Co-generation: Is it the best solution for energy cost control?

Combined heat and power (CHP), co-generation and tri-generation have become leading techniques for efficient on-site power generation resulting in reduced energy costs for office buildings, hotels, health care and multifamily housing. Each of these techniques utilizes the production of multiple forms of energy from a single input. The most prevalent form of CHP and co-generation uses natural gas as the primary fuel and produces power and heat while tri-generation generally adds chilled water as a third output. The concept appears deceptively simple; by recovering energy that would otherwise be wasted you will lower your costs for both electricity and thermal energy therefore bringing substantial economic benefit to the host facility. However, is this really the best solution to achieving long lasting meaningful savings? This article outlines some of the technical, financial and regulatory issues that must be addressed upfront to determine if this is a feasible solution for your building. Evaluating a Facility's Energy Use to Determine The Most Efficient Solution It is important to recognize that while energy efficiency is discussed across all installations, there is no single best type of system to meet all energy needs. System types change based on the size of the project and its specific energy use profile. The common element in the selection of all systems is a careful evaluation of the facility specific energy use profile; this profile will include all electricity consumption and the coincident thermal needs including heating, domestic hot water, comfort cooling, process heating or process cooling. It is the assembly of this data in a careful manner that will provide the necessary information to ascertain if it is worthwhile to take the next steps to determine feasibility. The Technical Considerations of Making the Switch to Co-Generation A common mistake that often leads to unfulfilled expectations is basing project feasibility on monthly usage summaries (such as total electricity and gas consumption commonly found on utility bills) rather than on hourly usage profiles. Once the basic feasibility is determined and a system size has been selected, you will be ready to assess the technical hurdles that the project will face such as: * System type, space requirements and installation costs * Fuel availability * Interconnection with existing building systems * Utility interconnection It is also important to note that if other energy projects are being considered the impact on the load profile should be included in the evaluation. Financial Aspects of Co-Generation The financial feasibility of each project, regardless of size, will be determined by the same factors, namely: * Current electricity cost * Current thermal energy cost based on current boilers and chillers * Coincident load profile * Natural gas cost * Project capital cost and financing scheme * Ongoing maintenance costs * Depending on the jurisdiction, the sharing of revenue derived from the sale of renewable energy certificates (RECs) * Availability of federal, state or local government incentives and funding. Each potential project can have a variety of financing methodologies. These may include: * A straight purchase in which all risk borne by and all benefits accrue to the purchaser. * A lease in which all risk borne by and all benefits accrue to the purchaser with potential tax benefits and potentially lower credit requirements than a conventional loan. Leases may also include operation and maintenance costs of the project. * A discount power purchase in which the project owner enters into an agreement with the system supplier whereby the project owner purchases electricity and heat at a discount to the rates currently paid and all operating and maintenance costs are typically included in the unit cost. This is sometimes referred to as a Power Purchase Agreement (PPA) * Shared savings arrangements Each of the above concepts has its own pros and cons as well as derivatives of the basic arrangements. Each project must be very carefully evaluated to determine what type of financing will be best. Regulatory Concerns of Co-Generation Regulatory issues represent the "third leg of the stool" in developing on-site power projects. Utility interconnection/net metering, standby service, utility regulation, contracts, emissions and permitting, and noise regulation issues can all play a critical role in determining technical specifications, project economics and overall project feasibility. Some particular areas of concern are addressed later in this article. Net Metering at a Co-Generation Facility An important regulatory consideration is whether the co-generation facility owner or building owner is eligible to participate in a "net metering" program of the local utility. Under such a program, which technically does not involve a "sale" of electricity, the owner could receive monetary billing credit or payment for excess electricity produced by the cogeneration facility at a rate equal to the utility standard retail rate for sales to the owner. Contractors may negotiate for a portion of this economic benefit to facilitate the financing of the cogeneration facility. Eligibility for net metering is dependent on state-specific (and sometimes utility-specific) criteria pertaining to the size of the generation facility and the technology used. Standby Energy Service Because a co-generation facility may not produce sufficient power to meet all of an owner's load, an owner needs to consider the cost of electric service obtained from its local utility (or an alternative supplier) when the cogeneration system is not producing sufficient power. Some utilities require a customer with "on-site generation" to take electric service under a "standby" service tariff with rates that may differ from the otherwise applicable tariff rates paid by the owner. This differential needs to be factored into the economic analysis of the cogeneration facility. Regulation as a Utility With a contractor assigned the responsibility of owning, operating and maintaining the cogeneration facility, there are minimal regulatory considerations for the property owner under state and Federal laws regulating utilities. While the contractor may be subject to limited regulation in certain jurisdictions, the owner, a retail purchaser of electricity under the PPA, is not subject to public utility regulation and will need to consider, as noted above, the terms of service for those hours when the co-generation facility is not producing. In addition to net metering, if an owner or developer wishes to consider the sale of excess power produced by the cogeneration facility to either the local utility (e.g., a direct wholesale of electricity to a utility), or a customer located near the owner's site (a retail sale of power), additional regulatory, technical and economic considerations will need to be examined. On-Site Generation Contracts Open to Negotiation The property owner will need to execute a number of contracts in order to implement on-site generation. These contracts, generally, are not regulated by any public utility commission or agency. Therefore, owners will have the latitude to negotiate terms and conditions without the restriction that usually accompany "standard" or "pro forma" contracts administered by regulators. In many cases, contracts administered by regulators do not invite negotiation. One of the primary documents that a building owner will need to negotiate with the cogeneration facility contractor, in addition to the PPA, is the lease for the space where the cogeneration facility will be located. This agreement will confer several important rights on the contractor, including the right of access to the building owner's property for purposes of constructing, operating and maintaining the cogeneration facility. Contractors (and their lenders) will be concerned with having access rights to the roof free from interference by building tenants or entities holding any mortgage on the building. Additionally, a contractor's lenders may request that building lien holders subordinate their rights to the lender's security interest/lien so that the lender's rights to access the cogeneration facility are protected, for example, should the lien holder foreclose. Emission and Noise Regulations The operation of an on-site co-generation facility will inevitably require an examination of regulations governing emissions and noise. While gas fired co-generation offers a more environmentally-benign form of electric generation, emissions will occur and will need to be monitored. An owner will need to be familiar with applicable regulations governing noise levels and the remediation measures available should the on-site generation facility exceed applicable levels. Renewable energy may offer an attractive opportunity for owners and developers of real property to lower energy costs and establish a market reputation for responsible energy usage. Cogeneration installations are gaining in applications across the country, particularly in California, Pennsylvania, Texas and New Jersey. With careful consideration of technical, economic and regulatory factors, a real property owner or developer may find that a cogeneration installation is a feasible energy solution. Nicholas Giannasca is a partner at Blank Rome LLP, New York, N.Y. and Neil Skidell is a managing director at Par Green Solutions, Lynbrook, N.Y.