DECEMBER 6, 2000
SPECIAL REPORT--POWER DEREGULATION
DIY Power Generates Some Buzz | With reliable electricity ever more essential, companies are wary of their reliance on the creaky national grid. One solution: Private generators
| Want to scare a CEO? Tell him his company won't meet its quarterly expectations, and he'll reach for the antacid. Tell him a key supplier can't deliver on time, and he'll groan. But if you really want to watch his eyes bug out, tell him the power is out. Nothing can shut down a modern-day business faster than an old-fashioned blackout that puts phone lines, Web sites, server farms, factories -- in fact, whole enterprises out of commission.
One might think that such an occurrence has no place in the new millennium. But for a reality check, just ask the Intel (INTC
) executives who had to deal with a rolling brownout in their Santa Clara (Calif.), headquarters in the summer of 2000 that wreaked short-term havoc with their operations. They already have contingency plans for next summer, which include dimming office lights, raising thermostats, and installing more energy-efficient lights.
If all this sounds a little too much like the 1970s to you, you're not alone. But the electricity shortages on the West Coast and in New York during the summer of 1999 were due to tremendous surges in demand, not a lack of imported oil. For a variety of reasons -- including deregulation, nuclear-power disasters, and the emergence of electricity-hungry computers -- the U.S. electrical grid is creaking under the weight of the New Economy's power demands.
EVERY BIZ FOR ITSELF. The seemingly simplest solution -- to build more power plants -- is easier said than done. An efficient power plant takes decades, not months, to build. Even when regulatory hurdles can be leaped, the complications of an entangled energy system can be too much too handle. For instance, in California, new superefficient natural-gas power plants were thrown up relatively quickly over the past few years. But no one planned for the spike in demand for natural gas, and a limited number of pipelines feeding California led to massive price rises for that commodity, which negated the price benefits of using gas to generate power.
All of which leaves business to fend for itself. In the long run, that might be a good thing because it could launch an era of distributed power generation, according to some analysts and observers of the U.S. energy infrastructure. "Your average corporation today, thanks to call centers and server farms that support mission-critical networks, is about as dependent on reliable, consistent, and guaranteed electricity as hospitals were 10 years ago," says Hugh Holman, a financial analyst at CIBC World Markets. "The technology is available today for those companies to produce their own power at a cost that's competitive to the local utility."
Ten percent of the electricity consumed in the U.S. is produced by the same entity that uses it, according to research firm Allied Business Report. That number, though, is expected to rise dramatically in the near future. Allied expects the amount of distributed power generation to grow 15% annually over the next five years -- and possibly double that outside the U.S. "The electricity picture is about to change drastically the next few years," says Allied analyst Michael Kujawa.
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Distributed power is analogous to the desktop revolution in computing
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The idea behind distributed power is simple: Put electricity generation in the hands of the users of that electricity rather than at a centralized power plant. "In the early days of the electricity industry, we evolved a hub-and-spoke system that produced power in the country and shipped it to cities over copper wires," says Merrill Lynch energy analyst Sam Brothwell. "It was highly inefficient -- a sledgehammer approach that was able to meet the enormous growth in demand. Distributed power is analogous to the desktop revolution in computing. It puts the power into the hands of the individual user rather than coming from the mainframe in the back room."
COTTAGE INDUSTRIES. Distributed power is expected to grow quickly, but in a decentralized manner. Both large corporations and small businesses could build mini-generators to produce their own power. Eventually, as the electricity grid is upgraded, they will be able to sell their extra power to the grid during peak hours. In addition, as costs for generators and new technology falls, even homeowners will be able to get into the business of producing their own electricity.
The technology is already available to those companies thirsting for energy security. Fuel Cell Energy (FCE
), a company that specializes in building fuel cells to create on-site electricity from natural gas, anticipates that as soon as it completes its new factory and ramps up production it will be able to reduce the cost of its systems by a factor of six. That would mean a kilowatt-hour of electricity produced by its fuel cells would cost 5 cents to 7 cents compared to 4 cents to 6 cents for power off the grid. The extra penny per-kilowatt-hour would be well worth it to the medical research, financial services, and Internet-centric companies that Fuel Cell Energy markets its systems to.
Although fuel cells are not the only systems that can create power for a distributed energy network, they are probably the best choice in most situations. That's because they can convert natural gas, something which already has a vast network of pipelines, into electricity quietly, with almost no pollution. One of the reasons many companies resist producing their own power on-site is fear of a rattling, smoke-belching generator next to the CEO suite. The fuel cell, which has only in the past few years reached the point of being economically feasible, solves those problems.
Distributed power generation might not be as revolutionary as the Internet, but it could change the way our world works. Ten years from now, most large and small businesses could be independent power producers. And as for cottage industries, don't be surprised if you soon find yourself equipping a new house with a dishwasher, washing machine -- and miniturbine.
By Sam Jaffe in New York
Edited by Beth Belton
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Copyright 2000, Bloomberg L.P.
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