How to justify and finance a cogeneration project in the Shale GPAEE

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
cmiller@ugiperformance.com