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2004-04-23
DG Growth Seen as Robust, but Volatile, as End-Users Seek Reliability: Consultant
reprinted from Electric Utility Week April 23, 2004
Distributed energy technologies will grow rapidly over the next several years, driven by an increase in demand for power, an aging transmission system and end-users’ desire for reliability, cost control and portability, according to a report released last week by the Distributed Energy Financial Group (DEFG).
Natural gas price volatility and increased government regulation also will contribute to the growth of the sector, which, according to DEFG, appears to have leapt in size since the August 2003 blackout. A portfolio of 12 stocks selected by the consultant increased in value by 49% in seven months, according to its “First Annual Distributed Energy Sector Review.”
But financing new technologies could hold back growth, and the consultant predicted significant volatility in the trend. “We strongly believe that the distributed energy sector will reach an inflection point, or tipping point, in its growth trajectory within the next three to five years, with very rapid growth thereafter,” said Jamie Wimberly, managing partner and CEO of DEFG. “The tipping point [is] that moment in a technology’s integration into society when after fairly flat growth it suddenly takes off. That usually happens when economies of scale are met by customer demand. The costs will come down dramatically and market penetration will increase dramatically after that.”
But Tom Lord, managing partner and COO, noted that the sector is expected to be speculative. “We expect a shakeout in the short to medium term, with at least some of the pure-play companies either being bought or going bankrupt,” he said.
As it is now, the sector’s inroads into the national grid’s mosaic are difficult to estimate, because it covers so many technologies. Resource Dynamics of Vienna, Va., in its report, “The Installed Base of U.S. Distributed Generation,” pegged grid-connected distributed generation at the end of 2003 at 60 GW. Most was from reciprocating engines and industrial turbines.
But the sector is so broad, and the emerging technologies so new that all-inclusive estimates can be elusive. The distributed energy sector itself includes both distributed generation and facilitating technologies. Distributed generation encompasses a huge diversity of products, as described in recent studies, ranging from fuel cells, many targeted for commercial and residential use, to microturbines (usually 25 kW to 300 kW), reciprocating engines (30 kW to 6,000 kW) and small gas turbines (500 kW to 20,000 kW), for commercial and industrial use.
Growth since the August 2003 blackout has been substantial, and the dozens of companies offering emerging or traditional technologies have seen their client list expand substantially, with clients ranging from hospitals to hotels to small industries.
“Distributed generation looked promising, but in 2000 it took a break for a couple years. We’re coming out of a recession, and companies are starting to spend more in terms of capital investment,” said Jerry Jackson, a consultant, who manages a web site at dgmarketplace.com. “The market is coming back and coming back strong. Lots of little companies are sprouting up.”
Contract signings announced in mid-April included a California food processor, who hopes that his build-own-operate agreement for a 4.1-MW system from MMR Power Solutions of Baton Rouge, La., will save his company 20% on its energy bills. In another, a laundromat corporation hired Distributed Generation Partners, a joint venture of Pepco Energy Services and CRM Energy Technologies, to design and build small-scale combined heat and power systems for the company’s coin-operated laundries. The developer will begin with a survey of New York City’s 51 laundromats.
But DEFG said the financial sector is viewing the technology stocks cautiously. “The initial market that defined DE for many investors was megawatt-scale generation. These … investments allowed for project financing to succeed even in the face of significant transaction costs.” But as the projects fell in size, the traditional project financing was not feasible.
“Despite the mushrooming opportunities … and despite the proliferation of promising new companies, many capital requirements go unsatisfied, and many investors turn away from this sector,” the report said. Moreover, many distributed energy provider companies do not lend themselves to the kind of aggregation necessary to make them able to receive financing, the consultant said.
Many utilities have been less than supportive of distributed generation because of its potential to take revenue away, and, as DEFG said, “the incentives inherent in the ratemaking process—the regulatory accounting, cost allocation and rate design approaches—offer disincentives to price-responsive consumers.”
Yet a handful of utilities, such as Detroit Edison, have embraced the technology. Detroit Edison first signed up with Plug Power, a New York fuel cell manufacturer, in a joint venture, and later, in 1998, set up an unregulated subsidiary, DTE Energy Technologies. The initiative was the brainchild of Anthony Earley Jr., chairman and CEO.
“What [Earley] began to realize was if he wanted to realize his vision for distributed generation that probably he was going to need a more formal internal mechanism to advance that. With the formation of the subsidiary we are now allowed to go any where in the world to market the technologies,” said Ted Bregar, the subsidiary’s director of business development.
Detroit Ed has developed a substantial portfolio of technologies, and created marketing channels to sell them both domestically and internationally. It also enters into third-party agreements. Business growth has been robust. From 2000 to 2001, revenues have doubled, Bregar said, and they doubled again from 2001 to 2002. From 2002 to 2003, revenue grew from 25% to 35%. This year, the subsidiary hopes revenues will exceed last year’s by 50%.
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