Q&A: Small generators pose big challenge to utilities

Ram Sunkara, a partner at the law firm Sutherland Asbill & Brennan, represents electric and gas utilities, independent power producers and private equity funds in commercial transactions. He also chairs the firm's distributed generation practice group.

Distributed generation refers to power generators - much smaller than typical power plants - installed at or near the sites they serve. They often use renewable resources like solar or wind power and are posing a conundrum for traditional utilities. Sunkara discussed the advent of the technology with the Houston Chronicle. Excerpts, condensed and edited for clarity.

Q: How did your firm come to have a distributed generation practice? It's a pretty new field.

A: It's new in the U.S. Not in Europe. I saw the writing on the wall five years ago in my practice. A lot of heavy industry's big plants have enormous electric loads - sometimes the equivalent of a large fraction of a city - and some of them are 24/7 operations. If a chemical plant goes down, for some of my clients that's $10 million a day in lost revenue.

If there's a storm and they lose power, they're losing money. A lot of them don't have backup systems, or they have backup generators that are legacy systems. So industrials are continuously looking to improve their reliability while reducing costs. Power is one of their largest cost centers.

In every state, there are different regulations for selling power "over the fence" to a third party. In Georgia, for example, I can't come to your manufacturing facility, build a power plant I own and sell you power. But no state restricts self-generation. So heavy industryis now looking to developers who build, own and transfer on-site generation. It would be new technology that runs efficiently. Most would stay grid-connected. But they'd use the grid for backup or for planned maintenance.

Q: To what extent is this happening already?

A: We've done a few of these projects. In the next decade it's going to really come into play, with coal plants coming offline. With the rise of shale gas in the U.S., feedstock is cheap, and industry will want to expand with new plants. But where are they getting the power from? It's going to have a direct effect on utilities. It's going to take significant load and customer base away from utilities if they don't play the game.

Utilities are culturally and historically very set in their ways. They have long had a firm grasp on their customer base. And optionality hasn't been part of their culture. If they don't think outside the box, they're going to lose business quickly.

Q: What should utilities be doing to stay relevant when customers are building their own generation?

A: Right now they're fighting distributed generation in the public commissions and courts and legislatures. They're lobbying for tougher legislation so people can't self-generate easily. Utilities need to start offering better incentive programs for customers to self-generate. I call it the rise of the "prosumer." I've heard that term before. It's a customer who is both producing and consuming power. They need to get in front of the prosumers quickly and say, "We're going to help you; we want to keep your plants in our territory; tell us how we can help you reduce your costs and continue to meet your needs."

Having that conversation has a direct benefit to the utilities. The biggest whammy they face is when someone takes 20 megawatts off their system overnight. It could help utilities forecast their own load.

Q: Why is Europe ahead of the U.S. on distributed generation?

A: The reasons we're having issues with distributed generation isn't at the federal level. President Obama issued an executive order in 2012 calling for 40 gigawatts of distributed generation by 2020.

The issue we have is at the state level, and the utilities have a very strong lobby. They haven't been in favor of this because it means losing their load. They're very territorial. What I'm saying is: Change your view on it. Don't lose that load. You might lose a little bit of the margin, and you might not be able to sell power at the same rates as before, but it's either that or nothing. Partner with your industrial customers. And not only would you be able to forecast better, but it keeps them in-house.

Q: Does distributed generation have applications beyond industrial settings?

A: Data centers, fulfillment centers and warehouses, corporate campuses, universities, and hospital complexes - they all need reliable, steady, cheap loads. Microgrids are rising in neighborhoods. They're effectively a chain of smaller, distributed generation-type technology - a solar panel on someone's roof, a backup generator next door and then an energy storage unit next door to that. You connect them and can store excess power for times when you may need it down the road. And you can share it among the chain of users.