Cleaner Energy, Greener Profits: Fuel Cells as Cost-Effective Distributed Energy Resources Contents: Executive Summary . 2 By Joel N. Swisher, Ph.D., P.E. Introduction . 4 Rocky Mountain Institute Fuel cells: A small, clean,reliable This publication and its underlying research were funded power source . 6 by the grants from the W. Alton Jones Foundation, What is different Pew Charitable Trusts, and Energy Foundation. about today’s electricity problems? The author, a civil and mechanical engineer with a . 8 Stanford doctorate in civil and environmental engineering, is an authority on distributed generation Changing Trends in and leads RMI’s Energy and Resource Services team. the Electricity Industry . 9 Small is profitable: the economic benefits of distributed generation . 13 Early markets and commercialization paths . 32 Cleaner Energy, Greener Profits Executive Summary The electric power industry is undergoing centrally focused “generation-transmission- major changes that are reshaping the traditional distribution” companies into a more heteroge- roles of utilities, creating opportunities for new neous structure. The new industry will be made technologies, and redefining the scope and up of companies fulfilling various traditional character of government regulation. These roles, including independent power producers, changes are arising out of the interaction of electric service providers, energy brokers and several driving forces: marketers, transmission operators, and local distribution companies. • An emerging technological shift could offer distributed generation sources economic One of the most promising and exciting distrib- benefits unavailable to traditional, central- uted generation (DG) options is fuel cell ized sources of electricity. technology, which converts fuel to electricity at • Regulatory and public policy support is high efficiency, without combustion, and with growing for competition over traditional negligible emissions. Several different fuel cell forms of cost-of-service regulation of elec- technologies are under development and com- tric utilities. mercialization for various stationary and vehicu- • The restructuring of the electric power lar applications. How quickly and how profitably industry and the emergence of the digital will fuel cell technology be implemented in the economy are causing power markets to electric power industry? The answer depends diverge into two groups of customers— those who demand a low-cost commodity, largely on how well the economic benefits of DG and those who demand electric service with are recognized and captured in the increasingly a high level of reliability and are willing to competitive electricity market. pay for it. New and improved DG technology is making it • Increased energy security concerns are more feasible and less expensive to produce revealing the vulnerability of centralized power supply infrastructure to disruption by power near the customer. Also, new technolo- accident or sabotage. gies for the control, switching and storage of electricity are enabling the transition to DG by • Stricter environmental constraints on power production are inevitable, as electric gener- improving system efficiency and reliability. ation produces a large share of local and Falling costs of fuel cells will make them in- global pollution. creasingly competitive with conventional power sources, approaching the point at which these The electric power industry is responding to options can compete directly against central these forces by experimenting with a host of generation costs. Already, careful study of the business strategies: flexible pricing for large economics of power delivery suggests that cost- customers; increased power purchases by effective applications are emerging. Because utilities; separation of generation, transmission, costs of fuel cells and other DG technologies are and distribution assets; diversification into non- dominated by manufacturing economies of regulated energy-service businesses; aggres- scale—the more units one makes, the less sive efforts to contain costs; and corporate expensive each unit is—these early markets can restructuring. Emerging from these experiments lead to commercialization paths that will bring is a less tightly integrated, more diversified and, fuel cells into mainstream use in both stationary above all, much more competitive power indus- and mobile applications. try. It is an industry that, during the next decade, will continue to shift from the traditional 2 Executive Summary The main benefits of such DG technologies as Fuel cells can be cost-effective in these applica- fuel cells can be divided into five categories: tions even at their present costs, if the DG benefits can be captured. Thus, the near-term • Small scale and modularity provide added commercialization path for fuel cells appears to value by offering the ability to put in place include grid-connected fuel cell systems in as little or as much generating capacity as commercial buildings, communication provider needed. The value derived from this facilities, and other facilities that need high increased flexibility, called option value, is reliability and low emissions. The most cost- based on shorter lead-time and decreased effective applications will be in locations where risk of overbuilding, which reduce financial cost and risk. existing distribution capacity is insufficient to serve expected demand growth, leading to • DG sources can provide substantial cost costly expansion investments. savings if they are sited where and when they can prevent or defer pending invest- A longer-term commercialization path for fuel ments in utility distribution capacity. cell technology will integrate these stationary • A related benefit is engineering cost applications with the potential for fuel cells in savings from reduced losses, improved cars, trucks and buses. Cars parked at these voltage levels and power factors, and facilities during the day offer the potential to longer equipment life. generate large amounts of electricity during peak-demand hours from the fuel cells that are • By providing an independent power source onboard, paid for, but otherwise idle. These fuel near the customer, DG can improve the cell vehicle-generators could connect to the reliability of electric service to critical cus- facilities’ electric infrastructure to deliver into tomer loads. Premium reliability can have a very high value in such sensitive industries the grid the electricity generated onboard. 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 increas- The Nexa™ power module, es in total electric demand. manufactured by Ballard Power Systems, is a • Finally, fuel cells are among the cleanest commercial fuel cell product DG technologies, and their environmental for portable applications. benefits allow them to be sited very flexibly. It is capable of generating This siting flexibility makes it more feasible up to 1.2 kilowatts of DC power. to capture other DG benefits, such as rapid construction, premium reliability, distribution cost savings, and use of waste heat, which Photo courtesy Ballard Power Systems depend on the proper siting of DG sources in relation to customer loads. Thus, promis- ing near-term applications exist in emission- limited areas (such as large concentrated urban centers) where there are premium reliability needs, costly distribution For more information about fuel cells and how they work, constraints, or both. see www.rmi.org/sitepages/pid537.php 3 Cleaner Energy, Greener Profits Introduction: Why is energy back in the news? It has been more than twenty years since energy The centralized infrastructure for electric power has been a frequent topic of news headlines. supply in the U.S. is also vulnerable to interrup- Today, however, we hear frequent references to tion by accidental failure or intentional sabotage. a new “energy crisis.” Some aspects of the High-voltage transmission lines each carry more energy debates of the 1970s have changed little than 1000 MW of power through hundreds, even since they disappeared along with long lines at thousands, of miles of remote, undefended terri- the gasoline pumps, while other aspects have tory. Nuclear power plants, although relatively changed dramatically. Concern about energy well protected against accidents, may be vulner- security related to oil imports from the Persian able to aggressive acts of sabotage, which could Gulf is due to the familiar fact that global oil release large amounts of radioactive contamina- reserves are concentrated in that region, and to tion and severely endanger the general public. gradually increasing U.S. demand after steep reductions in the early 1980s.1 Other forces in the energy market combined to cause a short-term crisis in the restructured This concern has prompted calls for developing California electricity market. Extreme electric fossil fuel reserves in highly sensitive areas of price volatility during 2000–2001 was caused by the U.S., such as the Arctic National Wildlife the failure of the now-abandoned market struc- Refuge, based on the premise that such domes- ture, in which utilities were required to buy power tic energy supplies cannot be subject to embar- through a central Power Exchange. A handful of go by a foreign power. However, it is difficult to wholesale power