Central plant economics are hard to beat, but distributed generation (DG) is poised to enter the national scene. Within a few years, homes and businesses could become energy producers as well as consumers.

Picture the power plant of the future. Do you see a hulking, smokestack-laden structure on the horizon converting large amounts of fuel into gigawatts of power to be sent over high-voltage transmission lines to thousands or millions of customers on an interconnected grid? If so, you may be overlooking a significant portion of the electric power industry of tomorrow. Many of the power plants of the future promise to be much smaller, much more local, and much more widely dispersed.

That, at least, is the promise of distributed generation (DG), a set of technologies that incorporate several different power generation techniques that share one common trait—the generation and distribution of electric power on a mini-grid serving a limited number of customers. Even more likely, future distributed generators will distribute power to a grid of one—a fuel cell powering one house, for instance, or a microturbine powering a single office building.

Distributed generation has gained steam over the past few years. In a recent study, energy information publisher Chartwell found that more than half of 103 energy companies interviewed had conducted a DG test or project. One-third had invested in DG technology companies and one-third had signed distribution agreements with DG manufacturers.

In August 2001, energy consultant Primen found that more than 10% of the 400,000 commercial and industrial energy customers in the U.S. and Canada consider themselves strong candidates to adopt grid-alternative distributed energy (DE) in the next two years. The establishments that called them- selves strong distributed energy customers represent nearly 11GW of aggregate load, and more than half said they are already actively investigating DE options.

The U.S. Department of Energy (DOE) hopes to see up to 30GW of distributed generation nationwide by 2010, which it says will represent about 20% of the national generating capacity by that time. In 2000, DOE invested more than $274 million in projects to research, develop, and field test distributed generation technologies.

Cost-benefit analyses. Distributed generation promises many benefits over central plant and large grid economics. One is that smaller power generators are likely to be cleaner and quieter than central power plants. Some DG technologies—hydrogen-based fuel cells, wind power, and photovoltaics, in particular—offer the prospect of not only reduced environmental impact, but also the lure of plentiful and cheap, if not free, fuel sources, such as water, wind, or the sun.

Perhaps an even bigger draw is the fact that on-site power generation offers increased power quality and reliability—albeit on a smaller scale—than that offered by a central plant feed. With generators on site, energy staff, contractors, and maintenance personnel are better able to shave load and otherwise calibrate and maintain systems at optimal perform ance for local conditions. Fuel cells and microturbines are much more easily and quickly stepped up to meet peak demands or shut down when power is no longer needed. The fact that the power they generate need not be passed over long distances is another benefit: Studies show utility-owned transmission lines have caused many outages and voltage sags.

Distributed generation is also being touted as a partial answer to grid shortages in California and other parts of the country, as a tech- nology perfectly suited to sparsely populated rural areas or dense urban areas where central plant and grid economics are not as favorable, and as an excellent source of on-site backup or emergency power.

With all those promises, though, come a few key drawbacks. One is that most of the technology for distributed generation remains new and untested. Utilities and end-users alike have no way to tell whether distributed generation will catch on, how or where it will be used, and just how that will change usage patterns or load demand. Interconnection with the central grid is another sticky issue. If a facility generates its own power, at what point can it, or should it, be able to draw on supplemental power from the grid? At what point should a user that is generating excess power be able to sell back to the grid? How will energy companies, utilities, or manufacturers price distributed generation? What happens to central grid economics if a significant portion of demand is taken off-grid and placed under the control or jurisdiction of individual actors? Who controls siting and environmental regulations when everyone has a mini-power plant in their own back yard? These and numerous other questions remain unanswered.

The biggest obstacle to widespread adoption of DG technology, though, may be simple economics. The cost of installing and maintaining individual generators and power systems remains high, particularly when compared to central grid economics. Experts generally agree that a price of $1,000/kW or less will be commercially attractive, while many of today’s most advanced and economical DG systems still cost $3,000/kW or more. Prices are likely to decline as technology matures and manufacturers ramp up production, but it looks to be at least 3 yr to 5 yr before DG has a significant impact on the electric generating market as a whole.

Microturbines and fuel cells. Two of the DG technologies creating the biggest buzz today are microturbines and fuel cells. As the name implies, a microturbine is a small, high-speed power plant featuring a turbine, compressor, generator, and power electronics, usually fueled by natural gas but often also able to use landfill or digester gases as an alternative or supplemental fuel. Microturbines generally produce between 20kW and 200kW of power, and many include an exhaust gas heat exchanger that can preheat inlet air, heat water, or make low-pressure steam, increasing efficiency or creating valuable byproducts in addition to electric power.

Nick Lenssen, senior director of distributed energy at Primen, says microturbines have finally started to deliver on promises that have been made for a number of years. In 2000, Lenssen says, manufacturers shipped some 1,200 microturbines worldwide, representing about 53MW of net capacity, an increase of 400% over 1999.

“We have seen a tremendous growth in shipments,” Lenssen says. “Part of that is being driven by the curiosity factor—engineers love to get one of these things and kick it around to see if it works. But we are also starting to see some very successful markets for microturbines.”

Among the more promising markets are those that can power microturbines using on-site oil or gas as fuel, dramatically lowering input fuel costs. Interstate Power Systems (IPS), an oil and gas drilling company, has deployed more than 100 microturbines in the Wyoming Powder River Basin. The Los Angeles Department of Water and Power has ordered 150 microturbines, roughly half of which are expected to be deployed near landfills to take advantage of methane and other waste gases.

“Microturbines are here to stay,” says David Kurzman, an analyst who studies alternative energy for investment firm H.C. Wainwright & Company. “My guess is they are going to gain great acceptance in the small generation market. They can use a multitude of different types of fuel, have relatively low emissions, and the technology that goes inside a microturbine is well-understood and largely reliable.”

Microturbines also are popular because leading manufacturers such as Capstone Turbine Corp. and Honeywell Power Systems have ramped up production to drive costs down to around $500/kW to $1,000/kW, a price Lenssen calls attractive for alternative energy devices and technology. Capstone and Honeywell currently control most of the market for microturbines, but other companies such as Cummins Engine, GE Power Systems, and even utilities like DTE Energy produce and market microturbines.

While microturbines are the leading DG technology today, the future could belong to the fuel cell. Fuel cells create electrical energy through chemical reactions rather than combustion, operating in principle much like a car battery. In its simplest form, a standard fuel cell consists of a positive and negative electrode (cathode and anode) with a solid, ion-conducting, catalyst-coated polymer membrane between the two. Hydrogen-rich natural gas is pumped into the fuel cell’s anode side while air—for oxygen—is pumped to the cathode side. On the anode side, the hydrogen molecule splits into two protons and two electrons, with the electrons passed through an electrical circuit to create electricity. On the cathode side, oxygen molecules split and combine with hydrogen protons to form water molecules. The process also produces heat that can be used to supplement water and space heating. A single fuel cell creates less than 1V at full load, so fuel cells are stacked to produce usable power. A stack of fuel cells is commonly referred to simply as a “fuel cell” in distributed generation literature.

Since fuel cells create electricity and heat with chemical reactions rather than combustion, the creation of electricity does not produce the noise or exhaust of combustion turbines. Proponents of fuel cells say fuel cell stacks that fit into an appliance no larger than a residential dishwasher or water heater may power the homes and businesses of the future. Homeowners and business owners may have fuel cells in their back yard or on business property, quietly and efficiently pumping out all the power needed for immediate local consumption. The U.S. Fuel Cell Commercialization Group estimates that the fuel efficiencies of most fuel cells (the amount of power produced as a percentage of fuel inputs) will be at least 50%, compared with efficiencies of 30% to 40% in traditional gas or coal-burning turbines. When the heat and steam output of fuel cells is also used, efficiencies can top 70%, the group says.

If all this sounds too good to be cheap, it is. Lenssen says there have been only about 200 fuel cells sold in the electric generating market to date, with few, if any, true success stories. Analysts say manufacturers must drive costs far below the current $3,000/kW before fuel cells will make much of a commercial impact.

Kurzman agrees. “Fuel cells won’t be a mass commercial market until at least 2003 or 2004, at the earliest,” he says. “Until the costs become substantially reduced, this is a niche product. Niches include rural areas, where the power lines generally don’t go; the ‘first adopter’ market; and the high net worth/summer-home-type setting. For the most part, fuel cells will be a second-half-of-the-decade phenomenon.”

By that time, though, fuel cell technology could advance to the point at which costs can be brought down to a more palatable level. Advances in fuel cell technology will likely replace today’s phosphoric-acid fuel cells with direct methanol cells based on proton exchange membrane (PEM) technology that will not require an external reformer to extract fuel (hydrogen) from methanol. These future cells promise to boost fuel cell efficiency and lower the cost of maintenance associated with a fuel reformer. Manufacturers are also working on molten-carbonate fuel cells and solid-oxide fuel cells, all able to operate at higher temperatures, which can boost a fuel cell’s co-generation capabilities.

Looking to the future. The relatively high cost of fuel cells—and to some extent the high cost of microturbines when compared to central grid economics—is not the only thing holding distributed generation back. Lenssen notes that the economic slowdown of 2001 and the after-effects of the September 11 terrorist attacks have hit the distributed energy business hard, with many potential customers afraid to move ahead on plans for new and as yet untested technologies. Customers have less money to invest in alternative energy technologies, and the specter of massive outages and shortages following last winter’s California electric restructuring debacle have generally failed to materialize. (see “Downturn in Demand Gives Contractors Time to Get in the DG Game” on page 42.) “There was also a lot of expectation that high-tech hotels would be big buyers, and that whole sector has been hit hard,” Lenssen adds.

George Hunt, director of channels and account management for Enerwise Global Technologies, says most customers today are looking at DG to provide backup and supplemental power. Enerwise works with utilities and large industrial and commercial customers on DG strategies, and Hunt says at least one utility expects to be offering between 50MW and 100MW of distributed generation to its customers within the next 5 yr. Most utilities are offering on-site generation as part of an enhanced reliability and uninterruptible power supply (UPS) strategy, he says, and key customers include health care facilities, banking centers, call centers, high-tech research organizations, pharmaceutical companies, Web-hosting firms, and all other businesses that demand 24/7, high-quality power.

Russ Erlich, a project engineer and project manager at Enerwise, says the initial costs of DG technologies must come down and the storage capacity of systems must be increased before DG will become truly commercially viable. “As the technologies become more mass produced, the cost will come down,” he predicts. “If you can get hot water or chilled water out of the system, that only adds to efficiency and lowers the cost. Battery technology is another factor. If you have something powered by solar energy or wind power, you have to be able to store that power more efficiently and effectively. As battery technology improves, you are going to see smaller on-site generation become more cost-effective.”

Lenssen says a combination of factors will lead to the gradual development and deployment of alternative energy and distributed generation technologies over the next 3 yr to 5 yr. Government subsidies and programs will contribute. “Most new energy technology gets driven that way anyway,” Lenssen notes. Environmental concerns will continue to grow, and he sees movement on the part of the EPA, DOE, and other government agencies to promote cleaner, less intrusive power technologies. Capital investment will come back, Lenssen predicts, once the overall economy starts to rebound.

“We did most of our studies before September 11 and before the economic slowdown late last year,” Lenssen notes. “At that point, we said we were on the ‘tipping point’ of distributed energy becoming a viable market. Did we tip? No. But many of the companies that wanted it six months ago are still thinking about it, and they will revisit [distributed generation] when they see it to their advantage again. It is also a new thing, a new way to buy energy. Energy remains one of the toughest things for a business to budget for, but this will allow them to budget it in the same way they do any other cost.”