Cost Savings and Enhanced Reliability Drive Use of Distributed Generation
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Stuart Bradford
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Although the equipment that makes distributed generation (DG) possible has been around for many years, an increased focus on energy conservation has helped raise awareness for the use of power sources other than the local utility. While the “green” benefits are a plus, what has made real estate companies across the country pay attention to DG technologies are the cost savings and improved reliability. As a result, the move toward utilizing DG—the use of small-scale power generation technologies that are located close to the property being served—has been gaining steam.
“DG is poised to enjoy rapid growth once the real estate community understands that the installation of the necessary equipment is safe and easy, and that the resulting energy is reliable,” says Dan Cashdan, chief executive officer and chairman of Real Energy, Inc., a Los Angeles-based provider of electrical and thermal energy.
DG reduces a real estate owners’ reliance on the local utility by allowing companies to continuously generate their own electricity, with or without the utility grid. In addition, DG permits users to generate power while co-generating heat for other uses (combined heat and power) and enables users to generate a portion of electricity onsite to reduce the amount of power purchased from the utility during peak price periods (peak shaving). In terms of reliability, DG provides stand-by or emergency backup power generation and can improve power quality throughout a building or facility.
Interest in DG has increased a great deal since the restructuring of the energy industry, which has allowed companies to investigate various options that were closed to them before deregulation, according to Christopher Cook, founder of energy consultancy E3 Energy Services.
Already On the Bandwagon
Technological improvements, such as solar energy, fuel cells, and the development of microturbines and smaller combined heat and power systems, have led to a greater range of opportunities for companies to use DG to either assure reliability or improve profitability.
Arden Realty, Inc. began investigating the possibility of generating its own power at its properties several years ago. “In 1998, we began energy auditing and accounting in our more than 250 commercial buildings in California,” explains Bob Accomondo, first vice president, asset management.
Today, Arden Realty uses DG in 13 of its buildings, generating 10 percent to 20 percent of the needed power for each of those buildings through natural gas-fired internal combustion reciprocating engines.
CarrAmerica Realty Corporation, Washington, D.C., has been involved in DG since the mid-1970s when the local utility began its load curtailment program by offering incentives for larger properties to shed significant loads during peak usage times. Today, the company uses DG in most of its 40 D.C.-area office buildings, and is in the process of expanding the program into buildings through the deregulated, or partially deregulated, regions of Northern Virginia, Texas and California. The company uses the diesel and gas turbine generators originally installed in the buildings and is able to reduce 2.7 megawatts, aggregate, on demand from the local utility. In the load curtailment program, the utility pays a fee to CarrAmerica for reducing its consumption from the grid during those times when it is near its generating capacity.
Chicago-based Equity Office Properties Trust investigates the possibility of using DG as each state deregulates its utility industry, says Frank Frankini, senior vice president, engineering and construction. To date, the company has focused its efforts on Massachusetts and California.
Currently, more than half of the states in the U.S. have deregulated their utility industry to break up monopolies and increase competition. The deregulated states are Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Vermont and Virginia.
However, it is not yet legal in most states to sell any excess power to the grid to create revenue. “Even in those states that have historically allowed DG generators to sell to the grid, the price received has been very low,” according to Michael Stavy, Chicago-based financial and economic consultant. “With utility sized wind turbines, it is technologically possible to generate low-cost electricity, but not financially because the tariff price that DG electricity earns from the grid has usually been less than the cost to generate it.”
E3 Energy’s Cook says it may be possible one day to take advantage of opportunities of real-time pricing to create a new revenue stream. However, even if the opportunity existed many REIT executives share the opinion that they are in the real estate business, not the utility business. The reason most companies utilize DG is not to generate revenues, but to trim costs, improve the bottom line and improve energy efficiency.
DG Costs Vary
The first step to improving the bottom line is cutting costs. Under the Real Energy business model, there are no costs involved for the property, other than for the power itself. Real Energy supplies all of the necessary equipment and the property typically pays the company the same rate it would pay to the utility. “The REIT, however, receives more reliable power and a rental revenue stream because we pay rent on the space the equipment occupies,” Cashdan says.
“Capital costs of DG vary, depending on the technology used,” observes Cook. The lower end of the spectrum includes combined heat and power units, while solar power is on the more expensive end. Co-generation technology has efficiencies of up to 70 percent, according to Cook, and becomes more valuable to properties as fuel costs increase, which increases the amount of money it takes to generate electricity.
Least expensive in terms of the cost of the electricity would be utility sized wind turbines, greater than 500 kilowatts, according to Stavy. These turbines produce electricity at a rate of four to seven cents a kilowatt hour, but are unsuitable for most urban or suburban real estate applications.
The installed gas units used by Arden Realty cost the company from $800 to $1,500 per kilowatt-hour to operate. “The more units you can use, the cheaper it gets,” Accomondo says. Gas is another factor to consider and costs Arden about 50 to 60 cents per therm [a unit of heat, equivalent to 1,000 large calories or 100,000 BTUs]. Maintenance costs, however, are negligible, particularly if regular servicing is maintained.
“To install a new turbine generator in the five to 600 kilowatt range can cost up to $250,000,” Curtin says. CarrAmerica chooses this size generator because they are used primarily for back-up power purposes, and DG is a secondary use. In the future, the company plans to use microturbines, but is waiting for the cost benefit to become more favorable. “Diesel or gas turbines are still less expensive than microturbines, which can run about $3,500 per kilowatt-hour to install,” he adds.
Equity Office says that costs for installed gas engines and turbines will run the company about $900 to $1,200 per kilowatt-hour. “We are also exploring some fuel cell options, but we don’t believe that this technology is economically feasible yet without incentives,” Frankini says, adding that future utility incentives may make this choice more cost effective.
Generating Savings
Even if a DG system is affordable to install, the real incentive lies with potential cost savings—which also can vary greatly. In combined heat and power units, for example, the savings in fuel costs can be a substantial motivating factor in choosing to use that technology, according to Cook. “Another cost saving factor in DG is the volatility of the restructured utility market, with profits and losses being made by the utility 24 hours a day, in real-time,” he says. The most expensive 100 hours of usage during the year, in real-time, is only 1 percent of total usage time, but can account for up to 20 percent of a property’s total annual expenditure for electricity. “That means that the top 1 percent of time represents the top 20 percent of dollars, making the self-generation of electricity during peak times a potentially substantial savings.”
Specifically, Arden Realty realizes a 5 percent energy savings through its Real Energy DG systems. That savings is then passed onto the tenants. According to Curtin, “DG can make a significant impact on the summer months’ electricity bills.” And Equity Office is expecting to receive a 25 percent to 40 percent return on investment through reduced energy consumption and costs from its DG capabilities.
Regulatory Issues Remain
Before DG can become more widely utilized, there are a host of regulatory issues that need to be addressed and may affect the growth of DG. One concern is the interconnection of separate DG systems onto the utility grid, which centers on the possibilities of electric backfeed. “It is important to remember, however, that the Institute of Electrical and Electronics Engineers universally accepted standards make it impossible for equipment built to those standards to generate backfeed,” Cashdan adds.
Another issue is stand-by charges, which allow utilities to collect fees from businesses whether they are using power from the grid or from their own DG system. “Real estate owners need to understand that they may be paying extra to the utility even though they are using DG,” Cashdan says.
“Another emerging regulatory issue is the need to develop rules that will cover the economic side of DG, and allow companies that use it to generate revenue by selling the electricity generated by DG to others,” says Cook, adding that it will be quite a while before the issue gets settled.
The National Association of Electrical Contractors (NECA) has recently published NECA 405-2001, Recommended Practice for Installing and Commissioning Interconnected Generation Systems, which deals with electric power production sources, such as DG, that are operating parallel with an electric utility source. NECA 405 is one of a series of National Electrical Installation Standards published by NECA. It is approved by the American National Standards Institute, thereby giving it the status of the “official” U.S. standard on the subject of cogeneration.
As these regulatory issues get resolved, the future role DG will play for real estate owners will become clearer. But as long as being energy conscious and preserving the bottom line continue to gel, more REIT executives will become members of the “distributed generation.”
Darlene Bremer, a frequent contributor to Real Estate Portfolio, is a freelance writer based in Solomons, MD.
