On-site power gets down to business

Eric Wong, Cummins Power Generation

Although the prices for natural gas, fuel oil and electricity are not as volatile as they were a year ago, and brownouts and blackouts haven’t made the national headlines for months, corporate managers-from the facility manager on up to the CEO-are as interested as ever in managing energy expenditures and insuring power availability and reliability. After conservation measures are in place, one of the last remaining options for cutting energy costs and improving reliability is by self-generation, also called on-site power generation.

In the past, the decision to install on-site power generation was usually implemented at the facility manager level. It was largely a “hardware” decision, a choice between diesel or gas reciprocating engine-generators, or a large turbine fueled by either oil or natural gas. This decision was dictated by the equipment purchase price and the so-called “spark spread” (the differential between the cost of a kWh of electricity and the total cost of power from the on-site generator). The greater this spread, the quicker the pay-back. However, few installations could be justified on this basis alone.

Today, utility deregulation, volatile energy costs, increasing concerns about power reliability, and global market pressures to reduce production costs have changed the on-site power decision. No longer is it a simple tactical decision between competing technologies; it has become a strategic business decision affecting the entire functioning of a facility, from energy inputs to production outputs to the bottom line.

Advances in technology have made power production truly democratic. That is, feasible for facilities both large and small. On-site power systems as small as 30 kW can prove practical and cost-effective for the proper application. This means that managers of smaller and more diverse facilities such as small factories, dwelling and office complexes, hotels, schools and universities, hospitals and green houses are looking at on-site power production or combined heat and power systems to control costs and improve the reliability of services.

Nearly all on-site power systems today can be designed to operate in parallel with the local utility. Advances in digital controls and utility-grade switchgear have made utility paralleling nearly seamless, allowing the system operator to dispatch the generator when additional power is needed. Each utility determines the details of their interconnection agreement with self-generators, safety requirements, sets fees and the price at which they will buy excess energy from a customer with an on-site generator. The savings projected from reductions in peak demand and the sale of excess power are part of the financial equation and can greatly accelerate pay-back.

In the past, the hardware financing math was simple: you just added up the costs to purchase, install, operate and maintain the generating equipment, subtracted the yearly projected savings in energy expenditures, and arrived at a pay-back period. If the pay-back period was more than a few years, companies were reluctant to undertake the added responsibility and manpower needs of operating an on-site generating facility. This limited on-site power production to only very large installations or facilities with unique power requirements that justified the expenditure.

Today, a facility can choose to finance, operate and maintain the on-site power system itself, or it can choose from among several options that can significantly alter the financial and operational landscape. While many companies opt to operate and maintain on-site power systems with their own staff, a growing number of companies are deciding that power production is not one of their “core competencies,” and that their sole focus should be on producing components or serving their customers.

These companies have turned to others, such as power supply aggregators, ESCOs, and independent power producers (IPP), to manage on-site power operations. Similarly, these systems managers have also begun to build, own and operate on-site power systems, delivering kilowatt hours and usable heat (combined heat and power) at a contracted price and guaranteed level of reliability that allow businesses to lower energy costs, reduce business disruptions, and improve financial forecasting of energy expenditures.

Due to significant improvements in the reliability of all types of on-site generating technologies, a combination of on-site generators and Uninterruptible Power Supplies (UPS) can improve reliability to the vaunted “six-sigma” goal of 99.9999% up time. Energy is such a critical element in the cost of all commercial operations that the issue of on-site power must be approached as a strategic business decision. elp

Wong is general manager of combined energy systems for Cummins West, the northern California distributor for Cummins Inc.

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