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2005-05-04
Start-stop DG history about to get into black, survey shows
Restructuring Today, May 4, 2005
Research by Distributed Energy Financial Group and Market Strategies included surveying DG customers, developers, equipment makers, regulators and other stakeholders.
Most expect DG and other technologies on both sides of the customer meter -- advanced metering, demand management, green energy -- to head into growth and profits in a couple of years. High gas prices hurt the economics of many projects using popular technologies such as combustion turbines.
But some states have worked on getting rid of barriers that made the business tough in the past -- streamlining hookups, setting net-metering policies and revising old standby rates.
Emerging concerns such as homeland security, reliability and air quality encourage DG-friendly public policy, Market Strategies believes, as do tradable markets in renewable energy credits, tax credits plus depreciation and ISO/RTO development.
With those trends to the good, what's still holding DG back?
Regulatory barriers and connection problem are the top concern said 41% of the 355 respondents.
High fuel costs came in second with 37%.
Market acceptance was an issue for 19% followed by the value proposition (16%).
Most (83%) expect big growth this year while 75% see a flourishing and profitable industry by 2010.
So what can be done to overcome remaining barriers?
Stakeholders at a workshop yesterday see getting utilities on board as most important.
The forces of centralization are quite powerful, noted Chip Schroeder, president of Distributed Energy Systems of Wallingford, Conn. Technology has "never been kind" to regulated monopolies, he added.
Policies that mean less punishment for utilities who make their money on volume aren't incentive enough to get utilities behind the idea. State commissions could help by defining DG as distribution support, Schroeder noted.
Some utilities put zero value on DG once the project is hooked up to the substation, agreed DEFG CEO Jamie Wimberly. Yet DG isn't too far from utilities' core business, he added, and ripe to be a new source of growth for back-to-basics utilities.
That might solve the problem of lots of IOU people wanting to do the right thing when it comes to DG, Schroeder noted, without boardroom support.
Many utilities in restructured states that were ordered out of the generation business aren't protecting that part of their turf, attendees reported, but they are trying to keep their best customers as measured by load, price and credit.
Thus utilities in open markets still put up barriers. One workshop attendee urged encouraging utilities to get into the DG business and own the projects to end the adversarial tinge in the atmosphere. Yet others are uneasy about a national energy agenda pushing centralized nuclear and coal plants and giving FERC siting authority -- a positive development for large projects.
RTO/ISOs haven't been particularly kind to DG, said Mike Swider, until recently Strategic Energy's regulatory expert. RTOs don't give parity to DG owners, mostly because the rules are set by other stakeholders with other interests. Thus federal policy isn't advancing the DG agenda.
What does encourage DG is incentives, as seen in New York and California where grants and tax incentives are core policies that have led to DG surges, an attendee reported.
That's borne out by Market Strategies' Distributed Energy Market Index.
Five of the 10 most DG-friendly markets are in California: San Diego (1), Riverside (3), San Francisco (6), San Jose (7) and Sacramento (10).
New York City-New Jersey-Long Island together rank fourth and western New York ninth.
Texas takes the number 2 spot with Austin and Dallas is fifth.
Hartford, Conn. rings in at eight.
Texas got rid of standby rates -- possibly a two-edged policy since DG users have to negotiate special contracts for backup service.
The index took into consideration factors such as local growth patterns, government policy (state and local), energy prices, air quality and grid congestion in ranking the 50 standard metropolitan statistical areas with populations of 1 million or more.
But a pro-DG policy agenda only goes so far. Ultimately customers decide whether DG is good for them and that throws the question back to DG developers and how they market.
What do customers know about DG, one workshop attendee asked. For some of them, making a decision to build a DG facility could be a "career-ending" move, he added. Customers want fast paybacks, savings, reliability and in some cases power quality they can't get from their utility at any price. The market for high-quality power and super-reliability could be the foot that gets DG in the door.
Schroeder believes the economics of installing DG are pretty even with buying power although using the free steam tips the balance toward DG and can deliver a three or four-year payback. In his view utilities can't compete with DG's reliability. Schroeder's wants to see customers get the option to buy higher quality service from their utility at a higher price, dubbing it a super un-interruptible rate class.
The deal would be backed with steep penalties for a utility that fails to deliver, possibly with liquidated damages for an outage. Then give others the right to compete for those customers, Schroeder urged.
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