December 6, 2000

SPECIAL REPORT--POWER DEREGULATION

Beyond Fossil Fuel: The Alternatives Are Growing

With the convergence of strict environmental controls, electricity deregulation, and high oil prices, renewable fuels are back in the limelight -- likely for good

If you lived through the '70s, you've heard it before. And once again, experts are predicting that alternative fuels are about to become cheap, plentiful energy sources.

Skeptical? Perhaps it will surprise you to learn that the big oil companies are taking alternative fuels very seriously these days. Plenty of petro giants are pouring time and money into developing power derived from fuel cells, wind, sunlight, underground steam, and garbage by-products.

Royal Dutch/Shell has established Shell International Renewables and committed $500 million to increasing the alternative-energy side of its business. BP Amoco expects its BP Solar unit to be a $1 billion business before the decade ends. Texaco has spawned Texaco Energy Systems Inc., which is developing fuel cells and other alternatives to burning oil. "The fact that oil companies are getting into alternative energy is a big indication it's going to happen," says Sam Brothwell, energy-technology analyst at Merrill Lynch.

COMPETITIVE COSTS

While such oil companies may be just playing defense, big utilities are embracing alternative energy as a means of growth. Enron Corp. has founded Enron Wind and is partnering with FuelCell Energy to develop fuel cells for power plants and other big users. Last summer, Reliant Energy of Houston formed Reliant Energy Renewables to produce electricity for Texas consumers using wind and methane gas from landfills, enough to power 80,000 homes.

As electricity becomes a bigger piece of the computerized world's energy equation -- with demand expected to grow 60% over the next two decades -- several factors are converging to speed development of these alternative energies. The factors include increasingly stringent environmental rules, the deregulation of electricity markets, and gyrating oil prices and supplies. At the same time, the Clinton Administration and state governments have revived government spending for the development of alternatives. The efforts are spurring technological advances that could well put some alternative-fuel sources on an economic par with the burning of fossil fuels -- roughly 4 cents per kilowatt hour -- in the next decade.

Today, renewable energy provides roughly 3% of the nation's electricity supply. But the Energy Dept. estimates that by the end of this decade, more than 20% of new electricity-generating capacity will come from alternatives. Last year, the North American market for renewable sources of generating power -- sources that occur naturally and are easily replenished, unlike oil -- was $800 million annually.

That's four times the market size of the previous year, according to Frost & Sullivan, an international marketing consulting firm. Adds William Halal, professor of management science at George Washington University: "The current rise in oil prices is not an aberration. It's a long-term trend, because the developing world is starting to industrialize. That will make these alternative energies more feasible."

Here's a look at the hottest alternatives:

Fuel cells

Advances in fuel cells for automobiles are driving the technology for stationary fuel cells, used on a small scale to run, say, traffic lights, and on a much larger scale, power plants. In a fuel cell, hydrogen and oxygen combine to form water, and the energy released in that reaction produces an electric current. The hydrogen can be used directly or extracted from natural gas, ethanol, or even gasoline. Because the fuel isn't burned and doesn't leave pollutants and the cells' energy can be stored long-term, fuel cells have an advantage over wind and sunshine.

FuelCell Energy in Danbury, Conn., which makes power-plant-size fuel cells, will start taking orders late next year, says CEO Jerry Leitman. "If you are in an area where you can build a big power plant and don't need a lot of reliability, coal-powered is cheaper," he says, "but it's very difficult to get coal-powered plants sited today." A three-megawatt fuel-cell plant (enough to power roughly 1,000 homes) is about the size of a tennis court and can be located anywhere. The drawback? Fuel cells still aren't cost-efficient. Leitman says the first plants will cost 9 to 10 cents per kilowatt hour to operate, but he expects that price to be nearly halved within four years.

Fuel cells are key in the trend toward "distributed power," which means producing electricity at or near the point where it's consumed. With distributed power, the grid becomes more of a network. "The thing that really made computing what it is today is networking. That's where we are headed with power -- making better use of the grid by spreading the power sources around and putting some of them closer to the end user," Merrill Lynch's Brothwell says. In many deregulated communities, the utility meters run both ways, so a business or residence producing more power than it needs can send the excess into the system, reinforcing the notion of a network.

Wind

Thanks to advances in turbine technology, wind power is much more price competitive than fuel cells. The fastest-growing energy source in the world, wind power costs about 4 cents per kilowatt hour, the same as natural gas, coal, or oil. In the past two years, worldwide wind-power capacity grew by one-third, to about 20,000 megawatts (enough to power about 6 million homes), according to the American Wind Energy Assn. One of the biggest wind projects, being built on the plains of West Texas by Reliant Energy Renewables, will have 160 turbine generators, each capable of putting out 1.3 megawatts.

The Clinton Administration's alternative-energy goals include generating 5% of the country's electricity from wind by 2020. "That would be 80,000 megawatts, the equivalent of building 100 new nuclear power plants," says Dan Reicher, Assistant Secretary for energy efficiency and renewable energy at the Energy Dept. Unlike nuclear power plants, wind farms are widely accepted in their communities and are an economic boon because farmers are paid for allowing the turbines on their land.

Solar

Ten years ago, outfitting a typical three-bedroom house with solar panels cost about $300,000. Today, new technology has brought that figure down to $30,000. Forecasters expect it will be two to three decades before solar energy costs less than burning coal or oil, but in regions with long, sunny days, such power is a considered a viable supplement to the main energy supply.

Solar energy is in a "which came first, the chicken or the egg?" position, Reicher says. Large-capacity plants would bring down the cost of such power, but until that happens, there isn't enough demand for the plants. The Energy Dept.'s goal is a million solar roofs by 2010, up from 100,000 today, and it's providing tax credits and grants to get the job done.

Geothermal

The heat and steam in underground geological formations, mostly in the western U.S., can be harnessed to produce electricity. The world's largest geothermal field, The Geysers in California, was developed 40 years ago. Such power plants built today would produce power at 6 to 8 cents per kilowatt hour, making them more expensive than coal and oil. But the Energy Dept. and the utilities are working to bring that figure down to 3 cents per kilowatt hour, the point at which large-scale production could take off.

Most geothermal plants in this country are in California, Nevada, Utah, and Hawaii, although the U.S. Geological Survey estimates five times the current output might be available in as-yet-undiscovered geothermal resources. The Energy Dept.'s goals call for 10% of the electricity in the states west of the Mississippi River to come from geothermal sources within 20 years. That would be enough energy to power about 7 million homes.

Garbage

Bioenergy is the combustion of plant matter to produce power, including the burning of wood, ethanol, and methane gas, a naturally occurring byproduct of landfills and sewage-treatment plants. For now, bioenergy provides less than 1% of the nation's electricity, but Reliant Energy Renewables is exploring this option, too. The utility plans to extract methane from 12 landfills in Texas and convert it to electricity, starting next year.

Nuclear power

Neither Main Street nor Wall Street has any appetite for building new nuclear plants in the U.S. after well-publicized disasters such as the meltdown at the Chernobyl nuclear plant in the former Soviet Union in 1986 and the accident at Three Mile Island in Pennsylvania in 1979. The country has about 100 operating nuclear power plants, which altogether produce some 100,000 megawatts of electricity. Because they don't generate greenhouse gases, such plants "probably won't become much of an issue unless you propose building another one," says Merrill's Brothwell.

Compared to fossil-burning fuels, these energy sources all have a lot of ground to make up. "When it comes to renewables, we've really only been at it for 25 years," says the Energy Dept.'s Reicher. That compares with 100 years for modern hydroelectric power and 50 years for nuclear power plants. But once alternative energy sources catch up, windy South Dakota and sunny California may have something in common with Kuwait and Saudi Arabia: a plentiful local power supply.


By Theresa Forsman in New York
Edited by Beth Belton