Pam Boschee, Managing Editor
EL&P introduces the first of its exclusive research series planned to provide the most up-to-date perspectives on various industry “hot topics” for our readers.
Distributed generation (DG) was the subject of this survey recently conducted for EL&P by PRTM, a global management consulting firm.
Market makers/niche takers
Let’s start with the definition of DG used in the survey: DG is the use of small-scale power generation technologies located on-site or near the location of the energy usage. DG technologies are small, modular, and come in sizes that range in capacity from kW to MW (typically less than 30 MW) and include reciprocating engines, microturbines, combustion gas turbines, fuel cells, wind turbines, photovoltaic systems, and all supporting technologies.
Survey results developed into a snapshot of the DG market with three major groups of players—utilities, equipment providers and service suppliers.
Each group had its own definition of who and what constituted the DG market. Many of the utility respondents believe utilities are the markets for DG technologies. Their perspective is that these technologies don’t have an end-consumer use and are best applied to their own networks to improve cost of delivery, uptime and capacity measurement. They look to equipment providers for network equipment and are implementing DG technologies on their own time scale.
Equipment providers, however, do see an end market beyond utilities. They appear to be focusing on off-grid applications, supplying end consumers with discontinuous power solutions and non-primary applications.
Tom Godward, a director who leads the Energy Practice of PRTM’s Atlantic Region, said it appears that equipment providers have a “nucleate and grow” strategy. “If energy services are something that you want to offer, then prime power applications are probably not available to you, except in very special circumstances. You then get into the market by offering non-prime offerings adjacent to what a large utility would offer—not directly competing per se. You could build that market, aggregate it and grow from there.”
Service suppliers appear to be the most aggressive in the market. The survey suggests that this group sees an end-user market served by multiple sources. The service suppliers seem to have a desire to provide end-consumer services along with services to traditional utilities.
Key survey conclusions include the following:
“- Distributed generation cannot be viewed as one market—it is many markets, and how you see it depends on who you are.
“- Utility company respondents do not see distributed generation as a revenue generating opportunity, while equipment and service company respondents do. Utility respondents tend to view distributed generation as a network enhancement, while equipment and service respondents see markets outside of utilities as having potential to generate revenue.
“- Cost is a major hurdle to implementing distributed generation, as are grid interconnection and regulatory issues. Reliability, performance and the like are lesser issues.
“- Utilities and equipment respondents do not have the same vision for the primary services that distributed generation may provide.
“- Very few companies are going it alone—partnerships and alliance will be a key success factor.
“- The market is sharply divided between those aggressively pursuing potential distributed generation business opportunities and those taking a “wait and see” approach.
Taking a closer look
The more than 100 survey participants consisted of 31 percent utilities, 43 percent service suppliers (including engineering, energy consulting, energy service management, and distributed power solutions firms), 7 percent equipment/systems suppliers, and 19 percent from venture capital firms, alternative energy providers, sales and distribution, and other service companies.
Forty-four percent of participants held executive level positions (CEO, president, VP, director, etc.). Sixty-three percent of the participants came from general or corporate management and engineering/R&D. Participants’ business revenues ranged from less than $50 million to more than $5 billion.
DG market—Fifty percent expect DG market growth of 5-20 percent in the next three years. Equipment (100 percent) and service providers (72 percent) are the most optimistic when it comes to the possibility of DG making up one-fifth of new electricity capacity additions annually by 2015. This compares to only 52 percent of utilities sharing that view.
Most participants (62 percent) identified initial equipment cost as the largest barrier to adoption of DG technologies. However, 90 percent indicated they need less than a 50 percent cost reduction to make their DG products/systems competitive with incumbent technologies on a $/kW basis. Further indication that this barrier may fall sooner than later was the finding that 78 percent predicted DG will be competitive with incumbent technologies within seven years.
Utility and service companies agreed that initial equipment cost is the largest barrier, but equipment companies think grid interconnection is the largest barrier.
Anthony F. Earley Jr., chairman and CEO of DTE Energy, provided some insight as to why utilities’ main focus is cost. “Right now, the largest factor is that there are a lot of utilities licking their wounds over foreign investments, trading issues, merchant generation, and there probably isn’t a lot of appetite to get into a new venture. The theme you hear is get back to the basics.”
When it comes to interconnection issues, David Hoffman, Celerity Energy Inc.’s (an energy management/energy service company in Oregon) president and CEO, said equipment providers frequently find it’s “not a problem from a technology standpoint, but it’s a problem from an implementation standpoint. Utilities frequently use the interconnect process either to slow the implementation of distributed resource applications, or they truly don’t have a process in place. Probably the closest they got to it in the 70s or 80s were with IPP [independent power producer] applications, such as QF [qualifying facilities], usually 25 MW or bigger, so they never really dealt with the small things.”
Hoffman added that Celerity has had some frustrating experiences with utility interconnect issues. For example, after working through a testing and approval process with a particular distribution engineer at one utility, Celerity had to repeat the process after that engineer retired. The replacement engineer “disapproved what the first one had done and made us go through it all over again with no real improvement from either a worker safety or equipment safety standpoint. It was just somebody’s different opinion, and that’s what we’re going to have until we really get utilities buying into using distributed resources as at least part of the solution.”
Earley agreed that interconnection issues sustain lively debates. DTE Energy Technologies, a subsidiary of DTE Energy Co., recently expanded its portfolio of on-site energy solutions to include a full range of natural gas and diesel generator products ranging from 5 kW to 2 MW, all marketed under the company’s energy/now brand.
Earley said, “Even internally here, trying to run a company that has a tradition utility generation piece and a DG organization, we have our internal debates. There are safety issues around interconnection, protection of the grid, protection of individuals. A big fear that utilities have is that you get DG units that you don’t know about out on the grid, and when our folks go out to work on the wires thinking they’re dead, you can kill somebody that way. On the other hand, there are ways around that. There are ways to install technology to prevent backfeeding into a dead grid, etc.”
Company interest level and preparedness—Sharp differences were found between equipment and service companies vs. utilities. One hundred percent of equipment companies and 91 percent of service companies indicated moderate or strong interest in commercializing DG technologies vs. only 68 percent of utilities.
Almost half of utilities anticipated “no share” of the DG market and 40 percent of utilities chose “not applicable” for use of sales channels, implying they will not be selling DG products.
Most companies have development programs, but the investment levels differ greatly. Fifty-four percent of the companies plan to spend less than $500,000 in 2003. Equipment suppliers are the big spenders here, with 60 percent planning to spend more than $1 million in 2003.
Twenty-one percent of all companies plan to spend more than $5 million in 2003. Forty percent of these are utilities and 40 percent are equipment and service providers.
Will utilities’ “wait and see” approaches prove to be detrimental in the long term? Will they be left out when DG begins to strengthen its position?
According to Godward, “Here’s the danger for utilities: If the pace keeps up, they’re suddenly going to find themselves in a position where they’ve been outflanked and they don’t’ have the services to offer at the cost point that other people are offering.
“Given this environment, everyone is struggling with investment levels. A ‘wait and see’ approach is okay if you don’t think that distributed energy will be a unique revenue stream, or you believe you can buy your way into the market through an acquisition once things get sorted out. Both strategies carry significant risk, but so does entering the market. It is likely that focused and balanced investments now would make sense with the key being a solid strategy, more in terms of the business model vs. the technology per se.”
Earley’s opinion depends upon what is meant by “left out.” “If you mean will they have DG as a major or even minor part of their profitability, yes there is a risk that they’ll be left out because there will be people that will figure out the right products, the right applicationsUand they’ll be way ahead.
“But if you mean left out by not being able to use DG, I don’t think that’s the case. I think it is perfectly appropriate to take a wait and see approach with any new technology. Sometimes being off of that cutting edge of technology may be, in some respects, even safer. So, I don’t think anyone is left out, but I do think if you want to make DG part of your profit picture in the future, you ought to be doing something about that now.”
DG opportunities—The majority of companies (83 percent) are targeting North American markets. Latin America, Asia/Australia and Europe are the next most commonly targeted with 16, 15 and 13 percent respectively.
Australia and Europe are the next most commonly targeted with 16, 15 and 13 percent respectively.
Small businesses (less than $1 billion) are the prime candidates for DG commercialization, followed by large businesses (more than $1 billion) and government.
The most attractive near-term opportunities are expected to be non-prime applications, such as cogeneration (service providers), peak shaving (utilities) and standby/emergency (equipment providers).
Earley said that utilities with infrastructure issues will most likely be interested in DG options. “Utilities have had some demand issues where their peak demand is high, and rather than build a new peaking plant, when right now the merchant market is a pretty risky business, they might be able to meet their needs by installing smaller modular units at a substation or out on the grid to either supply customer load or to reinforce a grid that’s weakened because it has a high load on it.”
DG offerings—The three groups emphasized different factors as the primary competitive advantage of DG products. The majority (57 percent) of equipment suppliers and 40 percent of utilities indicated power reliability/availability as the main advantage. Thirty-one percent of service providers selected value and customer/technical service.
Interestingly, only utilities identified power quality as a primary competitive advantage. This may be because they see themselves as the DG market.
The survey found that equipment and service companies have the most in-house development activity for DG supporting technologies. Equipment companies are mostly focused on DG product related technologies such as power electronics, sensors and controls. Service companies are focused on modeling/simulation and grid interconnection technologies. Utilities tend to emphasize grid technologies such as transmission and distribution as well as grid interconnection issues.
The apparent “disconnect” between equipment suppliers and utilities, according to Godward, indicates that information from utilities is not necessarily driving product development. Equipment companies have very large R&D budgets and are likely seeing a different market than are the utilities.
Value chain structure—Partnerships and alliances appear to be the norm for most companies. Only 19 percent of respondents indicated they would be going it alone.
Hoffman said, “I think companies have learned that they don’t have to totally invent it themselves. They find some of it is already existent and either buy it, partner, or enter into some license agreement with these companies on an extended basis.”
Celerity Energy has relationships with Sixth Dimension (now owned by Comverge) for software, Caterpillar for DG products, and MYR Group for construction services. Last year, Celerity acquired an electrical equipment sales and service business, Reliable Power, to provide direct access to a specific customer base and to allow expansion of the services Celerity provides inside the meter for customers.
DTE Energy Technologies’ recently expanded product line was developed exclusively for DTE under manufacturing agreements with Generac Power Systems Inc. and Katolight Power System Solutions.
The primary sales channel for DG products is a direct sales force, according to 57 percent of the respondents. Thirty-one percent indicated distributors/sales alliances as another option.
For example, DTE Energy Technologies has 18 sales and support offices throughout North America and a growing network of distribution partners in Europe and Asia.
Regulatory issues—Most companies (91 percent) think that at least minor governmental and regulatory support is required for successful market development. Fifty-three percent go as far as indicating moderate to heavy governmental and regulatory support.
PRTM’s Godward shared an interesting observation based on his experiences while attending alternative energy conferences, such as fuel cell conferences, etc. He had noted the presence of many lawyers at these conferences as opposed to conferences in other technology-driven markets. He once asked a lawyer about it. The lawyer replied that these were great markets for them because of the confusion and ambiguity about state and local regulations. Most deals require separate sets of contracts, legal review and assessment of applicable requirements—in other words, plenty of billable hours.
Earley commented, “One of the biggest challenges will be some of the legal restrictions. Right now, at a utility like ourselves, if we were to go out to an area outside of our normal franchise territory to set up a microgrid with DG technology, technically that creates another utility subject to the Public Utility Holding Company Act. Until PUHCA is repealed or changed, there may be restrictions on existing incumbents getting into that business.”
Looking ahead: Expect shifting strategies as players view markets from their own vantagepoints. Godward commented, “I believe that it will remain a fragmented market that grows in spurts with a few companies being successful and many being discouraged. The key issues are: (1) grid interconnect, as it appears a uniform standard (such as the Internet’s TCP/IP) that encompasses safety, technical issues, pricing, location, etc., does not exist; (2) regulatory, as public policy has a big impact on what each company in the value chain can do; and (3) cost, which may come down shortly.”