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Energy Alternatives Looking for Juice

Several stories above the pell-mell of Times Square, two fuel-cell batteries pump 400 kilowatts of power for the Conde Nast building -- enough electricity to supply nearly 300 homes annually. At a Walgreens drugstore in Chesterton, Ind., a 200-kilowatt microturbine keeps the aisles lit even when the electricity goes out, allowing customers to go on shopping. Back in New York City, a fuel cell at a police station kept the New York Power Authority from having to rip up Central Park in order to upgrade the power supply.

These projects are part of the brave new world of alternative energy known as distributed generation, which is hoping to grab a piece of the commercial market by offering small-scale, low-emission, low-maintenance power that's independent of the nation's overworked electricity grids.

As companies become increasingly worried about blackouts and brownouts, distributed generation is selling itself as reliable power that can be customized to businesses' needs while freeing them from utility monopolies. Distributed generation -- which accounts for just a trace of the energy market today -- should be able to capture about 10% of it by 2005 and about 30% in 2015, according to the Gas Research Institute.

FRIDGE-SIZE. The energy alternatives that look most likely to emerge as winners in the commercial market are fuel cells and microturbines. Fuel cells, like the ones above Times Square made by International Fuel Cell Corp., are batteries that make electricity by using hydrogen chemical reactions. Since they don't burn gas, they produce near-zero emissions -- a big advantage over a U.S. fossil-fuel plant, which can generate 25 pounds of pollutants for every 1,000 kilowatt hours produced.

Microturbines are clean-burning power plants about the size of a refrigerator. They run on natural gas and other fuels, not through the electric power grid. They could be especially valuable for companies that want to generate electricity from waste emissions and switch to a stand-alone system during costly peak-usage times.

Microturbines are priced at about $1,000 per kilowatt generated, vs. about $5,000 per kilowatt for fuel cells, says Steven Morris, president of Energy Info Source, which provides news and services to the energy industry. Fuel-cell costs are more likely to drop as volume of sales increase, Morris adds.

Despite the quest for more dependable power, many busineses are reluctant to invest heavily in these relatively untested products. The return on the investment can be low, and far into the future. A small commercial customer would require a two- to four-year payback period. Regular electric utilities charge about $0.07 per kilowatt-hour -- around $100 a month for a small company, while a 30-kilowatt fuel cell costs about $150,000 in startup costs alone. Throw in operation and maintenance expenses, fuel costs, and fees levied by utilities to connect to the central grid, and a company's budget can be pretty much wiped out.

SAME OLD WORLD. Most economists agree, for now at least, that nothing is cheaper than good old-fashioned electricity from the power grid. Besides, "We're still living in an oil and gas world, and that's going to continue for some time," says John Segner, manager of the Invesco Energy Fund, which has $625 million in energy-related assets.

Investors, too, have shied away from these alternative-energy companies. It's not just that these emerging markets take time to develop. Institutional investors largely ignore them because they don't want to get caught in another Internet trap. Segner's Invesco Fund has less than 5% of its portfolio in alternative energies, including microturbine maker Capstone Turbine and Active Power, which has commercialized a replacement for lead-acid batteries.

Segner won't even consider looking at fuel-cell companies, most of which say they won't be profitable until 2006. Only a few distributed-generation companies are catching investors' eyes, and they're stocks for only the most aggressive, says Craig Shere, an energy analyst for Standard & Poor's. He follows a few, such as Capstone Turbine and Ballard Power Systems, a maker of fuel cells and fuel-cell units.

LOOKING FOR GIGAWATTS. Distributed generation's best chance to catch on is if energy prices remain high. With ever-increasing demand for power, utilities can't really meet future energy needs without building more generation capacity of their own. The U.S. now has more than 15,000 electric utility plants capable of generating some 800,000 megawatts of power.

The federal Energy Information Administration estimates that an additional 1,300 plants with the capacity to produce 393 gigawatts of power will be needed by 2020. Such heavy demand could boost the market for fuel cells and microturbines. And leading distributed-generation suppliers figure they'll be able to cut their prices as technology advances and demand for their products increases. Shere predicts that power outages and shortages will help businesses realize that reliability and quality can offset the initial costs.

It's still not clear if microturbines or fuel cells will emerge as the leading technology. Already widely available and easy to build, microturbines do well in industrial settings and places where excess emissions can be converted to energy, such as thermal heat in hospitals or toxic exhaust from a drilling rig. The worldwide microturbine market is expected to reach $2.4 billion to $8 billion by 2010, according to a study from the Gas Research Institute. Shere expects Capstone to continue to be a market leader, and he expects revenues to climb to $85 million in 2001 on a $0.31 loss per share, up from $23.2 million in 2000 on a $12.82 per-share loss.

FUEL DIVERSITY. Fuel cells may have an edge because they produce near-zero pollution emissions. "The big difference is that microturbines are only run on natural gas, while fuel cells run on multiple fuels. Their diversity is what makes them more attractive," says Energy Info Source's Morris.

While International Fuel Cell makes the only commercially-available fuel cell power plants, many other fuel-cell companies already have sold units to carmakers, including DaimlerChrysler and Honda for the development of trial hybrid vehicles. And Ballard Power Systems expects to begin commercial production in mid-2001 for the portable generator market and in 2003 for automobiles. Shere says the company should reap more than $2 billion in revenues, or $2 per share, by 2005, assuming Ballard Power lives up to its promises.

With both fuel cells and microturbines still a few years away from the mainstream commercial market, utilities can use this time to figure out how to profit from them -- and shape the market for distributed generation. Already, a half-dozen utility affiliates have joined with Allied Signal to market its microturbine, and Duquesne Power & Light is investing in H Power, a fuel-cell developer.

If the threat of power outages persists in the 21st century, distributed generation could eventually find its niche as a security blanket for business owners. By Suzanne Robitaille in New York

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