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June 2001

Distributed Generation The Next Wave of the Technology-Enabled Revolution. Presentation to the Edison Electric Institute DG Task Force. June 2001. Marc w. Goldsmith. 1. Distributed Generation and Innovation. 3. 4. 2. ADL Research in Distributed Generation.

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June 2001

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  1. Distributed Generation The Next Wave of the Technology-Enabled Revolution Presentation to the Edison Electric Institute DG Task Force June 2001 Marc w. Goldsmith

  2. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Technology Economics Markets Policy Business Models Industry CAM MG10956

  3. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Technology Economics Markets Policy Business Models Industry CAM MG10956

  4. Distributed Generation Industry Context The energy industry is changing. Among the more successful players are those companies we have identified as “innovation energy.” 60 “Innovation Energy” BG Enron E&P companies Utility companies 50 AEP 40 Dynergy TFE P/E Ratio (%) 30 Centrica Duke Energy 20 ExxonMobil Texaco Repsol “Conventional Oil” ENI TXU 10 Shell BP Source: Winthrop Corporation 0 0 50 100 150 200 250 300 350 Market Capitalisation ($bn) CAM MG10956

  5. 1000 900 800 700 600 500 400 300 200 100 0 1/1/92 1/1/93 1/1/94 1/1/95 1/1/96 1/1/97 1/1/98 1/1/99 1/1/00 Distributed Generation Innovation Enron’s reputation for innovation has enabled it to consistently out-perform its peers in total shareholder return. ENRON Premium Peergroup Average CAM MG10956

  6. Distributed Generation Innovation & Technology We expect energy companies will leverage innovation and technology to close the widening growth gap. How to Target Earnings Growth The Innovation Challenge: Closing the Growth Gap and Building Confidence for the Longer Term New Markets and Ventures (Beyond Bulking Up) New Rules and Standards (Beyond ISO 9000) New Methods and Processes (Beyond Continuous Improvement Earnings Growth The Emerging Growth Gap: New Products and Services (Beyond Line Extensions) Through Conventional M&A, TQM, BPR, and NPD Projected Business Growth: What worked Before Doesn’t Work Anymore Total Quali Base Business Today Tomorrow CAM MG10956

  7. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Technology Economics Markets Policy Business Models Industry CAM MG10956

  8. Distributed Generation Threat or OpportunityCompany-Specific Generally it is corporate strategic perspectives and/or operational focus that determine whether companies see DG as a threat or an opportunity. Potential Opportunity Potential Threat • Distributed virtual power plants • O&M service • Direct kW/kWh competition • Impact on standard cost recovery • Air quality impacts Generator • Some potential increase transfer capability • Little direct impact • Long-term stranded costs Transmission Company • New service offerings (DG ISO/PX) • Tool to help manage system growth in de-regulated environment • Potential impact on distribution systems design • Reliability and maintenance • Substitute for new construction • System by-pass • Negative operational impact on distribution system (system protection outage recovery) • Impact on metering systems Distribution Company Electricity Company • New product opportunity • New service opportunity • New market entrants with a differentiated product • Innovative image • Reliable image • Hedge on disruptive technologies • Uncertainty of reward • Loss of traditional revenue sources Corporate CAM MG10956

  9. Distributed Generation Threat or OpportunityOverview Distributed Generation (DG) has provoked significant interest and investment from energy companies… Definition of Distributed Generation Integrated or stand-alone use of small modular resources by utilities, electricity customers, and third parties in applications that benefit the electric system, specific electricity users, or both. Often synonymous with other commonly used phrases like: self-generation, on-site generation, combined heat and power (CHP) or cogeneration, and "inside the fence" generation, our definition includes storage, superconducting and demand-side management technologies. Central Plant Step-UpTransformer DistributionSubstation TransmissionSubstation DistributionSubstation Gas Turbine Fuel Cell DistributionSubstation Micro- turbine Commercial Recip Engine Gas Turbine Photo-voltaics Flywheel Residential Commercial Industrial Fuel Cell Cogeneration Adapted from EPRI Distributed Resources Target … If deployed on a widespread basis distributed generation represents a fundamental shift in the electricity industry. CAM MG10956

  10. Distributed Generation Threat or Opportunity Emerging Opportunities Several forces are aligning to create opportunities for DG. Increased risk in large power plant construction Unbundling of traditional, vertical, integrated utilities Difficulty siting T&D and large plants Advances in communications & control technologies Emerging Distributed Generation Opportunities Slower demand growth Reliability and power quality concerns Improved distributed power technologies CAM MG10956

  11. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Technology Economics Markets Policy Business Models Industry CAM MG10956

  12. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Technology Economics Markets Policy Business Models Industry CAM MG10956

  13. Distributed Generation TechnologyAvailability There are several commercially available and emerging DG technologies. Commercialization Status of DG Technologies Research & Development Demonstration Market Entry Market Penetration Market Maturity Initial System Prototypes Refined Prototypes Commercial Prototypes Fuel Cell Microturbine PV Solar Recip Engine Gas Turbine • Fuel cells provide electricity and thermal services to buildings • Proton Exchange Membrane (PEM) fuel cells are being developed for transportation applications • If fuel cell transportation market develops, it would greatly accelerate the fuel cell market for stationary applications • Microturbine technology was initially developed for transportation, defense and aerospace applications but now shifted to powergen • Projected to have low capital cost, low maintenance cost, low emissions, low noise, and moderate efficiency • Photovoltaic semiconductor-based panels convert sunlight into power • Ideally suited and cost-effective for many off-grid applications • Still relies on government subsidies for grid-connected use, but price is steadily dropping • Diesel or gas recip engines packaged for power generation • Used widely for standby, baseload, cogeneration, and peaking • Drawbacks: emissions, noise, and high maintenance cost • Most products available were initially developed for mechanical drive applications • Majority of power generation applications are cogeneration or standby • Limitations are relatively high first cost and low efficiency CAM MG10956

  14. Distributed Generation Landscape DG TechnologiesCharacteristics and Applications Each of these DG technologies has distinctive performance characteristics that best fit the needs of different applications. Typical Unit Size Range (installation size can be larger) 2000 Installed Capital Cost ($/kW) Efficiency (%) Commercial Availability Residential Commercial Industrial Grid-Distributed Remote/Off-Grid Distributed Microturbines1 25 - 500 kW 1,000-1,300 22-30 2000 Reciprocating Engines 5 kW - 20 MW 400-6002 28-40 Now High-Temperature Fuel Cells 50 kW - 3 MW NA3 45-55 2003 Low-Temperature Fuel Cells PAFC 50 - 500 kW 3,000+ 34-40 Now PEM 1 - 250 kW NA4 30-40 2001+ Small Gas Turbines 500 kW - 20 MW 650 25-405 Now Stirling Engines 0.5 - 200kW NA6 20-32 2001+ Photovoltaic Cells 0.05 - 200kW 6,000 -10,000 12-13 Now Primary Target Market Secondary Target Market 1. Recuperated microturbine 2. Large, gas-fired reciprocating engine 3. Not available; projections of $1,000-$2,000 4. Not available; projections of $1,000 - $2,000 5. 40% efficiency achieved with advanced turbine cycle 6. Not available; projections of $700-1,500/kW CAM MG10956

  15. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Technology Economics Markets Policy Business Models Industry CAM MG10956

  16. Distributed Generation Landscape Disruptive Technologies Applications There are many DG applications emerging in both developed and developing countries. Commercial Building Segments Reliability Power Quality On-Site Baseload Peaking Cogeneration Remote Portable Landfill gas Biomass Residential Grid Support Microgrids Assembly Education Food Sales Food Service Health Care Lodging Retail Office Public Order Worship Warehouse Multi-Family Residential Farms Industrial Segments Food Textile Furniture Paper Pharmaceuticals Stone/Clay/Glass Primary Metals Fabricated Metals Machinery Electronics Transportation Power Delivery Business Needs • System Performance • Service reliability • Power quality • Power transfer capability • System capacity • Avoided system improvements and capacity upgrades • Improved capacity utilization system optimization • Reduced power losses • System Maintenance • Temporary power during maintenance of critical elements • Emergency power during system restoration • Financial Hedge • Energy cost reduction • Portfolio risk management • Financial resource management (capital and O&M) CAM MG10956

  17. Distributed Generation Topics Economics Customer Benefits There are benefits that DG can provide to customers that must be considered in assessing DG economics. • Reduced energy costs for thermal energy loads (steam, hot water and cooling) • Decreased exposure to electricity price volatility • Increased power reliability • Improved power quality • New sources of revenues CAM MG10956 Although the benefit values can vary by customer, some benefits may be similarly valued across a broad range of end-use customers.

  18. Distributed Generation Topics Economics Grid-Side Benefits There are also benefits on the grid-side that will also impact DG economics. • Avoided increases in system capacity • Reduced transmission and distribution (T&D) electric losses • T&D upgrade deferrals • VAR support • Transmission congestion relief • Peak shaving • Reduced reserve margin • Improved power quality • Improved power reliability • Avoided T&D siting concerns CAM MG10956

  19. Distributed Generation Topics Economics Added Costs for Customer Besides benefits there are additional costs to the customer when installing DG. • Typical additional costs when installing DG, include: • Standby charges • Exit fees • Competitive transition charges (CTC) • Additional incremental capital costs for interconnection and permitting • These added costs are extremely site-specific, and vary widely state by state. CAM MG10956

  20. Distributed Generation Topics Economics Benefits and Costs The attractiveness of DG will vary by these added benefits and costs that will fluctuate by fuel and electricity prices. 4.2 MW Gas Turbine 12 11 5-year payback with customer or grid benefits 10 9 5-year payback 8 MA 1998 Gas Prices ($/MMBtu) 7 FL VA AZ 6 CA 5-year payback with added 5 NY cost IL TX 4 3 2 4 5 6 7 8 9 10 11 12 1998 Electricity Prices (¢/Kwh) CAM MG10956

  21. Distributed Generation Topics Economics Vertically Integrated Utility DG could be an attractive option for the vertically integrated utility if their system is constrained. Range of Utility Costs to Meet New Demand Costs to Meet New Demand ($/Kwh) Central Plant Distributed Generation CAM MG10956

  22. Distributed Generation Topics Economics Wires Company DG could be an attractive option for a wires company in lieu of system expansion. Range of Utility Costs to Meet New Demand Range of Utility Costs to Meet New Demand ($/Kwh) Distributed Generation Central Plant CAM MG10956

  23. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Technology Economics Markets Policy Business Models Industry CAM MG10956

  24. DG Going Forward Market Perspective Megawatt Wave The DG opportunity will come in waves. Watt Wave Kilowatt Wave • Why? • Technology availability • Transaction and project costs ($/kW) • Project economics • Receptive customers • Large commercial and industrial • Wires companies CAM MG10956

  25. DG Going Forward Market Perspective What does the Megawatt wave look like? • Gas turbines, reciprocating engines, photovoltaics • Customer needs - price volatility and reliability • Rentals • Back-up generation plus DG • Capacity • T&D support • Hedge • Still traditional players • Equipment suppliers • Gas and electric utilities • Wires companies • Large customers CAM MG10956

  26. DG Going Forward Market Perspective What does the Kilowatt wave look like? The Megawatt wave with more uncertainty. • Microturbines and fuel cells • Drivers? • Power quality • Image • Green power • Cost savings • Seamless direct access to markets • Traditional players • Moving down and up value chain • Creating new value networks • Nontraditional players? • Market channels • Appliance manufacturers • Consumer products • HVAC suppliers • Retail (Home Depot, Walmart) • e-business • Equipment suppliers • Automotive • Appliance • HVAC • Consumer • Energy suppliers • Large and small C&I (telecom, supermarkets) • Residential • Customers • Residential • Small commercial • Large energy companies CAM MG10956

  27. Back-up Generation Market Review North American Market The North American back-up generation market continues to grow steadily, driven by the < 2 MW recip engine segment. North American Market for Backup Generators • The gas turbine and > 2 MW reciprocating engine markets both maintain a 2% CAGR, while < 2 MW reciprocating engines maintain a 7% CAGR. • Post Y2K markets for standby generators are primarily: data centers, internet applications and telecom. These segments make up roughly 50% of standby generator market. • Recip engines now dominate this market, but they may see competition from fuel cells and microturbines as the technologies develop. • Sales of backup generators to utilities and end-users will continue to be driven by reliability concerns. • There is increasing interest in using backup gensets for peak shaving/DG, but there are barriers (interconnection and emission standards). Market Trends for Backup Generators Annual sales based on Power Systems Research and “Diesel and Gas Turbine Worldwide” historical data (1992-1999) and ADL analysis. CAM MG10956

  28. Distributed Generation MarketsDG Market and Reliability Pockets of System Weakness Generation and transmission constraints and reliability concerns are creating near-term opportunities for DG. New York City/Long Island New England Wisconsin/Upper Michigan NYC and Long Island have a peak load of 14,840 MW with a combined capacity and import capability of 19,021 MW. With demand growing, ISO published that ‘”after summer 2000, the New York Control Area will not be able to meet NPCC adequacy criteria.” ISO NE has issued 6 voluntary load curtailments in 2000 and 11 during the summer of 1999. Lack of transmission capability between upper Michigan and Wisconsin has resulted in congestion. California Generation shortages and transmission constraints result in repeated voluntary load shedding and rolling blackouts during 2000-2001 WSCC Peak demand growth has exceeded new generation capacity. The southwest portion of WSCC may not have adequate resources for widespread heat waves. S. Illinois Boston/Connecticut Congestion in Southern IL due to the shipment of power to the south. Transmission into Boston is often heavily congested. Connecticut also has congestion problems. Dallas-Fort Worth PJM Dallas-Fort Worth has 800-1,000 MW annual load growth and insufficient generation and transmission capacity into the area. PJM has issued 19 Emergency Generation actions and/or Manual Load Dump Warnings, including 2 days of voluntary load shedding in 2000. Delmarva S. Delmarva had 13 Emergency generation and/or manual load dump warnings in Summer 2000, and continues to pose problems to grid. No grid upgrades are planned as S. Delmarva is rural. Texas Houston ERCOT issued 10 incidents of voluntary load curtailment resulting in 9,407 MW shed as of September 2000. Houston has excess generation but lacks export transmission capability. CAM MG10956

  29. Recip Engines installed by ComEd for system support Source: PMA Online Distributed Generation MarketsCase Study Commonwealth Edison Commonwealth Edison has been using DG for capacity and system support during peak periods over the last three summers. • Modular diesel generators installed in groups of 20 to 30 • 160 Caterpillar Power Modules producing 240 MW at 8 locations • trailer-mounted units driven to location • units have on-board fuel capabilities • 60 Aggreko container generators producing 60 MW at 2 locations • unloaded using cranes • standard design, e.g., switchgear is same from unit to unit • Setup takes about 1 month for the Caterpillar units and within 1 week for the Aggreko units Over the past 3 summers, ComEd bolstered its system with rental recip engine packages In the summer of 2000, ComEd began to use small gas turbines as well. • In each of the three years ComEd has used DG, they have looked at alternatives to recips, including GTs • Low emissions, a feature of GTs, are an increasing large concern for users of DG, particularly in urban areas where air quality may be poor • In summer of 2000, ComEd rented 5xTM2500’s (22.8MW each) from GE Rentals. CAM MG10956

  30. Distributed Generation Markets Back-up Generation Texas Based on prior ADL analysis, there are potentially 3,300 MW of operable gensets available in Texas. Population of Gensets Available in Texas Applications of Available Gensets Cumulative Capacity of Gensets Installed in Texas: 3,300 MW The vast majority of the gensets are less than 1 MW in size and were originally designed for standby application. About 1/3 might be convertible. CAM MG10956

  31. Distributed Generation Markets Uncertainties While the market potential is very large, the development of DG still carries some fundamental uncertainty… Which technologies (and suppliers) will be the winners? WinningTechnology? No single technology is likely to dominate, some will fail; there will be different speeds to market. TechnologyDevelopment? Most technical uncertainty is likely to be resolved (eventually), but not as quickly as predicted and with unexpected barriers. How soon will technical uncertainties be resolved? Fit WithNeeds? A key issue that involves technology, product and business/ service model components - a 50/50 proposition at this point. Will product attributes find a match with customer needs, enabling a winning product? Will customers find “value” in other than commodity electricity? DisruptivePotential? The great unknown - a lot of speculation, but none identified yet. The key to Distributed Generation’s real potential to revolutionize. Economics vary widely from application to application, with several areas of uncertainty. Although there will be attractive applications, mass market economics will be more difficult than assumed. Will the economics work at application and business levels? Economics? RegulatoryEnvironment? A regulatory environment which is technology neutral is likely to emerge. Disruptive triggering events could tip the scale. Will a supportive regulatory environment emerge? CAM MG10956

  32. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Technology Economics Markets Policy Business Models Industry CAM MG10956

  33. DG Policy Overview Impact Analysis We measured the impact of eight DG policy issues against five broad public policy objectives and on DG-specific policy. DG Policy Issues Public Policy Objectives • Grid-side benefits • DISCO participation • Interface with grid • Interconnection • Stranded costs • Stand by charges and customer retention tariffs • Siting and permitting • Public support • Encourage competition and economic efficiency • Protect consumers from cost-shifting • Maintain a viable utility franchise • Protect the environment • Ensure safety and grid reliability • Create a competitive environment for DG CAM MG10956

  34. DG Policy Overview Impact Analysis The analysis linked eight DG policy questions most directly with two major regulatory policy objectives, and five questions had a high impact on the policy goal of a competitive environment for DG. DG Policy Questions Major regulatory policy objectives Encourage competition and economic efficiency Ensure safety and grid reliability Priority DG issues for creating a competitive environment for DG System interfaces Interconnection Siting and permitting Stranded costs Standby charges CAM MG10956

  35. DG Policy Overview Impact Analysis Among the eight DG policy questions, five had a high impact on the policy goal of a competitive environment for DG. • Engineering connections and market access. • High technical complexity vs. additional capacity for T&D system, customer market access and operational flexibility. System Interfaces • Technical requirements, processes and contracts modified for DG? • Safety and reliability vs efficiency and fairness. Interconnection CAM MG10956

  36. DG Policy Overview Priority Issues Among the eight DG policy questions, five had a high impact on the policy goal of a competitive environment for DG. (continued) • Streamlined process vs. adequate consideration. • Environmental goals vs. reliability and other public policy objectives. Siting and permitting • Potential high assessed costs (disproportionate to cost of DG project) that discourage innovative solutions that are more efficient and cost effective vs. recognition of past investment and loss of load. • Scale of DG threat to load vs. customer choice and opportunity for system improvement. Stranded Costs (CTCs and exit fees) • Excessive (e.g., no recognition of combined reliability of DG units) vs. too low (no recognition of cost of backup power on spot markets. • Cost to utility vs. benefit to system and customer. Standby Charges CAM MG10956

  37. DG Policy Overview Additional Key Issues Three other key policy questions were identified in the analysis. • Correct price signals by sharing DG benefits and costs among appropriate parties vs. difficulty of calculating these benefits for local conditions. Grid-side Benefits • Best position to recognize best DG opportunities in distribution network vs. unique access to customers could threaten open markets and customer choice. • Alternatives to ownership that share benefits. Stranded Costs (CTCs and exit fees) • Active encouragement of commercialization of advanced technologies to provide public benefits (e.g., improved system reliability, climate change, energy efficiency) vs. distorted price signals and pursuit of poor technical risks. Public Support CAM MG10956

  38. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Technology Economics Markets Policy Business Models Industry CAM MG10956

  39. DG Business Models Developing a DG Business In order to assess the total value of a distributed generation business, revenue from all segments of the value chain should be considered. Marketing & Sales Product Development & Supply Operations Service Marketing Sales Manufacture Packaging Financing Distribution&Installation FuelSupply Operate Maintain ServiceDelivery • Advertising marketing collateral • Customer analysis • Sales force • Training • Account management • Technology core • Equipment selection • System design • Pricing decisions • Financing packages • Fuel cells • Battery storage • Small GTs and microturbines • Small IC engines • Automation/ diagnostics • Photovoltaics • Flywheels • Power electronics • Switchgear • Controls • Generation • Distribution • Storage • Portable systems (e.g., barge, truck-mounted) • Marketing • Service requirements • Sales/lease • Distribution networks • Dedicated sales staff • Structuring contracts • Gas marketing • Electric marketing • Fuel switching • Operating strategies • Contingency planning • Service • Hedging strategies • Savings levels • Performance guarantees • Outage arrangements • Noise and environmental • Customer interfaces • Maintenance services • Operate/maintain facilities network • Service/overhaul centers • Fuel management acquisition/ storage service • Replacement packages • Performance/monitoring maintenance management system • Billing • Payment terms • Customer satisfaction • TQM strategy • Remote multi-node system control • Managing end-user systems • Ownership of distributed systems • Providing energy services Arthur D. Little’s approach is designed to assist in assessing the fit where there is substantial business in the DG area. CAM MG10956

  40. DG Business Models Utility Business Strategy Competing Players and Strategies Although a number of approaches are being tried, the winning strategies are yet to emerge, giving the new entrant significant strategic freedom. Strategy Key Players Key Discriminators Core Component Technology Supplier Howmet Visteon Ballard Delphi • Strong proprietary technology position • Unique production capabilities Equipment Package Supplier AlliedSignal Plug Power Capstone • Efficient production processes • Strong product design capabilities Exclusive Regional Distributor Unicom DTE Energy GE Power Systems • Regional market and distribution channels • Ability to manage inventory risk Turnkey Customer Solution Provider Sempra PSEG Williams • Creative solution design capabilities • Access to product and technology solutions Field Service Provider (Install, Operate, Maintain) Honeywell • Extensive contractor network • Efficient dispatch and field support processes Energy Service Provider Enron Duke • Energy marketing and trading capabilities • Ability to manage technical and economic risks CAM MG10956

  41. DG Business Models Market Potential Formation Because DG technologies, business models, and regulatory frameworks are still embryonic, there is significant uncertainty in key market drivers. Technologies Business Models Regulatory Frameworks • Microturbines nearing commercial status - beta units in the market today • Fuel cells • PEM nearly commercial; residential beta units available by mid-2000 • SO commercial by 2005 • IC engines established -incremental improvements • Supporting technologies (power conditioning, fuel processing) developing rapidly (costs still high) • No clear winning business model (yet) • Equipment supply and distribution channels forming • Commercial & Industrial business models tend to focus on energy service (similar to traditional ESCO) • Residential business models aim toward eventual mass market • Emerging in several states (CA, TX, PA, NY, OH) as part of deregulation - some allowing DG net metering • Interconnection standards now being developed (IEEE) • Duration and level of competitive transition charges and impact on DG varies • In a number of states, there is no penalty for disconnecting from the grid CAM MG10956

  42. DG Business Models Business Opportunities and Risks The emergence of distributed generation creates both important opportunities and risks for utility businesses. Unregulated Utility Business Re gulated Utility Business • Increased portfolio of products, services and technologies to support turnkey customer solutions offerings • Potentially large, new markets for innovative DG products and services (e.g., residential) • New value chain and industry structure create opportunities for alliances and equity investments • Risk that national and global scale companies (GE, auto manufacturers, mega-ESCOs) will capture bulk of market • Risk that technologies or disruptive market potential do not develop • Risk of stranded investments (especially T&D) as end-users adopt DG solutions • Opportunity for DG to economically displace required T&D investments • Both opportunities and risks created by introducing end-user DG adoption into the regulatory equation • Potential ongoing role for T&D utilities as small-scale generators • Will equitable costs of providing standby power be recovered? • Added uncertainty in forecasting for regulated rate development CAM MG10956

  43. DG Business Models Strategic Option Identification Value Chain Analyzing the value chain, under alternative future scenarios is another tool to identify potentially attractive strategic options. Equipment Supplier Product Distributor and Supplier Operator and Maintainer EnergyProvider Equipment Integration / Packaging Equipment Sales and Distribution Financing OperationandMaintenance Energy Service Core Component Core Component System Design and Sales Installation and Inter-connection Fuel Delivery Illustrative DR value creation by VC Segment C&I 26% 8% 5% 7% 1% 4%1 48% 1% Res 33% 7% 5% 6% 1% 10% 37% 1% 1includes replacement parts System Designer and Seller Fuel Supplier • Fuel Supplier • Ability to provide customers with multiple gas supply options • Comprehensive fuel sales and distribution network • System Designer and Seller • Strong system and application engineering capabilities • Well-established relationship with DR equipment suppliers Financing Provider • Financing Supplier • Experience in consumer product finance Strategic Technology/ Product Investor Equipment Seller and Distributor • Able to achieve synergies with other business areas of the investor • Innovative product and services • Financial staying power • Complete distribution network • E-commerce capability (or alliance) • Secure exclusive distribution rights for key products or technologies in the region of interest • Brand recognition Operation and Maintenance Provider • Operation and Maintenance Provider • Rapid accessibility of O&M personnel to customer sites • System/product monitoring capability • Energy Services Provider • Broad portfolio of energy services package offerings Energy Services Provider Equipment/System Installer • Equipment/System Installer • Make DR equipment/systems transparent to the end-users • Expertise in system/process optimization • Provide integrated value-added gas/electric solutions CAM MG10956

  44. DG Business Models Utility Business Strategy The Challenge The challenge: to capture the opportunities from DG, companies must act quickly, but without enough information to fully resolve uncertainty. Potentially Large Opportunity • Commercial/small industrial DG products/services • Residential DG products/services • Equity investment opportunities (DG technologies and innovative DG product/service elements) DG presents potentially attractive opportunities . . . Unresolved Uncertainty Near-Term • Technology commercialization • Technology economics • Disruptive product attributes • Competitive intensity . . . about which there is substantial uncertainty which won’t be resolved in the near term . . . Delay Diminishes Strategic Position . . . and upon which a company must act soon, or significantly diminish its future DG strategic position. • Competitors moving now • Diminishing alliance options • Losing first mover advantages • Disadvantaged learning curve position CAM MG10956

  45. 1 Distributed Generation and Innovation 3 4 2 ADL Research in Distributed Generation The ADL Difference: Our Expertise and Experience Distributed Generation: Threat or Opportunity? Contents Industry Wires Perspectives Interconnection Iso’s and Grid CAM MG10956

  46. Distributed Generation Industry Wires Perspective DG Concerns Wires companies are concerned about the DG technologies and how they would interact with the grid. DG Equipment related concerns Grid-related concerns Source: Arthur D. Little Interviews with 14 U.S. electric distribution companies. CAM MG10956

  47. Distributed Generation Industry Wires Perspective DG Potential Benefits Most wires companies consider DG’s potential to augment the T&D system as its most important benefit. Source: Arthur D. Little Interviews with 14 U.S. electric distribution companies. CAM MG10956

  48. TYPICAL GENERATOR PROTECTION TYPICAL UTILITY PROTECTION 52 TRIP SIGNAL 52 TRIP SIGNAL CTs (3) CTs (3) 52 81 O/U 27 59 52 27/ 59 81 O/U 47 PTs 86 PTs 87G 86 87T 50/ 51 32 RV 46 32 CTs (3) 50/ 51 32 51N CTs (3) FROM 87G FROM 87T GEN TO 86 TO 86 40 CTs (3) 51G ALTERNATE CT CTs (3) 51G CT INCOMING UTILITY Distributed Generation Industry Interconnection The interconnection black box provides protection for the customer’s and the utility’s equipment, safety of line workers as well as the parallel operation of the DG with the utility grid. • 51G - Ground overcurrent relay • 51N - Residual ground overcurrent relay • 52 - Circuit breaker • 59 - Overvoltage relay • 59G - Ground overvoltage • 81O/U - Over/under frequency relay • 86 - High speed lock-out relay • 87G - Generator differential overcurrent relay • 87T - Transformer percentage differential overcurrent relay 21 - Distance relay 25 - Sync check relay 27 - Undervoltage relay 32 - Reverse power relay 32RV - Reverse vars (loss of excitation) 40 - Loss of excitation 46 - Negative phase sequence time overcurrent relay 47 - Voltage sequence/undervoltage relay 50 - Instantaneous overcurrent relay 51 - Time overcurrent relay Source: Enercon Engineering CAM MG10956

  49. Distributed Generation Industry Interconnection Levels of Complexity Grid interconnection and process has emerged as an important issue for multiple reasons. • The number of small generators seeking interconnection to the grid could increase in the future which will present stakeholders with: • Increased burden for processing • Potentially negative impact on the system • Potentially positive impact on the system if done properly • Opportunity for standardization and thus reduce costs • DG advocates contend that the current interconnection requirements and approval processes are effectively increasing costs unfairly and pricing DG out of this market (negative history of cogen). • Distribution companies are concerned that DG will negatively impact the safety and reliability of the grid, and unfairly increase the distribution companies’ costs. • ISO/RTOs may add another level of complexity relative to metering, scheduling and settling DG accounts and vice versa. CAM MG10956

  50. Process Technical Contract Distributed Generation Industry Interconnection Issue Summary There are three overlapping elements of interconnection that must be addressed together. CAM MG10956

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