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The case for natural-gas-fueled distributed power generation: changes in power markets and advances in generating technology have converged to place gas generator sets on the forefront of an emerging industry.

Ten years ago small-scale distributed generation was mainly an idea--at best a niche technology. Talk of deregulating the retail electric power industry had barely begun. A few utilities were beginning to see shortfalls in generating capacity, but only for short periods, highly seasonal, at the height of the cooling or heating season.

Fast-forward to today. Distributed generation has moved squarely into the mainstream of energy planning. It is the subject of business and trade magazine articles, white papers and forecasts from leading financial and marketing consultants, and reports from national government agencies. Private and publicly funded research projects aim to develop cleaner, more efficient, lower-cost generation sources specifically for the distributed power market.

All this happened because political, economic and market forces coalesced to change the dynamics of how electric power is produced, sold and delivered to end users. Today, distributed generation--defined broadly as the production of electricity near the point of use--is widely seen as a viable and permanent part of the energy-supply picture.

The distributed generation market is rapidly evolving, and so are the technologies that produce the power. Project developers--utilities or end-users--must carefully choose the technology that best supports their business objectives. Today and in the foreseeable future, distributed generation demands clean, reliable power for relatively long annual hours of operation, in intermittent duty, at the lowest cost per kilowatt hour. More than any other technology, natural-gas-fueled generator sets are positioned to meet those requirements.

Evolution In The Market

Since the early 1990s, four forces have fundamentally changed the electric power business. First, demand for power has risen rapidly with economic expansion and growth in computer and data systems and household appliances. The North American Electric Reliability Council estimates that peak power demand will grow by 2% per year through 2010.

Second, restructuring of power markets has modified the traditional industry model in which electricity comes from large, centralized power plants owned and operated by government-regulated utilities. Opportunities have opened for private, smaller-scale generators and, in some areas, to market-based pricing programs for power users.

Third, environmental concerns and air-quality regulations have shifted the mix of fuels used to produce electricity--in general away from coal and fuel oil and toward natural gas and renewable sources (wind, biomass, solar).

Fourth, new small-scale generating technologies have emerged and existing technologies have improved, making distributed generation more cost-competitive. Furthermore, because these systems are flexible and can be permitted and installed quickly, they are attractive to utilities facing short-term capacity needs.

All these forces work in favor of distributed power. The Frost & Sullivan market consulting firm has forecast that distributed generation in North America will grow significantly in the next 10 years. The firm projects cumulative shipments of distributed generation equipment to grow from 23 GW in 2002 to some 323 GW in 2012.

Constraints On Supply

The power industry increasingly recognizes the potential of distributed power to relieve regional and seasonal power shortages and to meet other significant needs of utilities and power consumers. Supply shortages developed in the mid- to late 1990s simply because market and political forces prevented capacity additions from keeping pace with growth in demand (Figure 1). Most significantly:


* Efforts to restructure power markets assumed that decisions about new-facility construction would be based on market economics, rather than on central planning. Restructuring took shape slowly. Utilities, uncertain about the system of risks and rewards in competitive markets, hesitated to invest in power plants and transmission lines.

* Large power facilities became politically more difficult to site and permit. Community, neighborhood and activist groups opposed new power plants and transmission projects, claiming they would cause environmental damage, noise, and declines in property value. Organized opposition stopped numerous projects and delayed others for years.

Starting in the mid-1990s, independent power producers OPPs) stepped in with proposals to build merchant plants, usually fueled by natural gas, to supply utilities with intermediate- and peak-load power. Capacity still failed to keep up with demand. In 2000, the official report on the Bush administration's National Energy Policy stated that from 1995-99, power companies planned 43,000 MW of new generating capacity, but built only 18,000 MW.

The industry recognized the shortfall in capacity and, as a new millennium began, power plant construction accelerated. Then in 2001, construction slowed again as wholesale power prices fell sharply, the economy slowed, and the massive collapse of Houston-based Enron made private power-development projects appear risky, frightening investors away.

The Bush Energy Policy report stated that the U.S. needs 1,300-1,900 new power plants over the next 20 years--60 to 90 per year. Even when new plants are built, transmission constraints can hinder delivery of power to the customers. Since 1989, electricity sales to consumers have increased by 2.1% annually, but transmission capacity has increased by only 0.8% per year. In the summer of 1998, the Midwest experienced electric power price spikes in part because transmission constraints limited the importing of power from other regions. Bottlenecks in transmission are cited among factors that contributed to blackouts in California in 2000, and such constraints have caused price spikes in New York City during peak-demand periods in recent years.

Closer To The Customer

Power supply and transmission constraints cause concerns beyond blackouts and price swings. In fact, a more common problem is a temporary decline or fluctuation in voltage affecting a sector of a utility's distribution grid during times of high demand. Today's high-value business equipment requires consistent power quality. Voltage fluctuations can seriously damage or disrupt computer systems and reduce the performance and service life of industrial machinery.

This makes distributed generation all the more attractive as a contributor to immediate and long-term power supplies. Distributed generation systems are typically small, relatively inexpensive, easy to site and permit, and quick to install. Placed at strategic locations on the grid, they can bolster capacity while supporting distribution system voltage (Figure 2). Distributed generation also helps utilities defer investments in central power plants and transmission and distribution infrastructure, while reducing transmissions and distribution losses.


Distributed generation can appeal to end users, as well, especially where power markets are opening to competition and to concepts such as time of-use or real-time pricing. In such cases, the ability to produce power can give a business a valuable hedge against market price volatility, or enable the profitable sale of energy on power exchanges. Further, as small-scale power technologies become more efficient and their electric output more cost competitive, end users have more reasons to consider on site generation. Applications can include:

* Prime power systems for complete control over reliability and power quality.

* Standby power sized to sustain critical production loads (not just bare-minimum emergency needs).

* Peak shaving systems to minimize demand charges or spikes in usage.

* Cogeneration systems to reduce fuel costs by supplying heat and/or cooling and electricity from one source.

* Hybrid cooling systems that enable switching between natural gas and electricity to secure the most favorable pricing.

Turning To Gas

Growth in these applications has radically changed the perception of distributed power. So has growing demand for power and the dwindling supply of utilities' backup power, or spinning reserves. A decade ago, distributed power mainly meant installing generator sets to hell) utilities meet spikes in demand: highly seasonal, usually brief, lasting no more than a few hours on the hottest or coldest clays. Total generator set run times typically averaged 100-200 hours per year.

Municipal utilities, rural electric cooperatives and end users (such as large industrial facilities) often hosted these systems under a concept called "peak sharing." The host received price incentives from the power-supplying investor-owned utility in return for installing the equipment and allowing the utility to dispatch it during peak-demand hours on the utility system. The size of the utility incentives not the economic value of electricity generated --determined the host's return on investment. Low installed cost was the key objective; most generator sets were driven by diesel-engines, chosen for their high power densities.

Today, utilities--rural cooperatives, municipals, independents and investor owned--need supplemental peaking power on more days and for more hours per day (Figure 3). As a direct consequence, the distributed generation market is looking toward natural gas.


Worldwide, natural gas is the fastest growing fuel for power production (Figure 4). In the next 20 years, global use of natural gas for generation is projected to double. In the U.S., the natural gas share of the electricity market is expected to increase from 15% in 1999 to 32% in 2020.


Distributed power applications favor gas technologies first and foremost because they deliver low air emissions. Diesel-fueled systems still dominate in stand by and short-run installations; low-sulfur fuels and lower-emission technologies will ensure that they have a role in the short-hour distributed power market.

As concerns rise about air pollution and global warming, governments are steadily tightening standards that limit nitrogen oxide (N[O.sub.x]) and other emissions from power generation. In the U.S., California's air-quality regulations virtually exclude fuels other than gas outside of critical standby applications.

Renewable power sources are inherently clean. Globally, wind power is the fastest-growing source of distributed generation, increasing from 10 MW in 1981 to 4,200 MW in 2001 in the US. alone. However, wind remains a niche technology, suitable under specific conditions but unreliable for dispatch on demand. Hydroelectric power development is con strained by environmental concerns related to the damming of streams: photovoltaic/battery systems are generally limited to small scale power production.

Given these realities, the choice of clean, higher hour distributed power technologies becomes a choice among natural-gas fueled systems.

Comparing Technologies

Distributed power developers have four basic technology choices other than renewables: reciprocating engine generator sets, gas turbine generators, microturbines, and fuel cells. For most applications, reciprocating engine generator sets deliver the most reliable operating characteristics and the lowest cost of electricity (Figures 5 and 6).


Gas turbine generators. An established and proven technology for high hour peaking and base load power generation, gas turbine-driven systems for distributed power typically range from 500 kW to 25 MW, or larger. In the coming decade, turbines will provide a growing share of the world's generating capacity. However, they are most cost effective for large-scale applications involving long, continuous run times at hill load. They lose efficiency with the intermittent service, short cycle times, and with the variable loads inherent in many distributed power applications. In addition, they forfeit performance in hot, humid weather.

Microturbines. Generally sized from 25-500 kW, microturbines were derived from turbocharger technologies found in large trucks and the turbines in aircraft auxiliary power units. Most are single-stage, radial flow devices with rotating speeds of 90,000-120,000 rpm. Currently, the main attraction of microturbines is the promise of very low emissions coupled with high efficiency in combined heat and power (cogeneration) service. Capital costs range from $1,200-2,000 per kW including the gas compressor that is required for operation. That is far too high to compete in today's distributed porter market. Furthermore, the technology has yet to prove reliable.

Fuel cells. A promising technology for power generation and heat recovery. fuel cells are just becoming commercially available. Four fuel cell technologies stand at yawing StaKes of development: phosphor ic acid, molten carbonate, solid oxide and proton exchange membrane. In the long term. fuel cells promise extremely clean, high quality power. At present, because of their high installed cost--$3,000-6,000 per kW--and their need to operate continuously at high load factors, fuel cells are mostly limited to applications where power quality or environmental performance overrides all other considerations.

Reciprocating engine generator sets. Generator sets are well proven in a wide range of distributed power applications: standby, prime power, cogeneration and peaking. Over the past decade, they have provided a fast-growing share of the world's generating capacity additions (Figure 7). They perform well in intermittent service and operate efficiently with variable, cyclic loads. The technology is simple and well understood. Qualified service technicians and replacement parts are readily available worldwide. The units can operate on a variety of gaseous fuels: pipeline natural gas, propane, landfill methane, digester gas, coal seam methane and others.


Installation is fast and simple: mobile, packaged generator sets can be delivered and installed within hours; permanent systems can be online and producing power within a few months from the date ordered, at attractive installed system costs from $450-600 per kW. Units are relatively straightforward to site and permit; multiple units can meet power requirements of virtually any size. Finally, in today's distributed power applications--typically 500 or more annual operating hours--generator sets deliver the lowest cost of electricity (Figure 8).


Advancing Engine Technology

While aggressive research and development supports advances in the newer fuel cell and microturbine technologies, gas fueled generator sets are not standing still. Private and government researchers acknowledge that improvements in generator set efficiency can immediately enhance that technology's competitive position in distributed power.

The Department of Energy's program for Advanced Reciprocating Engine Systems (ARES) aims to develop cleaner, more efficient gaseous-fueled engines, largely for the distributed power market. The DOE acknowledges that reciprocating engines are the fastest selling, lowest cost distributed generation technology in the world.

The DOE and major engine manufacturers support the ARES program, which over the next several years will produce a new generation of highly advanced gas engines. Manufacturer and supplier teams will strive to improve engine performance using advanced materials, new fuel handling and processing systems, and advanced ignition and combustion systems. The goal of ARES is to produce gas engines with:

* Installed cost from $400 to $450.

* Thermal efficiency 50% (30% higher than today's engines).

* N[O.sub.x] emissions at 0.1 grams per brake horsepower-hour (a 95% reduction).

* Significant increases in service intervals, resulting in major reductions in maintenance costs.

A look At The Economics

Distributed generation will grow in direct proportion to the economic benefits it delivers to those who install and operate the equipment. The concept is attractive to utilities whose transmission and distribution (T&D) are constrained. In those cases, small scale power placed close to the point of use helps delay major T&D investments while protecting customers' reliability and power quality.

More often, distributed generation benefits bulk purchasers of utility power, such as large industries, public utilities, and rural electric cooperatives. For these customers, distributed generation is viable if the investment in equipment leads to sufficient savings on purchased power.

Most small-scale distributed generation projects are evaluated on simple payback, which essentially means installed cost divided by the annual savings on purchased power. For example, a project with a $200,000 installed cost that generates $50,000 in annual savings has a four-year simple payback. Installed costs include the price of the equipment as well as interconnection, construction, permitting and engineering expenses.

Payback "hurdles" vary by company. For example, a commercial or industrial customer generally requires a two- to four-year payback, while an energy service company or public utility may have a five to seven-year payback horizon.

In general, the longer the equipment's annual run hours, the greater the importance of low operating costs (fuel, operations and maintenance, parts, oil) play into the total financial picture.

Hard equipment and operating costs are not the only factors in distributed generation economics. Other considerations, such as power reliability and power quality, can contribute strongly to financial benefits, especially if they can be quantified. At the same time, added costs, such as standby charges, exit fees, and additional incremental costs for interconnection, can degrade projects' attractiveness.
Figure 5: Technology Comparison

Technology Diesel Gas Simple Micro-
Comparison Recip Recip Cycl Gas turbine

Size Range 20-10,000 50- 1000+ 30-200
(eKW) 50,000

Efficiency 36- 43 % 28-46% 21-30% 25-30%

* Genset 125-300 250-600 300-600 350-750
Pkg Cost

* Turnkey 350-500 600-1000 650-900 600-1100
w/o Heat Rec

* Heat n.a. 75-150 100-200 75-350

* O & M .005-01 .007-015 .003-.008 .005-.015

Technology Fuel Cell Photo-
Comparison Voltaics

Size Range 50-1000 1 +

Efficiency 35-54% n.a.

* Genset 1500-3000 n.a.
Pkg Cost

* Turnkey 1900- 5000-
w/o Heat Rec 3500 10,000

* Heat Incl n.a.

* O & M .005-.010 001-.004

* Cost in $/eKW
Source: Distributed Generation Forum 2000

Michael Devine is the Gas Product Marketing Manager for Caterpillar Inc.'s Electric Power Group.
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Comment:The case for natural-gas-fueled distributed power generation: changes in power markets and advances in generating technology have converged to place gas generator sets on the forefront of an emerging industry.
Author:Devine, Michael A.
Publication:Pipeline & Gas Journal
Geographic Code:1USA
Date:Dec 1, 2004
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