Big Property Owners Form Alternative-Energy Venture.

A young company backed by major commercial property owners is creating a buzz in the increasingly volatile California energy industry.

RealEnergy Corp. of Century City is banking on what it believes will be an exploding market for on-site power generation among U.S. commercial property owners, who together spend an estimated $40 billion annually on energy.

The company enjoys a considerable edge with its built-in customer base -- its founders together own some 250 million square feet of commercial space nationwide. And with the California energy crisis, it has been generating plenty of interest from outsiders as well.

"The phone has been ringing off the hook," said RealEnergy President Paul Slye. "Not only from clients, but from people who are interested in learning more about the energy business."

Primed for major expansion in 2001, the company is tapping into a variety of alternative power sources it says will offer reliable streams of electricity and protection from rolling power outages while providing much-needed relief to the state's overtaxed power grid during peak hours.

Among the real estate investors in RealEnergy -- which raised $5.6 million initially and expects to bring in $15 million to $25 million more in the next six weeks -- are L.A.-based Arden Realty Inc., Layton Billing & Associates of Orange County and Divco West of San Jose. Chairman Daniel Cashdan and several other individual investors are executives of the investment banking firm Chadwick, Saylor & Co.

Rather than competing directly with California's power behemoths, RealEnergy is marketing its distributed generation systems as a supplemental energy source for building owners whose tenants -- many in the high-tech sector -- are dependent on even, reliable distribution of electricity.

In the past, alternative power systems offered by RealEnergy have failed to catch on because of technological limitations and simple math: On-site production was costlier than purchasing power through the marketplace. Recently, however, the technology has made tremendous stridest.

"The types of equipment we can put into place are very competitive," Cashdan. "You have to remember, we are not competing against the wholesale price; we are competing against the distributed price because the power is generated (on site)."

RealEnergy pays for the design, installation and operation of its generated distribution systems, which include such alternative energy sources as photovoltaic installations (solar panels), natural gas-powered microturbines and electrochemical fuel cells.

It costs RealEnergy $1.50 to $2.50 per square foot to install the systems, meaning a 500,000-square-foot building would require an investment of about $1 million. Landlords, who don't pay any up-front costs, generally contract with RealEnergy for the on-site power at a for a period of 15 years.

Although the amount of money to be saved is negligible, the real impetus for distributed generation is reliability, Cashdan said, adding that RealEnergy will never charge more for power than the utilities.

Another advantage, observers say, is that excess power can be sold back to the grid.

"If you have generation on site, you can use the grid as storage. You would have a meter that runs two ways" said Marwan Masri, manager of the Renewable Energy Program for the California Energy Commission.

For renewable energy sources, such as solar, the state offers rebates of up to $2.50 per watt for new development, Masri said.

RealEnergy took advantage of that program with its installation at Arden's 110,000-square-foot City Centre office building in Fountain Valley. In December, RealEnergy and Arden unveiled what they say is the largest commercial solar power system in the Western Hemisphere at Arden's 110,000 square foot City Centre in Fountain Valley.

Robert Accomando, first vice president of asset management at Arden, which owns 252 properties, said the company has seven other generated distribution systems in the works with RealEnergy.

"We're (installing RealEnergy systems on) our seven buildings to be ready for peak load period, June to October. Then we'll have that information and we can use it to decide (whether to outfit additional buildings) in the future," said Accomando.

But Arden is still the exception. Arthur O'Donnell, editor of California Energy Markets, an independent industry newsletter, said non-traditional energy remains a tough field.

"Most companies have an old-line mentality; it's even difficult to sell energy efficiency (much less alternative-energy systems)," O'Donnell said.

Still, O'Donnell acknowledged that the state's current energy crisis would likely spur more businesses to take a look at alternative power models.

Cashdan insisted that generated distribution systems would ultimately become more prevalent.

RealEnergy builds generators inside of buildings in California that generate power that stays in California," Cashdan said. "And every single kilowatt we produce that's consumed in the building reduces demand on the grid."