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Micropower: The next big thing?

New electricity technologies promise power to the people, but the revolution may be delayed

March 1, 2001


Douglas Clement Senior Writer
Micropower: The next big thing?

Call it Edison's revenge.

Over a century ago, not long after he invented the light bulb, Thomas Edison built an electrical power system that placed small generators close to the power user. Factories had power plants in their basements and neighborhoods had local generators. But after a pitched battle, George Westinghouse's model of large, central power plants and long-distance transmission of electricity—the system now in place—won out, and Edison's little generators were relegated to dumps.

Today, as the United States faces a growing electricity shortage and an increasingly unreliable power grid, many experts are suggesting that Edison's model may be the solution to the predicament. Rather than satisfy increasing electrical needs by building more large central power plants, these experts say that building very small power generators close to the point of use is more efficient, reliable and cleaner. They call it micropower. And it may—or may not—be the way back to the future.

Micropower—generally considered an electric power generator producing no more than 10 megawatts—includes a number of technologies, from a refined form of the familiar internal combustion engine, to emerging technologies like microturbines and fuel cells (see sidebar). Advocates say that these technologies, placed close to the electric load in what is called "distributed generation," reduce the need for controversial centralized power plants and related long-distance transmission lines. They also provide high-quality power well-suited to the reliability needs of computer technology. In addition, many of the emerging technologies emit fewer pollutants than conventional generators.

The Ninth District is home to a surprising array of these new small power technologies, from a microturbine heating water in a Fargo hotel to fuel cells providing electricity for a home near Prescott, Wis. By and large, however, micropower is in that awkward transitional stage between engineering experimentation and full-blown commercialization, and whether it succeeds in the marketplace—whether in fact, it begins to transform the way electric power is generated in America—depends on a number of technical, economic and political factors.

Fueled by exuberance

If wattage could be extracted from excitement levels about micropower, there would be no electricity shortage in America. The enthusiasm cuts a broad swath, from venture capitalists to environmentalists. In an August 2000 cover story, The Economist magazine predicted "the Dawn of Micropower," and suggested it would bring about an "electric revolution." In December 2000, Bear Stearns issued the second of two thick, glowing reports on companies active in the field, declaring that "the future looks brighter than ever for the new technologies." Micropower, a recent report by the Worldwatch Institute, an environmental policy group, says "the large-scale electricity model appears to be collapsing ... creating big opportunities for a little approach."

But in addition to the hype, serious money has come to the micropower table. Nth Power, a venture capital firm devoted to innovative energy technologies, estimates that venture capital funding for micropower and related businesses climbed from less than $30 million in 1995 to over $1 billion in 2000. Major corporations including GE, Siemens Westinghouse and the European giant, ABB, have launched efforts to develop their micropower potential; car manufacturers have also invested heavily in fuel cell development.

Ninth District micropower

Far from global finance and coastal hype, micropower has begun to gain a toehold in the Upper Midwest, and the most prevalent new micropower technology in this region is the microturbine, a refrigerator-sized power plant that spins at speeds up to 100,000 revolutions per minute to generate electricity.

About 80 microturbines are currently spinning in methane gas wells in the Powder River Basin coal beds of southeast Montana and northeast Wyoming. The turbines, leased by Interstate Power Systems, a company headquartered in Bloomington, Minn., generate electricity to run pumps that keep water from interfering with methane production. The microturbines run on "free" methane from the coal beds, are virtually maintenance free and produce low emissions.

The key economic justification for this application comes from the wells' remote location. "Microturbines power the gas wells until they can bring utility wires in," said Dave Thimsen, project engineer at Interstate. "The typical gas well revenue is on the order of $1,000 a day and if they have to wait three or four months to get utility power in there, that means they're deferring $100,000 in revenue."

Interstate is also in the process of installing microturbines to run oil well pumps in northern North Dakota, where they can run on otherwise unusable "sour" gas from the wells.

Reliant Energy Minnegasco, a Minneapolis utility, has made a limited foray into micropower by installing two microturbines at its Burnsville, Minn., facility for refrigerating natural gas and propane. The turbines help cope with peak demand problems at the facility and have proven useful, reliable and generally economical over their limited trial runs, according to plant manager Todd Lind, who noted that the cost of microturbine wattage has declined in the last year. "As long as the price of the turbines goes down, it would start making sense for a lot of commercial and industrial installations," he said.

Not everyone worries about the cost. "This is a beta test site," said Doug Anselmin, manager of the Holiday Inn in Fargo, N.D., "So the price was right." Anselmin pays only for fuel for the microturbine that was installed at his hotel by Cass County Electric Cooperative in a joint research project run by the U.S. Department of Energy, the National Rural Electric Cooperative Association, and the Electric Power Research Institute (EPRI). The 30-kilowatt microturbine generates electricity to heat water for the hotel's 200 guest rooms, and the turbine's exhaust heat then warms water for use in the hotel's kitchen and laundry, resulting in a total energy efficiency of nearly 60 percent.

Mark Hanson, account executive with Cass County Co-op, said the co-op initially got involved in the research because it was worried that their competition "might drop these [microturbines] in, sell more gas and eliminate the [Co-op's] electric sales." But now Hanson seems inherently interested in the technology and the potential for customer applications. "The results have looked real good," he said.

Fuel cells

Other new micropower technologies have begun to spread in the Upper Midwest. After a brief power outage in 1997 crashed computers at the First National Bank of Omaha, bank management calculated that an hour-long outage would cost them $6 million and decided to install a system of phosphoric acid fuel cells and energy-storing flywheels that provides 800 kilowatts of power to the Nebraska bank's mainframe at 99.9999 percent reliability, far higher than the local utility.

Electric cooperatives in the Ninth District are also taking an interest in fuel cells. In 1999, Energy Co-Opportunity (ECO), an energy services cooperative owned by a network of electric co-ops, entered into partnership with H Power Corp., a fuel cell manufacturer, to introduce fuel cells to residential and small business customers. One of H Power's experimental units was tested in Centuria, Wis., last year, and in January 2001, the company installed a more-refined version of its product in a home near Ellsworth, Wis., in cooperation with Pierce-Pepin Electric Cooperative. Hooked up to a propane gas line, the fuel cell generates all the electricity needed in the home, as well as much of the hot water and some space heating.

"There's a real need in a lot of parts of the country for distributed generation," said Steve Healy, chief executive officer of Pierce-Pepin, and chair of ECO's board of directors. Customers who need dependable, high quality power tell Healy they'll pay a premium price for the reliability of fuel cell power. Moreover, installing a small local generator is as cost effective, in some cases, as replacing inadequate or failing distribution lines, said Healy, and supplying propane for fuel cells "keeps your guys in the propane division busy in the summertime."

The residential fuel cell in Ellsworth will provide the home with 10 kilowatts of power, but a farm or small retail store might need a larger cell, providing 25 kilowatts of electricity, said Healy. A supermarket would need more power, as much as 200 kilowatts.

Chart-Projected Additions to Capacity
Source: U.S. Energy Information Administration Annual Energy Outlook 2001

Utilities and policymakers

Investor-owned utilities in the Ninth District are also looking into micropower. "I think it has the potential to be huge," said Dave Ryan, a senior distribution engineer at Montana Power Co. "The efficiencies are coming up and the costs are coming down on these small generation units." Ryan is developing a demonstration project that will use a microturbine to provide power and heat for an MPC facility in Butte, similar to the Fargo hotel application.

In northern Minnesota, Allete Corp. is designing two demonstration projects using fuel cells, microturbines and photovoltaic cells. Xcel Energy, the region's largest utility, tested early microturbines in 1997.

Wisconsin Electric has an ambitious distributed generation scenario, with a couple of demonstration projects under way, position papers drafted and a "Wisconsin Distributed Resources Collaborative" in formation. The company's initiative seems, in part, a response to popular opposition to siting new central power stations.

A number of policymaking bodies in the Ninth District also are investigating micropower solutions. In January, the Minnesota Department of Commerce proposed that the state's looming electricity shortfall can be partially addressed by enacting policies that encourage distributed generation.

Independent of statewide measures, Minnesota's Hennepin County is funding a $50,000 study, due by late March, to gauge the feasibility of a county micropower project. Concerned about the price, reliability and environmental impact of electric power, seven counties in the Minneapolis-St. Paul area have created an energy task force, said John Derus, task force chief of staff. Applications like a fuel cell that provides one-third of the power at a local air force base and a small high-efficiency turbine that provides electricity and heat for St. Mary's Hospital at the Mayo Clinic in Rochester, Minn., indicate that micropower technologies may prove useful at the county level, said Derus.

Pragmatism rears its ugly head

The reality remains, however, that most of these technologies are in development, testing and demonstration phases. Most Ninth District microturbines, for example, are just "looky-see" applications, as Interstate's Thimsen put it. Companies, utilities, co-ops, government bodies and others in the Ninth District are curious about the technologies, but don't yet consider them a substantial component of their overall energy resource plans.

The federal Department of Energy estimates that, for the foreseeable future, micropower will remain a small player. While DOE's Annual Energy Outlook 2001 projects a dramatic increase in the amount of distributed generation over the next 20 years-from virtually none in 1999 to over 13 gigawatts by 2020, this still constitutes just 3 percent of the nation's 393 gigawatts of additional generating capacity projected, and only 1 percent of total 2020 generating capacity of 1,061 gigawatts. Not quite a revolution-or perhaps, a revolution with a very long fuse.

Some of the impediments to widespread adoption of micropower are technical. For example, the "reformers," which strip hydrogen from natural gas or propane, are still problematic, creating an operating glitch for fuel cells; H Power couldn't install their cell in Ellsworth on schedule because they had to tweak the reformer. "There are still technology issues to be worked out here," noted Steve Taub, energy analyst for Cambridge Energy Research Associates (CERA). "The fuel cell was invented 50 years before the internal combustion engine. There's a reason it hasn't gotten that much further. It's not so easy."

The big costs of micropower

Micropower economics are a bigger question. Kilowatt costs of most emerging micropower technologies are currently higher than those of large-scale central stations. And one of the apparent economic advantages of some microtechnologies has disappeared, at least temporarily: The usual fuel source for both fuel cells and microturbines is natural gas, a commodity whose price has soared, raising operating costs and making micropower a less attractive alternative. Even if natural gas prices come down, micropower technologies might be a harder sell in the Upper Midwest, where electricity prices are relatively low.

Still, in niche markets—those needing extremely reliable power, for example, or early-technology adopters—paying a premium for micropower could make sense. And what begins as a niche may expand. "I think it may start out that way [as a niche]," observed Rita Hayen, senior project strategist for Wisconsin Energy. "But I think as with cell phones, as with computers, once some of the first users start installing this stuff and we start seeing what these applications look like and how well they work, then I think we're going to see other potential applications for this."

Moreover, costs will likely decrease over time, bringing many of these technologies into a very competitive range with traditional generation. EPRI, a noted industry-funded research organization, estimates that as micropower technologies evolve over the next two decades, efficiencies will increase substantially and costs will decline (see chart). When the cost of electricity transmission and distribution is factored in (varying from 1 cent to 8 cents per kilowatt-hour, according to EPRI), placing slightly more expensive generation close to the load becomes competitive with cheaper generation at a distance. The economic application of micropower, therefore, is very site-sensitive. With more innovation, costs could decline even more significantly. Engineers are working on hybrid technologies that combine fuel cells with gas turbines to create substantial electrical output with extremely high efficiency. "These may be megawatt-class generators that could fit uniquely into community power solutions, [at efficiencies] that beat today's most efficient combined-cycle plants," said Dan Rastler, manager of strategic options at EPRI. Some of this may sound fanciful, but 30 years ago, no one predicted that personal computers would replace mainframes.

Chart-Projected costs of micropower technologies 2000-2015

The power of policy

Government policies can have a substantial impact on the economics of micropower. Some observers say that tax codes inhibit micropower adoption, for example, by creating unfavorable depreciation rates for fuel cells. Other government policies may create an energy playing field that isn't entirely level. "Many big coal-fired power stations are escaping 'carbon' taxes on their emissions," notes The Economist, "through waivers that exempt many established power stations from environmental regulation." Other policy questions will play a role in the spread of micropower. Proponents say that some utilities discourage micropower adoption by creating onerous grid interconnection barriers, posing daunting barriers to self-generating customers who want to sell electricity back to the grid, or be grid-connected for backup power.

Minnesota's Commerce Department proposes to eliminate such barriers by establishing reasonable interconnection fees and modifying net metering tariffs to create fair prices for generators who sell power back to the grid. Wisconsin Electric has also announced plans to address the interconnection problem.

Some analysts suggest that a backlash against utility deregulation could undermine micropower by eliminating the price volatility that can serve as an incentive to install self-generation. "The political machinery is trying to protect customers from wholesale prices that we're seeing," said CERA's Taub. "[That] lessens considerably the incentive to put in your own generator. Putting in your own generator is basically price elasticity, it's fuel switching. ... But if you're going to manage prices for customers, then you're discouraging them from doing that."

But others believe that technological innovation and micropower adoption will flow regardless of the regulatory environment. "From a market standpoint, whether a deregulated or re-regulated utility market exists, I don't think will be a huge driver in the actual distributed generation market development because we're already in the computer age," said Hayen of Wisconsin Electric. "As long as the economy stays growing and does well ... and manufacturers are still running 24 hours, seven days a week, they can't afford to have outages of any kind. ... That's going to be the driver, I think. It's the business reasons, the financial reasons."

You say you want a revolution?

All in all, micropower doesn't seem likely to "revolutionize" the electrical power system, in the Ninth District or elsewhere in the United States. For all its frailties, the existing grid usually delivers. Central stations will remain the main model for the foreseeable future. "Everybody starts with this big excitement, the idea that [micropower] is going to revolutionize the world, it's going to put the electric utilities out of business, it's going to be under the hood of every car," observed CERA's Taub. "But as people's understanding of it matures and as the market matures in general, we've seen a lot of those claims tempered."

Nonetheless, micropower and distributed generation will undoubtedly play a greater role over time, as technologies develop, costs decline and customers test its benefits. Some believe that micro- and macro-power will eventually work hand-in-hand, each serving designated electrical needs, complementing rather than competing. "In the future, the new economy-type companies might be served by augmented infrastructure that is supported by distributed power," said Rastler. "And then you've got your existing infrastructure serving traditional loads that really don't need that high reliability and high power quality of service."

In the long run, then, Edison and Westinghouse might both have their way.

See also:
Pulling the plug on electricity deregulation?, January 2001 fedgazette


Douglas Clement
Senior Writer

Douglas Clement was a managing editor at the Minneapolis Fed, where he wrote about research conducted by economists and other scholars associated with the Minneapolis Fed and interviewed prominent economists.