Distributed Natural Gas

WHITE PAPER
Distributed Natural Gas:

Five Trends for 2017 and Beyond
Published 1Q 2017
Adam Forni
Senior Research Analyst
Mackinnon Lawrence
Senior Research Director
Distributed Natural Gas: Five Trends for 2017 and Beyond
Section 1
EXECUTIVE SUMMARY
1.1 Introduction
Navigant Research anticipates that a confluence of factors will drive growing demand for
electricity generation from distributed natural gas (DNG) around the world. DNG refers to
the non-centralized use of natural gas to generate electricity, either on- or off-grid. When
grid-tied, DNG connects at the voltage of the local distribution (not transmission) network.
Individual prime movers, generally sized 10 MW or less, include generator sets (gensets),
fuel cells, turbines, and microturbines. Although electricity generation is the focus of this
white paper, Navigant Research also covers the related practice of synthetically generating
fuel at a distributed scale for energy storage or other purposes.
While the core technologies of DNG have existed for decades, macroeconomic,
technological, and regulatory developments are opening new avenues and business
models for the application of these technologies. Several key factors are driving the
market:
• Inexpensive and abundant natural gas: Natural gas is reaching global markets and
should remain an economically viable energy source in most markets over the medium
to longer term. The unconventional gas revolution in North America is spreading and
the industry is globalizing. Large global shale plays, long held back due to a variety of
economic, regulatory, and technological reasons, are starting to be tapped in places
like China, Africa, and much of Latin America. Greenhouse gas (GHG) emissions
remain a risk, albeit one that remains largely checked at this time.
• Growth of intermittent renewables: The rapid rise of intermittent renewable

generation will continue to drive demand for increased levels of flexible generation. As
an established and low risk technology, DNG will play a key role in balancing the grid
alongside fast-growing advanced energy storage. Regulators will begin to more richly
reward dispatchable generation sources that can provide locational and fast-ramping
benefits.
• Enabling software and controls: Enabling technologies will create new opportunities
for DNG. Developments in software and the Internet of Things (IoT) will drive the
integration of distributed energy resources (DER) across the electrical distribution grid,
including DNG. Onsite generators, formerly subject to very simple on-off controls, will
become more interactive.
• Localization of electricity supply: The localization of generation—into microgrids, for

example—will favor DNG for its ability to compactly provide 24/7 baseload power.
Where available, DNG generally compares favorably with diesel, which is a boon for
emissions-choked cities across Asia Pacific especially.
©2017 Navigant Consulting, Inc. Notice: No material in this publication may be reproduced, stored in a retrieval system, or transmitted by any means,
in whole or in part, without the express written permission of Navigant Consulting, Inc.
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1.2 DNG: Five Trends for 2017 and Beyond

This Navigant Research white paper examines five trends identified as the most impactful
to the industry’s development over the next 3-5 years. These macroeconomic, regulatory,
and technological trends are expected to push industry into a new era where tested
technologies will be used in new ways with new business models in new markets. The
trends have varying significance for each of the stakeholder groups, which include energy
consumers, software and equipment vendors, utilities, regulators, and grid operators.
The five trends are as follows:
• Five years later, the Golden Age of Gas goes global
• To support renewables, gas will compete with storage—and often win
• DER software surge will unlock DNG revenue stacking in the Energy Cloud
• Stationary fuel cell vendors mending from a tough 2016 will look abroad
• Regulators will recognize the locational and fast-start benefits of DNG
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Section 2
FIVE DISTRIBUTED NATURAL GAS TRENDS TO WATCH
2.1 Five Years Later, the Golden Age of Gas Goes Global
In 2011, the International Energy Agency (IEA) published The Golden Age of Gas and
suggested the fuel would grow its market share significantly in the coming decades.
Technologies like hydraulic fracturing would open vast new unconventional natural gas
resources. The fuel’s displacement of alternatives like coal and diesel for power generation
would result in lowered emissions of greenhouse gases (GHGs) and other pollutants.
Spiking demand from the developing world, a globalizing supply chain, and a trend toward
market-based prices would lead to brisk growth in natural gas demand. Production indeed
grew briskly in North America, the epicenter of the Golden Age of Gas. According to British
Petroleum, annual natural gas production there grew 5.9 trillion cubic feet from 2010 to
2015, about the same increase as over 20 previous years (1990-2010).
On the way to the global Golden Age of Gas, though, some unexpected speed bumps
turned up. Slowed economic growth in the developing world, especially China, curbed
demand. A global energy oversupply led to falling oil & gas prices. This made the fuels
more attractive but also slowed infrastructure investments. In some cases, it gave oil an
edge over gas—which is harder to transport. Cheap subsidized renewables displaced
certain generation projects, sometimes thanks to the even lower emissions afforded by
such projects.
Despite these complications, the key drivers of the Golden Age of Gas scenario remain
intact. Unconventional resources are continuing to grow as Australia, the United States,
and other countries increase liquefied natural gas (LNG) exports. Gas in electricity
generation is growing; in 2016, it overtook coal as the largest fuel source in the United
States for the first time in history, according to the US Energy Information Administration
(EIA). Navigant Research expects coal-based generation in North America and Europe to
continue to decline over the next decade. Natural gas is poised to pick up some of the
slack. China set an LNG import record in November 2016, then set it again a month later.
A global trend away from nuclear power is an additional boon for natural gas. Globally,
suppliers still face an oversupplied market, though this is generally good news for
consumers of natural gas. Despite the setbacks that have slowed the Golden Age of Gas,
the latest forecasts from the EIA and IEA still show demand growth through 2035 similar to
that of the Golden Age of Gas scenario.
Some risks to this scenario still exist—most notably, concerns over emissions. Fracking
practices have come under increased scrutiny and activists have mobilized to protest
pipelines. To date, this has occurred mostly in North America, though the trend could
spread since pipelines are large and obvious targets. The Paris Agreement went into force
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in November 2016, with natural gas filling an uneasy role to displace emissions from diesel
and coal, which some say does not go far enough. Coal, meanwhile, remains cheap and
globally popular. Despite these challenges, the benefits of natural gas—outlined in this
white paper—are such that they are expected to broadly overcome the risks.
2.1.1 Distributed Natural Gas-Fueled Generation Rides the Golden Age of Gas
Distributed natural gas (DNG)-fueled generation rides the same wave as centralized
natural gas, but also shares separate momentum afforded to distributed energy resources
(DER). Onsite generation can provide resilience during outages, installs quickly, and can
have double the efficiency of central generation by using waste heat and avoiding grid
losses. Enabling software and Internet of Things (IoT) technologies are also opening
opportunities for DNG. These technologies optimize the operations of DNG in concert with
a suite of other DER, including PV, advanced storage, and demand response (DR). As
outlined in Navigant Consulting, Inc.’s (Navigant’s) Energy Cloud white papers, 1 electricity
consumers are increasingly embracing distributed generation (DG) technologies as a
hedge against grid insecurity (both in developed and developing markets, albeit for
different underlying motivations) and demanding more control over their generation
sources. As technology, regulations, and customer preferences shift toward favoring DG,
demand for DNG is projected to grow.
2.1.2 Infrastructure and International Trade Grow

Growing demand, growing supply, and the development of pricing hubs are all contributing
to broader access to cheap natural gas. Demand is growing across both the developing
and developed world as infrastructure expands and power plants built to cash in on
cheaper natural gas come online. Supplies, especially in the form of LNG exports from
Australia and North America, have grown so quickly that some projects have been put on
hold in this oversupplied market. In 2015, only 15% of Asia Pacific trade was hub-based,
with most of the rest was indexed to oil prices—though there is reason to believe hubs will
expand in Asia Pacific, resulting in a more fluid market with greater demand in the coming
years.
In the developing world, as natural gas pipelines expand and electrification grows, natural
gas will power regions that would otherwise have been powered with diesel or coal. Cities
currently crippled by local air pollution, especially in India and China, will have reason to
welcome the cleaner-burning gas.
1
Navigant Consulting, Inc., The Energy Cloud, 2015.
Navigant Consulting, Inc., Navigating the Energy Transformation, 2016.
Jan Vrins and Mackinnon A. Lawrence, “Energy Cloud Playbook,” Navigant Consulting, Inc. and Public Utilities
Fortnightly, August 2016.
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2.1.3 Opportunities
• Beyond North America, which has already been enjoying a natural gas renaissance,
the largest growth region is Asia Pacific due to its steady economic growth, need for
electrification, and growing access to natural gas. India and China are expected to see
the most growth in demand.
• Dual-fuel generator sets (gensets) or retrofits, which feed some fraction of natural gas
to an otherwise diesel engine, are good candidates to displace diesel fuel. There is
massive opportunity in retrofits alone. According to the International Renewable
Energy Agency, 400 GW of off-grid diesel is operating globally, much of it in areas with
growing access to natural gas. This represents a huge opportunity to save fuel costs,
decrease global emissions, and add fuel redundancy to the energy supply chain.
2.2 To Support Renewables, Gas Will Compete with Storage—and Often Win
Renewable generation continues to grow quickly, pointing to a future with more variability
on the grid. According to recent Navigant Research reports, 2 cumulative global added
capacity in solar PV and wind in the 2016-2020 timeframe is projected to reach 547 GW,
more than the installed capacity of Germany and Japan combined. Falling costs, improved
financing and business models, and strong government support all contribute to
renewables’ positive growth outlook. Renewable energy surpassed coal in terms of the
largest global installed capacity for the first time in 2015: 1,968 GW, according to the IEA.
Considering the current growth trends, renewables may plausibly hold that title for good.
Various solutions are being implemented to dampen the variability from this new solar and
wind power. Transmission grids are being expanded to link electricity supply and demand,
notably in places like California, Germany, and China. Energy storage is falling in price,
supported by regulators, and is viewed widely as the most important answer to renewables’
intermittency concerns. But transmission expansion and storage can be seen as
“necessary but insufficient” tools in the race to integrate renewables. Flexible gas
generation technologies will also play a growing role in the grid of the future.
2
Navigant Research, World Wind Energy Update, 2016.
Navigant Research, Distributed Solar PV, 2015.
Navigant Research, Distributed Energy Resources Global Forecast, 2015.
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2.2.1 Energy Storage and DNG: Both Competing and Cooperating

Fulfilling similar grid services, natural gas and storage compete in many arenas, and the
winner is sometimes surprising:
• A 2015 study in Energy Policy 3 showed that cheap natural gas generation routinely
outcompetes storage in frequency regulation and arbitrage applications in the
northeastern United States, a phenomenon the authors suggest is holding back the
storage industry at large.
• A 2016 report on California’s Self-Generation Incentive Program concluded that the

advanced energy storage systems installed under the program led to a net increase in
GHG emissions and suggested that rate structures should be improved to better align
the goals of consumer and grid operator with GHG reduction targets. All natural gas
technologies exhibited a net decrease in GHG emissions.
On the other hand, there have also been cases where storage outperforms gas. Storage
came to the rescue after the largest gas leak in US history at Aliso Canyon (also in
California) in February 2016. In May, the California Public Utilities Commission required
utilities to add more than 80 MW of energy storage to balance the grid. This was a
significant proving ground for storage companies to design, build, and commission quickly.
The additional capacity appears to be on track for completion in less than 8 months.
Gas and storage, while sometimes competing, ultimately have different strengths.
Advanced storage attracts more popular headlines for good reason: prices are falling
quickly and innovation is at a furious pace in this industry, one with the significant
distinction of zero onsite emissions. DNG, meanwhile, has the advantage of generating
electricity constantly in addition to certain incumbency benefits. For example, the vast
natural gas infrastructure in the United States includes more than 2.5 million miles of
pipeline and the gas-energy storage equivalent of 1,411 TWh, or more than 7,500 times
the total existing grid-tied energy storage tracked in Navigant Research’s Energy Storage
Tracker 3Q16 report. Despite rare incidents such as the one at Aliso Canyon, this
infrastructure represents a major incumbent resource that will serve to balance the grid for
decades to come. Storage and gas are the two most important resources to balancing a
grid. While they often compete, they also cooperate, as outlined in the examples below.
3 Eric Hittinger and Roger Lueken, “Is Inexpensive Natural Gas Hindering the Grid Energy Storage Industry?” Energy
Policy 87 (2015).
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2.2.2 2017: DNG Complements Renewables at Site Level

The complementarity of renewables, storage, and DNG is most evident behind the meter at
the individual site level. For example, a typical microgrid configuration has solar PV
generating energy to roughly match daytime peaks; consistent 24/7 baseload from a
turbine, genset, or fuel cell; and a battery to optimize these various energy flows. The
software and controls innovations that enable any one technology are increasingly
applicable to the others as standardization spreads across the industry. When making a
decision to incorporate one technology into a new or existing site, building managers often
find it easier to justify the capital expense and disruption when multiple technologies each
offer value. Whether on a military base in Europe, in a northeastern US city, or in a remote
village in India, this synergistic scenario is playing out with greater regularity globally.
2.2.3 Beyond: DNG Complements Renewables Gridwide

As noted above, grid expansions and energy storage are important but insufficient to
balance the grid of the future. According to Navigant Research estimates, the value of
curtailed renewable energy in 2015 exceeded $240 million in Germany and $1.8 billion in
China. Though these complex curtailments could not be simply solved with DNG, it brings
scale to the problem, which could potentially become far more severe as more renewables
connect to the grid. Curtailed renewable energy can be thought of as having neither
marginal costs nor emissions. To take advantage of it, thermal plants must be able to
flexibly turn down their output—which is where DNG has an edge. DNG technologies are
physically smaller than the large centralized thermal plants of the past and thus can
generally react quicker to changes in the grid.
Consider these other reports suggesting leading roles for flexible and/or DNG generation:
• A 2016 National Renewable Energy Laboratory report suggested that for California to
accommodate 50% of its generation coming from solar PV, a wide range of changes
would need to occur. Notably, flexible thermal generators and combined heat and
power (CHP) plants were mentioned as a key necessity, even if the amount of energy
storage is boosted to 10 times more than what is outlined in the current mandate.
• A 2015 report points out that Denmark was able to generate 39% of its electricity from
wind power thanks in large part to flexible district energy CHP resources. These district
energy systems are in many ways the core of Denmark’s grid. For example, during
periods of high wind generation district energy systems can use the cheap electricity to
add or remove heat from the system, thus becoming electricity consumers rather than
producers.
• A 2016 report funded by Germany’s Federal Ministry for Economic Affairs and Energy
suggests that power-to-heat storage could be more important than batteries in
balancing Germany’s grid in the future.
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• A 2015 report by the Union of Concerned Scientists on California’s grid states that
under a 50% renewable portfolio standard scenario, curtailment could be cut from
4.8% to 3.2% if natural gas resources are able to turn down to half-power. This would
lower emissions and put to use $350 million worth of energy that would otherwise be
wasted. An example of a curtailment scenario is indicated in Figure 2.1. Flexible, fast-
ramping natural gas generation is more valuable in this future scenario since it can turn
on and off quickly and thus put more renewables to use.
Figure 2.1 Renewable Energy Curtailment Scenario
(Source: Union of Concerned Scientists)
2.2.4 Opportunities
• Partnerships that market across the energy value chain will pay off, like Bloom
Energy’s partnership to offer storage via PowerSecure and Southern Company, and
Caterpillar teaming up with FirstSolar and Fluidic Energy to offer hybrid microgrids.
These types of partnerships can leverage not just the partner’s technology but also
their sales and distribution channels—in the end providing a more complete product
that better meets the needs of both customer and grid (for grid-tied systems).
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• As regulators continue to refine their methods used to balance the grid, rates are
expected to better compensate resources that can react quickly, presenting
opportunities for those players ready to act. Gensets, with their fast-ramping capability,
will be rewarded if deployed with the proper business model in the right locations.
Thermal heat storage, typically tied to a CHP or district energy system and used for
water or space heating, is also expected to represent a growing opportunity thanks to
the flexibility it affords to the grid.
2.3 DER Software Surge Will Unlock DNG Revenue Stacking in the Energy Cloud
The Energy Cloud is defined in Navigant’s Navigating the Energy Transformation white
paper as:
A dynamic energy ecosystem that leverages ubiquitous connectivity, intelligent

sensors and devices, information and operations technology, and data-driven
machine-learning functionality across the grid value chain.
This represents both a significant change from the traditional hub-and-spoke utility model
and a significant opportunity for DER. The software that supports the Energy Cloud is
increasingly spreading its reach, controlling more resources including energy storage and
DR loads in order to optimize grid operations.
In the context of the Energy Cloud, DR and storage are more familiar than DNG, though
that may be starting to change. Traditional uses of onsite fossil-fueled generation fall into
two broad categories: standby and prime power. Standby generators typically provide
power to ride through outages, often operating less than 100 hours per year. Prime power
DNG, including CHP applications, typically provides some combination of resilience, peak
shaving, and efficiency benefits, and operates at a higher capacity factor—sometimes
100%. But as DER software becomes more prevalent, new business models are opening
up for new categories of smart DNG. Grid balancing, which traditionally relied mostly on
transmission-connected natural gas turbines, is being handed to DER in increasing
amounts. Given the proper signals, these distribution level resources can provide the same
services, only closer to the load with more precision and less line loss. Under the right
scenario, such schemes can even offer deferral of significant transmission and distribution
(T&D) upgrades.
2.3.1 2017: Proof of Concept: edgeGEN

A new joint venture between Cummins, Inc. and Tangent Energy Solutions is proof of this
concept. Dubbed edgeGEN, this offering allows energy retailers and commercial and
industrial (C&I) facilities to capitalize on real-time economic opportunities on the grid.
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edgeGEN consists of Cummins’ natural gas gensets equipped with Tangent Energy’s
Tangent AMP DER management system. The system’s key focus is predicting (and
reacting to) customer coincident peak demand, a rare occurrence that can nonetheless
represent a significant portion of an electric bill. By focusing on these high value instances
which occur just a few select hours a year, edgeGEN has the potential to provide high
economic value to the grid with a small amount of fuel.
The business case for the product includes value propositions on both sides of the meter.
Municipal utilities and energy retailers, the exclusive channel partners for the offering, save
costs by incentivizing customers toward desired behavior like cutting demand during peak
hours. C&I customers can be rewarded monetarily while in some cases also realizing the
benefits of resilient power to ride through outages. This offering is tied together with a
financing structure that typically requires no money down from the host facility.
2.3.2 Beyond: DNG Expands into Virtual Power Plants

There is growing opportunity for DNG to be aggregated from multiple locations into a virtual
power plant (VPP). In Virtual Power Plant Enabling Technologies, Navigant Research
defines a VPP as:
A system that relies upon software and a smart grid to remotely and automatically
dispatch retail DER services to a distribution or wholesale market via an
aggregation and optimization platform.
The DER services mentioned often take the form of rapidly dispatchable resources like
advanced energy storage or DR, which can add supply or remove demand upon a signal
from the utility, independent system operator (ISO), or other entity. With newer DER control
software and the improving quality of market signals, DNG is expected to see more
opportunities to be dispatched in VPPs. Table 2.1 outlines use cases for grid-tied energy
storage and DNG. Storage asset operators typically try to stack two or more of these value
propositions to maximize the revenue from storage systems. Under the right conditions,
DNG can perform as well as storage for many of these use cases.
Table 2.1 Key Use Cases for Storage and Distributed Natural Gas
Viability of Viability of
Use Case Response Advanced Distributed
(Service User) Description Time Duration Storage Natural Gas
Frequency
Regulation Excellent. Inverter- Excellent. Natural
Balances fluctuations between
(ISO/Regional based storage is gas peaking plants
generation and load; manages ~1 minute Minutes
Transmission fast-acting and historically own this
variability in grid frequency
Organization highly controllable. space.
[RTO])
Excellent. Inverter- Good. Fast
Manages reactive power to
Voltage Support based storage is response favors
maintain the power system’s Seconds Seconds
(ISO/RTO) fast-acting and spinning equipment
voltages at acceptable ranges
highly controllable. that can vary output.
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Viability of Viability of
Use Case Response Advanced Distributed
(Service User) Description Time Duration Storage Natural Gas
Excellent. Inverter-
Reserve capacity that is grid-
Spinning/Non- based storage Good. Gensets and
synchronized and ready to
Spinning Seconds to Minutes to need not be some turbines are
meet electric demand within
Reserves Minutes Hours spinning to able ramp to power
10 minutes of a dispatch
(ISO/RTO) instantly export quickly enough.
instruction by an ISO
power.
Fair. Lower value Excellent. DNG can
Energy Arbitrage Shifts electricity use to more
Minutes Hours service favors provide cheap bulk
(ISO/RTO) optimal time of day
cheap natural gas. power on demand.
Avoids the installation of new
Good. Viability Good. Viability
T&D Deferral T&D assets that would have
N/A Years highly dependent highly dependent on
(Utility) otherwise been required due
on project details. project details.
to demand growth
Good. Complex Excellent. Either
Demand/Time-of- Lowers demand at customer
decisions are constant- or
Use Charge meter during periods of high
Minutes Hours required regarding variable-output DNG
Management electricity charges in demand-
state of battery can provide this
(Customer) or time-of-use based tariffs
charge. service.
Good. Proven DNG
Poor. Costs often technologies run
Continuous Powers customer facility when Hours to limit storage to just 24/7; diesel still
Seconds
Backup Power grid unavailable Days minutes of backup preferred where
power. onsite fuel storage
needed.
(Source: Navigant Research)
Note that the relative viability of storage versus DNG can vary substantially based on
geography, tariff structures, natural gas prices, and other factors. In addition, individual
storage and DNG technologies perform differently from one another with nuances that
need not be covered here. The purpose of Table 2.1 is to broadly characterize the
operational requirements of various use cases and briefly explain how storage and DNG
meet those requirements.
2.3.3 Opportunities
• Partnerships with other DER vendors, especially software and IoT companies, will
open new opportunities across the value chain and should be pursued. This includes
not just co-deploying these solutions in VPP-type settings, but also embedding smart
capabilities into DNG assets.
• Since DNG will be chasing the same use cases and value streams as storage, it is
imperative for all stakeholders to be aware of where each technology has an edge.
Project viability will be highly dependent on local rate structures and will shift as DER
regulations develop.
• Customer education will be needed to grow this market. Prospective host customers
may not have initial interest in a smart genset or even know that the option exists.
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2.4 Stationary Fuel Cell Vendors Mending from a Tough 2016 Will Look Abroad
Stationary fuel cells stand out from other DNG for several reasons: the electrochemical
process they employ is exceedingly clean and efficient; the technology continues to see
significant cost reductions; and the industry tends to perennially disappoint more than
nearly any energy technology. Costs remain high, representing by far the biggest hurdle to
broad adoption. Some significant developments from 2016 include:
• The US Investment Tax Credit for fuel cells expired at the end of 2016. This tax credit
is worth an average of $0.02/kWh throughout the lifetime of each fuel cell. According to
Navigant Research estimates, by one measure the loss of this incentive sets back the
US price of fuel cells by 3 years. That is, it takes about 3 years to cut the levelized cost
of fuel cell energy $0.02/kWh, assuming recent rates of fuel cell capital cost decline.
An extension has bipartisan congressional support, but is far from certain to pass in
2017. California’s Self-Generation Incentive Program also announced cuts to the
funding of natural gas generation, including fuel cells.
• The Beacon Falls Energy Park project, which would have been the world’s largest fuel
cell park at 63 MW, was not selected for the New England Clean RFP. Despite being
just one project, its rejection had a generally chilling effect on the US market. Against
this backdrop, three of the industry’s five most significant large stationary
manufacturers, all based in the northeastern United States, announced some form of
restructuring or layoffs.
• Globally, Japan’s flagship ENE-FARM microCHP program looks set to post a second
consecutive slow year, falling further behind the 2020 goal of 1.4 million units. POSCO
in South Korea and Intelligent Energy in the United Kingdom, both newsmakers for big
deals in recent years, announced layoffs.
2.4.1 2017: Industry Regroups after Tough 2016

The industry is no stranger to tough years, having gone through multiple boom-and-bust
cycles over the past decade. Though still somewhat fragile, industry supply chains have
grown more resilient since 2010. For example, many now have multiple vendors in place
where there was previously just one. Against the backdrop of falling incentives, companies
will perform thorough self-assessments to cut costs, streamline processes, and reunite
around the specific value proposition their products provide. This industry, long dependent
on government support, has an opportunity to look through a fresh lens at both existing
and untapped customer segments.
2.4.2 Beyond: Global Opportunity

Cumulative cost declines are starting to add up, a matter of crucial importance to the future
of the industry. With traditional markets like Japan, South Korea, and the United States
exhibiting lukewarm growth for various reasons, companies will continue to expand into
new markets. Countries with fresh LNG supplies and growing electricity demand like
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Thailand, Jordan, and Taiwan are in the market for generation. Island nations across the
Asia Pacific region represent a key opportunity: concerned about rising sea levels and
often reliant on natural gas, these countries want to make use of the fuel in the cleanest,
most compact, and most efficient manner possible. In North America and elsewhere,
gradually increasing natural gas prices will paradoxically present new opportunities to
flaunt fuel cells’ high efficiency, since it is possible to get more energy from each molecule.
2.4.3 Opportunities
• Opportunities will open beyond the well-developed markets of Japan, South Korea,
and North America. Look for growth in nascent European markets that have higher
electricity prices like the United Kingdom, Germany, and Italy, a push toward
decarbonization of heating, and growing support for fuel cells. Other countries with
new supplies of natural gas and growing electricity demand present significant growth
potential as well.
• The loss of key incentives is an opportunity for the industry at large to show it can
thrive without government support. Refocusing on customer needs and entering new
markets can reinvigorate companies and industry alike.
• Regulatory developments, like the value of DER proceedings outlined in the next
section, could also present opportunities for fuel cells to flaunt their exceedingly low
criteria emissions. The industry should unite more closely under a common banner to
promote the advantages of fuel cells.
• High efficiency fuel cell chemistries that can exhibit some level of output flexibility will
be viable for a wider range of applications on the grid of the future. Phosphoric acid
and the emerging alkaline fuel cells show special promise in this area, and makers
should actively engineer systems that are capable of varying output to meet different
levels of demand as needed.
2.5 Regulators Will Recognize the Locational and Fast-Start Benefits of DNG
Since they (by definition) connect at the distribution level, DER present an extra value
proposition to the grid. There is inherent value to generation at a local level since it can
limit line losses, defer T&D upgrades, and offer a variety of grid support services in a
geographically targeted fashion. Fast-starting generation—i.e., most DNG—provides an
extra value proposition due to its flexibility. Despite this, regulators have made only slow
progress in assigning value to the locational and fast-starting benefits of DER. However,
progress is being made among some authorities.
2.5.1 2017: FERC Lets Fast-Start Resources Set Prices

The value of fast-ramping resources is generally set by ISOs and regional transmission
organizations (RTOs), which are overseen by the Federal Energy Regulatory Commission
(FERC). FERC, in an effort to encourage pricing transparency and support efficient
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investing, proposed in December 2016 that all ISOs and RTOs standardize their rules
relating to fast-start resources.
This represents a departure from some long-standing rules, and represents new
opportunity for the fastest-starting of the DNG, especially gensets. For example, in PJM
and California ISO, fast-start resources get a full 2 hours to start, compared to the
10 minutes proposed in the new proposed rulemaking. PJM currently goes a step further
and limits its description to combustion turbines, prescriptively eliminating other options.
This change would make the operation of the equipment actually align with what the grid
ostensibly needs, and allow fast-ramping resources to set prices on the open market.
2.5.2 2017: New York State and California Decide the Value of DER
New York and California, two of the most environmentally progressive states, are
conducting parallel proceedings that aim to more holistically decide how DER are
integrated into the grid. As of early 2017, New York’s progress is more specific; though
both states have a long way to go, some comparisons are valuable:
• Both proceedings have explicitly stated goals which form the basis for a cost-benefit
analysis test(s) that ultimately decide the value that DER brings to the grid.
Considerations include avoided generation capacity, avoided T&D losses, avoided
outage costs, and importantly for DNG, avoided GHG and criteria pollutants. The
relative weighting of these factors will decide the rates at which DER will be
compensated for energy provided.
• New York lists “reduction of carbon emissions” last among its six key objectives. This is
notable, for though emissions still rank as very important, system resilience could be
deemed more important in the storm-prone Northeast. Across the Northeast, in fact,
there is more willingness to accept some limited carbon emissions if these emissions
are related to boosting system resilience. California, with its comparatively strong solar
resource, could be viewed as less will to compromise on cutting carbon emissions.
• One point of contention in New York is the treatment of behind-the-meter generation
that is entirely consumed onsite. As it stands at the current early stage, this generation
might not be compensated as generously, making community DG more viable than
behind-the-meter projects.
2.5.3 Beyond: Value of DER Recognized Across the Grid

California and New York are both being watched as examples for other domestic and
international jurisdictions, so these proceedings will likely have significant impacts outside
their borders. Regulators have largely accepted that DER will be a major part of the future
grid and are now developing rules to incorporate these resources appropriately. As
previously noted, more intermittent generation on the grid will drive up the value of
dispatchable power sources that can be easily placed close to the load.
14
2.5.4 Opportunities
• The FERC ruling would open new markets for gensets, which can usually ramp to full
power within about 5 minutes. Other technologies like fuel cells and turbines will see
more opportunities if they can improve ramping capabilities closer to that of gensets.
• The integrated DER proceedings can result in a range of outcomes for DNG and
should be followed closely. Depending on specific policy and regulatory initiatives, fuel
cells could gain a slight advantage over other DNG thanks to their high efficiency and
extremely low criteria pollutant emissions. Either way, it is expected that DER will be
more efficiently integrated into grids, which is good news for DNG at large.
15
Section 3
CONCLUSIONS AND RECOMMENDATIONS
3.1 Conclusions
Navigant Research believes the trends outlined in this white paper provide a positive
outlook for DNG over the next 5 years. Market, technology, and regulatory developments
paint a DNG-friendly scenario that is likely to persist. The following conclusions highlight
the key takeaways from this white paper:
• Cheap, widely available natural gas is the precursor for significant DNG growth. As the
industry globalizes and infrastructure grows, vastly more potential customers are
connected to natural gas every year.
• Growing intermittency from renewables represents a major opportunity for DNG. The
need for flexible generation will be significant if the aggressive renewable goals are to
be met.
• The DER surge presents opportunities for technologies across the DG value chain,
and suggests new business models are available to tested technologies like gensets in
the Energy Cloud.
• The trend toward grouping DER into microgrids suits DNG well, due to its ability to
operate for long periods of time and its complementarity with other technologies.
3.2 Recommendations
The following recommendations are offered to industry stakeholders:
• DNG vendors should seek fresh markets, applications, and business models that suit
their products well in the context of the Energy Cloud. As an industry, they should
lobby around common goals, speak frankly about emissions and related tradeoffs, and
make concerted efforts to incorporate zero net emissions fuels like biogas and
hydrogen when possible.
• Grid operators and utilities should ensure they are sending accurate signals to the
market in order to ensure that DNG and other resources like storage can multitask and
stack revenue streams as efficiently as possible. Proper market-based signals should
push toward a technology-agnostic approach to balancing the grid, and many
opportunities are expected for each technology category, including DNG.
16
• Partnerships should be sought across the value chain among DER and software
vendors, large C&I energy users, and even utilities when appropriate. Incorporate
advanced communications and software with specific customer classes and value
streams in mind.
• Regulators should engage closely with all stakeholders, and vice versa. Effort should
be taken to ensure that any given DER is compensated in accordance with the full and
true value provided. In many ways, the future of DNG and electricity at large is being
written in the context of these exact new regulations.
17
Section 4
ACRONYM AND ABBREVIATION LIST
C&I ........................................................................................................................ Commercial and Industrial
CHP ...................................................................................................................... Combined Heat and Power
DER ................................................................................................................. Distributed Energy Resources
DG ............................................................................................................................... Distributed Generation
DNG ...........................................................................................................................Distributed Natural Gas
DR .................................................................................................................................... Demand Response
EIA .......................................................................................................US Energy Information Administration
FERC............................................................................................... Federal Energy Regulatory Commission
genset....................................................................................................................................... Generator Set
GHG .....................................................................................................................................Greenhouse Gas
GW .................................................................................................................................................... Gigawatt
IEA ...................................................................................................................... International Energy Agency
IoT ....................................................................................................................................... Internet of Things
ISO .................................................................................................................. Independent System Operator
kWh ........................................................................................................................................... Kilowatt-Hour
LNG .............................................................................................................................. Liquefied Natural Gas
MW .................................................................................................................................................. Megawatt
PV ............................................................................................................................................... Photovoltaics
RFP ............................................................................................................................... Request for Proposal
RTO ....................................................................................................... Regional Transmission Organization
T&D ................................................................................................................. Transmission and Distribution
TWh .......................................................................................................................................... Terawatt-Hour
18
US ............................................................................................................................................. United States
VPP .................................................................................................................................. Virtual Power Plant
19
Section 5
TABLE OF CONTENTS
Section 1 ...................................................................................................................................................... 1
Executive Summary .................................................................................................................................... 1
1.1 Introduction.................................................................................................................................... 1
1.2 DNG: Five Trends for 2017 and Beyond ....................................................................................... 2
Section 2 ...................................................................................................................................................... 3
Five Distributed Natural Gas Trends to Watch ........................................................................................ 3
2.1 Five Years Later, the Golden Age of Gas Goes Global ................................................................ 3
2.1.1 Distributed Natural Gas-Fueled Generation Rides the Golden Age of Gas ............................ 4
2.1.2 Infrastructure and International Trade Grow ........................................................................... 4
2.1.3 Opportunities ........................................................................................................................... 5
2.2 To Support Renewables, Gas Will Compete with Storage—and Often Win ................................ 5
2.2.1 Energy Storage and DNG: Both Competing and Cooperating ................................................ 6
2.2.2 2017: DNG Complements Renewables at Site Level ............................................................. 7
2.2.3 Beyond: DNG Complements Renewables Gridwide ............................................................... 7
2.2.4 Opportunities ........................................................................................................................... 8
2.3 DER Software Surge Will Unlock DNG Revenue Stacking in the Energy Cloud .......................... 9
2.3.1 2017: Proof of Concept: edgeGEN.......................................................................................... 9
2.3.2 Beyond: DNG Expands into Virtual Power Plants ................................................................. 10
2.3.3 Opportunities ......................................................................................................................... 11
2.4 Stationary Fuel Cell Vendors Mending from a Tough 2016 Will Look Abroad ........................... 12
2.4.1 2017: Industry Regroups after Tough 2016 .......................................................................... 12
2.4.2 Beyond: Global Opportunity .................................................................................................. 12
20
2.4.3 Opportunities ......................................................................................................................... 13
2.5 Regulators Will Recognize the Locational and Fast-Start Benefits of DNG ............................... 13
2.5.1 2017: FERC Lets Fast-Start Resources Set Prices .............................................................. 13
2.5.2 2017: New York State and California Decide the Value of DER ........................................... 14
2.5.3 Beyond: Value of DER Recognized Across the Grid ............................................................ 14
2.5.4 Opportunities ......................................................................................................................... 15
Section 3 .................................................................................................................................................... 16
Conclusions and Recommendations ...................................................................................................... 16
3.1 Conclusions ................................................................................................................................. 16
3.2 Recommendations ...................................................................................................................... 16
Section 4 .................................................................................................................................................... 18
Acronym and Abbreviation List ............................................................................................................... 18
Section 5 .................................................................................................................................................... 20
Table of Contents ...................................................................................................................................... 20
Section 6 .................................................................................................................................................... 22
Table of Charts and Figures..................................................................................................................... 22
Section 7 .................................................................................................................................................... 23
Scope of Study .......................................................................................................................................... 23
Sources and Methodology ....................................................................................................................... 23
Notes .......................................................................................................................................................... 24
21
Section 6
TABLE OF CHARTS AND FIGURES
Figure 2.1 Renewable Energy Curtailment Scenario ............................................................................... 8
Table 2.1 Key Use Cases for Storage and Distributed Natural Gas ..................................................... 10
22
Section 7
SCOPE OF STUDY
This Navigant Research white paper analyzes five global trends for DNG in 2017 and beyond. The report
examines the key determinants driving global investment in DNG and the related opportunities. Each of
the topics in this white paper is examined more deeply in research reports and ongoing research from
Navigant Research’s Distributed Natural Gas Research Service.
SOURCES AND METHODOLOGY

Navigant Research’s industry analysts utilize a variety of research sources in preparing Research
Reports. The key component of Navigant Research’s analysis is primary research gained from phone and
in-person interviews with industry leaders including executives, engineers, and marketing professionals.
Analysts are diligent in ensuring that they speak with representatives from every part of the value chain,
including but not limited to technology companies, utilities and other service providers, industry
associations, government agencies, and the investment community.
Additional analysis includes secondary research conducted by Navigant Research’s analysts and its staff
of research assistants. Where applicable, all secondary research sources are appropriately cited within
this report.
These primary and secondary research sources, combined with the analyst’s industry expertise, are
synthesized into the qualitative and quantitative analysis presented in Navigant Research’s reports. Great
care is taken in making sure that all analysis is well-supported by facts, but where the facts are unknown
and assumptions must be made, analysts document their assumptions and are prepared to explain their
methodology, both within the body of a report and in direct conversations with clients.
Navigant Research is a market research group whose goal is to present an objective, unbiased view of
market opportunities within its coverage areas. Navigant Research is not beholden to any special
interests and is thus able to offer clear, actionable advice to help clients succeed in the industry,
unfettered by technology hype, political agendas, or emotional factors that are inherent in cleantech
markets.
23
NOTES
CAGR refers to compound average annual growth rate, using the formula:
CAGR = (End Year Value ÷ Start Year Value)(1/steps) – 1.
CAGRs presented in the tables are for the entire timeframe in the title. Where data for fewer years are
given, the CAGR is for the range presented. Where relevant, CAGRs for shorter timeframes may be given
as well.
Figures are based on the best estimates available at the time of calculation. Annual revenue, shipments,
and sales are based on end-of-year figures unless otherwise noted. All values are expressed in year
2017 US dollars unless otherwise noted. Percentages may not add up to 100 due to rounding.
24
Published 1Q 2017
©2017 Navigant Consulting, Inc.

1375 Walnut Street, Suite 100
Boulder, CO 80302 USA
Tel: +1.303.997.7609
http://www.navigantresearch.com
Navigant Consulting, Inc. (Navigant) has provided the information in this publication for informational
purposes only. The information has been obtained from sources believed to be reliable; however,
Navigant does not make any express or implied warranty or representation concerning such information.
Any market forecasts or predictions contained in the publication reflect Navigant’s current expectations
based on market data and trend analysis. Market predictions and expectations are inherently uncertain
and actual results may differ materially from those contained in the publication. Navigant and its
subsidiaries and affiliates hereby disclaim liability for any loss or damage caused by errors or omissions in
this publication.
Any reference to a specific commercial product, process, or service by trade name, trademark,
manufacturer, or otherwise, does not constitute or imply an endorsement, recommendation, or favoring by
Navigant.
This publication is intended for the sole and exclusive use of the original purchaser. No part of this
publication may be reproduced, stored in a retrieval system, distributed or transmitted in any form or by
any means, electronic or otherwise, including use in any public or private offering, without the prior written
permission of Navigant Consulting, Inc., Chicago, Illinois, USA.
Government data and other data obtained from public sources found in this report are not protected by
copyright or intellectual property claims.
Note: Editing of this report was closed on January 26, 2017.
25

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WHITE PAPER

Distributed Natural Gas:

• Growth of intermittent renewables: The rapid rise of intermittent renewable

• Localization of electricity supply: The localization of generation—into microgrids, for

1.2 DNG: Five Trends for 2017 and Beyond

The five trends are as follows:

• Five years later, the Golden Age of Gas goes global

• To support renewables, gas will compete with storage—and often win

• Regulators will recognize the locational and fast-start benefits of DNG

2.1.2 Infrastructure and International Trade Grow

2.2.1 Energy Storage and DNG: Both Competing and Cooperating

• A 2016 report on California’s Self-Generation Incentive Program concluded that the

2.2.2 2017: DNG Complements Renewables at Site Level

2.2.3 Beyond: DNG Complements Renewables Gridwide

Figure 2.1 Renewable Energy Curtailment Scenario

(Source: Union of Concerned Scientists)

A dynamic energy ecosystem that leverages ubiquitous connectivity, intelligent

2.3.1 2017: Proof of Concept: edgeGEN

2.3.2 Beyond: DNG Expands into Virtual Power Plants

2.4.1 2017: Industry Regroups after Tough 2016

2.4.2 Beyond: Global Opportunity

2.5.1 2017: FERC Lets Fast-Start Resources Set Prices

2.5.3 Beyond: Value of DER Recognized Across the Grid

CHP ...................................................................................................................... Combined Heat and Power

DER ................................................................................................................. Distributed Energy Resources

DG ............................................................................................................................... Distributed Generation

DNG ...........................................................................................................................Distributed Natural Gas

DR .................................................................................................................................... Demand Response

EIA .......................................................................................................US Energy Information Administration

FERC............................................................................................... Federal Energy Regulatory Commission

genset....................................................................................................................................... Generator Set

GHG .....................................................................................................................................Greenhouse Gas

IEA ...................................................................................................................... International Energy Agency

IoT ....................................................................................................................................... Internet of Things

ISO .................................................................................................................. Independent System Operator

kWh ........................................................................................................................................... Kilowatt-Hour

LNG .............................................................................................................................. Liquefied Natural Gas

RFP ............................................................................................................................... Request for Proposal

RTO ....................................................................................................... Regional Transmission Organization

T&D ................................................................................................................. Transmission and Distribution

TWh .......................................................................................................................................... Terawatt-Hour

US ............................................................................................................................................. United States

VPP .................................................................................................................................. Virtual Power Plant

Executive Summary .................................................................................................................................... 1

1.2 DNG: Five Trends for 2017 and Beyond ....................................................................................... 2

Five Distributed Natural Gas Trends to Watch ........................................................................................ 3

2.1.2 Infrastructure and International Trade Grow ........................................................................... 4

2.1.3 Opportunities ........................................................................................................................... 5

2.2.2 2017: DNG Complements Renewables at Site Level ............................................................. 7

2.2.3 Beyond: DNG Complements Renewables Gridwide ............................................................... 7

2.2.4 Opportunities ........................................................................................................................... 8

2.3.1 2017: Proof of Concept: edgeGEN.......................................................................................... 9

2.3.2 Beyond: DNG Expands into Virtual Power Plants ................................................................. 10

2.3.3 Opportunities ......................................................................................................................... 11

2.4.1 2017: Industry Regroups after Tough 2016 .......................................................................... 12

2.4.2 Beyond: Global Opportunity .................................................................................................. 12

2.4.3 Opportunities ......................................................................................................................... 13

2.5.1 2017: FERC Lets Fast-Start Resources Set Prices .............................................................. 13

2.5.3 Beyond: Value of DER Recognized Across the Grid ............................................................ 14