CHP Is Heating Up

Sept. 14, 2012
A decade ago the combined-heating-and-power (CHP) industry was wrapping-up a multi-year heyday. Caterpillar dealer Kirk Fowkes recalls, “The “‘spark spread’ was very good” (referring to the difference between per-kilowatt utility charges and the potential savings from self-generation). “Gas prices were low, and you saw a lot of CHP activity back then,” he says.

Fowkes, who is now general manager of Hawthorne Power Systems in San Diego, CA, was vice president of sales-until late 2011-for a CHP developer that came into existence in recent years to ride the new opportunity wave, Elite Energy Systems LLC, of Carson City, NV.

Naturally, after the feasting of that period came a famine, of sorts: Through much of the past decade, gas prices gyrated erratically, dampening project investment appetite. In 2008 global recession hit. Even though CHP economics were still not bad, uncertainties put worthy project development on hiatus.

The past few years, though, have brought the return of spark spreads unseen for nearly a dozen years. Business these days, says Fowkes, is “about as good as it’s been in the last decade.” Negatively, though, “Utilities continue to insist on standby charges every time there’s a load departure,” says Fowkes, referring to punitively high rates imposed if a CHP project ever needs utility power backup. “Basically,” he explains, “it helps wipe out some of the incentives in place now” offered by CHP-friendly subsidies such as California’s Self Generation Incentive Program.

Other barriers raised by utilities “cause the economics to work out not quite so well,” he adds. All in all, he says, “Getting people to buy a power purchase agreement is still pretty tough.”

Brent Beissler, mechanical engineering manager for Girtz Industries of Monticello, IN, reports that the recent decline in fuel costs is transforming Girtz’s market. The company’s bread-and-butter business is the packaging of straightforward powergen modules. Requests from buyers to modify the engines so as to capture heat in the process have been extremely rare since the 1990s, he says, “But that’s all changed in the last six months.” Girtz Industries has seen a recent tenfold increase in quotes for CHP. “Market-wise, it’s going crazy,” says Beissler.

In response, the firm has been busy doing research and new product development. Partnering with Newell Company, a regional supplier of heat transfer systems, Girtz is outfitting Cummins and Caterpillar engines for cogeneration. Ultimately, Beissler and the Girtz team will develop a variation of its Seaguard product line of stackable power modules, adding a unit to accommodate CHP. “One module will have all the genset equipment in it,” he says, “and another is going to house all the heat recovery equipment.”

In a related vein, a recent Girtz genset customer (a hospital) wanted a bid on a bifuel power plant able to run both natural gas and diesel fuel. The ability to operate with natural gas or diesel fuel offers additional flexibility, allowing the genset to be used as either standby power or a prime generator. “The price of gas has gotten so low, they thought, “˜Well, let’s run this generator more often, and let’s try to heat some process water, too.’ They’ll be using it for a peak shaving device,” says Beissler.

Global Gas Going Great Guns
What’s driving Girtz and other engineering firms to venture into such innovation, believes Beissler, “boils down to the price of natural gas.”

Indeed, the US Energy Information Administration reports that, since July 2008 (when the wellhead price last spiked up to $10.79 per thousand cubic feet), gas rates have collapsed by an astonishing 75%. As of March, the unit cost of gas stood at just $2.25-at par with the price of a decade ago.

Meanwhile, US electric rates now average almost 10 cents per kilowatt-hour. Trendwise, they’re either creeping up or holding steady.

For CHP developers, this means the spark spread should stay encouragingly wide for quite some time.

Capstone Turbine Corporation of Chatsworth, CA, has become well known in the CHP industry for its compact microturbines, sized for output of 35 kW, 65 kW, or 200 kW. During recent lean times, Capstone adapted their basic engine to make a multi-faceted UPS backup system, able to serve the booming data center power sector.

Executive vice president for sales and marketing Jim Crouse reports that recently Capstone has seen sales inquiries double or triple. He adds that while “lower gas prices are very helpful, what’s probably even better is the prospect of long-term stability.” Crouse has seen forecasts for steady and consistent prices and concludes that looking out “seven to 10 years from now in the four- to five-dollar range these [CHP systems] will be really great for business.”

Another commercial benefit of having “a large, fixed spark spread” will be an increased viability of heat-fired absorption chillers, enabling more CHP projects to be viable because the heat utilization will be maximized, he explains. “When gas prices go down, the electricity becomes the more valuable commodity than the heat.” So, if the heat can be used to power a chiller “and offset electric load . . . the economics look better as well.

“So, we’re seeing a resurgence of projects that have chillers. Which is nice.”

On the negative side, though, he concurs with Beissler’s views on California’s SGIP. “Unfortunately, it’s not a very good program for us,” he says. “In fact, it’s
almost been an impediment, historically, simply because customers will wait to make a decision until the program [funding] is announced.” It is also “overly complicated . . . and not what we hoped for.”

Sales Revving-up Via Non-Ownership
In contrast to the above equipment vendors’ views, a rather different perspective comes from Barry Sanders, president and chief operating officer of American DG Energy (ADGE), of Waltham, MA.

“We don’t sell equipment,” he says. “We sell cash flow.” ADGE happens to do this by providing cogeneration. The “huge difference” in ADGE’s approach, he says, is that ADGE owns, runs and maintains the CHP equipment onsite. Customers share no responsibility. Rather, they simply receive a monthly bill from ADGE, like they would from any utility. By leaving operations and maintenance to ADGE, customers can take advantage of lower bills. In return, CHP appliance located on the customer’s premises allows ADGE to utilize its considerable heat output.

According to Sanders, the future of CHP is as bright as it’s ever been. “The last two years have been our largest growth rate in bookings in company history by far,” he says, noting that the company’s employment numbers doubled in 2011.

Additionally, Sanders point to Europe as a fresh market for CHP manufacturers. Even though the economy abroad is weaker than in the US, closing deals is “much easier” overseas, he says, because “prospective customers already understand exactly what is being offered” and need little handholding or extensive discussion (in contrast to relatively uninformed US businesses). In the Eurozone, “They understand energy better than we do. If they see an energy-saving opportunity, they jump on it.” Since ADGE opened a London office a few months ago, “many orders are rolling in.”

ADGE shares management with a partner firm, cogeneration equipment-maker Tecogen, also of Waltham. Tecogen manufactures inverter-based cogeneration power plants in the 65-kW to 100-kW range, for primary or standby power. Over 2,100 units are now in operation, mainly in the Northeast.

Sales for Tecogen have also surged this year, the firm says, not so much from falling gas prices, but due more to a newly introduced “Ultra-low” emissions system. It reportedly saves adopters the often tens of thousands of dollars that were formerly needed on expensive catalytic converters or mandatory air quality testing and permitting.

Jeff Glick, a member of Tecogen’s sales and marketing staff, notes that in the months following this blanket approval, “We have sold four or five times more units” than in the prior sales quarter. Adding only about 3% to total project cost.

Micro CHP Rolling Out Here
A unique cogen concept, the Ecopower, is also being introduced in these heady days, of CHP popularity, but yet again, the timing of its arrival has little to do with low fuel prices. Designed and manufactured by Marathon Engine Systems-a family-owned business in East Troy, WI-the Ecopower and its development story was initially covered by Distributed Energy a half-dozen years ago, when the package first came forth in an earlier incarnation for European export.

As with the business model at ADGE, fuel cost does not figure decisively with the development of Ecopower.

What’s most distinctive about the system is surely its smallness. The Ecopower represents one of just a handful of tiny-scale, micro-CHP plants being made in the world. Packaged inside Ecopower’s compact cabinet are the small engine, heat-recovery elements, emissions equipment, and onboard controls.

In terms of its electricity and heat output, energy is “fully modulating, not fixed,” according to Marathon sales and marketing director Mike Monohan. This means it is quite adjustable, “so power can be produced from a tiny 1.4 kilowatts, up to 4.5 kilowatts.” And that flexibility allows the Ecopower to operate in a variety of installations from a 4,000-square-foot single-family home, to multi-family structures, small businesses, or commercial properties.

Ecopower’s domestic version hit the US market in late 2011, and as of mid-2012, 35 units were installed and running here (70% of them on the East Coast where the heat output is most valued). Installations include multiple apartment complexes, a car wash or two, and a YMCA. A dozen Connecticut homes in the 8,000- to 14,000-square-foot range own them, receiving all of their domestic hot water and year-round heated swimming pools.

Europe As a Role Model
Shifting now to the land of serious CHP, we can gain some interesting comparative perspective from across the Atlantic.

With its longer winters and costlier fuel, Europe has always been primed for cogeneration efficiencies. Today, CHP adoption is much further along in Europe than the US. Currently, about 11% of Eurozone power is cogenerated, 80% of which is fueled by natural gas. Although the pipeline delivery network is not as extensive as in the US, it is well developed in the northern and western countries, notes François-Xavier Saury, who has been involved in CHP on the Continent for seventeen years. Now based in Geneva, Saury is director of Caterpillar Electric Power Gas Business Development for the region.

Europe, he notes, did not develop its cogen infrastructure by market dynamics alone. Back in the early 1990s, “A big push took place when, by force of political will, CHP was pushed by governments,” recalls Saury. Proponents “put in place various [public] support schemes and mechanisms to encourage people to raise their efficiency into the high 90s, at a time when grid efficiency in Europe was in the low 40s,” he adds.

As a result, Europe now has a widely varied assortment of systems. In France, for instance, district heating is quite extensive. Holland has a large and thriving privately funded greenhouse agriculture sector yielding vegetables, crops, horticulture (and more than a few tulips year-round), and engines run day and night, providing power for grow lamps and hot water for tropical warmth. Germany likewise has seen a heavy private investment in CHP for industrial processes and district power. Denmark, says Saury, “with 65% efficiency, is the world champ for total energy efficiency. They invented distributed power. . . . The basic plan is, “˜power when you need it, and heat where you need it.'”

As for cogen equipment, European standards are high and efforts to extract incremental efficiency gains are continuous. In Europe, Caterpillar’s engines are equipped to capture heat from the engine jacket as well as from the oil cooler and exhaust system, and these elements convert all that heat to produce hot water. Late last year, Caterpillar completed its acquisition of a renowned 150-year-old German engine-maker MWM GmbH, of Mannheim.

“It’s a very old brand, dating from the beginning of the engine industry, even before gasoline,” says Saury. MWM engines are continuously improved and modified, and the firm is now considered the leader in high efficiency products. Caterpillar is now introducing the MWM line here and elsewhere through its extensive dealer network.

Saury observes that the recent gas supply bonanza in the US, transforming this nation into a net fuel exporter, is truly epochal-“probably the most important energy event in my career,” he says. “It enables the price of gas to be disconnected from the price of oil.” The two can now move in opposite ways, or fall together. Prospects for more CHP and onsite power in the US are brighter.

Finessing Remaining Barriers
Two critical obstacles to extensive CHP adoption are the cost of initial implementation, and the occasional lack of buy-in from privately owned utilities. Saury concludes his discussion by offering some possibly helpful observations on negotiating these touchy points.

First, the sticker-shock of an engine proposal can be viewed, he suggest, as “a psychological barrier but not a true barrier.” In CHP, “The capital expenditure is almost irrelevant if you can make your payment quicker,” he finds. “You will see that investors in CHP systems are ready to spend another $10,000 or $100,000 on a system that will have a faster payback.”

Shorter payback can be accomplished several ways. First, it will occur if the proposed cogen system “either burns less gas-and the gas is expensive-or, for the same gas, it produces more power, and power has a lot of value,” he says.

A second key is the power purchase agreement. If the utility or rate structure do not pay generators enough for the surplus power, or if the spark spread isn’t substantial, “you’ll see a very long payback,” and this really does make the system too expensive, he says.

Third, if payback will take five years or longer, the project is probably more doable in the public sector or semi-public sector, like a hospital or district heating.

Fourth, in Europe, potential cogen investors will receive extra inducements to offset the longer wait with stronger risk-reducing guarantees. Even a six- or seven-year deal can be worked out if the investor gets, say, a fixed gas price or guaranteed power buy-back agreement.

Lastly, fuller utilization of the heat may be achieved by adding an absorption chiller. Although this increases total project cost, it can speed up the payback by enabling the heat recovery to occur year-round.

Besides reducing the payback timeframe, a second and decisive key to growing the US market will come from gaining full cooperation from utilities.

While some utilities are known to be wonderful to work with, others can be challenging. The interconnection of customer-owned power within a utility’s tariff territory is often treated as a threat to grid stability, or, beneath the surface, a whack on utility profitability.

In Europe, Saury notes, many utilities are state owned. They are not competing with customers at all. Would-be self-generators are welcomed as partners, not viewed suspiciously as rivals. Power buy-back agreements are realistic and normal. Related tariffs are not (as often here) restrictive and limited, but flexible and diverse. Says Saury: “There are many ways to trade power. We have them all here.” For example: “Those who produce power with CHP can collect 80 to 100 Euros per megawatt-hour. . . . If you are willing to sell your excess to the grid, the grid will give you a contract-unless arm-twisted by the states,” which apparently occurs, as an economic favor to someone.

In the great majority of cases, Saury says, “grid operators regard power generators as friendly investors,” and say to them, “I’m happy to pay you a bit more for that kilowatt-hour you sell me, than the one I’m selling to you.” This is because the investor is relieving the utility of some capital risk.

In sum, Saury believes utilities “have a fantastic role to play as partners” with cogen developers in the US. Private utilities should take the initiative and go to their customers to participate in co-owning CHP together.

“They know how to produce power and how to transport it. They can discuss a power deal to make it a win-win, as the site will use only a fraction of the fuel that was needed before. It will help them distribute their power, and invest less.”

If utilities view power independence as a threat, Saury points out that a smarter approach would be to invite a partnership, “and say, “‘I’ll take the power, and you take the heat.’ That’s the way it works here, and in Asia.”

Saury concludes, “Most utilities first react in a conservative way. But you can’t go against efficiency in this world.” Given the passing of time and evolving awareness, he says, “I think utilities will, most of the time, enter the game. It’s in their interest.”

About the Author

David Engle

David Engle specializes in construction-related topics.

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