In the not-too-distant future, 5 to 10 percent of the electric generation market will be distributed. This is not a 'chicken little' statement but a simple matter of economics and customer value propositions. Some markets and geographies will experience less share loss and have a little more time; others will experience greater share loss and have less time. And while 5 or 10 percent may not seem like a lot of market share, we don't know of any CEO who would tell his or her shareholders that there are no plans for defending threats to his or her market of that magnitude.

In MetaVu Business Consulting's utility practice we work with several clients that operate in markets with mandatory solar energy and/or distributed energy targets. Our experiences have provided us with a glimpse into the future that we believe all Energy Central readers will want to understand. In summary, we believe significant market share will be lost to renewable DG before grid cost parity is reached. How could this be? Isn't electricity a commodity? Why would someone pay more for a commodity than necessary?

Our prediction is based on the premise that electricity generated by renewable DG is not a commodity. Renewable DG electricity is distinguishable from grid electricity in that it offers different value propositions to customers. These value propositions are important; they have economic value for which customers are willing to pay a premium.

These value propositions, which grid electricity does not offer, include:

1. Cost Certainty;
2. Tax Advantages;
3. Favorable Public Relations; and, in the future,
4. Greenhouse Gas (GHG) Liability Reductions.

Cost Certainty

Today, the installation of renewable DG is expensive relative to system energy. But system energy costs are rising. Fuel cost volatility, GHG reduction legislation, and rising infrastructure costs are just a few of the reasons why system energy cost increases can be expected to continue. When customers install most types of renewable DG they can typically count on two decades or more of energy with virtually zero risk of incremental cost. Customers are aware of this situation and are willing to pay extra for this cost certainty. In our experience, some customers are currently electing to pay up to twice as much on a kWh basis for renewable DG with expected energy production lasting 20 years or more.

Tax Advantages

Capital investments are required to install renewable DG. While this would seem to be a benefit for system electricity over renewable DG, capital investment does offer its own advantages. Federal tax policy has long encouraged capital investments by offering tax breaks to businesses that make them. In effect, this is a subsidy for renewable DG and reduces the cost of renewable DG relative to system electricity. And these benefits are in addition to the lucrative Production Tax Credits recently extended as part of the banking bailout bill recently passed by Congress.

Favorable Public Relations

You'd have to live in a cave to miss the degree to which consumers have demonstrated their preference for all things renewable and environmentally sound. Products created or services delivered with less environmental impact enjoy a competitive advantage over other products or services. Consumer preferences have percolated up through the supply chain of almost every industry. Even state and local governments, which compete with other state and local governments for employers and talented citizenry, are looking to improve their brands and competitive position through environmentally sound practices. Electricity, as a key part of most supply chains, is more valuable when it is generated by renewable DG than when it is sourced from generic system supply.

Greenhouse Gas (GHG) Liability Reduction

Some form of GHG reduction legislation will be passed by the next administration. The public wants it, it has economic development and national security implications, and it will serve as a key public barometer for 'getting something done' in Congress. While utilities and generators are concerned about the liabilities such legislation might create, their customers are trying to figure out how they can reduce their own GHG liabilities. One way customers can reduce GHG liabilities (and in some cases byproduct disposal costs) is to use any waste products they might have available as energy sources.

While most consider PV solar as the primary type of renewable DG, there are other significant (and less expensive) types. The following chart is a partial list of industries with significant waste products that could be used as energy sources for renewable DG. Customers that use waste products as energy resources cost-effectively reduce their GHG liabilities. Many of these industries are also large electricity consumers.

If you agree that electricity from renewable DG is more valuable than system electricity, you must also agree that utilities and generation companies will begin to lose market share before grid cost parity is reached. In future articles I'll discuss how soon renewable DG penetration can be expected, in which geographies, in which market segments, and what steps utilities and generation companies should be considering to maximize opportunities in the electricity market of the future. I look forward to your comments.

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Comments

January, 09 2009

KENNY MAGERS says

Renewable ( Thermal )=wind power the energy power source. For thoese that don't have a basic understanding of Jr. high school BASICS in our worlds enverioment and weather , structure designs. What is a tornado and what makes it happen. Understanding a thermal vacum, better known as natural up drafts. Window airconditioner= what is going on when the water drips and hot air gomming off outside thermal displacement. Solar heat over water natural updrafts in a tall structure. Now using your mind and now combine them in a structure as a cantainment chamber cone shape open at the ground and narrow at the top open, What happens. Jet engeine shape and fan design. This system can be used to repower our world from nature for nature and built over a closed steam plant using all the infurstructure, LESS COST.

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January, 10 2009

barry hanson says

Mr Alvarez: Do you think that it would be a good idea for utilities to be "de-linked" from the incentive to profit from energy sales? Perhaps link their profits to how much energy they can AVOID selling? This way there is not the implied threat from DG, after all isn't DG a good thing for everyone (except maybe utilities that do not have the savy to enter this market)?

Let me give you one example: there is a system now on the market that uses a thermal conversion process and a proprietary engine/gen set that will allow a fairly small operation to convert waste materials (plastics, sewage, wood, etc) into electricity, bio-oil and char. Very briefly the economics are that it will pay for itself in less than three years. It's scalable but a 2MW sytem costs $4 million installed, a pretty small capital investment, and the production cost for electricity is way below grid parity.

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January, 10 2009

Paul Alvarez says

Barry:

Thanks for your inquiry. I don't think my opinion on your question is too relevant, but I think the answer to your question depends on one's perspective.

The reality is that when grid electricity sales are growing regulated utilities will oppose decoupling. When grid electricity sales are declining utilities will seek decoupling. When the impact of energy efficiency and renewable DG become large enough to halt or reduce grid energy sales growth you will see an increase in decoupling. Until then I think decoupling will be a hard sell.

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January, 11 2009

Len Gould says

Interesting to see this proposition discussed openly. However, so long as utilities can keep regulators onside with a) mandated "grid / network stability studies" as a pre-requisite for DG interconnection, with the studies costing more than the capital cost of micro-DG systems b) flat-rate low feed-in tarifs which ignore load curves and time-of-day c) dual single-direction metering installations. d) all the other technical bariers presently used to discourage DG; I think utilities have long ago anticipated and quashed the very positive current trend to micro-DG.

I note that WhisperGen, on of the most promising current microDG products now coming available, states on their website that their product will become widely available in Europe in 2009, but "Areas like the US and Canada will take some time due to compliance issues as well as suitability." http://www.whispergen.com/main/on-grid/

I'd say that N American utilities have this issue well in hand already. Too bad, their Stirling CHP home boiler heating system has a great potential to greatly increase efficiency of N Gas use in heating-dominated climates.

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January, 11 2009

Roger Arnold says

It's amusing to see DG discussed as a "threat" in a forum where most readers -- or at least most who comment -- see it as an unqualified Good Thing. The article is clearly pitched toward utility execs who probably do have reason to see renewable DG as a threat. At least to their status quo business models.

I happen to agree with the article's thesis: that renewable DG will garner market share even before it achieves "grid parity". But grid parity is probably not that far off. A recent new article on Sempra Energy's new 10 MW PV farm in Nevada featured an analyst's conclusion that the cost of energy to Sempra was 7.5 cents per kWh. That was based on the analyst's assessment of what Sempra paid for the array of cadmium telluride thin film cells from First Solar. Sempra declined to comment. But if the analyst was even close, we should soon be seeing quite a boom in PV installations.

So what should a forward-looking utility exec be doing about all this? Perhaps I'm stepping on the toes of future articles that Paul has in the pipe, but to me the answer is obvious: invest in energy storage systems. There will be an increasing demand for them. But we'll also need rate structures that allow the providers to profit from storage facilities. Regulations that require utilities to purchase power from customers at the same rate they charge for it are roadblocks that benefit no one.

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January, 13 2009

Jack Ellis says

I think there are some utilities and some utility executives who are already thinking about losing sales to DG. Duke Energy is proposing to install solar systems at customer sites in order to meet RPS goals, as is Southern California Edison.

In California, residential PV systems are being sold on the premise that the cost per kWH from a PV system owned by the customer is known with certainty over the life of the system whereas utility prices are increasing at something like 6% per year. I don't think the rate of utility price increases is sustainable but that scenario could easily materialize under California's RPS and GHG goals.

Of course, in a competitive market there's no such thing as revenue decoupling. However, to the extent regulators buy into this silly idea, it likely hastens the day when DG and grid power achieve price parity!

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January, 13 2009

KENNY MAGERS says

This seems clear of one thing, Time for a change that is good for the power producer is building the RENEWABLE 9THERMAL 0=WIND system over steam plants and this will save the cost of updating for the envioment standards and it's from nature's combinations of 8 naturals in 1 structure 5 sizes structures. This system does not requeire to run, Thus Thermal=Wind. Get the facts kennynabb6@win.net AIRKEN Entreperneur

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January, 14 2009

Nicolas Mulliez says

Renewable distributed generation is part of the solution espacially where wasted heat or wasted material is available in my opinion. What if utility company would be involved in local project, design & manage local project, offer back up assurance and get a fee (cts/kwh) of what is produced locally. (1/2 or 1 cts). Utilities would get their usual margin, they would be 'connected' and they would take the lead in what public wants and what generations to come need.

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January, 21 2009

Malcolm Rawlingson says

All good ideas but missing some key ingredients to make intelligent decisions. It is OK to make electricity from (say) wood waste from a sawmill...until the sawmill goes out of business and there is no longer any waste to use. While the concept is OK having ones electrical supply tied to the ready availability if industrial waste seems problematic. I suppose that once you have a facility then you could truck the waste in from somewhere else that is still in business but that would burn a lot of diesel and doesn't really make economic sense. Malcolm

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January, 21 2009

Malcolm Rawlingson says

I was once a supporter of the whole concept of DG except that its's widespread use would of course eliminate the grid that it depends upon. So if one buys into the idea that every household and factory and office will generate its own electricity (I think that is what DG enthusiasts would consider their utopia) then it would seem unlikely that there would be a grid. So when your whisper gen breaks down you are in the dark and having to call the repair man in the middle of the night at $100 bucks an hour perhaps it will not be such a good idea in practice. I have no problem paying someone to make my electricity. For about a hundred bucks a month I run all my electrical appliances, cook, run the furnace fan, lights, entertainment, charge batteries and the like. Of all the things I buy each month electricity is by far and away the best value. Who would want to change that. Only someone who wants to make a fortune selling DG machines I would guess. Malcolm

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January, 26 2009

Len Gould says

Malcolm: Or someone who would prefer to see natural gas peaking generation operate at 100% efficiency (in heating or water heating season at least). It also looks to me like trying to scare DG off yith the argument that it might kill the grid is a REALLY thin straw-man. Given approaching PHEV auto charging, minimally grid-aware and possibly grid-wise, a hefty chunk of efficient non-polluting grid-centered baseload will always be required. DG at present should only threaten heavily polluting and/or fuel-inefficient central generation.

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