Cleaner Energy, Greener Profits: Fuel Cells as Cost-Effective Distributed Energy Resources

The electric power industry is undergoing major changes that are reshaping the traditional roles of utilities, creating opportunities for new technologies, and redefining the scope and character of government regulation.

These changes are arising out of the interaction of several driving forces: – An emerging technological shift could offer distributed generation sources economic benefits unavailable to traditional, centralized sources of electricity. – Regulatory and public policy support is growing for competition over traditional forms of cost-of service regulation of electric utilities. – The restructuring of the electric power industry and the emergence of the digital economy are causing power markets to diverge into two groups of customers—those who demand a low-cost commodity, and those who demand electric service with a high level of reliability and are willing to pay for it. – Increased energy security concerns are revealing the vulnerability of centralized power supply infrastructure to disruption by accident or sabotage. – Stricter environmental constraints on power production are inevitable, as electric generation produces a large share of local and global pollution. The electric power industry is responding to these forces by experimenting with a host of business strategies: flexible pricing for large customers; increased power purchases by utilities; separation of generation, transmission, and distribution assets; diversification into non-regulated energy-service businesses; aggressive efforts to contain costs; and corporate restructuring. Emerging from these experiments is a less tightly integrated, more diversified and, above all, much more competitive power industry. It is an industry that, during the next decade, will continue to shift from the traditional centrally focused “generation-transmission-distribution” companies into a more heterogeneous structure. The new industry will be made up of companies fulfilling various traditional roles, including independent power producers, electric service providers, energy brokers and marketers, transmission operators, and local distribution companies. One of the most promising and exciting distributed generation (DG) options is fuel cell technology, which converts fuel to electricity at high efficiency, without combustion, and with negligible emissions. Several different fuel cell technologies are under development and commercialization for various stationary and vehicular applications. How quickly and how profitably will fuel cell technology be implemented in the electric power industry? The answer depends largely on how well the economic benefits of DG are recognized and captured in the increasingly competitive electricity market. New and improved DG technology is making it more feasible and less expensive to produce power near the customer. Also, new technologies for the control, switching and storage of electricity are enabling the transition to DG by improving system efficiency and reliability. Falling costs of fuel cells will make them increasingly competitive with conventional power sources, approaching the point at which these options can compete directly against central generation costs. Already, careful study of the economics of power delivery suggests that cost effective applications are emerging. Because costs of fuel cells and other DG technologies are dominated by manufacturing economies of scale—the more units one makes, the less expensive each unit is—these early markets can lead to commercialization paths that will bring fuel cells into mainstream use in both stationary and mobile applications. The main benefits of such DG technologies as fuel cells can be divided into five categories: – Small scale and modularity provide added value by offering the ability to put in place as little or as much generating capacity as needed. The value derived from this increased flexibility, called option value, is based on shorter lead-time and decreased risk of overbuilding, which reduce financial cost and risk. – DG sources can provide substantial cost savings if they are sited where and when they can prevent or defer pending investments in utility distribution capacity. – A related benefit is engineering cost savings from reduced losses, improved voltage levels and power factors, and longer equipment life. – By providing an independent power source near the customer, DG can improve the reliability of electric service to critical customer loads. Premium reliability can have a very high value in such sensitive industries as data centers, semiconductor fabrication facilities (“fabs”), and many conventional businesses as well. Although the growth of the digital economy is driving demand for increased premium power reliability, this growth does not translate into large increases in total electric demand. – Finally, fuel cells are among the cleanest DG technologies, and their environmental benefits allow them to be sited very flexibly. This flexibility makes it more feasible to capture other DG benefits, such as rapid construction, premium reliability, distribution cost savings, and use of waste heat, which depend on the proper siting of DG sources in relation to customer loads. Thus, promising near-term applications exist in emission-limited areas (such as large concentrated urban centers) where there are premium reliability needs, costly distribution constraints, or both. Fuel cells can be cost-effective in these applications even at their present costs, if the DG benefits can be captured. Thus, the near-term commercialization path for fuel cells appears to include grid-connected fuel cell systems in commercial buildings, communication provider facilities, and other facilities that need high reliability and low emissions. The most cost effective applications will be in locations where existing distribution capacity is insufficient to serve expected demand growth, leading to costly expansion investments. A longer-term commercialization path for fuel cell technology will integrate these stationary applications with the potential for fuel cells in cars, trucks and buses. Cars parked at these facilities during the day offer the potential to generate large amounts of electricity during peak-demand hours from the fuel cells that are onboard, paid for, but otherwise idle. These fuel cell vehicle-generators could connect to the facilities’ electric infrastructure to deliver into the grid the electricity generated onboard. © Rocky Mountain Institute 2002 About the Author Joel Swisher is a civil and mechanical engineer with a Stanford doctorate in civil and environmental engineering and an authority on distributed generation. He leads RMI’s Energy and Resource Services team. The full “Cleaner Energy, Greener Profits” report is available for sale and download at
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