The recent spate of power outages across North America and Europe, and a number
of environmental initiatives that are being pushed by European and UK governments,
have led to a renewed focus on energy technologies. These include both green
technologies that reduce the reliance of generation on hydrocarbon fuels,
and micro-power technologies, that reduce the reliance of end-consumers on
large generators and the grid.

On this occasion, micro-power technologies are better placed to take advantage
of this attention – in the UK, both Powergen and BG Group’s Microgen
have announced their intention to launch large-scale commercial sales of a
domestic combined heat and power (CHP) unit (based on Stirling engine technology)
in 2004.

These domestic CHP units produce heat and hot water like conventional boilers,
but also use natural gas to generate electricity. This solution is more efficient
than traditional domestic energy solutions as it avoids the electrical losses
associated with power station conversion, transmission, and distribution, makes
use of the heat generated as a by-product, and should any excess electricity
be generated, it can be exported to other local sources of demand.

In the longer term, similar domestic CHP units based on fuel cell technologies
could become commercially available. While it isn’t clear yet which fuel
cell technology will dominate, in general, these would typically offer a higher
power-to-heat ratio and therefore extend the market to smaller homes with a
lower thermal demand, and offer greater opportunities for the export of excess
electricity.

Catalysts for Change

Two key drivers are influencing the commerciality of micro-generation: the
increasing demand for a secure supply of electricity and the prominence of
environmental issues on the political agenda.

In August and September of 2003, a number of high-profile power cuts affecting
areas of North America, Scandinavia, the UK, and Italy highlighted the reliance
of modern economies on a steady supply of electricity and demonstrated the
economic and social implications of a failure in this supply. Furthermore,
the clustering of these events led to a perception that rather than being unfortunate
flukes, these were events that were likely to recur. As a result, many governments,
businesses, and households are likely to believe that micro-power offers tangible
security of supply benefits.

Several months before the outages, the UK’s Department of Trade and Industry
(DTI) published its “Energy White Paper,” which had a strong emphasis
on environmental issues, targeting a 20 percent reduction in carbon dioxide
emissions, a 10 percent renewable energy share of UK electricity supplies,
and 10 gigawatts of installed CHP capacity by 2010. Environmental issues are
also at the forefront of the European agenda, with the EU emissions trading
scheme scheduled to start in 2005.

It is clear that domestic CHP technologies would assist the government in achieving
its targets for CHP, carbon emissions, and energy efficiency. As a result,
it is likely that forthcoming domestic CHP schemes would benefit from current
incentives provided by initiatives such as the energy efficiency commitment
and levy exemption certificates and may prompt the development of further incentives
or funding. Domestic CHP would also contribute to a sector-wide reduction in
carbon dioxide emissions, generating benefits under the EU emissions trading
scheme, which would be captured by those traditional generators displaced.
Furthermore, the launch of “Fuel Cells UK” by the DTI in the spring
of 2003 recognized the importance of the development of the UK fuel cells industry.

Implications for the Electricity Industry

Micro-power is poised to do to the energy and utility business what the personal
computer did to the mainframe computing industry 20 years ago.

The large-scale installation of domestic CHP into UK homes would have significant
implications for every part of the electricity value chain. Local generation
would displace traditional generation capacity and reduce the role of the electricity
transmission network leading to the potential stranding of both generation
and transmission assets within current investment horizons. The impact on the
distribution network is less clear cut: on the one hand, increased generation
self-sufficiency within homes could reduce the need for electricity distribution,
but on the other hand, the export of surplus electricity generated would create
new challenges for distribution businesses requiring the active management
of bidirectional flows of electricity.

The services offered to customers could also change significantly. Rather than
simply selling electricity and gas to households, there is likely to be a shift
in emphasis to “energy services,” namely the long-term provision
of energy-efficient solutions to achieve desired outputs such as warm rooms
and hot water. The energy white paper acknowledged that longer-term contractual
arrangements would allow energy service companies to invest in energy-saving
measures within the home such as insulation and domestic CHP units at no up-front
cost to the customer.

In the future, customers may enter into a single contract for a bundle of services.
While the outcome would be the cost-effective provision of warm rooms, hot
water, and electricity, the services to achieve this could include the financing,
installation, and maintenance of a domestic CHP unit, and the installation
of other energy-saving measures such as insulation, as well as the sale of
electricity and gas. Customers would benefit from a single supplier interface,
reduced energy bills, increased reliability, avoidance of capital investment,
and the transfer of risks such as boiler breakdown.

However, such arrangements would also have significant attractions for suppliers.
Not only would domestic CHP plans be likely to benefit from financial incentives,
as discussed above, they would also benefit from increased rates of customer
retention, brand enhancement, and opportunities for product bundling. Suppliers
may also be able to exploit some trading and arbitrage opportunities as a result
of the generation of surplus electricity. These trading opportunities will
increase significantly as domestic fuel cells, with high power-to-heat ratios
become commercially available.

Barriers and Enablers

Before such a vision can become a reality, a number of institutional and technical
barriers will need to be overcome.

At present, customers have the right to switch suppliers at 28 days’ notice,
so suppliers are unable to enter into long-term contracts with any certainty.
The energy white paper acknowledged this as one of the key barriers to the
successful creation of a market for energy services, and the DTI has set up
a joint working party with the Office of Gas and Electric Markets to establish
how such barriers can be overcome.

In order to fully exploit the potential of domestic CHP, energy companies would
need to have much more information available to them regarding the operation
of their networks and the flows of electricity along them. They would need
to find cost-effective technical solutions that enable them to aggregate and
dispatch electricity remotely, and measure the flow of electricity both into
and out of domestic premises.

The evolution of pervasive devices and nanotechnologies may help companies
to overcome these technical barriers. Traditional instrumentation and control
vendors are pioneering the all-digital sensor. This sensor is self-calibrating
and is self-diagnosing, meaning that it is designed to place a trouble call
to a technician whenever problems are predicted or encountered.

The development of these technologies would have significant implications for
utilities’ asset management functions, allowing them to monitor the condition
of their assets remotely on a real-time basis. However, these technologies
would also enable utilities to transition from the passive management of distribution
systems to the active management of bidirectional distribution flows. Miniature
sensors deployed throughout an entire transmission or distribution network
would give utilities access to data and information previously unavailable
to them. Not only would the real-time energized status of distribution feeders
speed outage restoration, but phase-balancing and line loss would be easier
to manage, helping to improve the overall operation of the distribution feeder
network.

Long-Term Vision

In the longer term, hydrogen-powered fuel cells are likely to become commercially
available.

Iceland has made a commitment to be the first country totally powered by hydrogen
and free of dependence on fossil fuels. Everything from cars, trucks, buses,
power plants, and fishing fleets will use hydrogen as the primary fuel. Already,
automakers and oil giants are steaming toward Iceland’s shore to participate
in realizing this vision.

However, the hydrogen infrastructure that will accompany the advent of fuel
cells isn’t clear yet. The Electric Power Research Institute (EPRI) has
a vision of a continental “supergrid” that delivers electricity
and hydrogen in an integrated energy pipeline. The supergrid would use a high-capacity,
super-conducting power-transmission cable cooled with liquid hydrogen produced
by advanced nuclear plants, with some hydrogen ultimately used in fuel cell
vehicles and generators. However, technologies for producing hydrogen at or
near the point of use are also under development. Recently, New York-based
Plug Power and Honda announced the successful demonstration of their Home Energy
Station, which produces hydrogen from natural gas, and Stuart Energy Systems
of Canada signed a joint cooperation agreement with Statkraft of Norway and
EHN of Spain to consider ways in which its water electrolysis system could
be powered by renewable technologies.

In the old model, the owner of a battery-powered car plugged the car into
a battery charger that represented a fairly large residential load. In
the new
model, the owner of a fuel cell-powered car plugs the car into the home circuitry.
The car then becomes the non-polluting electricity source for the entire
home.