Generation Gap

April 1, 2001
The Golden State's unstable electrical grid prompted rolling blackouts across the state this winter, and the ongoing threat of temporary power outages

The Golden State's unstable electrical grid prompted rolling blackouts across the state this winter, and the ongoing threat of temporary power outages has sent businesses along the West Coast scrambling for alternatives to keep the lights on and the wheels of commerce spinning.

Yes, it's the perfect rental scenario. And while megawatt genset packages belong to the high-stakes domain of the power rental elite, opportunities on the kilowatt level still abound for smaller rental companies.

But not so fast — California's emissions regulations are notoriously difficult, and now they are changing week to week. Throw in the political haggle to lay blame for the power crisis. Add technical issues — transformers, cables, paralleling — that require more than an Electrician 101 night class. This is not your weekend tiller rental.

For power providers that can meet the myriad challenges, it has been an incredible rental season, and the run promises to continue at least through the summer. Demand is extending beyond California, which is forcing other states, notably Washington, to bid for the same, suddenly precious power.

In this capital-intensive arena, companies hesitate to talk specific dollars and units, but it is a given that hundreds of megawatts of rented power are already in the mix for each of the Big Three — Aggreko, Cat Rental Power and GE Energy Rentals.

“If you have the iron and you are there, you are going to rent it,” says John Swanson, international rental manager for the Cat Rental Power network. “The need has outstripped the industry's ability to supply. You can't guarantee some iron because you already have other commitments for the summer.”

The biggest customers are utilities and large industrial customers, including oil refineries and pulp and paper manufacturers, according to John Campion, GE Energy Rentals executive vice president, global sales and marketing. “They realize that this situation is going to be here for a couple of years at least, so they're looking at rental,” Campion says. “These businesses have found it more cost-effective to rent power until they can put in a permanent solution.

“If your power goes down even briefly, it's costing you money. Even for a small company, you could have 100 people sitting around doing nothing for an hour. At $15 an hour in wages, that's a $1,500 loss of productivity. If that happens 20 times, you're looking at $30,000. And that's not even the economic impact of not getting your product out.”

Companies seeking rented power have one of two basic needs (and sometimes both) — an immediate fix to salvage operations during a power outage or longer-term support, a sort of insurance policy against the cost of operating during expensive peak usage periods.

For example, if there is a midday power outage, a restaurant will lose its lucrative lunch crowd and a hotel will have its guests stuck in elevators if they don't have backup power that responds immediately. In the high-tech world, Internet companies can lose thousands of orders if the juice running their sites stops, and a DVD manufacturer that runs thousands of burners simultaneously will have to start over if there is a hiccup in the power supply.

In California, rental companies also are being called on to supply backup power for “peak shaving.” The cost of energy consumption is based on peak usage. A company that runs its systems at 100 kilowatts for six hours but requires 150 kilowatts for two hours during a certain process will have all of its energy usage billed at the higher rate.

“Big industry likes to identify those two hours they spike up and come in with backup power,” says Richard House, sales manager for Prime Energy Services, part of Rental Service Corp. “They kick our [generators] on, and they keep their power consumption from the utility static or below level.”

Because the power crisis is a relatively young phenomenon and its scope is still not completely understood, most businesses are undecided on a strategic response.

“You may want to go out and buy a backup generator, but this is not always cost-effective if you only need it occasionally,” Campion says. “There is also a lead time, typically of several months, to place your order and install the unit. You could have a rental unit in a couple of hours.”

House says: “In this situation, because it's something new, no one is willing to step up and buy [power equipment]. People also like to rent because diesel power requires frequent maintenance. They are not in the generator business. They don't have a staff to change oils and filters and tweak the machine to make sure that it is ready to run when the power fails. If this [crisis] lasts for years, they may buy [the equipment] and set up a maintenance program.”

How long the power drama will continue is anyone's guess, but most people involved in the market are convinced there will be no resolution by this summer, when power demands will soar, and most believe the problem will continue for years.

“The core problem is supply,” says Bob Graydon, CEO and president of MQ Power, which has had a firsthand, supply-side view of the situation from its Carson, Calif., offices. “People used to walk in a room, hit a switch, and the power came on. They don't have that confidence anymore. Standby power used to be for emergency systems only. Now people are saying, ‘I need alternate power source for my entire facility.’

“Rental companies are in an excellent position to help handle this crisis. People are renting because they are not ready to spend the capital to ensure against the problem. They know they're going to need additional power, and they're looking for continuous-power-rated units.”

Indeed, the backup power market is not limited to the companies with the capital and resources to deliver $300,000 megawatt blocks of power. Nor do opportunities end with the larger rental companies and their sizable generator fleets, such as Prime and Sunbelt Rentals.

“The average small rental company can do quite well taking care of small businesses [with needs] below 1 megawatt,” Campion says. “There's a lot of opportunity to look beyond the traditional rental base and expand their customer base by looking at nontraditional customers such as small manufacturing companies, payroll data, hotels.”

Swanson agrees. “If a small bank or grocery store or similar facility wants to keep a few lights on and the checkout-line scanners going, a smaller generator set, from 30 kilowatts to 100 kilowatts, is absolutely no problem for a smaller rental company,” he says. “Higher, there's a certain amount of specialization involved. If you're talking to a utility and they have an internal spec for paralleling with the utility grid, you have to be able to show that your equipment meets the standards. They want to do this in a turnkey manner — you connect it, you take it off site. There is a certification process and specialized gear. There is cable, portable fuel tanks, transformers, timers.

“That is a very deep, technical sale. If you're familiar with the equipment and you have an understanding of how the customer's facility is laid out, it does not have to be difficult. At the end of the day, you're selling your service and the customer is expecting you to do it all.”

Graydon suggests that rental companies team up with electrical contractors who can size a building for its power needs and do the installation.

One of MQ Power's customers is Associated Power, a Wilmington, Calif.-based independent that does a lot of re-rental business with other rental companies as well as direct rentals to the electrical segment.

“A lot of people are looking for how to convert this [crisis] into business,” says Marvin Johnson, president of Associated. Johnson advises rental companies to focus on timely delivery and service of their machines. He says they should work with businesses that already have installed transfer switches or keyed breakers, which isolate the backup power unit and ensure it does not connect to the commercial power supply.

For the big boys, that is not a problem. “We're providing turnkey generators, transformers, cabling and operations, and maintenance,” Campion says. “With the sizing of gensets and services, it's a sophisticated sell if you want to give the value proposition to your customer. As part of GE Power Systems, we have the technical resources available to help with applications engineering, installation, operations and maintenance.”

The service envelope is large. “There is a lot more to specking one of these jobs than saying, ‘I need a 1000-kilowatt generator,’” House says. “We have to determine what kind of ancillary equipment is going to be needed — transformers, switching gear. We synchronize our equipment. If someone says they potentially need 1,000 kilowatts of power but they don't need it all the time, maybe only 20 percent of the time, we parallel these machines. They talk to each other, so as the power demand increases, they'll either make power or wait, listening for the signal to crank up.”

Technical and financial realities aside, good old rules and regulations are no small hurdle, either, even for the biggest players. “California is wrestling with the balance of emissions and how to handle the power crisis,” Swanson says. “There is an environmental lobby that is very tight, and that creates some opposing forces.” For now, the state has somewhat relaxed its strict emission rules on diesel-powered generators. A registered mobile generator can be turned on during a power outage, but as soon as the utility is back on, it must be disconnected. As one Bay Area Air Quality Management District official told the Los Angeles Times: “I'm not terribly sympathetic. These companies are major new drains on the public utilities. Their proposal is: ‘We're going to put the system into the red zone and break it, and then we'll be OK — we're going to fire up our [backup generators].’”

Despite political and environmental resistance, California businesses are being allowed to run their backup and standby power alternatives longer during outages, and without a near-term solution to the power crisis, rental companies will be called on to provide those alternative sources of power.

“It's a good time to be in the power rental business,” Campion says, but he warns rental companies to keep a balanced perspective. “A customer might think he needs 150 kilowatts when in fact he only needs an 85-kilowatt genset. A customer may call for a quote on a genset and not ask about service. That customer is in a situation where there is no choice now, but will that customer, when this crisis abates, come back if I take advantage now?

“Now is a really good time to create an ongoing relationship. Anyone in the rental business should be looking at creating growth and sustainable business. Short-term gain does not equate to long-term wealth. Don't treat your customers like a commodity, and do not give the customer the appearance that it's a seller's market. No company has ever been successful in the long term taking advantage of their customers in a crisis situation, be it an earthquake, hurricane or power outages.”

And no other state has served as the testing grounds to that statement more often than California. But other parts of the country, if the experts are right, might find out soon.

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WATTS UP? - Electric power demand is growing twice as fast as demand for all other forms of end-use energy, increasing more than 30 percent in the last decade, while transmission capacity grew at only 15 percent.
— Electric Power Research Institute

WATTS UP? - One out of five small businesses is considering leaving California because of the power crisis, with 34 percent of those saying they have lost sales as a result of power outages.
— National Federation of Independent Businesses

WATTS UP? - The Cat Rental Power network has installed more than 350 megawatts of rental power on the West Coast since December.
— John Swanson, international rental manager

WATTS UP? - One megawatt is enough power for about 1,000 typical homes.

WATTS UP? - “Authorities report the power shortage is a long-term problem that will get worse before it gets better…. If your business relies on the power grid system, you will be severely affected. MQ Power offers an immediate solution…. Don't be caught unprepared when the power goes out.”
— Excerpt from MQ Power radio ad running in California