DISTRIBUTED GENERATION AND EMERGING TECHNOLOGIES

OCTOBER 2012 TECHNOLOGY DISTRIBUTED GENERATION AND EMERGING TECHNOLOGIES Discussion Questions: 1. What infrastructure upgrades are required to support additional natural gas usage in the residential and commercial sector? 2. What are the key barriers to overcome in order to increase the adoption of distributed generation in the residential and commercial sector? 3. What siting requirements and processes will be required for fuel cells and microturbines? 4. What financing options are available for distributed generation? HIGHLIGHTS Greenhouse gases from the electric power sector can be reduced through more efficient electric generation technologies and by increasing the quantity of distributed generation, which is the generation of electricity at or near to where it will be consumed. In 2010, 67.7 percent of the primary energy produced, primarily at centralized electricity power stations, for the residential and commercial building sector was lost during generation and transmission. The majority of the energy loss occurs during the conversion of a fuel into electricity and is in the form of heat loss. Electricity is also lost during transmission and distribution; and on average about 7 percent of the electricity generated in the United States is lost during transmission. Increased direct use of natural gas in commercial and residential space heating and cooling, water heating, cooking as well as wet (clothes) cleaning could replace less efficient electricity end use. Increased use of higher efficiency distributed generation technology (e.g., natural gas-fueled solidoxide fuel cells and microturbines) by residential and commercial end-users would result in less primary energy demand and fewer greenhouse gases emissions. High upfront capital costs are likely to discourage investment in new generation technologies, especially at a time when low natural gas prices are putting downward pressure on energy bills. Several states, however, provide financial incentives for residential and commercial consumers who install distributed generation systems, and the federal Investment Tax Credit helps to defray capital costs for commercial entities, 30 percent of the cost or up to $3,000/kW. 1 This is a joint project between the Center for Climate and Energy Solutions and the University of Texas Energy Management and Innovation Center Center for Climate and Energy Solutions 1

INTRODUCTION Technological advances in the exploration and production of natural gas have dramatically increased the quantity of economically recoverable reserves in the United States. The U.S. Energy Information Agency (EIA) estimates that there is enough natural gas to last more than 90 years at current consumption rates. The growing supply has put downward pressure on natural gas prices, making it an attractive and affordable energy source. Therefore, it is likely that natural gas consumption will increase in all sectors. In 2010, residential and commercial buildings used natural gas for nearly 21 percent of their energy requirements (Figure 1). Electricity, created from various energy sources, is the most used energy form in these sectors. FIGURE 1: Projected* U.S. Residential and Commercial Buildings Primary Energy Direct- Use Consumption for 2010 of commercial space heating needs (Figure 2 and Figure 3). The other direct uses of natural gas are water heating, cooking, wet cleaning (clothes washing and drying) and space cooling to a much lesser extent. FIGURE 2: Projected* U.S. Residential Natural Gas End-Use Splits for 2010 Water Heating 26% Wet Cleaning 1% Cooking 4% Space Heating 69% Natural Gas 20.7% Latest actual Residential Energy Consumption Survey (RECS) conducted in 2009 Source: U.S. Department of Energy 2011 Petroleum 4.8% Coal 0.2% Electricity 72.9% Renewable 1.5% Latest actual Residential Energy Consumption Survey (RECS) conducted in 2009 Source: U.S. Department of Energy 2011 61 percent of the natural gas was used in the residential sector and 39 percent was used in the commercial sector (Figure 1). Out of these totals, natural gas was used for 69 percent of residential and 50 percent Center for Climate and Energy Solutions 2

FIGURE 3: Projected* U.S. Commercial Natural Gas End-Use Splits for 2010 Other 30% In the commercial and industrial sectors, where the majority of distributed generation occurs, natural gasfueled electricity comprised approximately 54 percent of the total net generation in 2010, followed by renewable sources at around 22 percent and coal-fired generation at nearly 13 percent. FIGURE 4: Distributed Generation by Fuel Source Cooking 6% Water Heating 13% Space Heating 50% Renewable Sources 22% Other 2% Coal 13% Petroleum 2% Space Cooling 1% EIA: Annual Energy Outlook 2012, National Energy Modeling System (NEMS), et al. Source: U.S. Department of Energy 2011 Other Gaseous Fuels 7% Natural Gas 54% Lower prices increase the likelihood of even greater use of natural gas for space heating and water heating, displacing home heating oil and some electricity use. Additionally, there will likely be renewed interest in natural gas air conditioning systems, which are a very small portion of the current market (Figure 3). Future direct use of natural gas in the residential and commercial sector will probably be very different from today, particularly with regard to electricity generation. New distribution and end use generation technologies have the potential to change the way residential and commercial users approach natural gas, and many of these ways will significantly reduce greenhouse gases. Distribution technologies include distributed generation and microgrids. End use technologies include specific natural gas-fueled electricity devices like fuel cells and microturbines. DISTRIBUTED GENERATION Distributed generation systems (also referred to as selfgeneration) consist of smaller electricity generating units located at or near where the electricity will be consumed. Source: U.S. Department of Energy 2011 Distributed generation has many benefits compared to centralized electricity generation including: end user access to waste heat, increased electric system reliability, reduced peaking power requirements, reduced greenhouse gas emissions and reduced vulnerability to terrorism. 2 These benefits derive, in large part, because distributed generation technologies are better able to utilize more of the energy in the fuel. In 2010, 67.7 percent of the primary energy used for electricity generated for the residential and commercial building sector was lost during generation and transmission. 3 Converting primary energy at a central power station into electricity produces a large quantity of heat energy, which generally is not captured for productive use and is therefore lost. Additional energy is lost as the electricity is delivered from power stations to end users. U.S. annual electricity transmission and distribution losses average about 7 percent of the electricity that is transmitted. 4 Center for Climate and Energy Solutions 3

Line losses depend on the following factors: line voltage, line load, weather, altitude and the distance travelled; the higher the line voltage the fewer losses that a line will experience. 5 For example, for a 765kV line, the highest voltage currently used in the bulk transmission system, electrical losses are on the order of 0.6 to 1.1 percent for a 1000 MW line load travelling 100 miles in normal weather. 6 A 345kV line under the same conditions would see a loss on the order of 4.2 percent. 7 Since most local distribution companies operate below 35kV 8, losses as high as 10 to 15 percent are possible in these networks. 9 Not all of these local line losses are the result of transmission physics. Some losses result from meter inaccuracies and energy theft; although it is difficult to quantify these losses, and they are highly variable from region to region. All else equal, higher line loads, higher ambient temperatures or longer distances travelled, all lead to higher line losses. NEW WAYS TO GENERATE ELECTRICITY MICROGRIDS One distributed generation technology that is increasingly being examined is natural gas powered microgrids. A microgrid is a small power system composed of one or more generation units that can be operated in conjunction with or independently from the bulk transmission system. 10 Microgrids offer the potential to more readily integrate distributed renewable and nonrenewable power with energy storage. Also, since the electricity is generated closer to where it will be used, it becomes feasible to use the waste heat in a productive manner, such as heating water or space in nearby homes and businesses. Microgrids can also be particularly attractive if new or upgraded long-distance transmission cannot be developed in a timely or cost-effective fashion. 11 FIGURE 5: Microgrid Concept Source: Nationalgrid 2012 Center for Climate and Energy Solutions 4

FUEL CELLS Fuel cells are another distributed generation technology. Natural gas fuel cells use natural gas and air to create electricity and heat through an electrochemical process rather than combustion. 12 First, natural gas is converted into hydrogen gas inside the fuel cell in a process known as reformation. When the hydrogen passes across the anode of the fuel cell stack (Figures 6 and 7), electricity, heat, water and carbon dioxide are created. As long as there is fuel, air and heat, the process continues producing energy. Although there are many types of fuel cells, the type of fuel cell described here and the type of fuel cell that is generally being commercialized for distributed electricity generation is referred to as a solid oxide fuel cell (SOFC). Natural gas-fueled solid oxide fuel cells operate at temperatures about 1,800 F. 13 ClearEdge Power, based in Oregon and established in 2003, manufactures refrigerator-sized fuel cell microchp (micro combined heat and power) units that generate baseload or backup electric power as well as provide useable heat for hot water and/or space heating. 14 These units are scalable to suit the energy requirements of individual homes, apartment buildings, hotels or other commercial businesses, and can be installed indoors or outdoors. These units are up to 90 percent efficient; 50 60 percent efficient in natural gas conversion to electricity plus useful heat. Therefore, they require less natural gas to generate an equivalent amount of energy provided from a power plant and heating appliance. 15 FIGURE 6: Fuel Cell Stack Source: U.S. Department of Energy 2011 FIGURE 7: How Fuel Cells Work Source: ClearEdge Powe 2011 Bloom Energy, based in California and founded in 2001, currently markets energy servers, which are arrays of fuel cell boxes in various sizes that must be installed Center for Climate and Energy Solutions 5

outdoors (Figure 8). The energy servers are scalable and service large corporate customers like Wal-Mart, ebay and FedEx, not the residential marketplace. 16 These servers achieve conversion efficiencies above 60 percent. Note that these are very high temperature devices, but the Bloom design does not use the heat for useful water or space heating. The average emissions are 773 pounds of CO2/MWh, which is just below the average U.S. natural 17, 18 gas power plant at 800 to 850 pounds of CO2/MWh. FIGURE 8: Bloom Energy Server Outdoor Installation Source: Bloom Energy 2012 Fuel Cell Energy is a Connecticut based manufacturer of fuel cells for commercial, industrial, government and utility operations. 19 The company was an early pioneer in fuel cell research and conducted experiments with many types of fuel cells beginning in the 1970s. 20 Their Direct Fuel Cell (DFC) product range generate between 300kW and 2.8 MW, and are currently delivering power at more than 50 installations around the world with electricity conversion efficiencies up to 47 percent. 21 Fuel cell technology has been around for a long time; it has been used by NASA on space projects for nearly 50 years. Commercially available SOFCs are capable of operation at very cold and very warm climates (-4 to 113 C), and they have electrical efficiencies around 50 percent. 22,23 They are quiet devices that require a fairly small footprint to operate, and the pure CO2 emissions allow for easy sequestration. Despite these benefits, skeptics question the durability and reliability of fuel cells. In the past, materials have corroded within months or a few years. Bloom Energy estimates that its current devices will have a 10-year life as long as the fuel stacks are replaced at least twice. However, due to their recent introduction, there are currently no operational fuel cell systems that have approached this age. 24 TABLE 1: Fuel Cells Summary COMPANY ELECTRICITY CONVERSION USABLE HEAT THERMAL ELECTRIC EFFICIENCY MARKETS ClearEdge 50-60 percent Yes 90 percent Residential, Commercial Bloom Energy 60 percent No 60 percent Commercial Fuel Cell Energy 47 percent Yes 70 percent or higher Commercial, Industrial, Utility Source: Clear Edge, Bloom Energy, Fuel Cell Energy Center for Climate and Energy Solutions 6

MICROTURBINES Microturbines are small combustion turbines approximately the size of a refrigerator with outputs up to 500kW. 25 These devices can be fueled by natural gas, hydrogen, propane or diesel. In a cogeneration configuration (Figure 10), the combined thermal electrical efficiency can reach as high as 90 percent. 26 Not unlike fuel cells, these devices are able to achieve much higher efficiencies than central power stations since the electricity is generated close to the source where it will be used, and the heat byproduct can be captured and utilized on site or nearby. FIGURE 9: Microturbine Schematic Source: Electric Power Research Institute 2003 There are more than twenty companies worldwide that are involved in the development and commercialization of microturbines for distributed generation applications. Los Angeles-based Capstone Turbine Corporation is a global market leader in the commercialization of microturbines. 27 The company offers individual units in the range of 30kW to 200kW, although greater quantities of power can be achieved by using multiple units, with electrical efficiencies from 25 to 35 percent. Using the heat produced by a microturbine for water or space heating, space cooling (in conjunction with absorption chillers) and/or process heating or drying, increases the efficiency of these units to 70 to 90 percent. 28 Capstone products service the commercial and industrial sectors, and they have installations all over the world, including universities, a winery and 35-story office tower in New York City. 29 Flex Energy, also headquartered in California, is Capstone s main competitor. Its 250kW microturbine offering has an electrical efficiency of 30 percent, and it too provides useful heat energy. 30 Flex Energy microturbines can use low quality and unrefined natural gas, making them capable of generating electricity at landfills and hydraulic fracturing sites. 31 Micro Turbine Technology (MTT), a company in the Netherlands, is currently developing a 3kW electrical with 15kW thermal microchp for homes and small businesses, which is expected to be ready for market in late 2012 or early 2013. 32 FIGURE 10: MTT Microturbine for Residential Use and Capstone Office Tower Installation Source: MTT Center for Climate and Energy Solutions 7

At 31 percent average electrical efficiency, much lower than a modern natural gas combined cycle plant or fuel cell (both around 50 percent), microturbines produce 1,290 pounds of CO2/MWh. 33 However, due to their ability to capture and utilize waste heat on-site, they are capable of achieving thermal electrical efficiencies greater than 80 percent. Additional strengths of microturbines include: compact size, small number of moving parts, generally lower noise than other engines, and long maintenance intervals; weaknesses include parasitic load loss from running a natural gas compressor and loss of power output and efficiency with higher ambient temperatures and elevation. 34 According to U.S. Environmental Protection Agency (EPA) data, at 80 F outdoor air temperature, the microturbines are about 3 percent less efficient than at 50 F outdoor air temperature. 35 TABLE 2: Microturbine Summary COMPANY ELECTRICITY CONVERSION USABLE HEAT THERMAL ELECTRIC EFFICIENCY MARKET Capstone 25-35 percent Yes 70-90 percent Commercial, Industrial Flex Energy 30 percent Yes N/A Commercial, Industrial MTT N/A Yes N/A Residential Source: Capstone, Flex Energy, MTT STIRLING ENGINES The WhisperGen, developed in New Zealand, is a microchp technology based on the Stirling engine. The company is currently headquartered in Spain, where the product is being marketed to European customers. The washing-machine sized microchp technology is designed to produce hot water and space heating. However, under normal operation the unit will provide around 1kW of electrical power. 36 FIGURE 11: WhisperGen MicroCHP Source: WhisperGen User Manual 2007 POLICIES TO INCENTIVIZE DEPLOYMENT OF NEW TECHNOLOGIES While there is significant potential for new technologies to use less primary energy and reduce greenhouse gas emissions, there are some hurdles to overcome. Higher upfront capital costs are believed to prevent investment in distributed generation technologies, and the State of California and at least nine other states provide financial incentives for self-generation. 37,38 Additionally, fuel cells, combined heat and power (CHP) and microturbines for use in the commercial, industrial, utility and agricultural sectors are eligible technologies for the federal Investment Tax Credit (ITC), which is designed to help defray capital expenditure costs. 39 Net metering programs serve as an important incentive for consumer investment in on-site energy generation. 40 Net metering allows an electricity meter to turn backwards when the site generates electricity in excess of its demand, enabling customers to receive retail prices for their excess generation. 43 states and the District of Columbia have rules supporting net metering. 41 Eligible generation technologies vary; however, fuel cells using any fuel type often qualify and cogeneration or CHP qualifies to a lesser extent. Center for Climate and Energy Solutions 8

Grid interconnection provides a source of backup power for sites using distributed generation. According to the EPA, standard interconnection rules establish clear and uniform processes and technical requirements that apply to utilities within a state. 42 These rules reduce uncertainty and prevent time delays that distributed generation systems can encounter when obtaining approval for electric grid connection. 43 As of April 2012, 34 states had interconnection standards for fuel cells and 29 states had such standards for microturbines. 44 Standby rates are charges levied by utilities when a distributed generation system experiences a scheduled or emergency outage, and then must rely on power purchased from the grid. 45 These charges are generally composed of an energy charge, which reflects the actual energy provided, and a demand charge, which attempts to recover the costs to the utility of providing capacity to meet the peak demand of the facility. 46 Utilities often argue that demand charges act as a strong incentive for system owners to manage their peak demand. 47 The use of demand charges can discourage use of distributed generation. The likelihood of unplanned outages during times of peak demand is low. When approving demand charges regulators should consider the benefits of distributed generation, including increased system reliability and reduced distribution losses, in addition to utilities capacity requirements. 48 BARRIERS TO DEPLOYMENT Consumer unfamiliarity with distributed generation technologies will likely slow their deployment. Also, stable utility bills due to low wholesale electricity prices (a result of lower natural gas prices) and, in the short term, uncertainty around the future growth of business activity will probably not motivate consumers and businesses to consider adopting new technologies. Consumer awareness of low natural gas prices may be spurring those without access (infrastructure and physical connections) to seek how they can gain access to natural gas. Those with access may be considering the costs of owning, operating and maintaining electrical and natural gas appliances, including natural gas distributed generation technologies. Fuel cells could be cost competitive if they reach an installed cost of $1,500 or less per kilowatt; but, the current installed, unsubsidized cost is approximately $4,000+ per kilowatt. 49 Nevertheless, an analysis by Seattle City Light, shows that with a combination of California state and federal subsidies as well as low natural gas prices, the Bloom 100kW energy server could make economic sense for California companies with high monthly energy bills. 50 Center for Climate and Energy Solutions 9

FIGURE 12: Bloom Energy Server Cost Depends on Gas Price and Subsidies Source: Seattle City Light 2010 According to the National Institute of Building Sciences: 51 Microturbine capital costs are currently in the range of $700-$1,100/kW. These costs include all hardware, associated manuals, software, and initial training. Adding heat recovery increases the cost by $75-$350/kW. Installation costs vary significantly by location but generally add 30-50 percent to the total installed cost. Microturbine manufacturers are targeting a future cost below $650/kW, which appears feasible if the market expands and sales volumes increase. With the proper policies in place it is not hard to imagine the increased uptake of distributed generation technologies. They have the potential to capture a large share of utilities electricity sales business. John Doerr, a venture capitalist supporting Bloom Energy says, The Bloombox is designed to replace the grid it s cheaper than the grid and greener than the grid. 52 For this reason, with current business models and rate structures, utilities are unlikely to be supportive of these technologies. Center for Climate and Energy Solutions 10

ENDNOTES 1 U.S. Department of Energy, Fuel Cell Technologies Program. March 2012. http://www1.eere.energy.gov/hydrogenandfuelcells/incentives.html?m=1&. 2 U.S. Department of Energy, The Potential Benefits of Distributed Generation and Rate-Related Issues That May Impede Their Expansion. February 2007. 3 U.S. Department of Energy, Key Definitions. March 2012. http://buildingsdatabook.eren.doe.gov/tableview.aspx?table=1.5.1 4 U.S. Energy Information Agency, Frequently Asked Questions. July 9, 2012. http://www.eia.gov/tools/faqs/faq.cfm?id=105&t=3 5 American Electric Power, Transmission Facts. http://www.aep.com/about/transmission/docs/transmissionfacts.pdf 6 Ibid. 7 Ibid. 8 Power Partners, Resource Guide Electricity Distribution. December 11, 2009. http://www.uspowerpartners.org/topics/section4topic-elecdistribution.htm 9 Thomas, Ed, Distribution Line Loss Management Offers Significant Savings for Electric Cooperatives. November 2007. http://www.utilityexchange.org/docs/white_line1101078x11.pdf. 10 Barker, Phil. EPRI, Technical and Economic Feasibility of Microgrid-Based Power Systems. March 2002. http://disgen.epri.com/downloads/15-definingmicrogrids.pdf. 11 Ibid. 12 Fuel Cells 2000, Types of Fuel Cells. http://www.fuelcells.org/fuel-cells-and-hydrogen/types/ 13 Ibid. 14 ClearEdge Power, http://www.clearedgepower.com/. 15 ClearEdge Power, Commercial System Specification. September 2011. http://www.clearedgepower.com/sites/default/public/fielduploads/prodpg/files/commercial%20ds%2009.12.11%20v2.p df. 16 Bloom Energy, Customers. 2012. http://www.bloomenergy.com/customer-fuel-cell/. 17 Bloom Energy, ES-5700 Energy Server Data Sheet. 2012. http://www.bloomenergy.com/fuel-cell/es-5700-datasheet/ 18 Washington Post, EPA to impose first greenhouse gas limits on power plants. March 26, 2012. http://www.washingtonpost.com/national/health-science/epa-to-impose-first-greenhouse-gas-limits-on-powerplants/2012/03/26/giqaijtscs_story.html 19 FuelCell Energy, Overview. 2012. http://www.fuelcellenergy.com/about-us.php 20 Ibid. 21 FuelCell Energy, DFC 300kW. 2012. http://www.fuelcellenergy.com/dfc300ma.php. 22 Bloom Energy, ES-5700 Energy Server Data Sheet. 2012. http://www.bloomenergy.com/fuel-cell/es-5700-datasheet/ 23 Fuel Cells 2000, Types of Fuel Cells. 2012. http://www.fuelcells.org/fuel-cells-and-hydrogen/types/. Center for Climate and Energy Solutions 11

24 Seattle City Light, Integrated Resource Plan. 2010. http://www.seattle.gov/light/news/issues/irp/docs/dbg_538_app_i_5.pdf 25 Capehart, Barney. Whole Building Design Guide, Microturbines. August 31, 2010. http://www.wbdg.org/resources/microturbines.php. 26 Ibid. 27 Capstone Turbine Corporation, Main Page. 2012. http://www.capstoneturbine.com/. 28 Capstone Turbine Corporation, Solutions CCHP. 2012. http://www.capstoneturbine.com/prodsol/solutions/chp.asp. 29 Capstone Turbine Corporation, Global Case Studies United States East. 2008. http://www.capstoneturbine.com/_docs/cs_cap380_ave%20of%20americas.pdf http://www.capstoneturbine.com/company/global/region.asp?region=35 30 Flex Energy, Flex Turbine MT250 G3. 2012. http://www.flexenergy.com/wp-content/uploads/2012/03/flex- MT250_G3_Product_312.pdf. 31 Flex Energy, Industry Sheets Landfill Applications, Oil & Gas. 2012. http://www.flexenergy.com/resources/marketing-library/ 32 Micro Turbine Technology, MTT s micro CHP system. 2012. http://www.mtt-eu.com/applications/micro-chp. 33 Carbon Lighthouse, Microturbines A Primer. March 2012. http://www.carbonlighthouse.com/2012/03/microturbines/. 34 Capehart, Barney. Whole Building Design Guide, Microturbines. August 31, 2010. http://www.wbdg.org/resources/microturbines.php. 35 Carbon Lighthouse, Microturbines A Primer. March 2012. http://www.carbonlighthouse.com/2012/03/microturbines/. 36 WhisperGen, User Manual. 2007. http://www.whispergen.com/content/library/wp503703000_uk_user1.pdf. 37 California Public Utilities Commission, About The Self-Generation Incentive Program. September 2011. http://www.cpuc.ca.gov/puc/energy/distgen/sgip/aboutsgip.htm. 38 DSIRE, Incentives/Policies for Renewables & Efficiency. 2011. http://www.dsireusa.org/incentives/index.cfm?ee=1&re=1&spv=0&st=0&sector=state_sector&implementingsector=s&tec hnology=fuel_cells&sh=1. 39 U.S. Department of Energy, Business Energy Investment Tax Credit (ITC). November 2011. http://www.dsireusa.org/incentives/incentive.cfm?incentive_code=us02f. 40 U.S. Department of Energy, Green Power Markets. May 2011. http://apps3.eere.energy.gov/greenpower/markets/netmetering.shtml 41 U.S. Department of Energy, Net Metering Map. July 2012. http://www.dsireusa.org/documents/summarymaps/net_metering_map.ppt. 42 U.S. Environmental Protection Agency, Combined Heat and Power Partnership. 2008. http://www.epa.gov/chp/state-policy/interconnection.html. 43 Ibid. 44 Interstate Renewable Energy Council, State Interconnection Standards for Distributed Generation. April 2012. http://www.irecusa.org/irec-programs/connecting-to-the-grid/interconnection/. Center for Climate and Energy Solutions 12

45 American Council for an Energy-Efficient Economy, Standby Rates. http://aceee.org/topics/standby-rates. 46 Ibid. 47 Ibid. 48 Ibid. 49 National Fuel Cell Research Center, Challenges. 2009. http://www.nfcrc.uci.edu/2/fuel_cell_information/fcexplained/challenges.aspx. 50 Seattle City Light, Integrated Resource Plan. 2010. http://www.seattle.gov/light/news/issues/irp/docs/dbg_538_app_i_5.pdf. 51 Capehart, Barney. Whole Building Design Guide, Microturbines. August 31, 2010. http://www.wbdg.org/resources/microturbines.php. 52 Johnson, R Colin. EE Times, Fuel cell system claims 2x efficiency. February 22, 2010. http://www.eetimes.com/electronics-news/4087892/fuel-cell-system-claims-2x-efficiency. Center for Climate and Energy Solutions 13