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					INSTITUTIONAL FACTORS AFFECTING
        COMMERCIALIZATION OF FUEL CELLS




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                Institutional Factors Affecting Commercialization of Fuel Cells
                                                1
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                        Institutional Factors Affecting Commercialization of Fuel Cells
                                                        2
INSTITUTIONAL FACTORS AFFECTING COMMERCIALIZATION OF FUEL CELLS


Prepared for
U.S. Department of Housing and Urban Development


Prepared by
NAHB Research Center, Inc.
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December 6, 2000




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                         Institutional Factors Affecting Commercialization of Fuel Cells
                                                         3
Acknowledgements
The principal author of this report was Burt Goldberg with technical and editorial support from Chris Fennell,
Jeannie Leggett Sikora and Joe Wiehagen. A special appreciation is extended to the staff of Energy Partners,
LLC for their support and review.




                     Institutional Factors Affecting Commercialization of Fuel Cells
                                                     4
       CONTENTS


Introduction ............................................................................................................................................................................................. v

Background .............................................................................................................................................................................................. 1
   Evolution of Traditional Electric Utilities ............................................................................................................................................. 1
   Regulation of Utilities ............................................................................................................................................................................ 1
   Period of Transition ............................................................................................................................................................................... 2
   Regulatory Reform ................................................................................................................................................................................ 2
   Deregulation ........................................................................................................................................................................................... 3
   Impact of Deregulation on Distributed Generation ............................................................................................................................... 5
Economic Obstacles to Commercialization .......................................................................................................................................... 6
   Introduction ............................................................................................................................................................................................ 6
   Stand-Alone Distributed Generation ..................................................................................................................................................... 6
   Distributed Generation Connections with Utilities ............................................................................................................................... 7
     Installations on the Customer Side of the Meter ............................................................................................................................... 8
     Installations on the Utility Side of the Meter .................................................................................................................................... 8
   Institutional Obstacles ........................................................................................................................................................................... 9
   Other Options ......................................................................................................................................................................................... 9
     ESPs and ESCOs ................................................................................................................................................................................ 9
     Builder ESPs .................................................................................................................................................................................... 10
   Customer Benefits and Costs ............................................................................................................................................................... 10
     Customer Gross Energy Savings ..................................................................................................................................................... 11
     Operating and Maintenance Costs .................................................................................................................................................. 11
        Fuel Costs ..................................................................................................................................................................................... 11
        Other Operating and Maintenance Costs ..................................................................................................................................... 12
     Installed Cost ................................................................................................................................................................................... 12
   Economic Feasibility of Distributed Generation to Customer ............................................................................................................ 13
     Added Customer Benefits ................................................................................................................................................................. 13
   Utility Benefits and Costs .................................................................................................................................................................... 14




                                       Institutional Factors Affecting Commercialization of Fuel Cells
                                                                       5
Institutional Barriers to Installation of Distributed Generation ..................................................................................................... 25
   System Interfaces ................................................................................................................................................................................. 15
     Grid Interconnection Metering ........................................................................................................................................................ 15
        Dual Metering ............................................................................................................................................................................... 16
        Net Metering ................................................................................................................................................................................. 16
          Benefits of Net Metering ........................................................................................................................................................... 16
          Criticism of Net Metering ......................................................................................................................................................... 16
          Existing Limits on Net Metering ............................................................................................................................................... 16
   Electrical Interconnection .................................................................................................................................................................... 16
     Technical Elements of Interconnection ............................................................................................................................................ 17
        Interconnection Barriers to Distributed Generation ..................................................................................................................... 17
        Solutions Underway ..................................................................................................................................................................... 17
     Interconnection Process and Fees ................................................................................................................................................... 17
     Legal Barriers: Purchase Power Agreements (PPAs) ..................................................................................................................... 18
   Stranded Costs ..................................................................................................................................................................................... 18
   Standby Charges .................................................................................................................................................................................. 19
     Justification for Charges .................................................................................................................................................................. 19
     Opposition to Charges ..................................................................................................................................................................... 19
   Siting and Permits ................................................................................................................................................................................ 20
     General Permitting Issues for Distributed Generation ................................................................................................................... 20
     Permitting Issues for Fuel Cells ...................................................................................................................................................... 21
        Fuel Cell Permitting Advantages .................................................................................................................................................. 21
        Fuel Cell Permitting Obstacles ..................................................................................................................................................... 22
   Permit and Land Development Review Process ................................................................................................................................. 22
   Summary of Permitting Issues and Barriers ....................................................................................................................................... 22
Summary of Findings ............................................................................................................................................................................ 23
   Problems and Opportunities for Fuel Cells in the Existing Market .................................................................................................... 23
   Public Intervention on Behalf of Fuel Cells ........................................................................................................................................ 25
   Prospects for Residential Fuel Cells .................................................................................................................................................... 25
   Builders and the Potential of Micro-grids ........................................................................................................................................... 26
Glossary .................................................................................................................................................................................................. 28




                                       Institutional Factors Affecting Commercialization of Fuel Cells
                                                                       6
INTRODUCTION


Distributed generation (DG) involves the placement and use of small, modular electric generation, either
integrated or stand-alone, close to the point of consumption. Fuel cells are poised to become an important
component of DG in stationary applications involving commercial and residential buildings. Still under
development and in the initial stages of commercialization, fuel cell technology competes with other DG
technologies. These technologies include conventional small gas turbines and internal combustion engines,
renewable energy generators such as photovoltaics (PV) and wind, as well as emerging microturbine
technology. This report seeks to gain an understanding of the institutional and policy issues that provide
barriers or opportunities for the commercialization of DG in general and fuel cells in particular in
buildings. An intial review of the economics and regulatory evolution of stationary generation of electric
power in the United States explains the origin of some of the barriers and opportunities that confront the
commercialization of DG.




                Institutional Factors Affecting Commercialization of Fuel Cells
                                                7
        BACKGROUND


Evolution of Traditional                                           the customer. Receiving and distribution      unit cost of the investments in dollars per
Electric Utilities                                                 substations then stepped-down high-
                                                                   voltage power and fed it to customers
                                                                                                                 kilowatt-hour ($/kW) declined with
                                                                                                                 increasing size of plants. Because of long
                                                                   over local distribution lines.                distances between customers and power
   The initial spread of electric energy                              The monopolistic tendencies of             sources, electric power producers built
occurred in a very open and competitive                            centralized production of power contin-       their own transmission lines. Because
market, with many small utilities vying to                         ued unabated as financial pyramid             they owned the transmission lines, electric
supply energy to a specific customer in a                          schemes resulted in utilities in many areas   power producers allowed no other
given location. For example, at the                                coming under the control of a small           producer to sell energy in their particular
beginning of the nineteenth century,                               number of holding companies. Utility          areas without their permission, exercising
Chicago had almost 50 utilities providing                          holding companies directly or indirectly      monopolistic control over their energy
electric energy in many of the individual                          held 10 percent or more of the outstand-      markets. Producers often made arrange-
neighborhoods of the city.1                                        ing securities of utilities on the public     ments to sell excess energy to other
   Eventually, however, electric utilities                         market. The Public Utility Holding Act        monopolistic companies. This situation
evolved into a highly monopolistic                                 (PUHCA) of 1935 broke up the very large       resulted in the creation of vertically
industry composed of a few hundred                                 trusts that controlled the nation’s gas and   integrated private utility companies that
investor-owned firms. Technical factors                            electric distribution networks. Conse-        directly owned and operated generation,
were principal contributors to this change.                        quently, during the late 1930s and early      transmission, and distribution of
The introduction of more efficient, big                            1940s, utilities underwent a major            electric energy.
steam turbines and electric generators led                         restructuring to prevent further exploita-
to the construction of large, electric                             tion of utilities and ratepayers by large
generation stations. The adoption of                               holding companies.
alternating current instead of direct                                 Concurrently, in the period from 1930
                                                                                                                 Regulation of Utilities
current allowed transformers to step-up                            to mid-1970, major advancements in
power from the central plant for long-                             technology, together with economic              The public sanctioned investor-owned
distance transmission of electric current                          factors and high electricity demand           utilities’ monopoly status through a
over high voltage overhead lines without                           fostered continued growth of larger           regulated system of profit, electricity
experiencing significant losses. High                              centralized power plants. At that time,       prices, and production encouraged
voltage transmission permitted location of                         economies of scale offset large invest-       investment in large centralized power
centralized power stations distant from                            ments in big electric generators, since the

1
    Dufour, Angelo U., “Fuel Cells – a new contributor to stationary power,” Journal of Power Sources, Vol. 71, (1998). p. 20.




                                 Institutional Factors Affecting Commercialization of Fuel Cells
                                                                 8
plants. Most utilities’ rate of return was             monopolistic power of utilities and                              cautious in their estimate of future          from QFs at the utility’s cost of producing
regulated under a cost-of-service (COS)                confronted them with contentious issues                          electricity usage and to forestall invest-    that power – known as avoided cost.
approach. The COS approach guaranteed                  related to their investment in costly                            ment in new generating plants. Also,          Avoided cost is equivalent to the utility’s
utilities’ rates of return based on their              nuclear power plants, storage of nuclear                         during this period, utility economics         cost of providing power, which is much
“prudent” investment in plant and                      waste, and the pollution generated by                            began to favor economies of mass              lower than the retail rate they normally
equipment, their so-called rate bases.                 fossil-fuel power plants. Pollution control                      production over economies of scale.           charge customers.
Investment in large power plants, trans-               devices required large amounts of money,                         Technological advances in the aircraft           Some QFs were so-called Small Power
mission and distribution facilities contrib-           which could only be offset by increasing                         industry fostered high volume fabrication     Producers (SPPs) that were required to
uted to larger rate bases, which resulted in           the cost of energy to the consumer.                              of gas turbines driving down their cost       generate at least 75 percent of their power
greater profits. This encouraged utilities             Obtaining regulatory approval for large-                         and improving their performance. As a         from renewable resources such as PV.
to over-invest in their system despite                 scale power stations or rights-of-way for                        result of the increased efficiency and        Many QFs, however, were industrial
regulators’ efforts to require that they               high-tension power lines was becoming                            lower cost of smaller, reciprocating gas      cogeneration projects that provided
invest prudently. At the same time,                    increasingly difficult. The visual effects of                    engines and gas turbine technologies,         combined heat and power (CHP),
regulations allowed thirty-year deprecia-              high-tension power lines and substations                         distributed generation (DG) began to          typically large, custom facilities ranging
tion schedules on power plants which                   as well as controversy over the biological                       emerge with the potential to become           in size from five to 50 MW.3 Cogenera-
encouraged utilities to hold on to outdated            effect of electromagnetic fields led to                          competitive with large central power          tion is an efficient process that generates
investments in large centralized power                 public resistance to expansion, which still                      stations.                                     steam and electric power from the same
plants and discouraged cost-saving                     exists today. Consequently, it was and                                                                         energy source. For example, waste heat
innovation when adding new capacity. A                 still is extremely expensive and can take                                                                      from turbine exhaust gases that normally
few utilities adopted performance-based                years of design, approval, and installation                                                                    is released into the atmosphere in conven-
ratemaking (PBR), which takes into                     to build a traditional central plant                             Regulatory Reform                             tional plants is efficiently recovered to
consideration fixed and variable costs in              generation, transmission, and distribution                                                                     generate large volumes of steam. The
determining revenues, but often incorpo-               capacity. Because of increasing public                             Partly a result of these issues, increas-   steam, in turn, is used to provide space or
rating caps on price or revenue. Under                 concern over the cost of energy, a number                        ing energy prices, and a relatively           process heat before being changed back to
the PBR approach, utilities had a stronger             of states required public programs to                            stagnant electric utility generating          water and reused. The generation of two
incentive to reduce costs rather than                  foster research, energy conservation, and                        capacity, the U.S. Congress passed a          energy products from one fuel input
invest to obtain profits.                              affordable energy prices for the poor.                           number of regulatory reforms. The Public      generally lowers the cost of providing
                                                          At the same time, despite the increasing                      Utilities Regulatory Act (PURPA) in 1978      both energy products.
                                                       use and application of electricity, a                            established a precedent for establishing
                                                                                                                                                                         The use of cogeneration and renewable
                                                       serious energy crisis spurred greater                            grid connections with nonutility, indepen-
Period of Transition                                   efficiencies in electric appliances and                          dent power producers (IPPs). PURPA
                                                                                                                                                                      energy sources by private entities inde-
                                                                                                                                                                      pendent from utility power plants pro-
                                                       consumer energy consumption, lowering                            granted special rights to sell power under
                                                                                                                                                                      vided an excellent laboratory to resolve
   During the 1970s, energy prices began               electricity’s rate of growth.2 Conse-                            protected contracts to so-called Qualify-
                                                                                                                                                                      the issues involved in interface with the
to rise due to constraints on the availabil-           quently, utilities found themselves with                         ing Facilities (QFs) that met certain
                                                                                                                                                                      grid, especially as they apply to net
ity of fuel resources and a number of                  large investments in expensive plants                            requirements in regard to operation,
                                                                                                                                                                      metering (see discussion below). It
environmental issues. Over time, the                   operating less efficiently below full                            efficiency, fuel, size, and ownership.
                                                                                                                                                                      opened utilities to partial competition and
public became more concerned with the                  capacity. This forced utilities to be more                       Also, utilities were required to buy power

2
  From 1978 to 1997, the increase in the number, size of housing units, and proportion of larger housing units in the United States resulted in an increase in the percentage of all residential energy provided by
electricity from 23 to 35 percent. Despite this rise, in the same period, total residential energy consumption in millions of Btus per household decreased by 27 percent. All of the decrease occurred in the 1978-1987
period, with Btu consumption unchanged since then. From U.S. Department of Energy, Energy Information Agency, Residential Energy Consumption Survey – Two Decades.
3
  Ibid., p.13.




                                                                                      Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                      9
established a precedent for the use of DG.          access to the national transmission                             (CAEM) published a national Retail               To develop a competitive market for
It forced utilities to compare the costs of         system. In the absence of a national law                        Energy Deregulation (RED) Index that          power, utility generating assets are being
independently produced energy with costs            detailing a schedule for restructuring,                         measured the progress that individual         separated from distribution and transmis-
of building new centralized power plants.           most of the initiative for establishing                         states made as of 1999 in moving from         sion. Although the transition has been
Also, deregulation of natural gas lowered           retail choice has devolved to the states.                       the monopoly model of public utility          slow, some progress has been made. In
prices of gas an important fuel source for          The Federal Energy Regulatory                                   regulation to the competitive model.5         1998, 239 investor-owned utilities (IOUs)
turbines and fuel cells. By the 1990s,              Commission’s (FERC’s) order 888 in                              Only a few states— in ranking order           comprised only about eight percent of the
expectations in regard to future long-term          1996 provided guidelines designed to                            Pennsylvania, New York, Nevada,               more than 3,000 utilities regulated under
demand changed and electricity consump-             encourage wholesale competition. By                             Maryland, Maine and Massachusetts—            the U.S. Code of Federal Regulations, but
tion was forecast to grow faster than               September, 2000, 25 states including                            scored above 50 on a scale of 0 (no           comprised 73 percent of the generating
originally projected. Many industrial               Arizona, Arkansas, California, Connecti-                        progress) to 100 (completely                  capacity of all utilities and 75 percent of
consumers noted trends of competitive               cut, Delaware, District of Columbia,                            competitive).                                 all utility electricity sales.6 The federal
marketing in other regulated industries,            Illinois, Maine, Maryland, Massachusetts,                          Some states are adopting a wait-and-see    government, local public jurisdictions,
and wanted to select electrical suppliers           Michigan, Montana, Nevada, New                                  attitude, expecting to learn from the         and cooperatives own the other utilities.
that would meet their requirements                  Hampshire, New Jersey, New Mexico,                              progress and mistakes of so-called “early     Prior to deregulation, IOUs were verti-
economically, reliably, and efficiently.            Ohio, Oklahoma, Oregon, Pennsylvania,                           adopters” of deregulation, while others       cally integrated utilities owning genera-
Moreover, consumers began to chafe at               Rhode Island, Texas, Virginia, and West                         fear that relatively low electricity rates    tion, transmission and distribution assets.
the large regional variations in electricity        Virginia had passed legislation establish-                      may rise if deregulation is implemented.      From 1997 to September 1999, however,
prices. Consequently, these issues led to           ing retail competition.4 The public utility                     Indeed California, the first state to         51 IOUs or 32 percent of all IOUs owning
passage of the Energy Policy Act                    commission in New York issued a                                 address deregulation when the California      generating capacity in the United States
(EPACT) of 1992, which instituted                   comprehensive regulatory order introduc-                        Public Utility Commission issued its          divested or were in the process of
deregulation, setting in motion fundamen-           ing retail competition. Legislation is                          proposal to radically restructure its         divesting 17 percent of the total U.S.
tal changes to the structure of the electric        pending in Alaska and South Carolina.                           electricity markets in April 1994, did not    electric utility capacity.7
utility industry.                                   States that have obtained consensus with                        implement deregulation until March 1998          During the transition, as of 1998,
                                                    stakeholders on how stranded costs (the                         after two years of debate and appears to      regulated vertically-integrated utilities
                                                    values of assets, which are no longer                           have encountered some problems. It’s          that generate, transmit, and distribute
                                                    economic as a result of deregulation)                           rated only 11th in the nation by the RED      power comprised only about 59 percent of
Deregulation                                        should be determined and who should pay                         index. Clearly, the nation is in transition   all 239 IOUs. They exist together with
                                                    for them have a good chance of success in                       in implementing deregulation, since the       IOUs that only generate and distribute
  The 1992 EPACT provided the broad                 implementing deregulation.                                      average index for the nation, as a whole in   power (DisCos), comprising 11 percent of
framework for breaking up the utility                  Progress in the implementation of state                      1999 was only 18, while the median was 7      all IOUs, and wires companies that only
monopoly, unbundling ownership of                   acts, however, has been slow. Like other                        (out of 100). Consequently, a variety of      own and operate distribution lines, about
power generation, transmission, and                 state rating systems, the rating of state                       organizations, including those still          14 percent of all IOUs. In some case,
distribution into separate entities. At the         progress in regard deregulation has its                         regulated under the old system and those      affiliates or subsidiaries of IOUs own and
same time it set the stage for creating a           critics. Despite criticisms, the Center for                     that are emerging under the new system        operate transmission companies, about
more competitive wholesale market for               the Advancement of Energy Markets                               exist to install or service DG in homes.      three percent of all IOUs (See Table 1).
power by giving buyers and sellers open

4
  Energy Information Agency, U.S. Department of Energy, “Status of the Electric Power Industry: Industry Restructuring Activity as of September 2000.”p.1.
5
  Center for the Advancement of Energy Markets, RED Index 2000, http://www.caem.org/red_index_2000.htm, 1999, updated March 14, 2000.
6
  Energy Information Agency, U.S. Department of Energy, “Electric Power Industry,” January 2000, pp.1-11.
7
  Energy Information Agency, U.S. Department of Energy, “The Changing Structure of the Electric Power Industry1999: Mergers and Other Corporate Combinations,” December 1999, Chapter 6, p.1.




                                                                                  Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                 10
   Wires-only companies or DisCos step-
down power from high voltage transmis-                      Functions                                                    IOUs                                 Other Utilities*                                      Total                                   Non-Utilities**
sion lines over local distribution lines                    Vertically Integrated                         No.                    % Total                No.                    % Total                No.                    % Total                No.                    % Total
(wires) for distribution to final customers
and energy service providers (ESPs) or                      Generate & Transmit, Only                    140                    58.6                    155                    4.6                    295                    8.2
energy service companies (ESCOs) (see
discussion below). Wires-only companies                     Transmit & Distribute, Only                  10                      4.2                    79                     2.3                    89                     2.5
charge customers for use of distribution                    Generate & Distribute, Only                  6                       2.5                    133                    3.9                    139                    3.9
lines. In addition to performing distribu-
tion functions wires-only companies also                    Generate Only                                 25                     10.5                   428                    12.7                   453                    12.6                   1,930                  100.0
sell electricity to end-use customers. So-
called nonutility or independent power                      Transmit Only                                 11                     4.6                    13                     0.4                    24                     6.7
producers (IPPs) also sell power at                         Distribute Only                              7                       2.9                    27                     0.8                    34                     9.4
wholesale prices to vertically integrated
utilities, DisCos, or energy service                        Other                                         34                     14.2                   2,522                  74.9                   2,556                  70.9
providers such as ESPs and ESCOs.
                                                            Total                                         239                    2.5                    10                     2.9                    16                     0.4
   In 1998, about 400 ESPs or ESCOs–
new classes of power marketers–sold                         Power Marketers                               400                    100.0                  3,367                  100.0                  3,606                  100.0                  1,930                  100.0
electricity and provided ancillary energy
services to end use customers. Such                         *Publicly Owned (2,009), Federally Owned (10), Cooperatively Owned (912) ** Cogenerators (QF or Non-QF), QF Small Power Producers, non-QF other or independent power producers (IPPs)
                                                            Source: Energy Information Agency, U.S. Department of Energy, The Changing Structure of the Electric Power Industry 1999: Mergers and Other Corporate Combinations, Chapter 2,Organizational Components of the Electric
services can include energy project                         Power Industry.
development and operation, management
of energy facilities, risk management, and
financing. As market makers for distrib-                                                           Table 1: Investor-Owned Utilities (IOUs), Other Utilities, and Non-Utilities by Function, 1999
uted generation they can provide these
functions from either the system or                      ISOs are regional entities subscribed to by                                   methods. They are also charged with                                          ity of the grid.
customer side of the meter. At the option                collaborating utilities, but authorized                                       ensuring the short-term reliability of grid
of customers, ESPs and ESCOs may                                                                                                                                                                                       As of March 31,1998, only four ISOs,
                                                         under State legislation and approved by                                       operations by making planning decisions                                      California, New England, Pennsylvania,
charge for other ancillary services such as              FERC. ISOs manage and operate the                                             in regard to peak power requirements,
assuring power reliability, providing                                                                                                                                                                               New Jersey, and the Electric Reliability
                                                         transmission grid owned by one or more                                        implementing emergency power pro-                                            Council of Texas had started operation of
emergency back up power, and offering                    electric generation companies. They are                                       grams, and defining and valuing ancillary
demand side management (DSM).                                                                                                                                                                                       ISOs, while seven others are in the
                                                         designed to assure equitable access to the                                    services. In this regard, they must comply                                   planning stages.8 The Midwest ISO has
   To aid in assuring equal access to                    transmission grid. It is the intention that                                   with relevant standards set by the North                                     an application pending with FERC, while
wholesale markets, FERC Order 888                        ISOs also should improve the operating                                        American Electric Reliability Council                                        no ISO has been proposed for the South.
enunciated principles for the formation of               efficiency by creating uniform transmis-                                      (NERC), which was created in 1968 as a                                       Although ISOs have some momentum,
Independent System Operators (ISOs).                     sion rates and providing market-oriented                                      result of the large Northeast and Canada                                     utility participation is fragmented, and
                                                         approaches to more efficient pricing                                          blackout, to assure the long-term reliabil-
8
  Energy Information Agency, “The Changing Structure of the Electric Power Industry: Selected Issues, 1998, Executive Summary,” pp. 2 –3.
9
  Dynegy, Inc., traditionally a seller of natural gas liquids, now obtains more than half its earnings from selling natural gas and electricity in the deregulated market. It acquired the electric utility Illinova, Inc., in
February 2000. Federal regulators wanted Illinova’s transmission facilities, serving 650,000 gas and electric customers in Illinois, to be controlled by neutral entities. Consequently, Illinova planned to have Dynegy
remain as part of a non-profit Midwest Independent System Operator (ISO). Dynegy, however, wants Illinova’s network of high-voltage transmission lines and substations transferred to a for-profit transmission
company.



                                                                                                   Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                                  11
many disputes regarding ISO decisions                                                                                                                           • “ESPs are interested in installing DG
remain unresolved.9                                                                                                                                               and DSM on the customer side of the
                                                          “Deregulation, now underway in half the country and functioning nationally                              meter. This includes self-generation
  In summary, the following components                    at the wholesale level, allows new players – some affiliated with utilities,
are embedded in retail electricity prices                                                                                                                         service, microgeneration, dispatchable
                                                          some not – to build power plants and sell electricity. Prices are supposed to                           load management, and energy effi-
charged by DisCos, wires companies or                     be set by competitive markets. Risks are borne by investors not ratepayers.
ESPs:                                                                                                                                                             ciency improvements.
                                                          At the same time, utilities are surrendering control of long haul transmission                        • ESPs are also interested in connecting
• sale charges consist of negotiated                      lines to new nonprofit operators, …which are supposed to ensure fair access                             DG to the system side of the distribu-
  wholesale price for power plus margin;                  to the grid—the multistate system of high voltage lines. Under this new                                 tion system to provide direct access
• charges imposed for use of transmission                 regime, energy prices should have dropped as companies raced to compete                                 energy and ancillary services. Such DG
  lines regulated by ISOs, which can                      with one another. But the massive U.S. energy infrastructure wasn’t designed                            technologies include gas turbines, fuel
  include a reasonable margin as deter-                   to serve as the backbone of a free market. On hot summer days, when there’s                             cells, reciprocating engines, photovolta-
  mined by the ISO when the transmis-                     little or no surplus electricity in the nation’s most populous regions, genera-                         ics, and storage.
  sion line is owned and operated by                      tors can charge prices far in excess of their production costs and be confident                       • Electric distribution companies are
  utility;                                                they’ll be tapped for service by grid operators who must keep the lights on at                          exploring or have begun using DG such
• wire charges for use of local distribu-                 any cost. Utility holding companies that still control transmission lines have                          as gas turbines or flywheel storage on
  tion wires plus margin; and                             an added advantage: They can effectively lock out cheaper competitors. The                              T&D [Transmission and Distribution]
• transition costs (see discussion below)                 new regional grid operators, called independent system operators or ISOs,                               site (such as substations and distribu-
  incurred by the utility for assets made                 eventually will be in charge of preventing manipulation. But as nongovern-                              tion poles) or on customer sites, as a
  obsolete or redundant by deregula-                      mental organizations, they won’t have the basic investigative tools, like                               substitute for T&D expansion, to serve
  tion.10                                                 subpoena powers or the ability to impose significant penalties. FERC, which                             congested areas, to provide reliability
  In addition to the existing IPPs that                   does have those powers, rarely uses them, preferring to let the market                                  and other ancillary services, and to
generate energy from CHP and renewable                    discipline itself.”                                                                                     avert bypass. Distribution companies
resources such as PV under PURPA,                                                                                                                                 are also interested in DSM measures for
                                                          Rebecca Smith, “Power Deregulation Opens New Lines to Profit,” Wall
FERC Order 888 provided opportunities                                                                                                                             these reasons.
                                                          Street Journal, August 4, 2000
for the use of bulk power transmission                                                                                                                          • Nationally, electric utility affiliates are
grid to suppliers other than utilities, such                                                                                                                      exploring installing distributed genera-
as independent large conventional power                                                                                                                           tion such as gas turbines on customer
generators as well as DG energy provid-              amount of the nation’s total energy                             Impact of Deregulation on                    sites as an alternative to T&D expan-
                                                     generation, about seven percent.11 By
ers. These new nonutility IPPs can sell
                                                     1998, however, the nonutility share of                          Distributed Generation                       sion, bypass or loss of sales to compet-
power to distributors, who make use of                                                                                                                            ing ESPs.
third parties’ grids between the IPP                 total industry capacity rose to 12 percent,
                                                                                                                        In view of these trends, some expect    • Some gas distribution companies or
energy production sites and the final                while the number of IOUs decreased by
                                                                                                                     strong interest among ESPs, distribution     affiliates are exploring offering distrib-
customers. The ISOs ensure that owners               nearly eight percent and their (nameplate)
                                                                                                                     companies, and manufacturers in DG and       uted generation such as gas turbines on
of the transmission lines provide IPPs               capacity decreased by five percent,
                                                                                                                     see increase in DG based on the follow-      customer sites as a competitive alterna-
equitable access to the grid. In 1993,               largely through divestitures of generation
                                                                                                                     ing:13                                       tive to service through the electric
IPPs generated a small, but significant              facilities as a result of deregulation.12
                                                                                                                                                                  distribution system.

10
   Gas Research Institute, The Role of Distributed Generation in Competitive Energy Markets, Distributed Energy Forum, March 1999, p. 11.
11
   Op.Cit., Dufour, p.21.
12
   Op.Cit., “Changing Structure of the Electric Power Industry 1999: Mergers and Other Corporate Combinations,” Chapter 6, p. 6.
13
   Letter to Richard Bilas, president, California Energy Commission, June 5, 1998, p.3.




                                                                                   Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                  12
• Makers of DG hardware seek to sell it
   to ESPs, end users and distribution
   companies.”
                                                              ECONOMIC OBSTACLES TO COMMERCIALIZATION
   Empowerment of IPPs and DG energy
providers, however, does not guarantee
implementation and many of these options
will be examined below.
                                                        Introduction                                                     • Will DG help builders market new               the utility infrastructure is not used
   Under the new competitive market                                                                                        homes?                                         at all.
conditions, previous state regulations that                Barriers to commercialization of fuel                         • How will DG impact builders’ costs of        • In another variant, DG is installed at the
required utilities to administer public                 cells occur at two levels. The discussion                          construction?                                  customer’s site with no connection to
interest programs such as research and                  that follows focuses on the basic eco-                                                                            the utility and is only used as backup
development, energy conservation,                       nomic and institutional obstacles common                                                                          supply, should utility power fail or not
support for renewables, and social
programs are no longer required. In the
                                                        to DG in residential markets and, there-
                                                        fore, also apply to fuel cells. These
                                                                                                                         Stand-Alone                                      be able to meet peak demand. Custom-
                                                                                                                                                                          ers often install small, low-cost DG
new competitive market, electric power is               barriers are addressed before considering,                       Distributed Generation                           such as diesel gas generators to provide
a commodity product. Producers can                      in another report, a second, more detailed                                                                        this kind of power. This type of DG
therefore avoid risks in the marketplace                level of barriers, based on technical                              One option is to install DG on a               probably accounts for a substantial
by focusing on low cost, reducing the                   attributes of fuel cells as they affect                          customer’s site at the customer’s side of        portion of DG in use today. In certain
level of capital investment, and providing              economics in competition with other                              the meter as a stand-alone source of             geographical areas where power
for short lead times when adding capacity.              distributed sources of energy.                                   power independent of the power grid.             capacity is constrained, utilities may
Many states are evaluating new mecha-                                                                                    This option is quite popular accounting          offer the customer incentives for the use
nisms to maintain these programs.                          Builders are key decision-makers in
                                                        commercialization of innovative products                         for a substantial portion of DG that exists      of this type of DG under conditions of
   Under deregulation, IPPs providing DG                in the residential segment of the construc-                      today. Since the decision to install and         peak demand, because it relieves load
based on emerging, energy efficient fuel                tion industry.14 The discussion therefore                        use DG is entirely up to the customer, it        on the system thereby preventing
cells, existing renewable energy re-                    considers their points of view, organized                        apparently encounters little in the way of       “brown-outs” or power outages.
sources, or gas turbines can offer eco-                 around the basic question: “Why should                           institutional obstacles. Three general         • In another alternative, customers install
nomic benefits that have the potential to               builders consider DG in a new homes or                           variations of this option are possible:          DG with no feedback connection to the
reduce market risks for producers and                   subdivisions?” This fundamental ques-                            • In one variation, DG provides all              utility, but DG supplies all or substan-
DisCos. Deregulation, however, is a work                tion leads to related, more specific                               customer requirements for power                tial portion of energy demand and the
in progress and, as will be discussed                   questions builders are likely to ask:                              (baseload), generating power alone or          customer uses the utility only in
below, many economic and institutional                                                                                     through CHP. This is a very practical          emergencies when DG fails to provide
issues in regard to fuel cells as a form of             • Where or at what point in the system
                                                           will DG be installed?                                           alternative in rural locations where no        power. Certain industrial or institu-
DG in a deregulated environment remain                                                                                     power distribution lines exist and where       tional users that place a high value on
to be resolved.                                         • Who will install and pay for DG?
                                                        • How does DG benefit potential                                    the cost of connection from the nearest        power reliability may find it economical
                                                           customers?                                                      utility would be prohibitive. In this case     to make a substantial investment in DG,
                                                                                                                                                                          especially in geographic areas with

14
     NAHB Research Center, Diffusion of Innovation in the Housing Industry, report prepared for the U.S. Department of Energy, November 1989.




                                                                                       Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                      13
  frequent power outages. Small losses                                                                                                                              for the excess energy it might produce, it
  of power, even though intermittent, can                                                                                                                           is more difficult to economically justify
  cause substantial economic loss for                        “Oracle Corp., for one isn’t taking any chances. Shaken by the huge power                              DG stand-alone options. Moreover, the
  certain industries that, therefore, require                failure in August 1996, the big software company has spent more than $6                                cumulative impact of a large shift to DG
  an uninterruptible source of power. If a                   million to build its own electrical bunker, completed with a substation and                            using natural gas as a source of power
  number of large customers turn to DG                       generators capable of supplying thousands of servers with electricity at its                           may cause pollution problems, resulting
  for all of their power, however, some                      headquarters in Redwood Shores, Calif. While giant manufacturers have                                  in Environmental Protection Agency
  problems may occur. If, for any reason,                    done this for decades, other commercial users are starting to follow suit.                             (EPA) restrictions that thwart further
  one large customer or a number of                          “What’s the self-sufficiency worth to us?” asks Jeffrey Byron, Oracle’s energy                         expansion. Fuel cells, because of their
  customers have to return to the grid for                   director. “Millions of dollars per hour. It’s so important, you almost can’t                           low emissions, may have an advantage in
  all their power needs, a large surge in                    calculate the value, to us and our customers.” The problem facing Oracle                               this regard, but at present it remains a
  power demand may disrupt the grid.                         and others isn’t likely to go away soon. The incomplete nature of deregula-                            high-cost alternative.
  Also, if a significant number of large                     tion has produced planning paralysis that could have long term conse-
  customers rely on DG in a given area                       quences. Old-line utilities shied away from adding capacity, worried they
  they would not generate sufficient                         wouldn’t be able to rcoup their investments in a truly competitive energy
  revenue for the utility or distribution                    market. Independent generators, who were supposed to fill the need, mainly                             Distributed Generation
  company to maintain and service the                        held back held back until they could figure out which markets would be most
                                                             lucrative. Regulators, who were often confused as to whether they should be
                                                                                                                                                                    Connections with Utilities
  grid.
                                                             enforcing the old rules or help tear them down, let things slide.”
  Stand-alone DG is likely to continue to                                                                                                                              Connecting DG with utilities presents
increase. For the most part DG demand                        Rebecca Smith, “New Rules, Demands Put Dangerous Strain on Electricity                                 an entirely different set of options and
for emergency purposes is for smaller,                       Supply,” Wall Street Journal, May11                                                                    numerous economic and institutional
low-cost generating technologies. In                                                                                                                                challenges that are a subject of the
addition, the present market appears                                                                                                                                remainder of this report. Advantages in
favorable to this type of DG, especially if               There is some concern, however,                               growth in the next two years.” 15 The       connecting DG with the utilities are the
price of power escalates and reliability                whether the current window of opportu-                          drop in capacity margins from projected     ability to use all the energy that DG is
continues to decline because of capacity                nity for DG that results from inadequate                        levels over the last three years has been   capable of producing and at the same time
constraints. Installation is more likely to             utility reserves and contributes to poor                        “disconcerting,” but if the additional      such use provides revenue that helps to
occur, however, in commercial buildings                 reliability will last, especially if existing                   capacity comes on-line during the next 18   make DG economically feasible.
than in residential buildings. If stand-                planned capacity comes on-line and                              to 24 months and NERC demand projec-           Connecting DG to the electric grid is
alone DG is installed in residential                    deregulation stabilizes. According to the                       tions hold, the margins will stabilize.16   likely to involve other major players such
buildings, it will most likely function as              NERC, “plans have been announced for                            However, if demand grows at the historic    as builders, utilities, and other parties as
back-up power for existing homeowners                   construction of about 51,600 MW                                 growth rate of 2.6 percent, capacity        well as the customer. DG is likely to be
who see it as a solution to frequent power              merchant generation by the end of 2001.                         margins could drop by another four          installed:
outages in their areas. Installers will have            By the summer of 2001, demand is                                percent.                                    • At DisCo sites such as substations or
to comply with local building codes and                 projected to grow by 27,500 MW. More                               Also, since DG is unable to receive         power poles – In this case DG is used
permitting procedures.                                  than half of the announced generation will                      economic return from a connecting utility      as part of the utility infrastructure near
                                                        be needed to keep pace with demand
15
     North American Electricity Reliability Council, “Reliability Assessment, 1999-2008.” May 2000, p.6
16
     Ibid., pp.9-11.




                                                                                      Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                     14
   the point of use. DG may service a                   on the customer’s side of the meter. If a                       costs related to secondary distribution         and the incentives for customer-side
   group of homes in residential develop-               vertically integrated utility producing                         lines if the DG is installed on the utility     installation.
   ments ranging in size from a few homes               electricity at some remote location or                          side of the meter.
   to hundreds of homes.                                wires-only company is unlikely to install                                                                     Installations on the Utility Side
• At the utility- or system-side of the                 DG on the customer’s side of the meter,                         Installations on the Customer Side            of the Meter
   meter at the individual customer’s home              the decision to install DG on the customer
• At the individual customer’s home on                  side of the meter becomes an option for                         of the Meter                                     Installations on the utility side of the
   the customer’s side of the meter, either:            the ESP, builder, or the prospective                              Economic and institutional obstacles        meter are of interest to manufacturers of
   • providing the entire home’s electrical             homeowner. In considering such an                               deter DisCos or vertically integrated         DG because utility-side installations
      demand using the connection to                    option, the builder will have additional                        utilities and wires-only companies from       could provide an important market for
      electric utility grid only as back-up             concerns regarding the economic feasibil-                       installing DG on the customer side of the     DG and could be instrumental in facilitat-
      supply to the fuel cell, if the fuel cell         ity and benefits of DG that might accrue                        meter because:                                ing DG’s commercialization. Such
      should fail, or                                   to the builder or homeowner and who will                                                                      utility-side installations will depend on
                                                                                                                        • Customer-side DG decreases metered          the adequacy of utility’s generating or
   • supplying only a portion of the                    be responsible for installation and                               energy demand, thereby reducing utility
      home’s electrical demand with the                 maintenance of the DG.                                                                                        transmission and distribution (T&D)
                                                                                                                          revenues and profits and therefore is an    capacity to accommodate downstream
      remaining demand serviced by the                     A variety of entities exist that can                           unlikely option for a vertically inte-
      electric utility system.                                                                                                                                        peak loads in areas where builders are
                                                        install DG for builders:                                          grated DisCo or other utility.              erecting new homes. With no constraints
   DG located at the utility side of the                • DisCos, that own generation and                               • A wires-only company, for example,          on T & D capacity, the utility has ad-
meter either at the substation or at the                   distribution;                                                  delivers but does not generate or sell      equate capacity and can use existing
customer’s location is not likely to be of              • Wires-only companies that own only                              energy. It is responsible, however, for     infrastructure by only increasing variable
concern to builders, since the utility bears               distribution assets and do not generate                        metering a customer’s retail power          operating costs (such as fuel costs) to
the cost of installation. It is assumed that               electricity, but charge for the delivery                       consumption and using the measured          increase generation. When constraints
if a utility makes the decision that DG is                 of electricity to customers;                                   consumption as a basis for its delivery     exist, however, the capacity of utility
the most economical solution to expand-                 • ESPs and ESCOs that sell retail                                 charges. DG installed on the                infrastructure is inadequate to accommo-
ing power to homeowners, it will ulti-                     electricity and other energy-related                           customer’s side of the meter will reduce    date increased demand, requiring invest-
mately benefit and make economic sense                     services to customers; and                                     the customer’s metered energy and           ment in the fixed cost of physical facili-
to homeowners as well. The builder will                 • Manufacturers’ distributors, qualified                          therefore the wires company’s charges       ties in addition to the necessary increase
want to be convinced, however, that a                      retailers or dealers, or other certified                       for the use of wires. Consequently, a       in operating costs.
utility or other provider installing DG on                 installers in the private sector.                              wires-only company is unlikely to be
the system side of the meter at the                                                                                       motivated to install DG on the                 Whether a vertically integrated utility
customer’s site will not add to construc-                  According to a general model that uses                                                                     or DisCo finds it economically feasible to
                                                        industry available data with supporting                           customer’s side of the meter.
tion costs, impose health and safety                                                                                    • Both utilities and wires-only companies     install DG at a new home at the utility
                                                        assumptions, a typical DG system                                                                              side of the meter depends on the extent
hazards to customer, and will properly                                                                                    are more likely to install DG on the
install, maintain, and service DG.                      produces power at a cost of between                                                                           and type of capacity related constraints
                                                        $0.07 and $0.15 per kWh.17 The range                              customer-side of the meter if they are
                                                                                                                          allowed to charge for the energy it         that exist in the utility’s system
   These same builder concerns apply to                 reflects variations in the fixed cost of                                                                      (See Table 2):
installation of DG at the customer’s site               particular DG technologies as well as any                         produces. However, this would reduce
                                                                                                                          the benefits of DG to the homeowner         • Installation of DG at the utility side of

17
     Arthur D. Little, Distributed Generation: Understanding the Economics, An Arthur D. Little White Paper, 1999.




                                                                                      Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                     15
  the meter at builders’ new home                                                                                                                                                           builder is constructing new homes is
  locations may be feasible if inadequate        “San Diego is a good illustration of how deregulation isn’t working out as                                                                 inadequate, estimates indicate that the
  utility capacity exists for both genera-       expected. The flourishing city, home to cell-phone suppler Qualcomm Inc. and                                                               added fixed cost of extending T&D
  tion and T&D or T&D alone. In such             a slew of other high tech firms, doesn’t have enough local generating plants to                                                            would be about the same as installing
  cases, the utility’s added fixed and           meet its growing needs. It also is poorly connected to plants elsewhere in the                                                             DG. As a result, it may be cost
  variable costs to provide both genera-         region. The transmission lines simply aren’t numerous enough to allow San                                                                  effective to install DG.
  tion and T&D or T&D alone would be             Diego Gas & Electric Co., a unit of Sempra Energy, Inc., to import enough
  comparable to or exceed the costs of           juice, according to California Independent System Operator, a nonprofit
  installing DG, making a DG option at           corporation that manages the state’s electric grid. That leaves San Diego                                                                Institutional Obstacles
  the utility side of the meter competitive.     dependent on the two existing generators, Dynegy Inc. and Duke Energy Corp.
• If only the utility’s generation capacity      that recently bought the plants from San Diego Gas & Electric. More plants are                                                              Even in situations where utility-side DG
  is constrained, the estimated fixed and        needed, but many generators want a special price zone set up before they will                                                            is economically feasible, however,
  operating cost of adding new central           build within San Diego, because its transmission problems limits their ability to                                                        vertically integrated utilities or DisCos
  generation capacity would be less than         sell power outside the area. Economists believe, however, that such a small                                                              might still prefer to invest in additions to
  the cost of DG and the utility would be        market wouldn’t have enough bidders to produce competitive prices, says                                                                  existing T&D rather than DG under the
  unlikely to install DG.                        Severin Borenstein, director of the University of California Energy Institute at                                                         cost of service (COS) method of pricing
• The estimated added operating expense          Berkley. Because demand for energy isn’t as sensitive to price as most com-                                                              permitted by regulations. The larger
  for generation and T&D to meet                 modities, generators could raise prices by almost 30-fold whenever demand                                                                investments in existing facilities under
  increased demand when the utility has          peaks, while staying within a statewide price cap.”                                                                                      this costing procedure offer greater profits
  no capacity constraints, would also be                                                                                                                                                  in the long term. Also, a major aim of
                                                 Rebecca Smith, “New Rules, Demands Put Dangerous Strain On Electricity                                                                   deregulation is to break up the utility
  less than the DG installation, thereby         Supply,” Wall Street Journal, May 11, 2000
  deterring the utility from installing DG.                                                                                                                                               monopoly by separating the generation of
                                                                                                                                                                                          power from its transmission and distribu-
  Wires-only companies are not con-                                                                                                                                                       tion. DisCos would be in a good position
cerned with generation capacity, but the                                                                                                                                                  to determine when and where T&D
following situations in regard to T&D                                                                   Range of Utility Cost ($/kWh) to Meet New Demand
                                                                                                                  under Alternative Constraints                                           capacity is needed. Many stakeholders,
capacity constraints affect installation of                                                                                                                                               however, view any decision by DisCos to
DG at a new home at the utility side of the    Stakeholders                                 Generation + T&D Generation Only                           T&D Only          No Constraints
                                                                                                                                                                                          install DG on the utility side of the meter
meter (see Table 2):                                                                                                                                                                      as anti-competitive, since they would be
                                               Vertically Integrated Utility                .09 to .22                     .04 to .07                   .07 to .18 .02 to .04
• When no capacity-related constraints                                                                                                                                                    generating electricity in addition to their
  exist at the builders’ location the wires-   Wires-Only Co.                               NA                             NA                          .05 to .16 < .01                   T&D functions.
  only company’s estimated added cost of
                                               DG Option                                                                                .07 - .15
  providing T&D (less than a $0.01 per
  kWh) would be miniscule compared to          Source: Arthur D. Little, Distributed Generation: Understanding the Economics, An Arthur D. Little White Paper, 1999, pp. 8-9.             Other Options
  the installation of DG, making it an
  unlikely option.                              Table 2: Range of Utility Cost ($/kWh) to Meet New Demand under Alternative Constraints,                                                  ESPs and ESCOs
• If the wires-only company finds that the                                       Compared with DG Option                                                                                    Adding DG to homes on the customer’s
  capacity of T&D in the area where the                                                                                                                                                   side of the meter may offer newly created




                                                                                        Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                       16
ESPs or ESCOs in a deregulated environ-                   company. This does not prevent ESPs,                          term cash flow. Builder involvement has       operating, and maintenance costs of DG
ment more flexible DG opportunities for                   however, from performing such                                 a number of advantages and disadvan-          of a given kW capacity. If builders and
the following reasons:                                    installations in another integrated                           tages. The major advantage of such an         their potential customers could realize
• They are not saddled with COS                           utility’s jurisdiction.                                       operation is its potential to provide         and be convinced of the tangible benefits
  requirements of regulated utilities or                                                                                greater margins and a consistent, long-       from DG, builders might encourage the
  DisCos.                                              Builder ESPs                                                     term cash flow that could overcome the        installation of DG. For enlightened
• They do not have a vested interest in                   The feasibility and/or profitability of                       cyclical variations that have plagued and     builders, DG could be an important tool
  maintaining utility revenues by install-             ESPs installing customer-side DG for                             deterred investment in home building.         in improving their competitive position
  ing DG on the utility side of meters. In             builders in individual homes compared                            The major disadvantage is that the            and expanding their market by differenti-
  fact, those that are market makers can               with the installation of DG for a large                          builders would be saddled with a long-        ating their product, eventually resulting in
  negotiate directly with producers of                 number of individual homes in a new                              term investment in the complex econom-        increased revenue and profits.
  electricity to obtain favorable wholesale            subdivision has not been determined. At                          ics of an unfamiliar technology. Builders        The specific application of DG in
  prices in direct competition with                    the subdivision level, for example, DG                           and/or their subcontractors would be          providing energy to the home can
  DisCos.                                              can occur as a micro-grid–one installation                       acting as brokers, negotiating directly       influence the amount of benefit and cost
• ESPs and ESCOs are capable of                        of large capacity positioned at a substa-                        with utilities on behalf of homeowners in     that accrues to the customer. DG could
  assembling an integrated package of                  tion, or a large number of installations of                      a spot market for energy that is compli-      provide:
  services for potential customers such as             smaller capacity in individual homes. It                         cated by an industry in transition as a
                                                                                                                                                                      • peak shaving - provide customers with
  determining economic feasibility and                 may be possible for builders or develop-                         result of deregulation. Builders could be
                                                                                                                        in direct competition with utilities that        energy during peak periods of demand,
  technical requirements for DG, execut-               ers of a subdivision to become ESPs by                                                                            providing the customer with an alterna-
  ing Demand Side Management (DSM),                    hiring subcontractors or forming subsid-                         could have a competitive advantage in
                                                                                                                                                                         tive to paying for higher cost energy
  and performing installation and                      iaries to install, service, and maintain DG                      being able to serve the micro-grid more
                                                                                                                        efficiently with existing generation             during peak hours, if time-of-use rates
  subsequent servicing of DG. Incorpo-                 and by eventually marketing and selling                                                                           are in effect;
  rating such high-value services may                  DG energy to others on the grid. Builder-                        facilities.
                                                                                                                                                                      • grid support – reduce utility line losses
  provide ESPs with the opportunity to                 ESPs could develop home marketing                                                                                 to the customer in remote or congested
  garner more profit than the pure-play                programs highlighting energy-efficient                                                                            portions of the T&D system;
  strategy of utilities that supply only               subdivisions of new homes, coordinating                          Customer Benefits and Costs                   • combined heat and power (CHP) –
  energy.                                              DG activities with building energy                                                                                produce electricity and useful heat at
• Many new ESPs and ESCOs, however,                    conservation measures and demand side                              The assessment of opportunities to             the same time, providing low cost
  are formed as affiliates or subsidiaries             management. Benefits could accrue to                             install DG thus far discussed the installed      energy to the customer and increasing
  of integrated utilities.18 Consequently,             customers in the form of energy savings                          cost of DG only from the utility’s point of      efficiency and cost-effectiveness of DG;
  it is unlikely that these ESPs will install          and reliable power and to the builder in                         view in terms of $/kWh of electricity            and
  customer-side DG in its parent                       terms of long-term cash flow or profit.                          produced. Potential energy savings and        • standby power – provide customers
  company’s area of distribution where it                 The feasibility of a builder-owned and -                      other benefits of DG have yet to be              with reserve capacity and improved
  will result in a revenue loss for the                operated micro-grid would depend on                              considered from the builder’s or                 reliability during peak periods or
  parent company. Such an installation                 whether the builder’s financial strategy                         homeowner’s point of view, comparing             possibly in outages.
  may occur, only if it is part of a system            favors a quick return on capital or long-                        benefits to a customer with the installed,
  wide expansion sponsored by the parent

18
   An affiliate company is one in which parent company has direct or indirect ownership of five percent or more of the voting stock. A subsidiary corporation, on the other hand, is one in which the parent corporation
owns at least a majority of the shares, and thus has control. (Black’s Law Dictionary, 5th Ed.)




                                                                                      Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                     17
  The attractiveness of applications can                Customer Gross Energy Savings                               of these applications are being unbundled         lower wholesale prices or so-called
vary according to the type of customer.                    Regulated utilities, along with their                    as ancillary services and priced sepa-            avoided costs of producing energy,
For example, some commercial customers                  primary responsibility of producing and                     rately. Some DG technologies may have             monetary benefits will be lower.
may place a high value on standby power                 distributing energy, were formerly                          the capability to provide several applica-        Balanced against the gross monetary
for the conduct of their business and are               responsible for providing in one-package                    tions simultaneously, providing multiple        benefits to the consumer, the customer
willing to pay for it while residential                 applications relating to reserve backup or                  monetary benefits to the customer. For          incurs costs related to DG operation and
customers may be relatively indifferent to              standby power and power factor correc-                      example, DG could provide baseload              maintenance as well as installation.
this application of DG.                                 tion and voltage support in the interests of                power to customers throughout the day,
                                                                                                                    allowing them not only to save energy
                                                        maintaining power reliability and quality
                                                                                                                    during peak hours, but also to sell unused
                                                                                                                                                                    Operating and Maintenance Costs
                                                        (See Glossary). Under deregulation many                                                                       To derive the true or net energy savings
                                                                                                                    off-peak energy to the grid, reducing
                                                                                                                    utility line losses and relieving T&D           to the customer, the annual operating
                                                                                                                    congestion.                                     costs associated with DG must first be
        “Where people have a power quality need, price is not an issue,” Mr. Wilson                                                                                 subtracted from the annual value of
        (director of strategic panning for Caterpillar) said. He predicts strong                                       The monetary benefit of DG to                benefits a customer might receive from
        growth for Caterpillar’s generator sales to a “premium” market of users for                                 homeowners depends upon a number of             reduced energy purchases or sales of
        whom price is no object when it comes to reliable backup energy. Such users                                 factors:                                        energy to the grid. Annual operating
        are willing to pay the equivalent of $20 per [kwh] for backup supplies,                                     • If the utility adopts time-of-use rates or    costs consist of fuel costs as well as
        compared with about seven cents a kilowatt, on average, for electricity drawn                                  demand charges that impose higher            operating and maintenance costs. Fuel
        directly from the utility grid. Although it varies by state around the nation,                                 retail prices for energy during peak         costs, in turn, are a function of the
        utility regulators generally define a momentary power loss as one lasting one                                  periods, homeowners will save a larger       efficiency of the DG technology under
        to five minutes. Such interruptions can cause havoc in stock-trading systems,                                  amount of money using DG than if a           consideration as well as fuel prices, which
        automated paper mills, and other computer-driven processes unless there is                                     utility charged a flat rate all day. Not     may vary according to the market and
        backup power generators and equipment to switch them seamlessly. Address-                                      all utilities impose time-of-use rates,      local conditions.
        ing the new economy’s power needs, however, is not simply a matter of                                          but under deregulation it is anticipated
        improving the utility grid. Studies show that 70 percent of disruptions                                                                                     Fuel Costs
                                                                                                                       that most will.
        originate from electrical problems at customer sites, according to Richard P.                               • The monetary value of energy savings             Aside from maintenance costs and DG
        Bingham, manager at Dranetz-BMI, a power quality product and consulting                                        to the homeowner will be greater or less     efficiencies, a principal variable determin-
        company, in Edison, N.J. “Laser printers often take out computers when the                                     depending upon the rates the utilities or    ing DG operating cost is fuel cost, which
        heater comes on,” said Mr. Bingham, citing but one example. Electronic                                         others on the grid compensate                is a function of variation in fuel prices in
        ballasts in overhead lighting and compressors in soda machines also cause                                      homeowners for the energy they return        geographical areas and type of fuel.19 For
        unexpected loads. And electronic devices, like drives that adjust speed on                                     to the grid. Homeowners will incur           example, one study examined how
        motors to save energy, generate electrical interference on lines that power                                    greater benefits if utilities compensate     variation in fuel prices affected changes in
        them. The interference can trip up other equipment unless it is cancelled by                                   them with the same high retail prices        annual energy savings of a 50 kW
        filtering devices. Barnaby J. Feder, “Digital Economy’s Demand for Power                                       that utilities usually charge other          microturbine for a commercial customer,
        Strains Utilities”, The New York Times, July 3, 2000, p. C1.                                                   customers for energy, but if the utilities   using avoided electricity cost and simple
                                                                                                                       pay the homeowner for energy based on        payback as investment-return criteria.20 It


19
     Fuel costs are zero for Solar Electric DG Systems.
20
     Op. Cit., Arthur D. Little, Understanding Economics, pp. 13-16.




                                                                                  Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                 18
determined that DG would be successful                nominal terms and the highest annual                                        turbine technology could generate higher                                and installation of DG. DG installed cost
in states where high electricity prices and           average price since 1985 in real terms,                                     than expected demand, putting an upward                                 not only includes the capital cost of DG
low gas rates coexist such as California,             according to the EIA.23 Moreover, “U.S.                                     pressure on gas prices. Even if DG could                                equipment, but the related interconnec-
Illinois, and New York.                               natural gas consumption is expected to                                      succeed in substituting for a significant                               tion, construction, permitting and engi-
   The economic feasibility of fuel cells             grow 1.8 percent annually from 1998 to                                      portion of planned large generation                                     neering costs. These costs should also be
and other DG that rely on natural gas are             2020 — faster than any other major fuel                                     facilities, the positive or negative impact                             deducted from the customer’s gross
heavily influenced by fluctuations in the             sources, mainly because of the growth in                                    on the overall consumption of natural gas                               energy savings in estimating the net
price of natural gas. The market for                  gas-fired electricity generation.”24 High                                   remains an issue that is subject to further                             benefit of DG to the consumer. DG
natural gas has typically been subject to             demand combined with a low level of                                         investigation.                                                          capital cost related to equipment can
                                                      storage is expected to contribute to higher                                                                                                         range from $125 to $500/kW for a diesel
considerable price volatility, facilitating                                                                                       Other Operating and Maintenance Costs
the development of financial markets that             prices for the remainder of 2000. Since                                                                                                             generating package to $1,500 to $3,000
                                                      producers will not immediately be able to                                     Table 3 indicates the relative efficiency                             for fuel cells (See Table 4). Other costs
trade in natural gas and hedge against                                                                                            as well as operation and maintenance
variation in prices.                                  meet demand increases, EIA foresees                                                                                                                 related to construction and installation,
                                                      higher prices continuing in the short term,                                 costs for a variety of DG technologies,                                 the so-called turnkey costs, can range
   Although the Energy Information                                                                                                independent of variable fuel prices. Fuel
                                                      and declining prices in the longer term                                                                                                             from $350 to $500/kW for a diesel engine
Administration (EIA) acknowledges,                    before rising again in 2020.                                                cell operating costs are comparable to DG                               set to $1,900 to $3,500/kW for fuel cells.
“uncertainty with regard to estimates of                                                                                          diesel engines and gas microturbines,
                                                        The timing of a projected long-term                                                                                                               Except for PV, fuel cells have the highest
the nation’s natural gas resources has                                                                                            higher than PV and simple-cycle gas
                                                      decline in natural gas prices relative to the                                                                                                       installed cost due to high equipment and
always been an issue in projecting                                                                                                turbines, and lower than DG gas engines.                                construction-related costs. The cost of
production, and could affect prices,” it is           period of fuel cell commercialization can
                                                      have a major impact on the economic                                                                                                                 fuel cells, however, is based on early
relatively optimistic concerning the
supply of natural gas resources. 21 It bases          feasibility of fuel cells. Moreover, the                                    Installed Cost                                                          models of higher generating capacity and
                                                      increased use of DG dependent on natural                                      In addition to bearing the operating and                              different technology than that intended for
its positive outlook on increased imports
                                                      gas combined with the expected increase                                     maintenance costs of DG, customers can                                  homes. Further, when fuel cells are
from Canada and technology advances
                                                      in electricity generation based on gas                                      also incur costs related to the purchase                                commercialized, costs are expected to
that have both reduced effective explora-
tion and development costs, and increased
the recoverability of in-place resources.                                                                                                                             Simple
   Prices of natural gas actually declined                 Attribute                                        Diesel Engine                Gas Engine                   Cycle Gas                    Micro-turbine    Fuel Cell        Photovoltaics
from 1997 to 1998. 22 Mild weather                                                                                                                                    Turbine
lowered demand. Lower prices from
competing fuel such as oil as well as                      Efficiency                                       36 to 43%                    28 to 42%                     21 to 40%                   25 to 30%        35 to 54%        N/A
availability of abundant gas supplies from                 O&M Cost ($/kWh)                                  0.005 to 0.010               0.007 to 0.015               0.003 to 0.008              0.005 to 0.010   0.005 to 0.010   0.001 to 0.004
domestic as well as foreign sources also
                                                           Source: Gas Research Institute, The Role of Distributed Generation in Competitive Markets, Distributed Energy Forum, March 1999, p.4.
contributed to declines. In contrast, the
average wellhead price of gas in the
summer of 2000 represented the highest                                                         Table 3: Comparison of Efficiencies, Operating and Maintenance Costs of DG Technologies
annual wellhead price on record in

21
   Testimony on Natural Gas Supply Forecasts before the Committee on Energy and Natural Resources, Statement of Mary J. Hutzler, director, Office of Integrated Analysis and Forecasting, Energy Information
Administration, Department of Energy, U.S. Senate, July 26, 2000, p.14.
22
   Energy Information Administration, Office of Oil and Gas, U.S. Department of Energy, Natural Gas 1998, Issues and Trends, April 1999, p. 5.
23
   Op. Cit., Hurtzler, p. 14.
24
   Ibid.



                                                                                               Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                              19
decline considerably. In contrast to gas
engines and turbine technologies, how-                                                                                                            DG Technologies
ever, fuel cells do not incur added               Attributes                                        Diesel Engine                Gas Engine              Simple Cycle                     Micro-turbine   Fuel Cell        PV
installation costs when heat recovery is                                                                                                                 Gas Turbine
added in CHP applications.
                                                  Size Range (kW)                                   20 to 10,000+                50 to 5,000+                 1,000+                      30 to 200       50 to 1,000+     1+

                                                  Equipment Cost                                    125 to 300                   250 to 600                   300 to 600                  350 to 750      1,500 to 3,000   N/A
Economic Feasibility of
Distributed Generation to                         Install. Cost – No CHP                            350 to 500                   600 to 1,000                 650 to 900                  600 to 1,100    1,900 to 3,500   5,000 to 10,000
Customer                                          Add. Install. Cost w/CHP                          N/A                          75 to 150                    100 to 200                  75 to 350       Included         N/A

                                                  Source: Gas Research Institute, The Role of Distributed Generation in Competitive Markets, Distributed Energy Forum, March 1999, p.4.
  The value of a customer’s annual
energy savings from DG and variations in
operating costs are critical in determining                                              Table 4: Comparison of the Equipment and Installation Costs ($/kW) of DG Technologies
the length of time it takes a customer to
pay for the installed cost of DG. Dividing
installed cost by the value of a customer’s     of existing energy infrastructure in                                       time or increased customer reliability                                tion, engineering, and other regulatory
annual energy savings determines the            accommodating demand and degree of                                         can be quantified and then serve as a                                 imposed charges are discussed below,
simple payback of installation. As the          congestion due to local physical                                           basis for customer compensation in                                    while equipment cost is treated elsewhere
margin of the value of energy saved over        characteristics and growth can also                                        addition to the costs of peak energy                                  in a separate report dealing with fuel cell
the annual operating and maintenance            affect utility pricing and, therefore, the                                 savings. In this way a previously                                     technology.
costs increases, the payback declines and       amount of savings.                                                         unattractive return on investment can
economic feasibility increases. DG’s          • Customer’s payback preferences – the                                       become attractive.                                                    Added Customer Benefits
economic feasibility therefore depends on       period of time that a customer is willing                                • Local variation in operating costs -                                    As noted above, a number of additional
a number of factors:                            to wait to be paid back for the installed                                  annual energy savings is determined by                                benefits can accrue to a homeowner that
                                                cost of DG can vary depending on the                                       deducting operating costs from the                                    would have a positive effect on the
• Imputed value of energy saved – the           type of customer. Energy service                                           amount the customer is paid for peak
  value of a customer’s energy savings                                                                                                                                                           economic feasibility of DG, but it is more
                                                companies and to some extent commer-                                       energy savings or other excess energy                                 difficult to impute a monetary value to
  based on the avoided or wholesale cost        cial customers who include the costs                                       returned to the grid. As noted above,
  of energy will be lower than if the value                                                                                                                                                      these benefits, especially for residential
                                                before payback as part of their cost of                                    variation in local fuel costs is a princi-                            customer. One source computed the value
  was based on the retail cost the utility      doing business will be more willing to                                     pal variable determining DG operating
  usually charges the customer. More-                                                                                                                                                            of these other benefits to a commercial
                                                wait longer to receive payback than                                        costs.                                                                customer of a small gas turbine at a 60
  over, utility retail pricing policies and     residential customers.
  wholesale costs vary by location based                                                                                   Of course, installed cost is also a                                   percent capacity factor. 25 The values for
                                              • Type of DG application – In some                                         critical factor influencing DG economic                                 some of the benefits are cited below as
  on local regulatory policy in regard to       instances, the benefits of other applica-
  transition costs, and relative access to                                                                               feasibility. Institutional factors affecting                            examples of orders of magnitude, but they
                                                tions such as avoided customer down-                                     cost of installation related to interconnec-
  or availability of fuels. The adequacy

25
     Ibid.




                                                                                      Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                     20
would probably have to be reduced                    • Additional sources of revenue – DG                            necessary to achieve the economies of         DG can also offer a number of technical
somewhat for residential customers:                     provides customers with the opportu-                         mass production that result in large        benefits to the utility grid:
• CHP – DG in combination with electric                 nity to sell power to the grid that is in                    volumes and low cost. Consequently          • DG can eliminate the electricity losses
  power can produce heat, which reduces                 excess of their energy needs.                                producers of DG seek to encourage and         associated with long distance transport
  the cost of energy by directly providing              A number of external economies result                        expand their markets regardless of who or     of electricity over the T&D system.
  hot water and more indirectly through              from DG in the form of public benefits to                       where DG is installed. The presumed or      • Some DG technologies can provide
  further processing by providing for                customers as a whole or society in                              demonstrated benefits of DG to utilities      reactive power (VARs) that can help
  heating and cooling needs. The value               general, which are more abstract and                            are therefore of concern to manufacturers     utilities maintain system voltage.
  of the additional benefit attributed to            remain to be proved, demonstrated, and                          in reducing their cost and such benefits    • DG reduces utility costs associated with
  this application to a commercial                   quantified .26                                                  accrue to builders and homeowners as          outages and providing reliable power.
  customer has been estimated to be                                                                                  well.                                       • DG can improve power quality and
                                                        DG may in the long term foster a more
  $.021/ kWh or $110/kW a year.                      competitive and efficient economic                                 DG by providing additional sources of      eliminate demand that is harmful to the
• Reduced price volatility – DG provides             environment for energy resulting in                             power at the customer’s site reduces the      power quality of the grid system.
  the customer with a safeguard against              reduced costs of energy to the customer.                        utility’s need to expand the generation,    • As a dedicated auxiliary power source,
  the uncertainty and potential harmful              By avoiding the necessity for construction                      transmission, and distribution system and     DG can assist a power source’s ability
  effects of electricity price volatility at         large generation facilities DG may reduce                       can defer the need for T&D upgrades. A        to reenergize lines following a power
  the same time permitting the customer              pollution associated with such facilities                       number of subsidiary utility benefits are     outage i.e., start up from a cold power
  to be more venturesome in energy                   and help protect the environment.                               an outgrowth of these DG grid-related         condition to fully operational status
  markets. The monetary value of this                                                                                benefits:                                     (“black start”).
  additional benefit to a commercial                                                                                 • DG, by reducing transmission conges-        The value of these benefits, however, is
  customer is estimated to be $.01/kWh
  or $55/kW a year.
                                                     Utility Benefits and Costs                                         tion at the point of consumption, may    difficult to quantify and reflect in utility
                                                                                                                        increase the capacity of T&D available   rates because many are specific to given
• Increased power reliability – DG can                  The perceived or demonstrated benefits                          for other customers.                     locations. As already noted, economic
  deter or eliminate grid power outages              of DG to utilities are of concern to                            • DG, by decreasing customer peak           and institutional considerations may
  that interrupt customer electricity                homeowner customers, since increased                               energy demands, reduces the level of     prevent utilities from taking advantage of
  service, can be detrimental to health              utility adoption of DG technologies can                            reserve margins the utility must         DG benefits. Utilities claim it is very
  and safety, and cause economic loss.               increase the scale of production thereby                           maintain to meet this demand             difficult to incorporate customer-side
  The value of this additional benefit to a          reducing the costs of DG and helping to                         • In obviating need for additional T&D      benefits such as peak shaving to the grid
  commercial customer is estimated to be             diffuse many of DG’s potential benefits to                         lines, DG can relieve the utility from   into their long-term plans because these
  $.006/kWh or $35/kW per year.                      customers. Manufacturers and suppliers                             dealing with troublesome public          benefits are not under their direct control
• Improved power quality – DG can                    of DG and fuel cells in particular are                             concerns and problems over adding        and are difficult to quantify.27 Utilities
  reduce or eliminate variation in grid              caught in the typical commercialization                            additional transmission lines.           therefore tend view DG as a short-term
  voltage or harmonics that could be                 conundrum. Low acceptance of their                                                                          solution.
  harmful to a customer’s sensitive                  innovative product results in low produc-
  electrical equipment such as computers                                                                                                                           DG may add to utility costs due to a
                                                     tion volumes and high prices, yet cus-                                                                      number concerns related to DG’s impact
  that depend on high quality power.                 tomer acceptance on a large scale is                                                                        on equipment and the grid.28 Additional

26
   Arthur D. Little White Paper, Distributed Generation: Policy Framework for Regulators, 1999.
27
   Ibid.
28
   Arthur D. Little White Paper, Distributed Generation: System Interfaces, pp. 6 and 9.




                                                                                   Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                  21
DG-related costs arise from additional
management and measurement equipment
required dealing with:
                                                           INSTITUTIONAL BARRIERS TO INSTALLATION OF DG
• Quality control problems;
• Negative impacts of DG on reliability;
   and
• Inconsistent maintenance by owners of
   DG units.
                                                        Installed cost is a major factor affecting                   System Interfaces                              no access to the grid, resulting in little or
                                                     the payback and feasibility of DG.                                                                             no complications for the grid. With
   Utility grid-related costs related to DG          Reductions in the capital cost of DG                              System interfaces occur where DG and         completely open access to the markets for
could result from:                                   equipment, one component of installation                        the utility grid intersect. DG system          energy and ancillary services, DG could
• Reduced system protection due to                   cost, can occur through technological                           interfaces are both physical and market        be dispatched, either individually or
   reverse power flows to the grid, de-              advancements and economies in the scale                         related. Physical interfaces involve a DG      collectively with other DG installations,
   energized utility distribution lines, over/       of production brought about by increasing                       unit’s connection with the fuel and            to compete in the same markets as
   under voltage, over/under frequency,              customer acceptance of DG. Costs                                electrical infrastructure and                  traditional utility power plants. In this
   and voltage imbalance;                            related to other components of installed                        includescommunication with a central           way the full potential of DG could be
• Threats to the safety of workers if DG             cost such as interconnection, construction,                     body that controls or monitors the DG          realized and additional benefits could
   should mistakenly energize a line where           permitting, and engineering, however,                           system. 32 Development of DG physical          accrue to builders and homeowners as
   workers are working; and                          remain high because of a number of                              interfaces involves dealing with issues        customers. As an alternative to complete
• Islanding, when a DG unit energizes a              institutional barriers. In addition,                            such as safety, protocols, system impacts,     access, one intermediate option constrains
   portion of the system that is supposed            transition costs, such as stranded and                          reliability, standards, and metering.          DG’s access by placing specific limits on
   to be de-energized or isolates a portion          standby costs, imposed on customers to                          Physical connections are also necessary to     its minimum size, bidding, and dispatch.33
   of the electric utility system from the           defray the cost of capital equipment                            provide real time market data to DG so         Regardless of the allowable level of DG
   remainder of the utility system.                  (made redundant under deregulation) also                        that DG owners can bid and compete with        access to the grid, however, the costs of
                                                     add significantly to installation cost.                         other energy sources in selling energy in      access must be weighed against the
   DG advocates claim that the extent of             Explained below are the cumulative                              the marketplace. Issues related to DG in       benefits. For example, owners of DG can
these problems and their related costs are           impacts of institutional barriers that can                      developing market interfaces include           incur costs because the level of opera-
exaggerated and that many costs are                  ultimately deter widespread acceptance of                       dispatch, tariffs, pricing signals, response   tional complexity increases with grid
based on perceptions rather than demon-              DG and fuel cells in particular:31                              and business operations.                       access, requiring investment in control
strated fact.29 Proponents of this view                                                                                                                             and communications systems to maintain
have even suggested that the threat of               • system interfaces;
competition from DG rather than safety               • electrical interconnection;                                   Grid Interconnection Metering                  power quality, reliability and safety, as
                                                     • stranded costs;                                                 Increasing the ability of DG owners to       well as to provide information in support
and grid integrity is behind some of these                                                                                                                          of market transactions.
concerns.30                                          • standby charges; and                                          access and sell energy to the grid would
                                                     • siting and permitting.                                        help DG to gain wider acceptance among            The enactment of PURPA in 1978
                                                                                                                     customers such as builders and                 established a precedent for grid connec-
                                                                                                                     homeowners. Currently, most installed          tions with independent generators of
                                                                                                                     DG only supplies energy on-site and has        power and metering.

29
   Thomas J. Starrs and Howard J. Wenger, Policies to Support A Distributed Energy System, 1997.
30
   Ibid., p. 10
31
   Op. Cit., Arthur D. Little, Policy Framework for Regulators
32
   Op. Cit., Arthur D. Little, System Interfaces, p. 3.
33
   Op. Cit., Arthur D. Little, Policy Framework for Regulators, p. 12.



                                                                                   Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                  22
Dual Metering                                     • Compensation for customers at the                          time to compensate for energy the            • Capacity limits are often expressed as a
   Most PURPA qualifying facilities (QF),           retail rate for the energy DG provides                     utility dispatches and delivers at             percentage of each utility’s peak
including large-scale cogeneration and              regardless of whether they immediately                     another point in time.                         demand and can range from a low of
smaller renewable energy projects, has net          use the energy.                                          • Customers are, in effect, getting a free       0.1% in California, New York, and
purchase and sale agreements with                 • Elimination of the requirement for a                       ride by being allowed to use the               Washington to a high of 1% in
utilities. These agreements require use of          second meter and the need for the                          distribution system to store their surplus     Vermont.38
dual meters, one that measures the                  utility to purchase power, which entails                   energy without paying the distribution       • The largest proportion of the states with
electricity flowing into the building and           time-consuming and costly paperwork                        utility for this service.                      regulation of net metering, almost 30
the other that measures the flow of                 and processing.                                            Others counter that:                           percent, limit the allowable generator
electricity out of the building and into the        In 1998, small-scale renewable projects                                                                   capacity to equal or less than 100 kW.
                                                                                                             • The utility merely shunts the DG
grid. Under this type of agreement,               in 23 states34 were eligible to use a more                                                                • Almost half of these states require that
                                                                                                               surplus energy to another customer and
customers purchase energy from the                favorable net metering approach in which                                                                    the net excess generation of electricity
                                                                                                               charges that customer the retail price
utility at the retail rate, but the electricity   customers can connect to the grid using                                                                     by the customer’s generator must be
                                                                                                               without having incurred the expense of
not immediately used is sold back to the          their existing meter. Twelve of 23 states                                                                   purchased at the avoided cost.
                                                                                                               generating the power.
utility at the lower avoided or wholesale         with regulations or laws on net metering                   • As long as the power fed back to the
cost. Under this arrangement it is                limited net metering to renewables and                       utility is miniscule relative to the power
advantageous for customers to use all the         cogeneration, while most of the remaining                    flowing through distribution system, net     Electrical Interconnection
DG electricity as it is generated rather          states excluded cogeneration, limiting it                    metering should have little effect on           A DG unit often requires an electric
than selling it at avoided cost to the            specifically to solar or some combination                    utility operations.36                        interface to make a connection to an
utility, since their immediate use of energy      of solar with wind or hydroelectricity.
is equivalent to replacing electricity            Two states had no restrictions on allow-                   Existing Limits on Net Metering                external utility power system or grid
which they would normally have to buy at          able customers.                                              A real concern exists, however, that if      simultaneously as it generates electricity.
the retail rate.                                                                                             net metering were allowed to expand its        For this reason the term interconnection is
                                                  Criticism of Net Metering                                  penetration of the market to cover all         often synonymous with the terms “syn-
Net Metering                                        Since the scale of DG required for                                                                      chronized operation” or “parallel opera-
                                                                                                             types of DG, at some point so many
  Net metering of DG can be beneficial to         homes would be similar to that of small                                                                   tion.” DG electrical interfaces are non-
                                                                                                             customers would be free-riders that there
the DG owner. In net metering, the meter          renewable projects, net metering might be                                                                 existent in remote, isolated grid applica-
                                                                                                             would not be enough revenue left to pay
spins forward when energy from the                particularly applicable to other forms of                                                                 tions, but become more complex as the
                                                                                                             for cost of maintaining the distribution
utility is flowing into the building and          DG, but utilities have leveled a number of                                                                requirements for interaction between DG
                                                                                                             network. Consequently, several states
moves backward when energy flows from             criticisms against the use of net meter-                                                                  units and electric utility/distribution
                                                                                                             have adopted constraints37 on the use of
the building to the utility. At the end of        ing:35                                                                                                    companies increase. Average costs for
                                                                                                             net metering by limiting the amount of net
the billing period the customer is charged                                                                                                                  larger QFs’ interconnection under PURPA
                                                  • On the abstract level, net metering is                   metered generating capacity or the
for net energy consumed.                                                                                                                                    range from $50/kW to $200/kW, but
                                                    contrary to competition, which involves                  number of generating systems so that
Benefits of Net Metering                            the market pricing of wholesale energy.                  when the limit is reached the revenue          smaller units often have higher costs. 39
  Proponents claim customer benefits of           • Critics object to customers using                        impacts would be insignificant. The            The main issues in regard to electrical
net metering include:                               surplus energy generated at one point in                 following are existing limits on net           interconnection arise from the complex
                                                                                                             metering:

34
   Op. Cit., Starrs, p. 4.
35
   Ibid., pp. 5-6.
36
   Ibid., p. 6.
37
   Ibid., p. 6.
38
   Ibid.
39
   Ibid., p. 4.


                                                                           Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                          23
technical requirements and processes that               Interconnection Barriers to DG                                 ments are based on needs of large QFs,       more cost-effective interconnections of
utilities impose for safety and reliability                Most equipment is protective, designed                      producing greater than 50MW of               DG with the grid, at the same time
on the one hand and the contention of DG                to maintain the safety, stability, and                         electricity.                                 ensuring the safety and reliability of the
producers and owners that these costs are               integrity of voltage and current on the                        Utilities also often require redundancy      electrical system. New York, California
too high and inequitable, posing serious                grid, alleviating operational problems that                 in their system by not allowing incorpora-      and Texas have initiatives under way.
obstacles to commercialization. Photo-                  might occur as a result of DG by detecting                  tion of protective equipment within an        • The Institute of Electric and Electronic
voltaics (PV), a unique DG technology,                  voltage faults, abnormal conditions, and                    individual generator, maintaining that this     Engineers (IEEE) at the national level
has already confronted many of these                    de-activated distribution lines. The                        is necessary to prevent system failure that     expects to develop, based on consensus,
issues and its experience foretells many of             following interconnection requirements                      might result if an individual piece of          uniform interconnection standards by
the problems that small DG units will                   negatively impact the cost of DG:                           equipment fails.42 On the other hand, DG        2002.
encounter and may exacerbate in the                     • Utilities require safety measures to                      producers, in the interest of economy,        • New technical standards for DG
future as their numbers increase.                          ensure that DG does not activate a line                  attempt to integrate protective equipment       dispatch, metering, communication, and
   Based on the PV industry experience,                    while workers are working on the line.                   into their products. For example, a New         control based on expertise and emerg-
electrical interconnection issues have                  • Requirements for electrical connection                    Hampshire utility required PV customers         ing technologies in other fields such as
evolved around:                                            are not standardized and vary not only                   to purchase mechanical relays to protect        telecommunications, remote sensing,
                                                           by utility but even by project within a                  against variation in voltage and frequency,     and software design, however, may
• the technical elements of interconnec-
                                                           given utility. Lack of standardization is                even though the customer’s inverter             pose a more formidable problem.
   tion;
• standardization of technical require-                    in part due to the fact that the type of                 already contained such relays.43 The
   ments for interconnection;                              protective equipment required can vary                   price of the relays added $50 per watt to     Interconnection Process and Fees
• complexity of power purchase agree-                      according to the type of DG, its size                    the cost of PV. Moreover, since the              Utility processes for the design,
   ments; and                                              and location in the distribution system,                 mechanical relays were less advanced          approval, and inspection of interconnec-
• the relevance of various engineering                     the voltage on the system, and the                       than the electronic relays in the inverter,   tion equipment are lengthy since they
   fees and other charges related to                       configuration of the distribution                        they required annual utility calibration      were designed for larger QFs. Conse-
   interconnection.                                        network.41 Consequently, requirements                    costing $100, which nullified half of the     quently, rules are burdensome and contain
                                                           are often not well defined or, when                      annual energy produced by the small-          requirements that are not relevant or
                                                                                                                    scale PV system.                              readily understood by small-scale DG
Technical Elements                                         defined, are subject to change with each
                                                                                                                                                                  customers. The process typically pro-
of Interconnection                                         interconnection.                                         Solutions Underway                            ceeds as follows: 45
  Electrical interconnection typically                  • DG producers, who expect to achieve
                                                                                                                      Technical interconnection issues are
involves three types of equipment:40                       economies of scale through mass                                                                        1. Initial contact is made with the utility.
                                                                                                                    concrete and, therefore, easier to address.
                                                           production of standardized products,                                                                   2. The customer and utility exchange
• Control equipment to regulate the                                                                                 Technical issues may need to be resolved
                                                           complain that lack of interconnection                                                                      project information.
  output of DG;                                                                                                     before dealing with other more abstract
                                                           standardization can add significantly to                                                               3. Based on the information provided,
• Circuit breakers or switches to isolate                                                                           economic and institutional issues related
                                                           price of their products.                                                                                   the utility conducts an engineering
  the DG unit from the system; and                                                                                  to the allocation of costs and benefits:44
                                                        • Many interconnection requirements are                                                                       analysis to determine the effect of the
• Relay mechanisms to protect and                          too expensive and not suitable for                       • At the state and national levels, efforts       installation on worker safety, system
  monitor the status of the system.                        smaller scale DG since the require-                        are underway to develop uniform                 protection, and operation.
                                                                                                                      technical standards that will allow for

40
   Op. Cit. Arthur D. Little, System Interfaces, pp. 8-9.
41
   Ibid.
42
   Ibid.
43
   Op. Cit., Starrs, p. 13.
44
   Op. Cit., Arthur D. Little, Policy Framework for Regulators, p. 14.
45
   Op. Cit., Arthur D. Little, System Interfaces, p. 11.


                                                                                  Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                 24
4. The customer then has the option of                 In addition to the technical requirements                    Public Service Commission found that            As a result, some of these investments are
    accepting or rejecting the utility’s               previously discussed, such agreements                        such charges were too costly and impos-         no longer economic for traditional utility
    engineering design.                                typically cover “metering requirements,                      sible for residential customers to meet. It     companies and have become redundant.
5. An engineering project review meeting               payment for excess energy, imposition of                     limited such charges to $100,000, an            States have, therefore, allowed utilities to
    between the utility and the customer is            standby charges, service interruption or                     amount covered under conventional               charge customers exit fees or competitive
    then convened.                                     curtailment, permitting and maintenance                      homeowner insurance policies.                   transition charges (CTCs) to compensate
6. Assuming agreement, project engi-                   obligations, access provisions, indemnity                                                                    investors for these uneconomic or
    neering and construction can begin.                and liability provisions, notification                                                                       “stranded” investments.
7. At completion, the utility conducts a               requirements, and non-transferability                        Stranded Costs51                                   Exit fees are other charges for stranded
    final inspection of the interconnection            provisions.”47 For example, the PPA not                                                                      costs imposed when DG customers leave
    and protective equipment.                          only indicates the type of metering for the                    Investors under the old rules made            the grid and reduce the utility load. The
8. Minor changes to engineering plans                  DG facility, but it usually requires that the                investments in utility generation, trans-       following are arguments for and against
    during this process may require                    DG owner be responsible for providing                        mission, and distribution with the under-       these charges:
    additional analysis and meetings                   approved metering equipment and utility                      standing that there would be a fair return
                                                                                                                                                                    • Utilities contend that DG imposes a
    resulting in further delays.                       access to the meter at all times.48 Since                    on investment. Deregulation, however,
                                                       the complexity of these agreements is                                                                           burden of stranded costs on investors
   The utilities require that applicants pay                                                                        required that generation, transmission,
                                                                                                                                                                       and non-DG customers when DG
a fee, often in advance, for the engineer-             difficult to understand, small DG owners                     and distribution be broken up into
                                                                                                                                                                       residential or other customers exit the
ing analysis and review regardless of                  often must incur the added expense of                        separate business or non-profit entities.
whether the project is completed. Some-                retaining a lawyer to comprehend and
times, applicants are required to pay for              negotiate a contract.
any modifications to the utility’s distribu-             As PV experience points out, many                                  “Stripped of their monopolies, industry executives grumbled, they would
tion system that is required to accommo-               standard contract requirements are                                   never recoup the money they spent over the decades of building generation
date DG. It has been argued that such fees             applicable to the larger generating                                  plants – including nuclear reactors – to meet demand. Competition from
are discriminatory and arbitrary, citing the           capacity typical of QFs under PURPA,                                 newer, lower-cost power producers, they complained, would force old-line
example of a New Hampshire utility that                but are inappropriate and onerous to                                 utilities to eat more than $100 billion of “stranded costs” – money spent
charged $900 for a design review of a                  small-scale DG. Liability and insurance                              building generation plants that would be unable to pay for themselves under
900-watt PV system–adding $1 per watt                  may be reasonable and low for a large QF                             deregulation. Instead, the industry appears to be holding its own. Rising
to its installed cost.46                               on a per kW basis, but the same insurance                            prices for electricity in many parts of the nation have helped make existing
                                                       may be significantly higher per kW for                               plants more valuable than anyone expected. Nonetheless, the utilities continue
Legal Barriers: Purchase Power                         small DG.49 Objections were lodged                                   to enjoy ratepayer-financed bailouts for nuclear plants and other assets,
                                                                                                                            based on a gloomy post-regulation outlook. Five years ago Moody’s Inves-
Agreements (PPAs)                                      against the burdensome requirements of
                                                                                                                            tors Service, the bond rating house, estimated the industry’s stranded costs at
   The interconnection agreement, or PPA,              several New York utilities requiring small
                                                       net metering customers to carry liability                            $135 billion; it now puts it at just $10 billion.”
is an enforceable contract between the
utility and the DG owner desiring to                   insurance ranging between $500,000 and                               Richard A. Oppel, Jr., “Deregulation Has Given Power to the Power
interconnect, specifying the terms and                 $1,000,000 from a utility-approved                                   People,” The New York Times, April 30, 2000
conditions of the two-party relationship.              carrier.50 In one case, the New York


46
   Op. Cit., Starrs, p. 13.
47
   Ibid., Starrs, p. 11.
48
   Op. Cit., Arthur D. Little, System Interfaces, p. 15.
49
   Ibid.
50
   Op. Cit., Starrs, p. 12.
51
   Op. Cit., Arthur D. Little, Policy Framework for Regulators, pp. 16-18.


                                                                                  Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                 25
   system and no longer provide the                    • Another study cited the example of a                      backup power, however, they can confront          the customer, they are excessive,
   revenue necessary to compensate                       100-kW PV system for a commercial or                      the same issues of economic feasibility           negatively affecting the economics of
   utilities for existing investments in                 industrial facility in which CTCs                         experienced with stranded costs.                  DG and, therefore, its feasibility. This
   generation and distribution infrastruc-               resulted in an extra expense of more                                                                        discourages the adoption of DG.
   ture.                                                 than $160,000 per year.53                                 Justification for Charges                      • Given the relatively small amounts of
• DG advocates, on the other hand,                     • Since most states impose CTCs for a                         The cost of standby service is assessed         power involved with individual
   contend that DG contributes many                      fixed period of time, CTCs may not be                                                                       residential DG units, some supporters
                                                                                                                   as an added charge or tariff based on
   benefits (see above) to utilities that                a long-term threat to some DG, because                                                                      of DG argue for complete exemption
                                                                                                                   power usage or demand in the
   offset such costs. Also they assert that              of the possibility that such fees could                   homeowner’s monthly bill. Utilities’              for residential units, asserting that such
   when DG returns energy to the grid it is              expire before the commercialization of                                                                      revenue losses are inconsequential to
                                                                                                                   justification of the charges is as follows:
   shunted to other customers that pay                   some emerging DG technologies, such                                                                         utilities.
   utilities retail prices for power that                as fuel cells. No such mitigating                         • Utilities are saddled with the fixed cost    • Advocates contend further that utilities
   utilities do not generate.                            circumstances, however, exist for exit                      and maintenance of the T&D, which is            do not take into consideration the
                                                         fees.                                                       no longer fully compensated by                  benefit of combined reliability that
   Currently, the imposition of CTCs or
                                                                                                                     customer user revenue due to                    many DG units, dispersed over the
exit fees can negatively affect the eco-                                                                             customer’s reduced reliance on the grid
nomic feasibility of DG. Consequently,                                                                                                                               system, offer by decreasing utility
many proponents of DG argue that states                Standby Charges                                               as a result of DG.
                                                                                                                   • A portion of the distribution infrastruc-
                                                                                                                                                                     capacity constraints.
should grant DG exemptions from these                                                                                ture is devoted to a particular home and        In computing a standby power rate,
fees. Utilities argue exemptions for                      When builders or homeowners install                                                                     many utilities establish a flat equivalency
                                                       DG they usually want to maintain a                            cannot be reallocated to other custom-
stranded costs will increase the burden of                                                                                                                        between the standby charge and the
                                                       parallel connection with the grid so that                     ers when not used by the homeowner.
costs imposed on the rest of their cus-                                                                            • Without charges for standby service,         capacity of the DG generator the home-
tomer base.                                            the utility can supply power during an                                                                     owner installs, regardless of the
                                                       unexpected outage or add capacity when                        fixed distribution costs would be shifted
   California regulations on CTCs appear                                                                                                                          homeowner’s use of standby services.54
                                                       peak demand exceeds DG capacity. A                            to other utility customers who do not
to allow exemptions for residential PV                                                                               have DG and who would, therefore,            For example, the rate a utility would
                                                       utility provides standby services when it                                                                  charge a homeowner with a 4 kW
applications, but are complex and                      is necessary to interconnect with custom-                     have a higher incidence of cost, in
somewhat ambiguous and are subject to a                                                                                                                           generator and a peak demand of 10 kW
                                                       ers to substitute for or add to their normal                  effect subsidizing DG.
variety of interpretations. The following                                                                          • Utilities are often not compensated for      would be based on 6 kW of backup
                                                       source of power. Charges for standby                                                                       power. As peak demand exceeds DG
are examples of some of the consequences               services differ from fees for stranded                        higher prices of backup power they
of CTCs:                                                                                                                                                          capacity and the 4 kW generator is
                                                       costs in that they are for particular                         often must procure from spot markets to
                                                                                                                     provide standby power.                       insufficient, it can be argued that
• One study found that the added costs of              services rather than compensation for past                                                                 homeowners may want to have the
   standby charges, CTCs, and exit fees                investments. Backup service, the most                                                                      flexibility of being able to rely on the
   together with interconnection and                   common of standby services, supplies                        Opposition to Charges                          utility for only a limited amount of
   permitting costs could lengthen the                 power or additional capacity during                           Advocates of DG, on the other hand,          backup power and voluntarily reduce or
   payback period for DG customers,                    unanticipated outages of power at the                       claim that:                                    shed the rest of their load.55
   making DG economically infeasible in                homeowner’s site. When residential DG                       • Since standby charges are not based on
   all but a few states.52                             customers incur standby charges for                           the actual cost or value of the service to

52
   Op. Cit., Arthur D. Little, Understanding the Economics, pp. 19-21.
53
   Op. Cit., Starrs, p. 14.
54
   Op. Cit., Arthur D. Little, Policy Framework for Utilities, p. 20.
55
   Ibid.




                                                                                 Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                26
Siting and Permits                                     gas DG combustion technologies are not
                                                       land intensive, but can pose moderate to                              Type Facility                              Hazardous           Air Quality        Water Use             Noise, Odors,   Land-
   Small DG should have the advantage of               significant permitting issues (see Table 5)                                                                      Materials                              & Quality             & Visual        Intensive
not having to meet the elaborate and often             in the areas of hazardous material                                                                               & Storage
onerous planning and approval require-                 handling and storage, air quality, water
                                                                                                                             Advanced Gas Turbines                      ++                  +                  ++                    +               0
ments related to environmental and                     use and quality, and noise and odors:
physical impacts that local jurisdictions              • Particularly significant are issues                                 Cogeneration                               ++                  ++                 ++                    +               0
impose on utility central power generation                related to hazardous wastes and storage
and T&D facilities. However, the costs of                                                                                    Combined Cycles                            ++                  ++                 ++                    +               0
                                                          and air quality.
complying with local permit requirements               • Air quality, however, is only moderately                            Simple-Cycle Gas Turbines                  ++                  ++                 0                     +               0
related to the siting of DG at a particular               significant for advanced gas turbines
location and the added expense of                         and water quality has little or no                                 Steam-Injected Gas Turbines ++                                 ++                 ++                    ++              0
administrative delays in applying and                     significance for simple-cycle gas
obtaining approval for such permits can                                                                                      Fuel Cells                                 0                   0                  0                     0               0
                                                          turbines.
still be significant. Such costs often                 • Most evaluations in the permitting of                               0 = no or insignificant issue; + = potentially moderate issue; ++ = potentially significant issue
outweigh the impact of burdensome local                   fossil fuel DG at the local level have
permit fees and can negatively affect the                 been based on standards developed for                              Source: California Energy Commission, Energy Aware Planning Guide: Energy Facilities, pp. B.05 – B06.
economic feasibility of DG. Compared to                   large commercial and institutional
other DG institutional issues discussed                   cogeneration projects ranging from 10                                       Table 5: Significance of Permitting Issues by Type Distributed Generation Facility
above, DG siting and permitting issues                    to 20 MW.57
are more closely related to the character-
istics of specific DG technologies. For                   One of the principal barriers to installa-                       facilities, many sites desired for the                                       Combustion-based DG technologies in
example, deeds or community covenants                  tion of DG at the local level can be state                          location of DG may be off-limits                                          California must overcome control
that control the external appearance of                and regional air pollution regulations.58                           because they are in so-called “non-                                       technology requirements and emission
homes may be important factors restrict-               In this context, fuel cells have major                              attainment areas” where air pollution                                     levels to comply with air quality per-
ing installation of PV roof systems, but               advantages.                                                         concentrations from old generating                                        mits.59 Energy projects requiring air
they would not be a factor for fuel cells.             • Typically “emissions per unit of fuel                             facilities exceed the Act’s requirements.                                 quality permits in California are reviewed
                                                          consumed” is used as a criterion in the                        • Many State Implementation Plans                                           by various regional Air Quality Manage-
                                                          permitting decisions regarding new                               incorporate a system for trading                                          ment Districts (AQMDs) on a case-by-
General Permitting Issues for DG                          generation facilities, but an output-                                                                                                      case basis to account for the environmen-
                                                                                                                           emission credits for new generation
  Except for renewable energy technolo-                   based standard such as “emissions per                            facilities. Although state procedures                                     tal and economic impacts as well as to
gies, the fuel for most DG systems is                     unit of power produced” would be more                            for awarding credits vary, if utilities                                   determine the Best Available Control
natural gas. One authority claims that                    favorable to DG since it would better                            have a substantial share of allowable                                     Technology (BACT) for the particular DG
most DG systems running on natural gas                    reflect inherent DG efficiencies.                                credits they have considerable market                                     technology under consideration. Some air
meet California emission requirements.56               • Since the Clean Air Act grandfathered                             power to influence the location of DG                                     quality regulations designed for larger
On the other hand, according to the                       many old, central power generation                               in their area by withholding or granting                                  cogeneration projects initiated under
California Energy Commission, natural
                                                                                                                           credits.

56
   C.J. Weinberg, “Emerging Energy Technologies”, for California Energy Commission, Energy Aware Planning Guide: Energy Facilities.
57
   The permitting impact of large industrial or commercial DG facilities in local areas may be quite different than that of smaller DG in light commercial or residential applications. Local emission requirements are a
consideration for large DG but not for small DG facilities, since large DG facilities run for longer hours.
58
   Op. Cit., Arthur D. Little, Policy Framework for Regulators, pp. 22-23.
59
   California Alliance for Distributed Energy Resources (CADER) Siting and Environment Committee, Final Draft Action Plan, submitted to the CADER Steering Committee, June 6, 1997, p. 14.



                                                                                       Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                      27
PURPA are not appropriate for smaller                accessible for distribution to homes and                                                                                                       (a)
DG. For example, in California regula-               an economical and safe means of storing                                Emission                                        Emission Limits                           Typical Emission Levels
tion of generation technologies generally            hydrogen in homes does not yet exist.
                                                                                                                            NOx                                             0.045 (3)                                 1
requires cogeneration applications with
                                                     Fuel Cell Permitting Advantages
emissions of 5 parts per million (ppm) of                                                                                   CO                                              1.40 (10)                                 5
NOx to install selective catalytic reduc-              It is more common for fuel cells to use
tion (SCR) for control of emissions. The             natural gas as a source of hydrogen, since                             SOx                                             (b)                                       (b)
operating and maintenance costs of SCR               the requirements for safe handling of
                                                     natural gas are well established for                                   Particulates                                    (b)                                       (b)
would be prohibitive to small DG units of
                                                     commercial and residential applications.
less than 15 MW, however, find .                                                                                            Unburned Hydrocarbons                           0.03 (250)                                ~1
                                                     The California Energy Commission cites
                                                     no significant permitting issues for fuel                           (a)            Numbers in parentheses are SAQMD’s emission limits.
Permitting Issues for Fuel Cells                     cells (see Table 5), a major advantage of                           (b)            Emission levels were either negligible or lower than detectable
   Fuel cells are more flexible in regard to         fuel cells over other competing DG                                  Source: U.S. Department of Energy, Federal Technology Alerts, Natural Gas Fuel Cells, p.16
fuel sources than other DG technologies,             technologies:
offering options of using pure hydrogen
or other fossil fuel derivatives. Fuel cells         • Natural gas fuel cells (NGFCs) have                                       Table 6: Natural Gas Fuel Cell (NGFC) Emission Levels (units of ppmv, 15% O2 dry)
that use pure hydrogen and oxygen as                   very low emissions because they rely on
inputs to produce energy emit no pollut-               chemical reaction rather combustion to
ants. On the other hand, except for some               produce energy.
                                                     • NGFCs also produce as byproducts                              relatively small numbers of Phosphoric                                         sanitary discharge standards adopted by
industrial and commercial settings,                                                                                  Acid Fuel Cells (PAFCs) that have been                                         most local regulatory authorities.
experience with storage and use of pure                relatively pure water, CO2, and rela-
                                                       tively low levels of hydrocarbons,                            installed and demonstrated in stationary                                     • The fuel cells that have been commer-
hydrogen is not widespread and percep-                                                                               applications:                                                                  cialized to date have been reliable and
tions exist that it is highly explosive. The           carbon monoxide, and nitrogen oxides.
                                                     • The California South Coast AQMD                               • These fuel cells are easily located in                                       require low maintenance.
disastrous explosion of the Hindenburg                                                                                                                                                            • The California Energy Commission
dirigible in 1938, which was filled with               independent emissions tests of a NGFC                           urban areas serving large loads at
                                                       system confirmed low levels of air                              central locations such as distribution                                       concludes, “there are no significant
hydrogen, is responsible for much of the                                                                                                                                                            permitting issues associated with
negative impressions of hydrogen. One                  pollution, granting the NGFC exemp-                             substations, hospitals, offices and other
                                                       tion from all air quality permitting (See                       institutions.                                                                commercially-available PAFCs.”63
study claims that hydrogen was not the
cause of the disaster, that hydrogen will              Table 6).                                                     • Such uses are feasible because PAFCs                                       Fuel Cell Permitting Obstacles
disperse much more quickly than gasoline             • Nitrogen oxide emissions from fuel                              are modular (5kW to 10 MW), can be                                           As of 1997, large size fuel cells
and natural gas, and storing hydrogen can              cells in pounds (lb.)/ BTU were 0.003                           operated from remote locations, and the                                    encountered permitting obstacles in
actually be safer than storage of gaso-                to 0.02 lb./BTU compared with 0.3 lb./                          amount of land used, operating noise,                                      California even though technical tests
line.60 Negative perceptions in regard to              BTU for gas engines and 0.10 lb./BTU                            and emissions emitted is minimal.62                                        indicated benign effects on the local
hydrogen’s safety still exist, however,                for gas turbine generators.61                                 • Discharge water that is a byproduct of                                     environment.64 The Sacramento Munici-
especially in regard to its use in homes.              The favorable impacts of NGFCs have                             the NCFG chemical process meets                                            pal Utility District (SMUD) and Southern
Furthermore, hydrogen is not readily                 been largely based on the studies of the                                                                                                     California Gas required that fuel cells


60
   Ford Motor Company, “Direct-Hydrogen-Fueled Proton Exchange Membrane Fuel Cell Systems for Transportation Applications: Hydrogen Vehicle Safety Report,” May 1997, pp. xii and 17-18.
61
   Distributed Power Coalition of America, “Summary of Distributed Generation Technologies,” p.1.
62
   Dufour, A.E., “Fuel Cells – a new contributor to stationary power”, Journal of Power Sources, vol. 71, 1998, p.23; California Energy Commission, Energy Aware Planning Guide: Energy Facilities, Appendix B-6:
“Fuel Cells”, p. B.6.1.
63
   Ibid., p. B.6.2
64
   Op. Cit., CADER, p. 14.


                                                                                   Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                  28
undergo a long permitting process that        permitting process. Under 1997 Califor-                              Planning Commission acts as lead         Summary of Permitting Issues
delayed installation and possibly added       nia laws and regulations, fuel cells sized                           agency for CEQA review which will        and Barriers
costs. These entities raised issues in        between 2kW and 5 MW operating with                                  involve several City/County depart-        Based on considerable experience and
regard to area water quality output and       natural gas, propane, and landfill gas fuel                          ments, the public, California State      research on the permitting process,
disposal. Since California air quality        sources would be required, with excep-                               Clearinghouse, and state and federal     California enumerated six siting and
regulations provided no thresholds to         tions noted, to obtain permits and meet                              agencies. An initial study based on      environment barriers for DG which are
determine whether fuel cells were             requirements on the following:65                                     CEQA guidelines with descriptive         most likely applicable in any area of the
required to have air quality permits, air     • Construction Permits – required by the                             information may be adequate.             nation:66
quality agencies raised questions in regard      California Uniform Building Code and                          •   Hazardous Materials, Emergency           • Lack of Policy Support – policy and
to air quality that also delayed installa-       administered by City and County                                   Response Plan – administered by the        regulations supporting and specifically
tion.                                            Building Departments include the                                  local fire department.                     acknowledging DG are generally
   PAFCs differ in regard to operating           following:                                                    •   Hazardous Waste Generation –               lacking, creating ambiguity, unneces-
characteristics and possible impacts             • Fire Permits – underground or                                   administered by local City/County          sary approvals, which are obstacles to
compared with smaller proton exchange              overhead fire sprinklers, fire alarm,                           Health Department and California           an efficient siting and permitting of DG.
membrane (PEM) fuel cells under                    tank installation, gas detection                                Department of Health                     • Lack of General Information and
consideration for residential applications.        system, site preparation, sewer and                         •   Air Toxics – authorized by Bay Area        Understanding – ignorance and lack of
PAFC high operating temperatures of                fire line permit                                                AQMD regulation # 1-110.8 and              general information on DG and its
205o C are suitable and even advantageous        • Electrical Permits – underground                                administered by the Bay Area               benefits hinders use and acceptance of
for larger DG facilities, but may be               conduit                                                         AQMD, requires a permit for any            DG in the permitting and siting of DG
dangerous and impractical in the home.           • Building permits – plan check,                                  new emission source which results in       projects, adding unnecessary, costly
PEM fuel cells share many of the same              building permit, seismic fee, plumb-                            a net increase in non-attainment           delays.
advantages outlined above for PAFCs, but           ing and mechanical permit, and                                  pollutants. A project may be exempt      • Lack of Information on Technology of
their lower operating temperatures of              landscape                                                       if it emits very low levels of pollut-     DG – lack of research or information
between 70 and 80o C and their potential         • Land Development Review –                                       ants.                                      on the results DG testing and applicable
for achieving lower production costs may           required by local zoning and adminis-                       •   Air Permit – authorized by South           standards can lead to mistaken percep-
make them more favorable candidates for            tered by City or County Building or                             Coast AQMD under Rule 219:                 tions, inappropriate application of DG,
residential applications.                          Planning Departments, covers:                                   equipment not requiring a written          delay and slow the regulatory process,
                                                   review of impact on city/county                                 permit pursuant to Regulation II,          and prevent approval of projects.
Permit and Land Development                        services, infrastructure, traffic, sewer,                       when PAFC, PEM, molten carbonate
                                                                                                                   or solid oxide technologies are used.
Review Process                                     water, fire, zoning, easements, etc.
  California regulations and laws may            • Environmental Review and Condi-
represent an extreme case of complexity            tional Use Permit – authorized by the
in regard to permit and approval require-          California Environmental Quality Act
ments, but are cited here as an indication         (CEQA) and administered by City or
of the potential for complications in the          County Planning Commission:



65
     Op. Cit., CADER, pp. 27-28.
66
     Op. Cit., CADER, pp. 2-13.




                                                                         Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                        29
• Lack of Community Planning Related
  to DG – the acceptability of DG in
  terms of its impact on the community’s
                                                           SUMMARY OF FINDINGS
  environment and infrastructure is not
  established in advance as part of the
  community’s planning process, result-
  ing in negative perceptions and its
  being opposed as an incompatible land               Deregulation of the production and                             Many of the problems related to high        Problems and Opportunities
  use.
                                                   distribution of power provides a particu-
                                                   larly opportune time for the commercial-
                                                                                                                  installed cost, a principal disadvantage of
                                                                                                                  fuel cells in residential building applica-
                                                                                                                                                                 for Fuel Cells in the
• Inconsistent Regulatory and Technical
                                                   ization of DG and fuel cells in particular.                    tions, can deter commercialization.67          Existing Market
  Standards – permit requirements,
                                                   Independent entrepreneurs given access to                      • Taking advantage of the economies
  technical standards, and levels of                                                                                                                               The imperfect market that now exists
  exemptions are inconsistent and overlap          the market under deregulation exist side-                         inherent in mass production can reduce      for DG under deregulation provides both
  across multiple jurisdictions resulting in       by-side and compete in the wholesale                              fuel cell installed cost, but is not        opportunities and obstacles for the
                                                   power market with regulated utilities that                        economically feasible without a
  tortuous, inefficient regulatory process                                                                                                                       commercialization of fuel cells:
  that is costly to the DG customer as             maintain their monopoly status and                                significant expansion of the customer
                                                   operate under different rules. The current                                                                    • About 45 percent of consumers would
  well as to the government.                                                                                         base for fuel cells.
                                                   transitional and fluid state of the electric-                                                                   be interested or very interested in a
                                                                                                                  • As cited above a number of “external”
                                                   ity industry leads to uncertainty that may                                                                      generator about half the size of a
                                                                                                                     institutional and economic barriers to
                                                   make it difficult to maintain necessary                                                                         refrigerator that could be bought for
                                                                                                                     reducing high costs hinder creation of
                                                   levels of generation capacity. In the                                                                           about $400 and saved about 20 percent
                                                                                                                     an expanded market for fuel cells and
                                                   interest of protecting the public from                                                                          of their electric bill, according to a
                                                                                                                     successful commercialization. High
                                                   unreasonable price increases, state                                                                             nationwide survey of 600 consumers in
                                                                                                                     labor and other costs incurred during
                                                   regulatory interventions distort market                                                                         1999.68 If any significant portion of
                                                                                                                     installation, for example, are the result
                                                   price signals that would ordinarily                                                                             these interested consumers purchased
                                                                                                                     of institutional impediments associated
                                                   provide incentives to increase system                                                                           DG, it would have dramatic implica-
                                                                                                                     with establishment of system interfaces,
                                                   capacity and reliability. Economic                                                                              tions for the electric power industry,
                                                                                                                     variation in standards for electrical
                                                   prosperity and population growth in                                                                             concluded the sponsor of the survey.
                                                                                                                     connection with the utility grid,
                                                   certain areas encourages independent                                                                            Potential energy savings depends on
                                                                                                                     imposition of stranded and standby
                                                   distribution companies to revive once                                                                           DG efficiency, the pattern (peaks and
                                                                                                                     costs, and onerous siting and permitting
                                                   discarded plans for expansion of transmis-                                                                      valleys) of residential load profile,
                                                                                                                     regulatory procedures and fees.
                                                   sion and distribution lines, but public                                                                         whether the application allows the
                                                   opposition thwarts implementation for                                                                           consumer the option of selling unused
                                                   environmental and other reasons. As a                                                                           energy, and the method utilities use to
                                                   result, generation and system capacity                                                                          charge consumers. The energy savings
                                                   margins are declining, creating potential                                                                       fuel cells offer residential customers
                                                   for increased power outages and less
                                                   system reliability in the future.
67
  Advances in technology that reduce fuel cell equipment costs can also contribute substantially to decreased installed cost, but are not a focus of this report.
68
  “Consumer Uninformed about Deregulation, Enthusiastic About On-Site Generation”, Deregulation Inc. Webzine: 1999 Deloitte & Touche Consumer Awareness Survey of Electric Deregulation, conducted by
International Consumer Research, Inc., Media PA, November 5-9, 1999.




                                                                                Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                               30
  has yet to be demonstrated, but fuel cell         • In the absence of residential consumers,                        petitive in California, since a very large   • Despite the reported reluctance of some
  efficiency is relatively high compared              business attitudes can provide a                                share of the market is held by tradi-          portions of the market to switch to
  to other DG (See Table 2). The                      foretaste of behavior in the deregulated                        tional utilities with cash reserves from       deregulated energy providers, three
  estimated installed cost of fuel cells,             market. More than half of U.S. busi-                            recovered stranded costs and where the         million customers use non-regulated
  which is significantly higher than other            nesses are distrustful of energy suppli-                        Public Service Commission has already          utility suppliers for natural gas and
  DG options, substantially exceeds                   ers, stating that information they                              reduced electric bills by ten percent.         electricity.74 Moreover, five retail
  residential consumers’ cost goal, while             received from their suppliers is self-                        • Very large consumer price increases            companies catering to these customers
  the less environmentally compatible                 serving or confusing.71 If businesses do                        during the peak summer months have             represent 60 percent of this market.
  diesel generator is the only other DG               not get expert guidance from utilities                          led many states to wrestle with estab-         Each has 300,000 customers, a scale
  technology that meets customer cost                 they are prepared to switch. Businesses                         lishing a maximum wholesale price they         sufficient to reduce the cost of market-
  criteria (See Table 3).                             rank reliable supply, 24-hour customer                          will allow ISOs or distribution compa-         ing and customer service and remain
• A large majority of consumers are                   service, and power delivery ahead of                            nies to pay for power.73 States such as        profitable. The retailers’ focus on
  uninformed about the changes under-                 low prices, according to a recent survey                        California consider such price caps            wholesale commodity markets together
  way in the electric industry and are                and focus groups. Despite the apparent                          necessary since there are not enough           with energy infrastructures and utility
  evenly split as to whether such changes             readiness of businesses to switch, the                          generators bidding against one another         interfaces suggest priorities that might
  will increase or decrease electricity               study finds that IPPs and energy                                to produce competitive prices. For             serve as a model for successful com-
  price.69 Moreover, large numbers of                 brokers that could promote fuel cells                           example, in a recent five-day heat wave        mercialization of fuel cells in the
  residential customers are not switching             are not as aggressive as natural gas                            in California, distribution companies          residential market.
  to new electric power providers                     companies in soliciting key business                            paid three times as much for power on        • The current capacity of the T&D
  because customers are much more                     customers, suggesting that they also                            the wholesale market as they did in the        system is constrained in many areas.
  sensitive to price and are not being                might not be aggressive in promoting                            costliest week in 1999. This amount            Institutional obstacles related to
  offered price discounts, according to               fuel cells in the residential market.                           included substantial funds from the            permitting rather than technical factors
  another survey.70 For example, 20                 • State regulators find it difficult to let                       California ISO to stabilize the system.        result in growing opposition to new
  percent of residential customers would              the free market determine energy prices                         The San Francisco area’s power system          substation and T&D infrastructure
  switch if offered a ten percent discount            for residential consumers and are not                           came dangerously close to collapse and         despite the proposed new lines’
  with other non-price attributes remain-             ready to embrace deregulation by                                rolling blackouts were ordered through-        demonstrated electrical need, economic
  ing the same, while only five percent               opening up the market to deregulated                            out the area. Market opportunities             feasibility, and environmental compat-
  would switch if reliability is less                 energy providers that might install                             might exist for entry of IPPs promoting        ibility.75 Aside from reported problems
  assured, and no one would switch if                 DG.72 For example, the regulated price                          DG such as fuel cells if shortages of          regarding electromagnetic fields,
  reliability and customer service were               structure in Massachusetts makes it                             power and market imperfections                 environmental impact, and declines in
  likely to diminish. Given these condi-              hard for outside retailers to be price                          persist, and if, as promised, the              property values attributed to proposed
  tions, fuel cells can compete with other            competitive with existing utilities in the                      majority of generators should remove           power lines, local entities are concerned
  DG in the broad residential market                  residential market. Entrepreneurial                             themselves from the California market          that new lines will import power,
  only if they become less expensive or               IPPs that might install DG such as fuel                         when and if caps are reduced.                  thereby diminishing jobs at local power
  serve niche markets that highly value               cells find it difficult to be price com-                                                                       plants or the amount of local resources
  reliability and environmental compat-                                                                                                                              used for fuel at plants. Some claim that
  ibility.

69
   Op. Cit., “Consumer Uninformed...”
70
   W. Causey, “What Prevents Customers from Switching”, Electrical World, March/April 2000, p. 47. (A study by National Economic Research Associates, San Francisco).
71
   RKS Research & Consulting, “Study Reports Fragile Relationships Between U.S. Businesses and Electricity Suppliers,” Business Wires, March 30, 2000.
72
   Ibid.
73
   R. Smith, “California Ponders Lowering Price Cap as Hot Spell Raised Temper,” Wall Street Journal, June 26, 2000.
74
   J.D. Pine, “Report Says Number of Consumers Embracing Retail Choice is Snowballing,” Deregulation Inc. Webzine, 1999.
75
   M. Janick, “Siting Lines and Substations Gets Harder as Opposition Gets Savvy,” Electrical World, March/April 2000, p. 15.

                                                                                  Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                 31
     existing transmission lines were not            under deregulation that nullifies many                            PEM and other types of fuel cells now         review the equity and justification for
     designed to accommodate the increas-            of the inherent advantages of DG                                  in the early stages of commercializa-         recovering stranded costs and allow
     ing number of independent generation            technologies and discourages IPPs from                            tion.78                                       more flexible standby charges. Provide
     and cogeneration projects being built           promoting them.                                               •   Require utilities to offer net metering       direct and indirect government aid that
     and proposed as a result of deregula-           Some experts are skeptical concerning                             for DG and fuel cells. Such a require-        induces utilities to adopt DG and fuel
     tion.76 Other studies discussed above         the value of direct public support for DG,                          ment should include a formula that            cell technologies in later stages of
     claim, however, that customer-side DG         claiming that:                                                      provides a cap on the amount of net           commercialization. Such incentives
     such as fuel cells provides a cost-                                                                               metering allowed on an individual             would make fuel cells and DG more
                                                   • Sufficient incentives exist for the
     effective and environmentally compat-                                                                             utility’s system. The cap should be           competitive. Incentives could include
     ible approach to relieving congestion           private sector to invest in the R&D and                           sufficiently high to provide incentives       buy-downs, tax credits, special fuel
                                                     commercialization of new, efficient, and
     and circumventing some of these                                                                                   to install fuel cells, but small enough       tariffs, or subsidized loans.79
                                                     cost-effective technologies with new
     problems. DG also provides a local                                                                                not to significantly impact the utility’s   • Develop uniform, efficient permitting
     sense of ownership and connection with          entrepreneurs emerging from utility                               revenue.                                      requirements and processes that balance
                                                     restructuring under deregulation, the
     power lines that is now lacking and                                                                           •   Mandate or facilitate agreement among         environmental concerns and concerns
                                                     trend of increasing fuel prices, and the
     thwarts new construction of T&D.                                                                                  utilities to provide standardized             about the local impact of DG with DG’s
                                                     capacity constraints that now exist in                            technical requirements for interconnec-       broad benefits to the public. Allow
                                                     the electric power system.
                                                                                                                       tion of DG and fuel cells, limiting           independent laboratories to test and
                                                   • The artificial price signals resulting
Public Intervention on                               from public subsidies prevent the
                                                                                                                       utilities’ discretion to accept or modify     pre-certify fuel cells to ensure that they
Behalf of Fuel Cells                                 market’s evaluation of the real efficien-
                                                                                                                       standards. Such procedures would
                                                                                                                       allow manufacturers to offer more
                                                                                                                                                                     meet uniform, minimum regulatory
                                                                                                                                                                     requirements for installation.
                                                     cies and costs of competing DG
  A number of general recommendations                                                                                  affordable, standardized plug and play      • Provide regulatory or financial incen-
                                                     technologies.                                                     products.                                     tives for the creation of distribution
for overcoming the hurdles that contribute         • Public programs give some DG
to the high installed cost of fuel cells and                                                                       •   Require utilities to provide simple, easy     level power markets that allow DG and
                                                     technologies that might not make it on
DG in general depend on public funding.                                                                                to understand contracts appropriate for       fuel cells to execute bids and bilateral
                                                     their own an unfair competitive                                   customers installing small DG systems         contracts in a DG power exchange,
Public involvement is based on the                   advantage.
following:                                                                                                             such as fuel cells.                           thereby competing more directly with
                                                     A number of general policy recommen-                          •   Reduce or waive various fees and              central power plants and other sources
• Government expects significant public            dations aimed at federal, state, and local                          charges associated with permitting,           of power through real-time pricing.
  benefits from its programs in the form           government entities could provide a                                 installing and/or operating DG and fuel
  of reduced impacts on climate change,            context for reducing costs, increasing                              cells.
  reduced air pollution, substantial
  increases in energy efficiency, and
                                                   consumer incentives, and elevating the
                                                   economic feasibility of fuel cells:77
                                                                                                                   •   Adopt new federal legislation that          Prospects for Residential
  reduced dependency on petroleum.
                                                   • Continue government-funded research
                                                                                                                       restructures the utility distribution
                                                                                                                       system and incorporates new proce-
                                                                                                                                                                   Fuel Cells
• The government may seek to redress
                                                     and development (R&D) and demon-                                  dures to remedy some of the market            A very optimistic future has been
  unfair competitive advantage of
                                                     strations of equipment performance                                imperfections and unintended conse-         forecast for fuel cells in stationary
  traditional utilities and distribution
                                                     under real operating conditions for                               quences of EPACT. In the process,           markets. A relatively modest projection
  companies in the imperfect market

76
   Ibid.
77
   Op. Cit., Starr, pp. 24-26.
78
   NAHB Research Center, for Partnership for Advancing Technology in Housing (PATH), Task 1.0 Interim Report Background Literature Review of Fuel Cell Firms, Products, and Research and Development, March
17, 2000.
79
   Op. Cit., Arthur D. Little, Policy Framework for Regulators, p. 26.



                                                                                 Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                32
still expects fuel cells in stationary                  contribute to frequent outages and                              place more strain on a constrained             An increasing number of homeowners
applications to grow substantially from a               where price is secondary to good power                          utility system and can increase the         desire high-speed Internet access, but
revenue base of $20.9 million in 1998 at a              quality and reliability.                                        probability of outages.                     developers and builders of subdivisions
compound annual growth of 49.6 percent                  An indeterminate number of homes may                          • Digital appliances and computers are        and planned communities in the suburbs
by 2005.80 The high-tech, health care, and            be increasingly sensitive to frequent                             extremely sensitive to lapses of power      own the land and easements necessary to
financial segments of the non-residential             outages and poor power quality, espe-                             as small as one to five minutes, which      carry the structured wiring that provides
sector need and can pay for high quality,             cially when exacerbated by severe                                 can cause major disruptions.                broadband access to individual homes.
stand-by, and uninterrupitible power and              capacity constraints on the generation and                      • Electronic controlled devices can           Builders have been taking advantage of
are likely to drive growth. However, the              distribution of energy in their areas.                            provide interference or harmonic            this monopoly on real estate, the so-called
prospects for growth may be much more                 Recent trends in usage of electricity                             signals that can negatively affect the      “first mile,” either by building and
narrow and specialized in the residential             increase the sensitivity of this residential                      grid and other equipment in the home        owning neighborhood networks that offer
sector. Fuel cells will have to compete               market to the quality of power, adding it                         unless cancelled by filtering devices.      Internet access bundled with cable and
with other DG technologies in entering                to the list of potential markets for fuel                       • Poor power quality resulting from as        phone service or by joining with telecom-
the residential market. Assuming that the             cells:                                                            much as a ten percent voltage dip in        munication companies to provide such
fuel cell’s small footprint, noiseless                                                                                  less than a second can cause problems       access.82 Such service is being offered at
operation, low maintenance requirements,              • The increasing importance of comput-                            in the operation some types of digital      up to $20 dollars below cost. Moreover,
                                                        ers and other digital appliances in the
and negligible pollution levels are                                                                                     equipment.                                  homeowners can pay one fee for Internet
                                                        home for general access to the Internet
particularly desirable in the residential                                                                                                                           and cable through a homeowner associa-
market, it should have an advantage over                as well as entertainment and home                                                                           tion instead of receiving different bills. In
                                                        automation;
other DG technologies in this sector. It
                                                      • The increasing proportion of house-                           Builders and the Potential of                 effect, builders are either competing with
has been suggested, however, that the fuel
cell’s chief competitor among DG                        holds that telecommute or work at                             Micro-grids                                   regional phone companies, cable compa-
                                                                                                                                                                    nies, and other service providers, or are
                                                        home and depend on home computers
technologies might be the gas                                                                                            Some claim that the course of deregula-    joining with them to share in continuing
                                                        for their livelihood; and
microturbine and that opportunities for                                                                               tion of telecommunications industry a         revenue resulting from the market for new
installation of fuel cells exist only in some         • The increasing use of microchips or                                                                         technologies.
                                                        electronic devices for control in                             decade ago and the rise of the Internet are
small segments of the residential market                                                                              analogous to deregulation of the power           Production builders are establishing
                                                        appliances, electric light ballast, and
where price is less of an issue such as: 81                                                                           industry and the rise of DG, providing a      relationships with the high tech telecom-
                                                        variable speed motors in compressors
• luxury homes that can afford the high                 for energy efficiency.                                        foretaste of what might happen to             munications industry because they are
   cost of fuel cells;                                                                                                emerging DG technologies under deregu-        seeking sources of stable, long-term cash
                                                        Increases in use of digital equipment                         lation of the power industry. Some of the
• homes located in remote areas where                                                                                                                               flow. Despite the prosperity of home
   power infrastructure is lacking, making            and electronic control of devices can                           impacts of deregulation of telecommuni-       building in recent years, publicly traded
                                                      contribute to a number of negative                              cations industry and the Internet as they
   conventional connections to the grid                                                                                                                             homebuilding stocks are trading at prices
                                                      impacts that may influence this segment                         relate specifically to the homebuilding
   extremely costly, but homes will still                                                                                                                           of only five to eight times earnings and at
   have to be provided with fuel;                     of the residential market to add DG as an                       industry may therefore serve as a model       values below prior years when they were
                                                      auxiliary source of power:
• homes in areas subject to frequent and                                                                              for the impact of DG on home building in      less profitable.83 One of the reasons for
   severe weather disturbances that                   • An increase in the density of residential                     a deregulated environment.                    this anomaly is that the industry in the
                                                        demand in watts per square foot can

80
   “A Sober Look at Fuel Cells in the New Millennium” Deregulation Inc. Webzine, citing Frost & Sullivan, “Stationary Fuel Cell Markets”.
81
   Ibid.
82
   R.A. Oppel Jr., “Internet-Ready Houses are Finding a Home,” The New York Times, May 26, 2000, p. 1.
83
   P.O. O’Toole, “Out of Whack on Wall Street,” Professional Builder, April 2000, pp. 128-134.




                                                                                    Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                                   33
past has proven to be very cyclical–one of         nications are looking for builders to                     cells’ high installed cost among a large         • The margin of benefits over cost is
the first sectors to feel the impact of rising     wire their planned communities                            number of homeowners in subdivisions:              assumed to be sufficient to provide
interest rates. Another reason is that           • R. Horton, a builder headquartered in                     • A builder could install, own, and                revenue incentives for builders as well
industry has the reputation of being “low-         Arlington, Texas, is partnering with a                      operate a larger capacity fuel cell at a         as reduced energy costs and high
tech” and does not have the positive               Santa Monica-based venture capital                          substation that supplies power to                quality, reliable energy for prospective
connotations for investors that the current        firm to create a $100 million fund                          individual homes within a subdivision            homeowners.
high-tech sector enjoys. Expansion into            desiring to invest in e-commerce and                        development and interconnects with the         • Negotiations with a utility, DisCo, or a
telecommunication also gives some                  Internet opportunities that relate to real                  utility grid for the sale of excess power        wires company would be necessary for
homebuilders an opportunity to differenti-         estate and home building industries.85                      and receipt of standby power.                    electrical connection with the grid.
ate their product in competition with other      • Estridge Companies, a builder of                          • A builder could install, own, and                Negotiation is most likely to proceed
builders and garner a share of the profits         Centennial homes outside of Indianapo-                      operate small fuel cells at the customer         favorably if the subdivision develop-
in the rapidly growing high-tech industry.         lis, has formed a company with another                      side of the meter in all individual              ment is located in an area where
   Large builders are making a concerted           investor, First Mile Technologies, to                       homes offered for sale in a subdivision          constraints exist on either generation
effort to partake in the ownership of the          wire new developments. It expects to                        of homes and would connect these units           and T&D or T&D alone.
revenue streams flowing into the Internet,         negotiate deals with other developers,                      to a utility substation within the             • Along with the potential for increased
the cable, the telephone lines after the sale      granting them up to ten percent of the                      subdivision. In this alternative, the            margins and cash flow, the builder ESP
of the house is completed. This effort             revenue from services that it sells their                   small footprint and benign noise and air         and/or subcontractor must also bear the
takes many forms, some of which may                homebuyers and expects that such                            pollution attributes of fuel cells along         increased risk associated with participa-
possibly serve as models for local energy          services would be 15 percent or more                        with low maintenance requirements                tion in the very fluid energy market
micro-grids:84                                     less expensive for the homeowner.                           provide an advantage over other DG               fluctuating prices for power as well as
                                                 • Although Centex Corporation in Dallas                       technologies. The high installed cost            fuel. (See discussion above).
• Toll Brothers, a builder of luxury               has not yet invested in broadband
   homes in Huntington, Pennsylvania has                                                                       could be offset by discounts from the
                                                   services, it is seeking to augment its                      manufacturer based on the economies
   formed its own subsidiary to build and
                                                   cash flow by diversifying into areas                        of scale from large volume production.
   own broadband networks in its develop-          such as lawn care and home security.
   ments. It recently formed a unit,                                                                           In each of the above alternatives:
   Advanced Broadband to wire two new              As noted above, the construction of a
                                                                                                             • A subsidiary construction company or
   developments in Florida and one in            miniature electric grid or a so-called
                                                 micro-grid based on fuel cell technology,                     ESP, independent ESP or one that is an
   Virginia.                                                                                                   affiliate or subsidiary of a utility, or IPP
• Also Toll Brothers and other builders          combined with other energy saving
                                                                                                               could install, operate, and maintain the
   such as Kaufman & Broad are evaluat-          construction measures, offers builders an
                                                 opportunity to obtain long-term cash flow                     fuel cell and micro-grid system.
   ing revenue-sharing deals with compa-                                                                       Depending on contractual arrangements
   nies to install wiring in new communi-        based on highly-valued services that also
                                                                                                               and negotiations they could share in
   ties                                          provide the builder with potential for
                                                 higher margins. A number of alternatives                      ownership and revenues with the
• Service providers such as SBC Commu-                                                                         builder.
   nications, U.S. West, and Cox Commu-          exist for spreading the burden of fuel



84
     Ibid.
85
     Op. Cit., O’Toole, p. 130.




                                                                           Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                          34
     GLOSSARY


Ancillary Services – Generation, storage                   Black Start – A power source’s ability to      Cogeneration – (See CHP) The produc-
and generation-like services that comple-                  power up from a cold shut down condi-          tion of electricity and, in sequence,
ment electricity generation and support                    tion to a fully operational status through a   another form of useful thermal energy for
the quality and stability of the grid                      dedicated auxiliary power source that is       general heating and cooling purposes or
including, but not limited to, reliability                 totally independent of external systems.       steam for industrial processes. Many
services such voltage support, reactive                    It is the net capability of generating units   nonutility electricity-generating compa-
power, black start, spinning and non-                      that carry load or have quick-start            nies own cogeneration facilities, and have
spinning reserve, and generation of                        capability. In general, quick-start            status under the Public Utilities Regula-
services in areas with power supply                        capability refers to generating units that     tory Act (See PURPA) of 1978 as
capacity constraints (see definitions                      can be available for load within a 30-         Qualifying Facilities (See QF below),
below).                                                    minute period.                                 which allows them to sell excess power
                                                                                                          back to utilities at avoided cost (See
Avoided Cost – Equivalent to the utility’s                 CHP – Combined Heat and Power –                Avoided Cost). Other cogenerators
cost of providing electricity service,                     (See Cogeneration) Projects that use           produce power for their own use and do
which is much lower than the retail rate                   cogeneration to generate heat and power        not qualify as facilities under PURPA.
and is used as a basis for compensating                    from the same energy source. For
cogenerators (See Cogenerators and CHP)                    example, waste heat that is normally           Congestion – The condition that exists in
and Small Power Producers (See SPPs)                       released into the air is efficiently recov-    a portion of the transmission and distribu-
under the Public Utility Regulatory Policy                 ered to generate large volumes of steam,       tion (See T&D) system where T&D
Act (See PURPA and QFs).                                   which is used to provide space or process      capacity is inadequate to accommodate
                                                           heat before being changed back to water        the downstream peak load with generation
Baseload – The minimum amount of                           and reused. The generation of two energy       from an upstream central facility. Con-
electric power delivered or required over                  products from one fuel input generally         gestion may be relieved by redispatch of
a period of time at a steady rate.                         lowers the cost of providing both prod-        the upstream generation, downstream
Baseload capacity consists of generating                   ucts.                                          generation or storage, by demand side
equipment normally operated to serve                                                                      management (See DSM), distributed
loads continuously.                                                                                       generation (See DG), or by expanding the
                                                                                                          T&D.




                         Institutional Factors Affecting Commercialization of Fuel Cells
                                                        35
CTCs – Competitive Transition                 DSM – Demand-Side Management –                              Electric Energy – The amount of work           ESPs or ESCOs – Energy Service
Charges – (See Stranded Costs) CTCs           The planning, implementation, and                           that can be done by electricity. The unit      Providers or Energy Service Compa-
refer to charges that offset uneconomic       monitoring of utility activities designed to                of measure for electric energy is a watt-      nies – Retail companies that buy power at
investments as a consequence of deregu-       encourage consumers to modify patterns                      hour. Electric energy is measured over a       wholesale prices and sell it, ancillary
lation.                                       of electricity usage, including the timing                  period of time and has a time dimension        services, or other services to end use
                                              and level of electricity demand. DSM                        as well as an energy dimension. The            customers from either the system side or
Cooperative Electric Utilities – Utilities    refers only to energy and load-shape                        amount of electric energy produced or          the customer side of the meter. Services
that are owned by members and estab-          changes arising from the normal operation                   used during a specified period of time by      on the customer side of the meter may
lished to provide electricity to those        of the marketplace or from marketplace or                   a piece of electrical equipment is referred    include billing, energy auditing, load
members. Cooperative electric utilities       government–mandated energy–efficiency                       to as generation or consumption.               management, distributed generation (See
operate in rural areas with low concentra-    standards. DSM covers the complete                                                                         DG) or cogeneration. Such companies
tions of consumers because these areas        range of load-shape objectives, including                   Electric Power – The rate at which             may be utility affiliates. At the option of
historically have been viewed as uneco-       strategic conservation and load manage-                     electricity does work – measured at a          customers, the companies may charge for
nomical operations for IOUs (See IOUs).       ment, as well as load growth. In essence                    point in time, with no time dimension.         other ancillary services (See Ancillary
                                              it encompasses measures that reduce or                      The unit of measure for electric power is      Services) such as assuring power reliabil-
COS – Cost-of-Service – An approach           shift the customer’s energy load in the                     a watt.                                        ity (See Reliability), providing emergency
used to regulate utility rate of returns in   interest of energy conservation and                                                                        back up power, and offering demand-side
which a utility’s rate of return is guaran-   efficiency. For example, DSM can                            EPACT – Energy Policy Act of 1992              management (See DSM). Service may
teed based on their “prudent” investment      manage energy dispatched over the grid                      (Public Law 102-486) – EPACT contains          also include energy project development,
in plant and equipment—the so-called          and/or non-dispatchable energy used                         two provisions that enabled deregulation:      risk management, or operation and
rate base. Under this approach, invest-       entirely within the home by providing for                   (1) the creation of new class of non-utility   management of energy facilities.
ment in large power plants, transmission,     interruption of customer energy service.                    electric power producers, including public
and distribution facilities generally                                                                     utility holding companies, that could          Electric Utility – A corporation, person,
contribute to larger rate bases, which        DisCos – Distribution Companies –                           develop and operate independent power          agency, authority, or other legal entity or
result in greater profits.                    Investor-owned utilities (see IOUs) that                    projects anywhere in the world, and (2)        instrumentality that owns and operates
                                              own and operate generation and distribu-                    the broadening of the authority of FERC        facilities within the United States for the
                                              tion facilities and may also be a retail                    (See FERC) to order a transmitting utility     generation, transmission, distribution, or
                                              supplier of electricity.                                    to provide transmission service, including     sale of electric energy primarily for the
                                                                                                          building of facilities needed to provide       use by the public and files forms listed in
                                              DG – Distributed Generation – The                           transmission, at the request of any electric   the Code of Federal Regulations, Title 18,
                                              placement and use of small, modular                         utility, federal power marketing agency, or    Part 141. Independent Power Producers
                                              electric generation, either integrated or                   business generating electricity at whole-      (See IPPs) or facilities that qualify as
                                              stand-alone, close to the point of con-                     sale. Together, these two provisions           cogenerators (See Cogenerators) or Small
                                              sumption. A fuel cell is one example of a                   opened up the industry so that virtually       Power Producers (See SPPs) under the
                                              distributed generation technology that can                  any business could generate electricity        Public Utility Regulatory Act (See
                                              be used in commercial and residential                       and sell it at wholesale.                      PURPA and QFs) are not considered
                                              buildings.                                                                                                 electric utilities (See Non-Utilities).




                                                                        Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                       36
Exit Fees – (See Stranded Costs) Fees         Interruptible Load – Program activities                     IPPs – Independent Power Producers –           ISOs – Independent System Operators
imposed on DG customers when they             (See DSM) that, in accordance with                          Nonutility companies (See Nonutility           – A regional organizational entity that
leave the grid, reducing the utility load     contractual arrangements, can interrupt                     Power Producers) that generate power for       plans and operates a transmission system
and making portions the utility infrastruc-   consumer load at times of seasonal peak                     their own use and/or for sale in wholesale     but is not its owner, a generator, or
ture uneconomic.                              load by direct control of the utility system                power markets. IPPs can operate entirely       service provider. Prior to deregulation
                                              operator or by action of the consumer at                    independent of traditional, regulated,         vertically integrated utilities formed
FERC – Federal Energy Regulatory              the direct request of the system operator                   vertically integrated utilities (See Verti-    regional power systems that decided on
Commission – A quasi-independent              (remote tripping) after notice to the                       cally Integrated Utilities), or indepen-       peak power requirements and imple-
regulatory agency within the U.S.             consumer in accordance with contractual                     dently as wholly owned subsidiaries of         mented emergency power programs.
Department of Energy (DOE) having             provisions. For example, loads that can                     utility holding companies. Independent         ISOs assume many of these decision-
jurisdiction over interstate electricity      be interrupted to fulfill planning or                       System Operators (See ISOs) assure IPPs        making functions and in addition operate
sales, wholesale electric rates, hydroelec-   operation reserve requirements are                          access to the grid to sell electricity at      the new competitive power market,
tric licensing, natural gas pricing, oil      reported as Interruptible Load, and                         wholesale prices to utilities, DisCos, ESPs    defining and valuing ancillary services
pipeline rates, and gas pipeline certifica-   excludes Direct Load Control and other                      or ESCOs. IPPs can use distributed             and creating rules that assure DG access
tion.                                         load management methods of controlling                      generation (See DG) or combined heat           and participation in the power market.
                                              demand. This definition is synonymous                       and power (See CHP) to produce energy.         Utilities usually voluntarily join ISOs in
Fuel Cells – Electrochemical devices that     with Interruptible Demand as reported to                    Utilities are required to buy IPPs’ excess     their own self-interest, thereby obviating
can continuously convert the chemical         the North American Electric Reliability                     power at avoided cost if, under PURPA,         possible imposition of federal rules, but
energy of a fuel and oxidant to electrical    Council (See NERC) on the voluntary                         they qualify as a cogeneration facility        some opt out when they disagree with
energy. The fuel and oxidant are typically    Office of Emergency Operations Form                         (See QFs) or they qualify as a small           rulings. The Federal Energy Regulatory
stored outside of the cell and transferred    OE-411, “Coordinated Regional Bulk                          power producer (SPP) that generates at         Commission (FERC) approves acquisi-
into the cell as reactants are consumed.      Power Supply Program Report.”                               least 75 percent of their power from           tion and mergers on condition that the
                                                                                                          renewable resources (See SPP and QFs).         entities involved join a regional ISO.
Gas Turbine Plant – An electric-              IOUs – Investor-Owned Electric                              Under deregulation, the unbundling of
generating plant in which the prime           Utilities – Privately owned entities that                   electricity supply from transmission and       Islanding – Operation of a non-utility
mover is a gas turbine. A gas turbine         have the fundamental objective of                           distribution has opened wholesale power        power source with or without a portion of
typically consists of an axial-flow air       producing a return for their investors.                     markets to competition and spawned the         the utility system isolated from the
compressor and one or more combustion         IOUs either distribute profits to stock-                    growth of non-QF IPPs that produce and         remainder of the utility system.
chambers, where liquid or gaseous fuel is     holders as dividends or reinvest profits.                   sell power at market wholesale prices or
burned and the hot gases are passed to the    IOUs are granted service monopolies in                      for resale and do not possess transmission     Load (Electric) – The amount of electric
turbine, in which hot gases expand to         certain geographic areas and are obliged                    facilities or sell electricity on the retail   power delivered at any specific point or
drive the generator and are then used to      to serve all consumers. As franchised                       market.                                        points on a system. The requirement
run the compressor.                           monopolies, IOUs are regulated and                                                                         originates at the energy-consuming
                                              required to charge reasonable prices, to                                                                   equipment of consumers.
                                              charge comparable prices to similar
                                              classifications of consumers, and to give
                                              consumers access to service under similar
                                              conditions. Most IOUs are operating
                                              companies that provide the basic services
                                              for generation, transmission and distribu-
                                              tion of electricity.




                                                                        Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                       37
Megawatt (MW) – One million watts               PBR – Performance-Based Ratemaking                             PURPA – Public Utilities Regulatory          Reactive Power (VAR) – A unit of
(See Electric Power).                           – An approach used in regulating utilities                     Act of 1978 – Act which granted special      reactive power in a circuit carrying a
                                                that takes into consideration fixed and                        rights to sell power under protected         sinusoidal current. A VAR equals the
Net Metering – A type of metering of            variable costs in determining revenues,                        contracts to qualifying independently        amount of reactive power in the circuit
electricity in which the meter spins            often incorporating caps on price or                           owned industrial and institutional cogen-    when the product of the root-mean-square
forward when energy from the utility is         revenue. Under this approach, utilities                        eration projects that provide combined       of the Volts (Voltage) by the root-mean-
flowing into a building and backward            generally have a stronger incentive to                         heat and power or Small Power Producers      square of the current (amps) and the sine
when energy flows from a generator              reduce costs rather than invest in their                       (See SPP) that generate power from           of the phase angle between the voltage
(usually a photovoltaic system) in a            system to obtain profits.                                      renewable resources (See QFs and IPPs).      and the current equals one.
building to a utility. At the end of the
billing period the customer is charged for      Power Reliability – The ability of the                         QFs – Qualifying Facilities – Indepen-       Reserve Power or Margin (Operating)
net energy consumed.                            power system to perform a required                             dent generators or producers of power        – The amount of unused available
                                                function under stated conditions for a                         (See Nonutility Power Producers and          capability of an electric power system at
Nonutility Power Producers – Corpora-           stated period of time. Power reliability                       IPPs). Authorized under PURPA, many          peak load for a utility system as a percent-
tions, persons, agencies, authorities, or       can be measured most generally by the                          QFs are industrial cogeneration (See         age of total capability.
other legal entities or instrumentalities       percentage of the total time the power                         Cogeneration and CHP) projects that must
that own electric generation capacity and       system is available for operation or by the                    meet certain requirements in regard to       Retail – Sales covering electrical energy
are not electric utilities. Nonutility power    forced outage rate, the percentage of the                      operation, efficiency, fuel size, and        supplied for residential, commercial, and
producers are synonymous with indepen-          time the system is not available for                           ownership. Qualifying facilities are         industrial end-use purposes. Other small
dent power producers (See IPPs) and             operation due to unplanned factors or the                      typically large, custom facilities ranging   classes such as agriculture and street
include qualifying cogenerators, qualify-       mean time between forced outages. A                            in size from five to 50 MW. They are         lighting are included in this category.
ing small power producers, and other            power plant can be deliberately taken out                      allowed to sell power that utilities must
nonutility generators without a designated      of service at a specific time for construc-                    purchase at avoided cost (See Avoided        Spinning Reserve – Reserve generating
franchised service area.                        tion, repair or maintenance. Conse-                            Cost). Other QFs are Small Power             capacity running at zero load and syn-
                                                quently, a scheduled outage factor                             Producers (See SPPs) that rely on            chronized to the electric system.
NERC – North American Electric                  measures the percentage of time set aside                      renewable energy as sources for power.
Reliability Council – Voluntarily formed        for planned maintenance.                                                                                    SSP – Small Power Producer – A small
in 1968 by the electric utility industry as a                                                                  Rate Base – The value of property upon       power production facility or producer
result of the 1965 power failure in the         Publicly Owned Electric Utilities –                            which a utility is permitted to earn a       generates electricity using waste, renew-
Northeast, NERC has responsibility for          Nonprofit local government agencies                            specified rate of return as established by   able (water, wind, and solar), or geother-
overall reliability planning and coordina-      established to provide service to their                        regulatory authority. The rate base          mal energy as a primary source of energy,
tion of interconnected power systems.           communities and nearby consumers at                            generally represents the value of property   qualifying under the Public Utility
NERC’s nine regional councils cover 48          cost, returning excess funds to consumers                      used by the utility in providing service     Regulatory Act (See PURPA and QFs).
contiguous states, part of Alaska, and          in the form of community contributions,                        and may be calculated by any one or          Fossil fuels can be used but renewable
portions of Canada and Mexico. The              increased economies and efficiencies in                        combination of the following methods:        resources must provide at least 75 percent
councils are responsible for overall            operations, and reduced rates. They                            fair value, prudent investment, reproduc-    of the total energy input. (See Code of
coordination of bulk power policies that        include municipals, public power dis-                          tion cost, or original cost.                 Federal Regulations, Title 18, Part 292.)
affect the reliability and adequacy of          tricts, state authorities, irrigation districts,
service in their areas.                         and other state organizations.




                                                                             Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                            38
Standby Power – Power provided to             Switching Station – Facility equipment                      Unbundling – Separating generation,           Wheeling Service – The movement of
consumers by generators on a customer’s       used to tie together two or more electric                   transmission, and distribution that           electricity from one system to another
site (See DG) or during power outages         circuits through switches. The switches                     function together as a monopoly service       over a transmission network of intercon-
due to storms or accidental damage to         are selectively arranged to permit a circuit                in a vertically integrated utility (See       nected systems. Wheeling service
overhead T & D systems.                       to be disconnected, or to change the                        Vertically Integrated Utility) so that they   contracts can be established between two
                                              electric connection between circuits.                       function as individual services under         or more systems.
Standby Service – Service that is                                                                         independent entities with competitive
available, as needed, to supplement a         Transformer – An electrical device for                      rates.                                        Wholesale Sales – Energy supplied to
consumer, a utility system, or to another     changing the voltage of alternating                                                                       other electric utilities, cooperative,
utility if a schedule or agreement autho-     current.                                                    Vertically Integrated Utilities – An          municipals, and federal and state electric
rizes the transaction.                                                                                    arrangement whereby the same company          agencies for resale to ultimate consumers.
                                              T & D – Transmission and Distribution                       owns all the different aspects of making,
Stranded Costs – Investments that are no      – An interconnected group of electric                       selling, and delivering a product or a        Wires Companies – Companies that own
longer economic and have become               lines and associated equipment for                          service. In the electricity industry, it      and operate only distribution lines,
redundant as a result of breakup of utility   moving or transferring electricity in bulk                  refers to the historically common arrange-    provide delivery services to consumers,
functions under deregulation and when         between points of supply and points at                      ments whereby a utility owns its own          generators of power, marketers or
customers leave the grid. States have         which it is transformed for delivery over                   generating plants, transmission system,       retailers, and that charge customers for
allowed utilities to charge customers         the distribution lines to consumers. The                    and distribution lines to provide all         energy only as a pass through. In some
competitive transition charges (See CTCs)     transmission line is that part of the grid                  aspects of electric service.                  cases DisCos and private, for-profit
and exit fees (See Exit Fees) to offset       that typically transmits energy across state                                                              distribution or wires companies may be
these costs.                                  boundaries that is sold at wholesale prices                 Voltage Reduction – Any intentional           retail suppliers of electricity to customers
                                              (so-called interstate wheeling) and                         reduction of system voltage by three          in addition to performing distribution
Substation – Facility equipment that          therefore is under the Federal Energy                       percent or greater for reasons of maintain-   functions.
switches, changes, or regulates electric      Regulatory Commission and ISO (See                          ing continuity of service of the bulk
voltage.                                      ISO) jurisdiction. The distribution                         power supply system.
                                              portion of the grid includes local trans-
                                              mission and radial feeder lines that
                                              transmit electricity, once it is transformed
                                              to voltages usable in residences, at retail
                                              prices to consumers and is therefore under
                                              state rather than federal jurisdiction.




                                                                        Institutional Factors Affecting Commercialization of Fuel Cells
                                                                                                       39
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                                                   Institutional Factors Affecting Commercialization of Fuel Cells
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