The California energy crisis and cogeneration investment opportunities for office landlords

Abstract

For the past eight months, California has been beset by an energy crisis. An inadequate supply of electricity has not been able to keep up with the growing demand. Vital transmission lines are operating at or near capacity. The installation of cogeneration systems into office buildings can play an important role in the overall solution. Cogeneration is a form of on-site generation that can provide electricity to office landlords and tenants that is less costly and more reliable than that provided by the utilities. There are several ways that office cogeneration systems can ease the pressure on California's electric generation and transmission infrastructure. First, office buildings consume 26% of all electricity nationwide. They place an equally great demand on California's generating capacity. With widespread application, the siting of cogeneration systems in office buildings can reduce the demand placed on California's centralized power plants (CPPs). Reducing the demand for electricity that is centrally generated and delivered via transmission lines reduces the risk of blackouts and the cost of wholesale and retail electricity. Second, because transmission lines are already operating at or near their capacity, it will be problematic to deliver the new centralized generation capacity that is coming on-line. It will be many years and billions of dollars before the transmission lines are fully upgraded. On-site cogeneration reduces the electrical congestion on these power lines, enabling more of the new centralized generation to get delivered. Third, office cogeneration systems can be deployed in one-fifth of the time it takes to place a large CPP into operation. The quicker more generation can be added, the sooner a healthy supply/demand balance can be struck. Because of their small-scale and relatively simple component parts, office cogeneration systems can be completely permitted, installed and in-operation within 90 to 180 days. By contrast, it takes up to two and one-half years to permit, construct and place a large CPP into operation. When fuel such as natural gas is combusted at a CPP, only 33% of the energy that is released via the combustion process actually reaches the remotely located end-users (e.g., homes and businesses) in the form of electricity. The conversion efficiency of an office cogeneration system is 75%, twice that of the CPP. Consequently, a cogeneration system can produce the electricity needed by a given office building while using only half the amount of fuel that a CPP would require. As these office cogeneration systems are located on-site, not only is the cost of transmitting electricity over long distances eliminated, so are the expenses associated with the maintenance and repair of the power grid. The fuel and transmission cost savings are what primarily enable office cogeneration systems to deliver electricity to office landlords and tenants at a fraction of the cost of power provided by the CPPs. The resultant price differential is what creates the investment opportunity for office landlords.