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Landlords Teaming Up With Power Companies

Property: New deals provide office tenants with energy produced on-site to help offset costs and reduce risk of outages.


In an early sign that electricity deregulation may change the way businesses buy power, a few office landlords are teaming up with independent power companies to provide tenants with an attractive new perk: cheaper electricity.

These building owners offer energy produced on-site to help offset the rising cost of electricity during peak periods and minimize the risk of power outages.

Energy entrepreneurs say they can provide power that is reliable in both supply and price.

One company, RealEnergy of Napa, Calif., said it can sell energy generated in office buildings for 5% to 10% less than rates charged by local electrical companies.

Possibly the biggest customer of on-site electrical generation is Arden Realty, a Los Angeles-based office landlord that owns 142 properties. Arden is testing a set of different technologies, including micro-turbines, combustion engines that run on clean-burning fuels such as natural gas, and solar panels, in seven buildings in Los Angeles, Orange and San Diego counties. RealEnergy will own and operate the equipment and provide power to the buildings.

"Our goals are, first, to install equipment that increases the reliability of power systems to our tenants," said Arden President Victor J. Coleman, "and second, to reduce the environmental impact of 'dirty' electrical generation."

The energy generated in those seven test buildings in the next 15 years would be the equivalent of 30,000 barrels of oil, according to Coleman, and would prevent the emission of 66 tons of nitrogen oxide at coal-burning electrical plants.

In its largest installation to date, RealEnergy recently mounted an acre of solar panels on the roofs of City Center, a two-building office complex in Fountain Valley owned by Arden. The panels are the largest private installation of solar photo-voltaic equipment in the Western Hemisphere, said Greg Husebye, Arden vice president of engineering. Arden will unveil the system in a ceremony next month.

The panels are capable of providing up to 230 kilowatts, or enough to light 2,300 100-watt bulbs, and can provide up to 12% of the building's energy needs. Typically, RealEnergy installs enough equipment to supply up to 40% of a building's energy needs. Although the company has provided 100% of the needs of certain buildings, RealEnergy said that lower percentages are more affordable for clients.

In the San Francisco Bay Area, RealEnergy is installing micro-turbines and other equipment at the Pleasanton Power Park, an office complex under construction in Pleasanton. The developer is Sacramento-based Panattoni Development.

The trend goes beyond California: Alternate Energy, based in Long Island City, N.Y., retrofits diesel-powered emergency generators to use a cleaner-burning mixture of diesel and natural gas. To date, the company has converted generators in at least 10 office buildings in Manhattan, including J.P. Morgan headquarters.

The purpose of the conversions, said Alternate Energy principal Peter Nelson, is "peak shaving," or supplementing the electricity supply during peak hours when energy costs are the highest. He said such conversions "provide a multimillion-dollar advantage in peak-shaving" over the life of the installation.

The growth of small energy companies relies on continued high electricity rates. The cost-effectiveness of devices that run on natural gas, such as micro-turbines, works only as long as power produced by natural gas remains cheaper than electricity.

Although solar panels and other equipment involve upfront expenditures, RealEnergy Chief Executive Kevin D. Best argued that those costs appear reasonable over a 20-year life of the equipment.

Solar panels provide energy at a cost of 16 cents per kilowatt hour, Best said. That is higher than the lowest electricity rate of about 3 cents, but far less than the 27 cents per kilowatt hour that San Diego rate payers experienced during the periods of highest demand this summer. (Electricity customers in San Diego and northern Orange County, the first in the nation to pay free-market prices, saw their bills double and even triple this summer until state regulators stepped in to cap rates.)

After the initial costs of installing the panels, "there's no fuel and no maintenance," Best said. "That's a price cap in my book."

Although RealEnergy and similar companies appear to challenge the monopoly on electricity enjoyed by traditional utilities, the new generation of power providers will help, not hurt, old-line power providers, said Chairman Daniel M. Cashdan.

"We are trying to work hand in hand with the utilities," he said. "What we provide to the [electrical] grid is a Band-Aid: We provide support to a constrained supply."

Small companies such as RealEnergy, however, are unlikely to reverse the trend of short supply and rising prices in the near future.

"The state is woefully short of peak kilowatt supply in summer months, and we are working very hard to protect our clients' buildings from power outages," Best said. The situation, however, "will get worse before it gets better," he added.

The advent of office buildings generating their own electricity "will definitely change the relationship between landlord and tenant, because [the technology] is cost-efficient, and therefore affects the bottom line of both tenant and landlord," said Arden's Coleman.

The value of office buildings may someday be determined by their ability to generate power on-site. Buildings with lower energy costs will experience a corresponding increase in revenue.

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