Distributed energy resources market is starting to rebound

Nick Lenssen and Shawn McNulty, Primen

After shrinking dramatically in 2002, the market for distributed energy (DE) such as engine generators, microturbines, and fuel cells began to rebound in 2003, according to Primen, an energy market intelligence company.

Primen’s December 2003 study of the distributed energy market, “Converting Distributed Energy Prospects into Customers,” found that among energy users in the 100 kW to 10 MW size range, 13 percent can be considered DE prospects, based on their expressed interest in acquiring DE. But only 2 percent of energy users were actively evaluating their DE options, though for users with a demand of more than 300 kW, the percentage increased to more than 4 percent.

By extrapolating those results, we conclude over 12,000 North American energy users are strong prospects for DE—that is, companies that are exploring DE options and rate themselves as having a likelihood of 50 percent or greater of adopting a distributed energy solution in the next two years.

Surprisingly, these strong prospects have very realistic expectations on the economic payback for a DE project, with 86 percent saying they’re willing to accept a payback of four years or longer. Soft prospects, however, have payback requirements that are far more difficult to meet (see figure).

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But the challenge for distributed energy providers remains: How can these prospects be converted into DE buyers? To find answers to this question, Primen conducted 100 in-depth qualitative interviews with U.S. and Canadian commercial, industrial, and institutional electricity customers—ranging from bakeries to semiconductor manufacturers to universities.

Their candid responses—a few of which are included here—provide significant insights into the DE decision-making process. To supplement our in-depth interviews and garner a comprehensive picture of the DE market, we drew upon data from more than 800 quantitative interviews conducted as part of Primen’s annual Business Market Survey.

We found the bottom line on selling distributed energy systems is just that—the bottom line. Prospective DE customers say their top three drivers behind considering DE are direct energy cost savings, improved power reliability, and predictable energy prices—all factors that directly affect company expenses.

We wanted to get away from the constant power outages, because it was devastating to our plastics manufacturingU You crash a machine sometimes when the power goes out, because it doesn’t have a chance to follow its program, damaging machines and motors. Unplanned outages just raise havoc with manufacturing equipment.U Reliability, next to cost savings, was the next greatest influence why we wanted (DE).
—Equipment manufacturer, Illinois

But economic savings alone won’t tip a DE prospect into being a DE customer. Before a customer will sign on the bottom line, distributed energy vendors also need to satisfy energy users’ concerns on matters such as ongoing maintenance of equipment, environmental permitting and natural gas fuel price escalation.

Moments of opportunity

Completing our study in the wake of the August 2003 Northeast blackout and Hurricane Isabel, we naturally considered how such crises affect DE sales. We found that, in addition to the obvious case of major grid disruptions, other specific instances provide windows of opportunity for DE sales. Vendors need to be prepared to capitalize on these events, as their effects attenuate fairly quickly.

In the last couple of years the energy world has changed several times.U When the emergency first hit California, we were looking at going with some fairly substantial generation capacity U microturbines or an IC engineU. But,U in the long run caution and cooler heads have prevailed.
—Ski resort, California

Potential DE buyers also express seemingly contradictory desires, indicating they may be unclear on how to proceed in adopting DE. While they want strong service agreements and warranties to guarantee DE savings and reliability gains, customers also want to retain control over the equipment.

If we have people trained in-house we will handle it. If not, we rely on the vendor. Part of the reason why we want the vendor to do it is to help our people learn more on how to do it so that in the future we can do it ourselves.
—University, New Mexico

Although natural gas remains the preferred fuel option, and spark-ignition engines the prime mover technology of choice, users express great concern over the volatile and rising natural gas price curve. Any steps promoters can take to alleviate price stability concerns will go a long way toward closing a DE sale.

DE decision makers

And, who makes the DE decision in North American businesses? In the businesses we surveyed, we found that rarely does one person make the call. More commonly, companies use a team approach, which leads to a lengthy and time consuming sales process. Different arguments may be called for to convince company personnel, with job titles ranging from facility manager and energy specialist, to chief financial officer or CEO.

Although it is corporate capital, the mill manager, sector vice president, and environment would have to put a push on there as well. It is a large corporation and there is a lot of effort needed.
—Paper products manufacturer, Ontario

The study also explores how electric utilities can proactively influence DE prospects, whether to encourage or discourage them from pursuing a distributed energy option. Surprisingly, it often isn’t necessary for utilities to offer cheaper or more reliable electricity to dissuade energy users from adopting distributed energy solutions, as other approaches can be equally effective. For example, utilities can stymie DE project development by keeping their competing tariff structure in flux.

We went from a tariff to a pure time-of-day electric rate, so, as opposed to having a fixed, predictable electric cost, now we have an U every five minute variable, electric rateU We’re not wanting to make a lot of changes in our capital investments in electric generation, because we want to see what this is going to mean.
—University, New Jersey

Despite substantial interest among energy users, DE remains a tough sell. But understanding what energy users want from DE and how they view various industry players—as well as having specific strategies to address those customer expectations—will go a long way toward converting a prospect into a customer.

Companies interested in the “Converting Distributed Energy Prospects into Customers” study can download the prospectus at www.primen.com, call 877.976.4681, or email ask@primen.com.

Lenssen is senior director for distributed energy at Primen in Boulder, Colo. McNulty is a senior director at Primen in Madison, Wis. Primen is an energy market intelligence company that develops, analyzes, and delivers comprehensive, timely information and analysis tools related to electric and natural gas markets, competitors, pricing, and new energy products and services. Primen is an affiliate of EPRI.

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