation business unit, says the deciding factor when it comes to the future of unit sizes is the bottom line.

The latest Westinghouse combustion-turbine model, the G series, can produce electricity at 3.5¢/Kwh, depending on siting and gas costs.

"I think you'll still see a lot of central power, because the name of the game is cost of electricity," Reker says. "It's where you get the economies of scale."

For peaking, distributed power will still be used. "That still isn't to say there aren't going to be some small units, 50 Mw and below [used for firm power], but I don't think, certainly in any timeframe soon, that we'll see a major change in that area."

Westinghouse sells

25-, 50-, 100-, 160-, and 230-Mw combustion-turbine units. In the United States, about 85 to 90 percent of the megawatts being purchased are combustion-turbine based, Reker says. A subset involves cogeneration. "In the last several years, a high percentage of combustion-turbine applications involve cogen," he says. "Below the 50-Mw size, I'm sure three-quarters or more also involve cogen."

Whether the future demands large- or

small-scale generation, it's clear that economics will always play a role. That's why two observers raise the nuclear option.

Is it a serious one?

Thompson, of Black & Veatch, says we could see a return to nuclear power because we may have pushed the limits of natural gas, or run out of other options like coal, with developers wary of investing in a single technology.

"There could be some big nuclear units built. ... I'm dead serious," he says. "It's going to happen in China. And it will happen in the United States, too, because when there's gas and you can't get it to where you want to use it, we just start shutting the lights off."

Swanson says Caterpillar is working with Westinghouse on engineering next-generation nuclear plants (600 and 900 Mw) that use generating sets for standby power. For now, opportunities lie in the Pacific Rim, where environmental and political pressures appear less daunting than in the United States.

Of the U.S. nuclear industry, Swanson says, "Hey, who knows, it could come back around." t

Joseph F. Schuler, Jr. is associate editor of PUBLIC UTILITIES FORTNIGHTLY.

E-mail: schuler@pur.com

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