Big Power Goes Local

In the late 1990s, the town of Freiamt in Germany's Black Forest decided to take the fight against global warming into its own hands. Three hundred of the town's 4,300 residents chipped in to buy the four 80-meter-tall Enercon wind turbines that now top the surrounding hills, generating 1.8 megawatts each. An additional 270 families put solar collectors on their roofs to heat water and power their homes. Three businesses—two sawmills and a bakery—whose land abuts a gurgling stream have installed old-fashioned water wheels, each providing an additional 15 kilowatts.

To make up for shortfalls when the sun doesn't shine or the wind doesn't blow, one of the local farmers invested in a "biogas" fermenter, which uses enzymes to turn grain and agricultural waste such as manure and chaff into methane. The gas, in turn, fires up an electricity generator. And rather than simply release heat given off in the process into the air, as conventional power plants do, the generator pumps the waste heat into nearby homes, where it's used for water and space heating, through pipes laid by volunteers. But the prize for Freiamt's most creative source of energy surely goes to Walter Schneider, a local dairy farmer. To harness the energy set free when the milk from his 50 cows is chilled before transport, Schneider installed a heat exchanger that uses the heat from the cow's milk to warm the water he needs for cleaning and showering. Today, the Freiamters are proudly self-sufficient. What's more, in 2007 they generated an extra 2.3 million kilowatt-hours beyond the 12 million they consumed. They sold the surplus, enough for an additional 200 homes, back to the national grid.

Freiamt is no hippie commune trying to shut itself off from the world. It's at the forefront of a growing and thoroughly modern trend. Whether to save the climate or save money—or a combination of both—homeowners, businesses and entire communities around the world are increasingly generating their own energy. From Tokyo, where homeowners have begun installing the first commercial fuel cells, to California's Million Solar Roofs program, to towns like Freiamt, the new word in energy is think small and go local.

The global electricity industry is still dominated by big, fossil-fuel-fired utilities, no question. They account for 67 percent of all electricity generation worldwide. And the International Energy Agency's World Energy Outlook, published in December, predicts in its "alternative scenario" that even if governments push energy and efficiency savings hard, big coal and gas power plants will provide half of all new generating capacity coming on line by 2030—and locally generated power will make up less than 20 percent. But other experts say the IEA projection could shift as massive new investment in energy research bears fruit and governments liberalize the energy markets that have so far favored centralized utilities. In 2006, locally generated "micropower" passed nuclear power in terms of total electricity generated, supplying 16 percent of the globe's power. Amory Lovins, founder of the Rocky Mountain Institute, estimates that one third of the generating capacity installed each year is local.

Some energy economists now foresee an "alternative alternative" scenario, in which governments break the hold that fossil-fueled utilities have on the market. Nikolaus Richter, networks specialist at Germany's Wuppertal Institute for Climate Research, says liberalized energy markets, combined with new technologies, could break the "carbon lock-in"—the preference for existing energy technology based on experience, legislation and vested interests. There's evidence that this state-sponsored revolution is underway.

Rising fuel costs and climate worries are making businesses and households think a lot harder about how they get their power. Governments are pushing the trend with subsidies and by opening up protected electricity markets that have so far favored the big utilities. In January, the European Commission made opening up power grids to locally produced energy one of several measures to boost the bloc's energy efficiency 20 percent by 2020. The vision of local communities generating their own power is also a crucial part of Sweden's ambitious program to wean the country off all oil and gas imports by 2020. In the past few years, more than three dozen countries, including Germany, Spain, Brazil and Indonesia, have created "feed-in tariffs"—guaranteed rates at which public utilities must buy power from wind, sun, waste or biomass from private citizens or local cooperatives.

Ironically, these state subsidies seem to be the fastest and most effective way to create mass markets for new, efficient sources of energy. They break the monopoly of utilities over the electrical grid by allowing virtually anyone to sell their power. That creates an opening for local-generation technologies such as wind turbines, solar panels and household-size boilers cogenerating power and heat in the basement, which are now hitting the market in significant numbers at declining prices. Critics argue that many of these technologies are still far from competitive and depend on the continued flow of subsidies.

The idea of generating power locally, where it's needed, is as old as power itself. In the late 1800s, light-bulb inventor Thomas Edison envisioned efficient cogeneration of heat and power for every home and business, and even drew up plans for a self-sufficient home powered by a wind generator. However, it was George Westinghouse's vision of a giant hub-and-spoke system of centralized electricity plants and a vast network of power lines and transformer stations to distribute power that won the day. The central plants' efficiency was abominable, and much of the power was lost in transit from electrical resistance in the wires. That didn't matter in an age when fossil fuels were cheap, the environment didn't count and central planning was in vogue.

That equation is changing. The most powerful argument for generating local power is efficiency. The average power plant converts only about 30 percent of the energy content of fossil fuel into power—the rest is lost directly from the plant as heat to the atmosphere or cooling water. Of the power generated, 7 percent is then lost from transmission lines.

The newest, state-of-the-art power plants can reduce direct losses of heat to about 45 percent. Create power locally, even with fossil fuels, and not only do you cut transmission losses but you can also recapture waste heat to boil water or to heat homes. "Trigeneration" machines in schools and hospitals use generated heat to extract power, heating and, in a process that absorbs heat by boiling a liquid coolant, air conditioning out of a single fuel course, raising efficiency to about 90 percent. Do the math: tripling efficiency from 30 to 90 percent cuts fuel needs (and carbon emissions) by two thirds. Add better insulation or more-efficient appliances and local generation could cut the fuel required to heat and power homes and businesses to a small fraction of today's.

The poster child of local power is Denmark, the world's most energy-efficient nation. This resource-poor country began mandating local cogeneration of heat and power in the 1980s. In the 1990s, the Danish Parliament was the first in the world to create "a feed-in tariff" promoting local sources of alternative energy. Today, with less than one third of the nation's power generated by big utilities, Denmark uses less energy to generate each dollar of GDP than any other country in the world.

Increasingly, other governments are following suit. Thanks to a feed-in tariff established in 2004, Germany has become the world leader in solar power. In three years, 400,000 households and small businesses have installed 3,000 megawatts of solar generating capacity, enough to replace six conventional power plants. Germany is today the world's biggest market for photovoltaics and solar thermal collectors; the runners-up are Japan and Spain, which also have feed-in tariffs.

Although these programs are based on tax credits and subsidies, they have jump-started the market for photovoltaics, spurring entrepreneurs to bring prices down to where solar power is expected to be competitive with conventional power generation by 2010. As a result, solar is no longer confined to off-grid niche markets like remote cabins or pocket calculators. The majority of new solar installations are now directly connected to the grid.

Opening up those grids hasn't been easy. Not only do utility companies jealously guard their turf, but there are technical complications as well. Power plants can be turned on and off, but countless local generators working independently of one another can't match demand at any given time (at least not until there are better ways to store power).

New technology is being developed to solve this problem. The Scandinavian countries have connected their power grids across their borders. Now, when a gale blows through Denmark's wind farms, hydroelectric turbines in Norway shut down. Ireland and Scotland are working on a similar network. The Germans last year tested a "virtual utility" that uses the Internet to monitor power generation at hundreds of dispersed local facilities producing solar, wind and biogas power, turning reserve generating capacity on and off to match demand.

In Denmark, grid operator Energinet is developing the next step: using "smart meters" and variable prices depending on the time of day, sunshine and wind speed, to create a self-regulating grid no longer dependent on a central utility—a kind of "energy Internet." "Moving to a decentralized smart grid is like shifting from analog to digital," says John Balbach, managing partner at Cleantech, a Silicon Valley venture-capital firm. "We'll be there in 10 years."

In the lucrative global power market, utilities in many other countries aren't always happy about the newcomers. Most French and German utility oligopolies have little interest in opening their grids. Since they own both the transmission network and the power plants, they naturally want to sell as much of their own power as possible. Local-power advocates accuse them of using technical norms and licensing procedures to keep new sources off the grid. That's why the European Commission is pressing member states to create separate companies to run the grid, as the Scandinavians have done.

The market would take care of the rest, says Richter. In late February Germany's biggest utility, Eon, announced it would pre-empt the EU mandate by selling its high-voltage grid. The surprise announcement is a step in the right direction—but by keeping ownership of the "last mile" of power lines to customers, Eon maintains substantial control over the market. Germany and France, in particular, oppose any further liberalization.

The battle is creating some unlikely allies. Equipment manufacturers such as Germany's Bosch and New Zealand's WhisperGen hope to push superefficient household "micro-cogeneration" units onto the market. These units work like regular boilers for hot water and heat—except that they generate additional electricity that can be sold back to the grid, cutting household electricity consumption by at least 20 percent. Since the boilers run on gas, some gas utilities are helping to distribute them. Their hope, says Richter, is that future energy savings come at the cost of the power companies, not the gas utilities.

Though local production is growing mainly in electricity, some communities are starting to feed their own locally produced "biogas" into the existing network of gas pipes. After more than a decade of wrangling with the local natural-gas utility, the German town of Aachen became the first to pump biogas made from corn and rye—which yields twice the energy per unit of land as corn-based ethanol—into the city network. Replacing natural gas imported from Siberia, the biogas is enough to supply gas for 5,000 households. Other European towns are following suit, and German lawmakers are developing a law that would open up the gas-pipeline network to locally produced biogas.

In America, too, several trends are pushing local power. New green policies, from Texas's generous tax credits for wind generators, to California's Million Solar Roofs program, have helped kick-start a long-dormant market.

Yet the developing world has the most promising markets for do-it-yourself power. With the long-distance power network underdeveloped (in rural India or China) or nonexistent (as in much of Africa), local generation allows communities and businesses to leapfrog multibillion-dollar investments in power plants and transmission lines. In February, the Indian government announced a new project to fund biomass and wind generators for rural communities. China is expected to pass Germany as the world's biggest manufacturer of photovoltaics in 2009. For now, China's production is for export to Western countries, but China's entry into the solar market has raised hopes that prices will see another fall, to where solar starts making economic sense in China, too.

Critics of local power point to the high costs of current generating technology. With the exception of wind turbines, few of the new local power sources are yet competitive with traditional power plants. Their growth is still largely due to tax credits, renewables mandates and above-market feed-in tariffs. Consumers and taxpayers in Germany, to take just one example, are paying more than $6.2 billion a year to subsidize local and renewable power.

Defenders say the laws and subsidies are needed to jump-start the market; they can be slowly phased out as production revs up and equipment prices come down. The benefits of cutting imports and emissions should also be factored into the equation, they say, not to mention the estimated $300 billion in annual subsidies to the global utility industry. What's more, local power production could save much of the $22 trillion the IEA estimates is necessary to upgrade the distribution infrastructure by 2030. "You don't need to invest in a big grid if you have a lot of micropower," says an executive at Denmark's Energinet.

Will all this amount to a "paradigm switch" from central utilities to local power? "Technology might be disruptive, but changing behavior in the way we use energy is only going to be incremental," says Vinod Khosla, a leading California venture capitalist. All those increments—the thousands of communities like Freiamt producing and selling power—add up to a whole lot of change.