As discretionary capital dries up, contractors have a chance to prepare for the next wave of demand for distributed generation (DG).

Just six months ago the distributed generation (DG) market appeared to be ripe with possibilities for electrical contractors. Madison, Wis.-based energy market analysis company Primen announced DG was at the “tipping point” in the summer of 2001. But a lot can change in six months’ time. First came the recession. And then wholesale energy prices dropped. And then September 11. Money that might have been spent on DG projects was coffered away, and those interested in cutting-edge on-site power generation technologies adopted a cautious, wait-and-see attitude.


Though no one can predict when demand for DG will meet the lofty expectations predicted by industry analysts in early 2001, few believe the concept is a fad. Downtime is a naughty word in the power generation milieu, but with DG, it presents electrical contractors who were slow to enter the DG market with an opportunity to make up for lost time and prepare themselves for the day when it comes back into vogue.

Generating interest. Just because the DG market isn’t what it was last year, the reasons for its burgeoning popularity haven’t gone away—they’ve just been replaced by more pressing financial matters. Problems like power reliability and soaring electricity prices can be attributed in large part to an idea that looked good on paper yet failed to pan out in practice: deregulation.

California’s energy users have been plagued for more than a year by surges, brownouts, and any number of other power quality problems caused by the state’s attempt to create a competitive energy market. Although California may not have accomplished its stated goal, it was successful in creating a desire on the part of many large commercial/industrial facilities to look into generating their own power. And as research into on-site power sources like fuel cells and microturbines increased, the DG market seemed poised to take off.

And for some, it did. Cupertino Electric, the San Jose, Calif.-based electrical contractor, got a head start on the market, establishing its Energy Solutions Group in mid-2000 to deal with power quality problems on the West Coast, offering, among other things, DG. The company had already been installing on-site generation for more than three years, but mainly in backup capacities. All told, Cupertino has set up some 250MW of DG power in the California market over the past five years. And then came the economic downturn.

DG dries up. “Downturn isn’t even the word for it,” explains Steve Schumer, vice president of technology development for Cupertino. “There’s a decrease in demand for our services, period. Nobody’s building anything. People just aren’t spending money on their facilities.”

Though the company has two projects currently under construction that will create power with the use of solar energy, two other combustion turbine projects were “back-burnered” after the recession set in in mid-2001. Schumer says the discretionary capital normally set aside for such projects is in short supply, as companies focus on investing in things like new development and new products that will turn a profit much faster than a DG installation.

Not only did businesses in California stop spending money on distributed generation projects as the market went south, companies across the country shied away from risky DG ventures. Nick Lenssen, senior director of distributed generation at Primen says most market researchers are having to back- pedal from their original predictions about DG. He even admits the numbers Primen published in the report, “Distributed Energy at the Tipping Point: Customers’ Growing Receptivity to Grid-Alternative DE,” which showed more than 10% of businesses identified themselves as “strong candidates” for base-load DG applications during the next 2 yr, aren’t quite as solid any more.

“It’s hard to be super-bullish right now on the near-term distributed generation future,” he says.

However, there are other factors that have worked to slow down the wider adoption of DG aside from the economy and the fallout of September 11, chiefly declining wholesale energy prices. With oil, natural gas, and electricity prices the lowest they’ve been in a year, few companies may see the advantage to investing in DG, which takes a long time to turn a profit.

Given the recent volatility of energy prices, counting on them to remain in one place for long is risky. In fact, Lenssen points out that now would be a good time to put in on-site generation and secure a long term contract with a gas company while prices are so low. However, he says, few end-users plan that far into the future.

“If I was an energy user and had big items, I would love to get a third party to guarantee me future energy prices, lock that in and do on-site generation, because it clearly makes economic sense,” Lenssen says.

To a lesser degree, some industry analysts believe the companies in need of reliable, on-site power generation are the most hesitant to employ it. Manufacturing facilities that cannot tolerate downtime are apprehensive about allowing outside engineers and contractors to tinker with their processes. It’s a fear that speaks to a general lack of knowledge on the part of manufacturers and a knowledge gap that falls upon the contractor and equipment manufacturers to bridge.

“It’s on us,” Schumer says. “I believe that anybody, the equipment vendors, the contractors, they have an obligation under any circumstances, whatever the problem is, to educate their clients. We’re dealing with people whose core strength is not in electric power supply, so whatever we propose to our clients that’s outside of what we call ‘lights, plugs, and switches,’ we believe requires education so everybody knows what they’re getting and what they’re not getting.”

Although these obstacles may be causing problems for the contractor interested in establishing a place in the DG market, one player not upset by the slowdown is the utility. DG may never replace grid power, but it does stand to siphon revenue away from the utilities.

“The utilities have been very opposed to customer generation for quite a few years because it was a direct revenue loss,” says Richard Friedman, chairman and CEO of Resource Dynamics, a Vienna, Va.-based distributed generation market analysis and consultant group. “In many cases, if a customer started talking about putting in his own generation of any significant size, the utility—in an effort to head that project off—would strike a special negotiated rate with that customer that would make the planned savings associated with the on-site power basically go away.”

Although efforts on the part of such utilities as Public Service Electrical & Gas of New Jersey and Pacific Gas & Electric in California to adopt an if-you-can’t- beat-’em-join-’em approach and develop independent subsidiaries specializing in on-site power generation failed, the potential still exists for an unlikely marriage between contractors and the utilities. Some power companies are offering users the option of dispatching on-site generators to help meet peak demand—generators that will need to be serviced and maintained.

Strange bedfellows. With the exception of outfits on the scale of Cupertino, few contractors are large enough to compete directly with utilities that set out to offer DG. However, the utilities are also at a disadvantage in that most are without the capability to install or maintain on-site power. As a result, both have something to offer the other, and contractors could find themselves in the position to gain some sub-contract work from their direct competitors in the DG market.

Robert Brozey, senior vice president of business development for ABB Energy Capital, believes the potential for such a partnership is very possible, and he’s seen the proof. “The utility service companies I know of outsource a lot of their work to electrical contractors with engineering design capabilities,” he says. “They’ll go out and make the sale and turn around and bid it out to the contractors they know. It’s not as profitable, but it would definitely allow [contractors] to stay in the game.”

The most lucrative—and most likely—potential partnership Friedman and Brozey see exists between contractors and gas companies. Although microturbines and fuel cells may be the technology of the future, diesel generators are still the most popular form of DG at present. Many generators run on natural gas, so contractors looking to make their way into the market might have luck teaming up with the companies that supply the gas.

“I’m a big believer that the gas company is one of your biggest allies if you’re a contractor, because the gas company wants to sell more gas, and they don’t mind taking the business away from the electric company,” Brozey says. “But I think that kind of partnership should only be attempted by a contractor who’s done work for the utility, who’s a larger contractor with some regional expertise and some ‘umph.’”

Only a matter of time. The presence of these obstacles is not to say DG is too risky for contractors to get involved in. The economy will turn around, grid power will still be unreliable, and energy users will look into on-site power again. All of which proves there is still time for electrical contractors to get into the market. And Primen’s study shows that when they do become interested, companies will look to contractors specializing in DG to install it (See Figure on page 43). Friedman notes that brushing up on the changes to the NEC concerning DG would also be beneficial (Sidebar on page 44.)

Integrated Electrical Services (IES), Houston, conducted studies of North America and found that DG constitutes a $4 billion to $5 billion market that is growing at 20%. And Lenssen and Brozey agree that manufacturing facilities—and to a lesser degree colleges and universities—in the Northeast, Midwest, and California will be the group most interested in DG once the economy turns around.

And though the market may not look good now, Robert Reynolds, executive vice president and CFO of IES believes on-site power generation is here to stay.

“The fundamental drivers are still there,” he says. “People still want reliable power, and not only that, they want higher power quality, two things that DG provides.”