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<title>Cost Barriers to Distributed Energy Options: Real or Imagined?</title>
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<td width="75%" valign="top"><p ALIGN="left"><font face="Arial"><b><big><big><big><strong>COST
BARRIERS TO DISTRIBUTED ENERGY OPTIONS: REAL OR IMAGINED?</strong></big></big></big></b></font></p>
<font SIZE="2"><p></font><font size="4"><strong><font face="Arial">BY GERRY RUNTE</font><font size="4" face="Arial"><br>
</font><font face="Arial">M-C POWER CORPORATION</font></strong><br>
<small>(<em>originally published by PMA OnLine Magazine: 09/98</em>)</small></p>
</font><i><b><p></b></i> </p>
<p><font face="Arial">One of the most significant barriers to the adoption of distributed
energy options is their perceived relative cost. Cost in terms of purchase price, cost in
terms of delivered cost of electricity. Taken to the extreme, there is a belief on the
part of some observers that distributed energy options must not only be competitive with
current wholesale energy costs in the few existing open markets, but in future markets
where the overwhelming presumption is that electricity costs will be much lower. </font></p>
<p><font face="Arial">Most developers of these technologies love to talk about the value
of the electricity received, about the value of the solutions they will provide. And while
these values will indeed be real, their quantification relies a great deal on a common
vision of future open electricity markets. Unfortunately, one vision is not commonly
shared by all potential customer bases.</font></p>
<p><font face="Arial">Fortunately, one need not argue for "value received" to
demonstrate that distributed energy options can be economic at their currently forecasted
costs. Making use of some assumptions and realities that most parties might share
indicates that any delivered cost of electricity between 5 and 8 cents/kWh will indeed be
quite competitive, even in the cheaper world of a deregulated future, post stranded costs
and post wholesale price reductions.</font></p>
<p><font face="Arial">A brief analysis that supports this view starts with a look at the
power pools.</font></p>
<b><p><font face="Arial">California is no barometer</font></b></p>
<p><font face="Arial">First, let’s dispel the notion that the California Power
Exchange represents a window to the future. As important as events in California have been
to motivate other regions to introduce deregulation, the actual mechanisms used to
establish markets and market pricing in California are not likely to be representative for
the rest of the U.S. or the world. </font></p>
<p><font face="Arial">The principle difference between California and other power pool
relates to how the power pool addresses (and charges for) reliability and capacity
obligations. In simplest terms, the California market is a wholesale power market, period.
California took the position that enough generation will always be available at a given
price and that it chose not to concern itself whether or not sellers have sufficient
supply under contract to cover commitments. As a consequence, in July, California prices
were tremendously volatile, reaching over $10/kWh at peak periods. Other regions have not
allowed such a laissez faire approach and are demanding that suppliers have contracts to
back up their commitments, thus creating capacity markets as well as energy markets. These
regions, particularly in the Northeast and New England, have established several markets:
energy, capacity, transmission, and ancillary services. </font></p>
<p><font face="Arial">Additionally, the concept of locational marginal pricing (LMP) is
taking root, lead by the Pennsylvania Jersey Maryland Interconnection (PJM - the third
largest power pool in the world). PJM instituted LMP when it opened its market in April
and began operation under a new set of rules. LMP reflects the additional costs caused by
transmission constraints (when the load wanting to pass through a point is greater than
the capacity to move it). Many of the new ISO’s are considering the use of LMP. </font></p>
<p><font face="Arial">Further, California is likely to be the only region where the
regulated wire company is barred from owning and operating distributed energy
technologies.</font></p>
<p><font face="Arial">Finally, the California PX price is a wholesale market price only
and ignores the other costs of retail energy delivery which are essential in a distributed
energy (i.e., retail) economic analysis. </font></p>
<b><p><font face="Arial">End-User Relative Costs</font></p>
<p><font face="Arial">Any market cost comparison </b><i>of distributed energy options </i><b>must
utilize end user costs, not simply wholesale power costs<i>.</i></b> There are several
other categories of cost that must be considered:</font></p>
<blockquote>
<blockquote>
<blockquote>
<ul>
<li><font face="Arial">The cost of transmission, transmission constraints and other
services; </font></li>
<li><font face="Arial">The cost of distribution; and</font></li>
<li><font face="Arial">The cost of the wholesale energy </font></li>
</ul>
</blockquote>
</blockquote>
</blockquote>
<p><font face="Arial">Using PJM as an example, the total delivered cost at a retail level
is quite different than California.</font></p>
<p><font face="Arial">The PJM transmission tariff, varies by entry point, but for a 500 kW
or smaller unit would amount to as much as 3 cents/kWh to a low of 2 cents/kWh.</font></p>
<p><font face="Arial">Disregarding "stranded costs" and assuming they are all
worked out by 2005, there remains an additional distribution charge of between 2 and 4
cents kWh, depending on the utility.</font></p>
<p><font face="Arial">The net retail rate range in the Northeast therefore might have a
minimum charge totaling 4 to 6 cents/kWh (transmission and distribution). </font></p>
<p><font face="Arial">From 8 am through 6 pm, the PJM LMP wholesale energy charge
(including the costs of capacity obligations imposed by pool rules) was generally above 4
cents/kWh in June. Averaging over a single hour over the month hides the fact that there
is nonetheless great variability. At one point, at 4 a.m., power was almost too cheap to
meter, but from 10 am through 5 p.m. on several days, the price was as high as 30
cents/kWh. </font></p>
<p><font face="Arial">Adding the minimum delivery charges hypothesized above (4 cents/kWh
low; 6 cents/kWh high) with the PJM Locational Marginal Pricing (the wholesale energy
charge), by hour, averaged over the month of June, 1998, is plotted in the chart below:</font></p>
<p><font face="Arial"> </font></p>
<p align="center"><font face="Arial"> </font><img src="../images/runte2.gif" alt="runte2.gif (10147 bytes)" WIDTH="506" HEIGHT="359"></p>
<p><font face="Arial"> </font></p>
<blockquote>
<blockquote>
<i><p><font face="Arial">Reference: PJM Open Access Transmission Tariff, filed with FERC
December 31, 1997, effective April 1, 1998</font></p>
</i>
</blockquote>
</blockquote>
<p><font face="Arial">The solid lines in this chart merely present "open market"
retail costs in the early years of market development, but without regard to the
anticipated reductions in wholesale electricity prices. Allowing for a 25% reduction in
today’s wholesale energy price (the LMP), of 3 to 4 cents, to about 1.7 to 3 cents,
gives us a total retail rate structure that ranges from 5 to as much as over 9 cents/kWh.
This reduced delivered price is shown on the chart with dots for the high case and plusses
for the low case. </font></p>
<p><font face="Arial">Most distributed energy developers are currently working with
economic objectives well within this competitive range.</font></p>
<p><font face="Arial">This analysis, however brief and simplistic, illustrates an
important consideration for any market forecast. Many promises have been made regarding
significantly lower costs of electricity to the consumer in a post-deregulated market.
While these promises may indeed be realized in most markets with respect to wholesale
energy costs, in many parts of the country wholesale costs represent only a fraction of
the delivered cost to the customer. </font></p>
<hr>
<p><font SIZE="2">Gerry Runte is <strong>Director, Eastern Regional Office</strong>, M-C
Power Corporation, a world leader in the development of molten carbonate fuel cell
technology. Gerry has been associated with the electric energy industry for 21 years and
fuel cells since 1991. He is a board member of the U.S. Fuel Cell Council and the Fuel
Cell Power Association. M-C Power Corporation, 125 Mount Airy Road, Bernardsville,
NJ 07924, (908) 630-0900 (voice), (908) 630-0922 (fax) e-mail: <a href="mailto:[email protected]">[email protected]</a></font></td>
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