How to justify and finance a cogeneration project in the Shale Gas era Presented to GPAEE January 2013 Cogeneration – an old idea? Who’s time has come? Cheap Natural Gas Gives New Hope to the Rust Belt (WSJ 10/2012) The impact of the U.S. energy revolution is only beginning. Natural Gas On a Par With Coal This is an absolutely huge phenomenon with massive implications for the U.S. economy, and I think most people are still a little bit slow to appreciate just how big this is (CNN 11/2012) The USA will become the world's No. 1 producer of natural gas in 2015 (USA Today 10/2012) Shale Gas = Abundance = Low, Stable Price CHP Technologies – What’s New? Microturbines IC Engines Small scale Workhorse Very low Emissions Improved electrical efficiency Combustion Turbines Recuperator Improved Efficiency CHP Enabling Technologies Remote Monitoring Electronic, programmable relay packages Packaged Solutions CHP Enabling Regulations Standard Interconnection Renewable Portfolio Standards Net Metering Reasonable Standby service tariffs SANDY How Natural Gas Kept Some Spots Bright and Warm as Sandy Blasted New York City How N.Y.U. Stayed (Partly) Warm and Lighted “Our cogen is up and running,” Combined Heat & Power Saver/Savior at TCNJ CHP Proves More Reliable When Battling Hurricane Daily Princetonian “All in all, the University’s capacity to provide power and amenities to Lessons From Where the Lights Stayed on its students exceeded the town’s During Hurricane Sandy capabilities.” Electric Situation • Nationally electric generation companies have announced that 108 coal plants will be retired • First Energy is retiring 3,797 megawatts at 24 units in PA, MD, OH, WV that were built from 1944 to 1972. • GenOn is retiring 3,493 megawatts at 25 units in OH, PA, VA that were built from 1949 to 1970. • Other companies retiring more than 800 megawatts are Ameren, Edison International, EFH, Consumers, Exelon, and PPL. PJM Capacity Price ($/MW-day) $200.00 $180.00 $160.00 $140.00 $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 Capacity Capacity Prices $/Mwday $300 $250 $200 $150 PECO PS $100 BGE AE $50 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11 2009-10 $- Tax Incentives Federal Investment tax credit 10% (30% for biomass) Federal Accelerated Depreciation Five year MACRS Incentives - MD Design incentive ($75/kW): Subsequent to signed commitment letter and acceptance of minimum requirements document. Installation incentive ($175/kW): Subsequent to commissioning of the CHP system and BGE inspection. Production incentive ($0.07/kWh for 18 months): Three payments subsequent to review of metering data at the end of the 6th, 12th and 18th months. Incentives- NJ P4P Bonus Incentive Utility Match ($/W), $1M ($/W),$250,000 maximum maximum Technology NJCEP Incentive ($/W), $1M maximum CHP Using Nonrenewable Fuel (microturbines, internal combustion engine, combustion turbine) up to 500 kW: $1.00/W 501-1,000 kW: $0.50/W $0.25/W up to 500 kW: $1.00/W 501-1,000 kW $0.50/W 30% (or 40% with cooling application Heat or Mechanical Recovery From Existing Equipment Using New Electric Generation Equipment $0.50/W $0.25/W $0.50/W 30% Fuel Cells With Waste Heat Utilization (non-renewable fuel) $2.00/W $0.25/W $2.00/W 60% $1.50/W $0.25/W $1.50/W 60% Fuel Cells Without Waste Heat Utilization (non-renewable fuel) Maximum % of Project Cost Incentives – PA Act 129 Up to $.18/kWh saved NTE 50% of Project Cost Capacity: $250 - $300/kW for first 500 kW $100 - $150/kW for capacity between 500 kW and 1.5 MW $50 - $75/kW for capacity between 1.5 MW and 10 MW. Performance incentives are paid at $0.02/kWh generated in the first year of operation $0.05/kWh saved based on verified savings Up to $250,000 per customer site Financing Options Owner Financed Cash or Loan PPA type Finance 5-10 year term 10 year term Debt tolerance Tax appetite 7-10 year term On Bill Finance 5 year term No debt No debt Monetize tax benefit Performance guarantees Take or pay obligation Collateralized Take or pay obligation Sample Project Parameters CAPITAL COSTS capital cost $ 3,000,000 rebate $ 385,000 grant $ ITC 10% $ 300,000 other $ net capital $ 2,315,000 Gas cost Electric cost base interest rate discount rate project life O&M corp tax rate depreciation size heat rate thermal eff PLANT DATA 1000 kw 9000 btu/kwh 35% ASSUMPTIONS $ 6.00 dt $0.1000 kwh 5.0% 6.0% 10 years $ 0.02 per kwh 30% 5 years escalation escalation production 25,525 dt/yr 8,000,000 kwh/yr 1.5% 3.5% Owner Finance  Owner finances through cash or loan ∗ Takes tax benefit ∗ Owner responsible for operations and maintenance ∗ Self perform or through contract ∗ Owner buys fuel ∗ Owner responsible for system performance ∗ Owner has debt and asset Owner Finance year expenses fuel o&m other 0 1 2 3 10 $ $ 432,000 $ 160,000 $ 438,480 $ 160,000 $ 445,057 $ 160,000 $ 493,944 160,000 savings fuel electric o&m $ $ 204,203 $ 800,000 $ 207,266 $ 828,000 $ 210,375 $ 856,980 $ 233,484 1,090,318 net savings (cost) $ 412,203 $ 436,786 $ 462,298 $ 669,857 412,203 $ 436,786 $ 462,298 $ 669,857 (1,902,797) $ (1,466,011) $ (1,003,713) $ 3,032,067 net cash flow $ (2,315,000) $ cummulative net cash flow $ (2,315,000) $ Operating Lease Finance • Lessor (UGI) finances project – Lessor takes tax benefits – Owner buys asset for fixed value at end of term (negotiable 10-30%) • • • • • • Lessor provides maintenance; operations negotiable Lessor provides fuel (fixed for some or all of term) Owner pays fixed amount over fuel cost Owner agrees to minimum offtake (fuel purchase) Typically 7-10 year term Normally not treated as debt (consult accounting) Operating Lease Finance year OWNER lease payment 0 1 2 3 10 $ (270,978) $ (275,042) $ (279,168) $ (309,833) expenses fuel o&m other $ 432,000 $ 160,000 $ 438,480 $ 160,000 $ 445,057 $ 160,000 $ 493,944 $ 160,000 savings fuel electric o&m $ 204,203 $ 800,000 $ 207,266 $ 828,000 $ 210,375 $ 856,980 $ 233,484 $ 1,090,318 net savings (cost) $ 412,203 $ 436,786 $ 462,298 $ 669,857 net cash flow $ 141,225 $ 161,744 $ 183,130 $ 360,024 $ 141,225 $ 302,969 $ 486,099 $ 2,446,868 cummulative net cash flow $ - PPA Finance • Third party owns plant for term – Takes tax benefit – Ownership ‘flip’ at end of term • Host agrees to buy plant output (kwh and btu) – Take or pay arrangement (guarantee purchase) – Fuel is ‘pass through’ (Host purchases) • Constructor guarantees performance for term – Operations and maintenance are by constructor • Typically 10-15 year term PPA Finance year Owner savings fuel electric Savings in purchased energy payments to PPA electric thermal Fuel payments net cash flow to Owner cummulative net cash flow 0 1 $ $ $ $0.05/kwh $ $5.00/mmbtu $ Payments to PPA $ $ $ $ 2 3 10 204,200 $ 206,242 $ 208,304 $ 800,000 $ 828,000 $ 856,980 $ 1,004,200 $ 1,034,242 $ 1,065,284 $ 400,000 127,625 527,625 432,000 44,575 44,575 $ $ $ $ $ $ 400,000 127,625 527,625 440,683 65,934 110,509 $ $ $ $ $ $ 400,000 127,625 527,625 445,090 92,569 203,078 $ $ $ $ $ $ 223,331 1,090,318 1,313,648 400,000 127,625 527,625 477,197 308,827 1,684,696 On Bill Finance • Utility finances through gas rate • Owner takes tax benefit • Owner offers collateral, has minimum offtake • Fuel is purchased through utility • Owner is responsible for performance • Operations and maintenance are by Owner • Typically 5 year term $4,000,000 Cash Flow - Owner Finance $3,000,000 $2,000,000 $1,000,000 $- 0 $(1,000,000) $(2,000,000) $(3,000,000) 1 2 3 4 5 6 7 8 9 10 Additional Savings? • Sustainability gains/carbon offsets • Capital avoidance for replacement of obsolete equipment • Reduced expenses for backup generation or lost productivity • Demand response, reduction in peak load contribution Thank You! Chuck Miller [email protected]