Do-it-yourself power
Toni Mack
Forbes Magazine, 03.09.98

The technology is now here to do what Edison wanted: small generators that are almost as efficient as the utilities' behemoths.

When the new Walgreen's drugstore opens later this year in Peoria, Ill., its power will come from a 75-kilowatt natural gas turbine on the premises. By doing its own generating, Walgreen's will save an estimated 10%off the 6.2 cents per kilowatt-hour the local utility charges. That's a savings of at least $2,400 a year.

Managers at Sears Tower in Chicago want to shave $2 million off its yearly electric bill by having eight 1,600-kilowatt dynamos installed.

The local utility, Unicom Corp., won't let the installeruse the wires Unicom owns in the building.

Welcome to the guerrilla phase of the electric deregulation wars. Do-it-yourself generators cost about $750 per kilowatt of power, or $300,000for a 400-kilowatt generator, enough to power a 130,000-square- foot store. On a capital cost basis, that's competitive with the huge central generating units. Fuel for on-site power is a little more expensive, but the overall savings come from dodging two extras that are built into utility bills: taxes and "stranded" costs. The latter are fees utilities charge to recoup the cost of power plants that wouldn't survive in a free market.

As states deregulate power generation, they're letting utilities recoup stranded costs by overcharging for transmission and distribution systems, which remain monopolies.

Says Enron Senior Vice President Steven Kean: "It's as if you disconnected from the phone company and the phone company showed up on your doorstep the next day with a bill." Californians will be free to choose their own power suppliers in March, but they must still fork over several billion dollars a year until 2002 to their local utilities.

That's where the new technology comes in. With it you don't need the utility companies' wires and towers. For years, only electricity gluttons like oil refineries and aluminum smelters could afford to build their own generators. Now generators as small as 200 kilowatts are almost as efficient and cheap as the big refinery-size ones.

AlliedSignal's 75-kilowatt turbine, now in commercial tests in Peoria and elsewhere, is the smallest on the market. Price: $35,000.

Capstone Turbine Corp. is working on a 30-kilowatt unit, suitable for very large houses. The Palo Alto-based Electric Power Research Institute is sponsoring trials of a 3-kilowatt fuel cell that it thinks will be affordable to small homeowners.

Besides AlliedSignal, GE, Caterpillar, United Technologies and Rolls- Royce are potential winners. Gary Simon, an electric power expert at Cambridge Energy Research Associates, estimates that they already write $1.4 billion in U.S. orders yearly for generators under 5 megawatts capacity.

Since the turbines use natural gas, pipeline companies like Enron and Duke Energy and local utilities like KeySpan Energy Corp.'s Brooklyn Union Gas unit would benefit. KeySpan will own and run heating and cooling equipment at the new Brooklyn, N.Y. Renaissance Plaza office/hotel complex. Enron Energy Services is courting fast-food outlets and grocery and hotel chains across the country.

Utilities and regulators are reacting to unhappy customers the way the East German police used to react to people jumping the wall: driving them back if they can, shooting at them if they can't. In New York State, Niagara Mohawk Power Corp. wants any do-it-yourselfer who gets backup power from a competitor to pay an exit fee equal to the stranded costs he would have paid as an ongoing customer. Consolidated Edison wants any buyer who stays hooked up and taps its power just once a year to pay a partial bill for all 365 days.

California forces customers who depart the utility grid to keep paying stranded-cost fees. The state hasn't figured out how to extract fees from brand-new users who were never connected to the grid. What happens when a new breadmaking plant produces its own power and uses the savings to underprice other local bakers?

And just wait until the tax-grabbers see what is happening to their captive audience. For years state and local officials have forced the big utilities to collect taxes for them from the public to the tune of $14 billion a year, 8% of utilities' electricity revenues. Neat trick: The pols get money to spend and the public blames the "greedy" utility.

Would legislators dare to enact an electricity tax on a shopping mall that generates its own power? Maybe. What about a do-it-yourself homeowner? It will be an interesting battle.

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