Even though the United States’ electric utility system delivers only 20% to 30% of potential energy to end-users, it’s still the most cost-effective means of generation available today. Distributed generation (DG) has proven to be more efficient, but its cost has been prohibitive to this point. Its supporters have been pushing to capture more of the power market for years, but until it can compete on both levels, it will have trouble.

In certain situations, however, economics, reliability, and/or quality have created a circumstance where it actually makes sense for the electric power user to generate his own power. Large-scale industrial users—especially those who can also use the by-product heat—can justify the investment on economic terms. Many others have justified investment in power generation capability to provide better-than-grid reliability or quality in the form of uninterruptible power supply systems. Emergency standby systems remain connected to the grid but can operate autonomously at least for a time. Still others have found economies in peak shaving applications. The result is that more than 550,000 small (less than 5MW) stationary power generation facilities are currently operating in the United States. But many owners of these small power plants still look at their monthly electric bills and wonder if there might be a better way.

Renewed interest in DG has been driven by a combination of issues, including total cost, capital availability, supply reliability, and power quality. To the degree that these factors stack up favorably for self generation as opposed to grid supplied power, DG emerges as a compelling choice.

Over the past several years, the events and developments that many in the power generation industry had predicted would help the DG market take off have failed to materialize. Concerns surrounding Y2K, projections of substantial increases in utility costs, deteriorating utility infrastructure, and continuing gas surpluses led many to project that the equation would move in a favorable direction for distributed power. Some even believed it would move quickly and substantially. In fact, developers of micro turbine products thought that they could tip the balance with new technology. None of these has come true, but that’s not to say they never will.

The market potential. Of the 550,000 small stationary power generation plants in the United States, less than 25,000 are used for standalone, full-time power generation (See Table). Many of these are powered by reciprocating natural gas fueled engines. Though in use in some locations, diesel creates a costly emissions problem that contributes to its overall unfavorable economics. Small and micro turbines represent a small portion of the market, and a variety of situational sources, such as small hydro, solar, wind, hybrid, and fuel cells, make up the rest. The distribution of output for these power plants—some include multiple generators with a combined total less than 5MW—indicates that these plants have made most sense for larger users.

Small-scale self generators have met with a wide range of economic successes, but very few of them can claim substantial economic gains. Only in situations where fuel is essentially free, as in the cases of bio gas by-products, coal seam gas, or other such sources, have alternative generation technologies been able to demonstrate an economic advantage. They may have achieved improved reliability or better quality, but economic improvements are usually marginal except in cases where the plant location is remote or isolated from the grid or is optimized for combined heat and power supply. The economics are further complicated by the fact that for most users electric power and heat are relatively minor parts of their overall operating budget. Over the years surveys have found that for most small power plant owners, electric power and heat account for less than 5% and 4% of annual operating budgets, respectively. These figures vary seasonally and regionally as well as by sector.

Reliability has been less of a concern in certain regions, but the consensus seems to be that it has been declining and could be cause for serious concern in the future. Moreover, it’s believed by many that the infrastructure will continue to slip and will be too expensive to correct in the short term.

The outlook from here. It has become clear that most of the “easy” applications for small DG have been explored. In order for more opportunities to emerge, some of the factors in the viability equation must change. The micro turbine promoters had the right idea by implementing changes in technology incrementally, but few of these changes resulted in a real benefit.

In addition, it takes a considerable amount of time to prove those benefits to a skeptical marketplace, something that many in the industry often forget. On the other hand, the adoption time can be shortened if the benefit is significant. A disruptive technology that offers much higher efficiencies at considerably lower first cost will be necessary unless other factors move in favor of current technologies.

Those closest to the threshold are installations that can use both the heat and electric power. These opportunities are everywhere, and they’re just over the horizon. The factors that could drive the variables in favor of small distributed power generation are those that force utilities to invest more heavily while leaving end-user choices unaffected. The prospects are real, and the large scale transmission system failures last summer only strengthen their chances. The utilities are also faced with continuing pressure on emissions reductions, and the proportion of electric power generated by low-cost coal could change the playing field.

It appears to be inevitable that the cost differential will improve for small distributed power. The rate of utility investments will increase over the next several years. The proportion of power generated by low-cost coal will decrease. Regulatory change will move in favor of better gas buying opportunities for small generators.

Change in product technology will be more important if it reduces cost of the equipment than if it improves efficiency, except in the case of the self generator who uses the power plant only for electricity. However, in that case the economics make that option far from viable. The total package efficiency needs to be 80% or greater. A typical reciprocating gas engine today is never more than 40% efficient at converting the potential energy in the fuel to electricity. It’s possible to capture another 40% to 45% of that potential in waste heat. The typical micro turbine without heat recovery is less than 30% efficient, and therefore just isn’t practical without other circumstantial rationalization.

Change could come in the form of significantly increased power output of a given engine. Today’s gas engines produce only about 50% of the power of a similarly sized diesel. There are technologies currently under development that can nearly double the power output from the same piece of iron, thereby keeping the cost about the same.

The 550,000 installed power plants that aren’t in full-time use are also attracting interest. Utilities could very well decide that they’ll supply distributed power installations. This would eliminate the complexity factor. A case could be made that a gas company could move into the electric power business and level out the summer/winter demand imbalance. However, this would only be possible with regulatory changes and a different perspective on future gas supplies and cost. Neither of these will happen quickly.

The potential for DG is huge, even if single-family residential applications are excluded. More than 10 million commercial and institutional establishments and more than 15 million multi-family residential facilities are candidates. Obviously some of these prospects are better than others. The further this projection is extended, the higher the probability but the wider the error range in that estimate. Customers who are large enough to have a peak demand of more than 300kW but too small to gain advantageous electric rates are the best early adapter candidates. These are small and medium size industrial and commercial users. Hotels, factories, office buildings, and schools are good examples.

The timing for this change is uncertain. The number of DG installations will undoubtedly increase, but how much and how soon are difficult to predict. Given some reasonable assumptions for the energy outlook and the pace of regulatory change, it’s reasonable to expect that installations will have doubled within five years, and they’ll probably double again in the five years after that.

The key factors to watch for are increasing utility investments and higher interest rates, which both make life difficult for large-scale utility investments. New technologies that increase the specific output but not necessarily the efficiency of gas engines or small turbines, could reduce the initial cost per kW of capacity. Further deterioration of the delivery system reliability would also increase the premium that self generators might be willing to pay (See Graph).

Some combination of these factors will continue to drive the DG market. If the utilities decide to get on board, the demand could accelerate sharply. If they decide to discourage this direction, it could continue to be a slow painful struggle.

Zirnhelt is president and CEO of Power Systems Research in St. Paul, Minn.