Generator-maker finding new ways to get energy

I Power Energy Systems isn't a coal-burning electric utility's worst nightmare. Not yet, anyway.

For now, the Remy International spin-off that makes natural-gas-powered electric generators that are the primary power source
of corporate and college campuses is still a novelty in Indiana. After all, coal is still a cheaper source of electricity
than is natural gas.

But while I Power chisels away at the market share of high-cost electric utilities on the coasts and overseas, it soon may
make a more compelling business case here in cheap-coal country. It is developing applications for electric generators that
burn biogas from sources ranging from garbage to ground-up corn.

I Power within days will place one of its SUV-size power plants at the South Side Landfill, on Kentucky Avenue, where it
will burn methane from buried trash, generating enough electricity to serve at least eight average-size homes. In this case,
the electricity will power the landfill's operations.

I Power units also will burn methane produced from corn stillage, a waste product from ethanol refineries that are sprouting
in the state like spring dandelions. The Anderson firm is even looking at ways to burn the gases that form at municipal water
treatment plants.

"We still need to start weaning ourselves from coal, and we're ready to serve," said Mike Hudson, chairman
and CEO of I Power, uttering what would be blasphemy in some parts of southwest Indiana's bituminous country.

Alternative energy has been the ruin of many an entrepreneur over the years, but Hudson's credentials suggest he shouldn't
be underestimated. Until retiring a few years ago, he was vice chairman of Indianapolis-based Rolls-Royce North America. The
University of Texas-trained aerospace engineer has sat on numerous NASA committees. And he has a monetary incentive to succeed:
In 2005, Hudson and a handful of other central Indiana investors bought I Power from DTE Energy, better known as Detroit Edison,
for an undisclosed price.

Besides working on product development inside a 62,000-square-foot facility just down the road from Guide Corp.'s doomed
auto parts plant, I Power engineers have been ankle deep in agricultural waste in Terre Haute. There, Rose Energy Discovery
has developed a bacteria to quickly digest what's left of corn after it is ground up to brew ethanol, the alternative-fuel
and gasoline additive.

Usually, ethanol refineries sell the leftover stillage as animal feed. But Rose's potion, when placed in an anaerobic
digester, breaks down corn matter into a methane-like gas that can power the electric units. The electricity could be used
to power ethanol plants or it could be sold. I Power units also produce heat that can be used to make hot water.

"We're just on the leading edge of commercializing our units for this [bio] processing," said Terry J. Pahls,
president of I Power and an investor.

The market for these applications already exists.

Earlier this month, Purdue University said it was partnering with Clinton County to develop an $18 million facility to produce
methane from hog and industrial waste. The county plans to seek proposals from firms to convert the methane into electricity.

"There is a halfway decent amount of [landfill gas] here in Indiana," said Douglas Gotham, director of the state
utility forecasting group at Purdue University.

Another advantage of the gas is that it's virtually free, although there's a cost to filter out impurities, Gotham
noted.

Mini-utilities

I Power is already in the market in places like California, where electric consumers seek a cheaper source of energy than
connecting to the local electric utility. I Power's units, priced roughly $65,000 to $75,000 apiece, provide a customer's
primary source of electricity. These aren't back-up generators–quite the opposite. In fact, the electrical utility is
the back-up power supply for these customers.

"Essentially, you're a utility," said Pahls, a former GM and Remy executive.

In some cases, natural-gas prices in a given location are low enough relative to electric rates to make I Power units a cheaper
source of electricity. But what often tips the energy equation in I Power's favor is when the user also harvests heat
from the generator's engine to heat or cool buildings, via a heat exchanger. One customer uses the heat to warm a swimming
pool.

With this side-benefit of heat, "you might be able to make the economics work" in Indiana, Gotham said, although
it's probably "more of a niche market" here.

At the heart of the power unit is a General Motors 8.1-liter medium-duty truck engine, whose roots date to the 1965 Corvette.

It's not as sexy as microturbines other companies are developing to make electricity from natural gas. But turbines use
expensive, exotic metals. I Power buys the comparatively primitive piston engines from GM and makes extensive modifications.
Working with the Indianapolis-based Menard's racing team, I Power engineers improved the life of engines by using aerospace
materials in key areas such as valve seats. Its long list of modifications are said to extend engine life to the equivalent
of 1.5 million highway miles.

The engines are coupled to an electric generator, with everything controlled by a proprietary computer system. With projected
2007 sales not much in excess of $6 million, development is done on the cheap. Technology students from IUPUI are helping
make the computer control system more efficient, for example. And one of the company's engineers just happened to be working
on a side business to develop remote monitoring software. That will save I Power from needlessly sending a technician thousands
of miles away to diagnose a problem.

"Terry [Pahls] has a propensity for taking in stray cats and dogs," Hudson said.

So far, cost-conscious I Power has assembled about 100 units operating everywhere from a manufacturing plant in Balsthal,
Switzerland, to a high-rise apartment building in Wooseong, South Korea.

Closer to home, they power office buildings and hospitals in Michigan, an Embassy Suites in San Luis Obispo, Calif., and
a metal plating plant in Los Angeles. The units can be "ganged" for larger applications, such as at Merced College
in Merced, Calif.

"You can put 10 of these together and you're almost up to a megawatt," said Bruce Hedman, an analyst and director
at Arlington, Va.-based Energy and Environmental Analysis Inc.

One big draw in California is that, by burning natural gas, the units are less polluting and meet that state's tough
emissions standards. Increasingly, the units are displacing diesel-powered generators that power irrigation pumps in that
state.

Another environmental draw of these so-called distributed generation devices, besides their ability to burn clean gases,
is their efficiency. By some estimates, about 40 percent of electricity generated by a traditional electric utility is wasted
within the distribution system. The recovery of heat from I Power's engines to also heat and cool a building further improves
the economics and cuts thousands of tons of carbon dioxide emissions

"Our view is that, with the growing awareness of the CO2 issue and the cost of addressing it and other coal-related
emissions, there will be an increase in the cost of electricity and increased interest in cogeneration," Hudson said.

The market potential for so-called combined heat and power units of the type I Power sells "is huge," said Hedman,
particularly in expensive-energy areas such as California, Texas, the upper Midwest and the Northeast.

Challenges ahead

One enemy of I Power's segment, however, is rising natural-gas prices. That became clear just as Hudson and partners
were closing the purchase of I Power from DTE Energy in 2005. Hurricane Katrina had disrupted supplies, sending natural-gas
prices upwards of $11 per million BTUs compared with today's levels of $6 to $7.

"We're now back to what I would call market-driven prices for natural gas," Hudson said.

Also key to I Power's economic sustainability is cost control. Pahls is a disciple of Toyota production techniques. It
starts in the supply room, where cabinets holding everything from pens to rubber bands are clearly labeled so workers don't
waste valuable time looking for them. Same with many of the parts on the production floor. Even garbage cans and dust mops
are kept in designated areas, color-coded for easy spotting.

Another cost-cutter is that there's virtually no sales force. I Power is letting energy services firms market its power
plants. I Power executives next plan to target sales through contracts with major chains, such as hotels that are putting
up dozens of buildings at any given time.

"The message is, we will be opportunistic and versatile in how we approach the marketplace," Hudson said.

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