Technologies to green the grid

Darbee took Schneider's pragmatism to heart. PG&E began to lobby for more -not less - regulation of its industry. It was also the only big California utility to actively back the state's global-warming bill. Without that key support, the legislation might not have passed, says former Schwarzenegger adviser Terry Tamminen. In return, he says, PG&E was able to negotiate "a lot of changes" that made the bill more flexible.

Among utilities, PG&E is particularly well suited for thriving in a carbon-constrained world. With just 2 percent of its in-state electricity generated by coal, it was already greener than most of the nation's big utilities. It also benefits from the way California regulates its utilities. Their sales are separated, or "decoupled," from revenue, so they neither earn more by selling more energy nor lose money by promoting efficiency measures that reduce those sales.

Instead, California's utilities make a guaranteed profit on all their investments - $2.8 billion this year for PG&E. The regulators have also approved big budgets for energy efficiency, something that has helped PG&E's top business clients save money, while boosting PG&E's bottom line. The $300 million PG&E set aside for energy efficiency in 2007 includes a lot of "customer education," which often doubles as public relations for the company.

"This is not a normal business, like the bubble-gum business, where you can make money by selling more gum. If a regulator will let you, you can make money by selling less of the product," notes David Victor, director of Stanford's Program on Energy and Sustainable Development. "The single most important relationship is with the regulators."

Yet as concern about global warming increases, PG&E's fortunes also will depend on its relationships with the entrepreneurs the utility hopes will supply enough green energy to meet the targets set by the state's energy bureaucrats. And that's giving green startups a chance to score some very big deals.

On another unseasonably warm early-spring morning in downtown San Francisco, about three dozen entrepreneurs sit in a darkened PG&E auditorium as a company executive tells them the utility is "open to any and all offers" to provide as much as 800 megawatts of clean power. Among those in the audience is John Pimentel, a business-suited former state bureaucrat who has a plan to make biofuel and energy from nonrecyclable trash.

This is PG&E's fourth annual request for proposals as it seeks to meet the state's renewable-energy target of 20 percent by 2010. It's still short; only 12 percent of the utility's delivered energy currently meets that standard - though it has signed contracts for 18 percent. "We have a lot more renewable megawords than renewable megawatts," scoffs renewable-energy lobbyist V. John White, executive director of the nonprofit Center for Energy Efficiency and Renewable Technologies. In fact, Southern California Edison, with a much less vividly green public profile, has surged ahead of PG&E, with 17 percent of its mix from renewable energy.

So the heat is on PG&E - and it's getting hotter. State officials recently approved a new target of 33 percent renewables by 2020. And earlier this year, regulators banned utilities from signing long-term contracts with out-of-state coal-fired power plants - the source of 20 percent of California's electricity.

That's why PG&E is turning for help to Silicon Valley, where there's a boom in new clean-energy technology fueled by venture capital. To be sure, it's a brave entrepreneur who will chase this holy grail and risk failure at the hands of a lumbering corporate bureaucracy and the numerous government agencies that regulate the industry. "They're opening the door," Pimentel says, "but there's still a thick forest to walk through."

Darbee maintains that only a few current technologies offer the hope of a fast scale-up at a price reasonably competitive with that of fossil fuel. One of these is wind power, which PG&E is pursuing. PG&E is also betting that solar power - or, more specifically, massive-megawatt "Big Solar" power plants operating in the deserts of California and the Southwest - will help it meet its targets.

The utility is working on three major solar projects expected to start delivering power between 2009 and 2011. Each is in the 200-to 500-megawatt range, enough to light as many as 700,000 homes at prices competitive with those for natural gas. The first deal was a 500-megawatt agreement with Bright-Source Energy, an Oakland, Calif., startup funded by Silicon Valley VCs and run by veteran solar entrepreneur Arnold Goldman. Goldman says he's convinced that PG&E is committed to his technology. "It's a funny-strange feeling, going in there and finding a group within a utility that's actually trying to see how we can make these things happen," he says.

Then in July, PG&E announced the world's largest solar deal to date: an agreement to buy 553 megawatts of electricity from a plant to be built in the Mojave Desert by Israeli firm Solel.

Silicon Valley VC Vinod Khosla, a leading green-tech investor, is working on the third potential PG&E deal with a solar power company called Ausra, which recently relocated to Palo Alto from Australia. He shares Goldman's enthusiasm about the utility. "They're not really acting like a big company," says Khosla, who appreciates the utility's nimble grasp of what he calls the "massive opportunities" to profit by adapting to climate change. "I mentioned I needed to do some due diligence, and within three or four days, they'd sent a team to Australia," he recalls.

PG&E is making progress on other fronts as well. It's leading the herd, for instance, in the emerging industry of "cow power." That's the polite name for extracting methane - a potent greenhouse gas - from cow manure and turning it into biogas that can be piped to power plants.

During the past year, PG&E has signed long-term contracts with two biogas startups: Microgy, based in Golden, Colo., and BioEnergy Solutions in Bakersfield, Calif. Each aims to produce enough gas in the next two years to power 50,000 homes. "PG&E has been way out in front on this," says Microgy senior vice president Jeffrey Dasovich, who adds that the utility has devoted considerable time and resources to engineering the system to connect Microgy's machinery to its pipes.

Further out on the horizon are PG&E's plans to produce electricity from ocean currents off the Northern California coast. The utility's WaveConnect project will test wave-energy technologies with the aim of getting two 40-megawatt power plants up and running within a few years. That could provide a big boost to other wave-energy startups.

McGinnes at Ocean Power Delivery, which makes a semisubmerged 459-foot cylindrical wave-energy converter called the Pelamis, says PG&E is the first U.S. utility to include wave power as part of its green-energy mix. "We see this technology as ultimately being competitive with other renewables," he says. PG&E is also seeking federal permits to test tidal power under the Golden Gate Bridge.

Perhaps just as important as where PG&E gets its power - where the wind blows, where the waves crash, where the sun shines, where the cows poop - is how it plans to share it. Instead of generating electricity in colossal centralized power plants and pushing electrons into homes and businesses, energy distribution in the future may be more a matter of give and take, of energy managed over a web that draws electricity from wherever it's abundant and sends it wherever it's needed.

We got a peek at that future one morning in May when Kyle Aarons, a 20-something PG&E employee whose title is project manager for clean air transportation, took a plug attached to a mutant Toyota Prius hybrid and stuck it in a wall socket in the utility's underground garage in San Francisco. A meter moved clockwise, showing that the nearly 9-kilowatt lithiumion battery pack installed in the back of the Prius was charging like a cell phone. Then Aarons flipped a switch, and the meter moved in the opposite direction, demonstrating how the car can also send electricity back into the grid.

Call it user-generated power. In June, PG&E and Google (Charts, Fortune 500) took the concept one step further by unveiling a solar-panel-covered carport at the Googleplex in Mountain View, Calif., where employees will be able to plug in a fleet of hybrid vehicles that the search giant is creating for an electric-car-sharing program.

Much work remains to be done, but the plug-in technology is revolutionary on several counts. It could help ramp up wind power, which is now nearly cost-competitive with natural gas but has the drawback of being intermittent. Vehicle-to-grid technology could change all that if plug-in hybrids become common. A driver could charge a car in the evening, tapping renewable energy when the winds blow most strongly but demand is low. When electricity demand peaks during the afternoon, hybrids plugged in at office parking lots could send power back into the grid (while owners rack up microcredits on their utility bills). If automakers embrace vehicle-to-grid, utilities could end up with valuable credits to sell to companies that exceed their greenhouse-gas-emission limits.

Next page: Climate-change legislation

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