There is a renewed emphasis in the distributed generation marketplace for solutions such as Combined Heating and Power (CHP) and cogeneration, with shale gas being one of the primary drivers, notes Clark Wiedetz, director of alternative and renewable energy for the Building Technologies Division of Siemens.
Michael Perna, vice president of business development at ConEdison Solutions, agrees. “There is a growing importance attached to demand response, CHP, and backup power generation,” he says.
Meanwhile, time is running out on the federal Business Energy Investment Tax Credit, which is available for eligible CHP systems placed in service on or before December 31, 2016.
CHP offers particular energy efficiency benefits to those who can utilize the heating and the power available from an engine, Perna points out. “The beauty of combined heat and power is if-and it’s a big “˜if’-you can utilize the heat, the thermal energy coming off of the machine,” he says. “Then it becomes a very efficient system.”
The systems are typically sized for maximizing the thermal usage and taking whatever electricity goes along with it, he adds.
There also are financial benefits. “Every case is different, so you have to be very diligent on the assumptions,” says Perna. “Where people sometimes go astray on simple assumptions is on the future cost of electricity and the future cost of natural gas. You look at capital costs and then the cost of the operations going forward, and compare that to what you’d otherwise pay off the grid for heat and electricity.”
The importance of redundancy of energy systems became amplified for such facilities as hospitals during weather-related events like Hurricane Sandy, points out Michael Bakas, senior vice president for Ameresco. “If there are utility outages, in addition to backup generators, CHP offers another level of redundancy,” he says.
For many end users, cost savings is the bottom line requirement. However, for mission-critical facilities such as hospitals, wastewater treatment facilities, and manufacturing plants with costly production lines, reliability and sustainability delivered by CHP is more important than ROI, Bakas adds.
“We’re seeing a lot of activity in the health care sector,” he says. “Interestingly enough, in the past, administrators were not as involved in energy issues day-to-day as would be the engineering or facilities groups. Now we are finding more and more administrators are actually getting involved because of the concern about reliability that stemmed from some of the recent weather events we’ve seen in the Northeast.”
For example, when during Hurricane Sandy NYU Medical Center had to evacuate and relocate hundreds of patients-many in critical condition-after backup generation failed. Also, when 91 sewage treatment plants in New Jersey’s 21 counties either flooded or lost power during the storm, spewing billions of gallons of sewage into state waterways.
Recognizing the increased demand for cogeneration, Siemens recently acquired Rolls-Royce’s energy gas turbine and compressor business, as well as Dresser-Rand-which, among its many offerings, includes a reciprocating engine that helps complement Siemen’s CHP and cogeneration operations, says Wiedetz. “With shale gas, there is better cost control over fuel,” he points out. “One of the issues 15 to 20 years ago was the extreme volatility in natural gas. If you were in the private or public sector and looking for a way to better manage or reduce but had the fuel volatility, that doesn’t solve your problem.”
Amata B.Grimm power plant in Amata, Chonburi, Thailand
RiverBay Power plant, Co-op City Bronx, NY, 2xSGT-400, 1xSST-300, combined cycle trigeneration plant (district heating and cooling)
He continues, “There had been an increase in cogeneration towards the turn of the century and maybe the first year or two after that, and then it decreased significantly over the next six or seven years, with some exceptions in some private sector markets where it was always economically attractive.”
The recent increase in CHP projects comes at a good time due to escalating electricity costs, Wiedetz notes. “The future outlook on the cost of electricity is still going up, not solely because of fuels or the cost of coal, nuclear, hydro, or natural-gas fired units, but mostly because of labor costs and the grid with all of its wires and components that consistently drive up our cost of electricity here in the US,” he adds.
Cogeneration is an “excellent way” to offset those costs, says Wiedetz. “A public or private sector entity may want to better manage or control electricity costs or the load and can do it in a partial way by having some type of distributed generation,” he a says. “Distributed generation using natural gas at its consistent fuel prices then starts to make sense.”
Financing Incentives
For many facility owners and operators, CHP makes good economic sense. But financing such projects upfront can be of concern. Incentives help shave the capital costs.
“There probably has never been a better time to consider this from the perspective of getting assistance of the first cost of that installation,” says Perna. “The second piece is the ongoing operating costs, which is combined with a couple of factors: the fuel to run the machine, as well as the ongoing required maintenance for the moving parts.”
He says equipment has improved over the years. “When I got into the industry 30 years ago, there was a real concern about the reliability of the combined heat and power machine. We’ve moved past that. There are plenty of reputable manufacturers out there now. So, all of these factors are nice tailwinds for CHP right now.”
Perna expects most facilities would use natural gas to fuel a CHP. “The mid-term forecast for natural gas is that it’s going to stay fairly conservatively priced with the abundance of shale gas coming out,” he says.
With respect to incentive deadlines, industry experts point out the permitting process to get a CHP project operational can take months.
According to the United States Department of Energy’s Database of State Incentives for Renewables & Efficiency (DSIRE), the federal Business Energy Investment Tax Credit was expanded by the Energy Improvement and Extension Act of 2008, which extended by eight years existing credits for a number of energy projects, including CHP systems.
The credit is equal to 10% of expenditures, with no maximum limit. Eligible CHP property generally includes systems up to 50 MW in capacity that exceed 60% energy efficiency with some limitations and reductions for large systems. The efficiency requirement does not apply to CHP systems using biomass for at least 90% of the system’s energy source; however, the credit may be reduced for less-efficient systems.
The credit applies to eligible property placed in service after October 3, 2008. In general, the original use of the equipment must begin with the taxpayer, or the system must be constructed by the taxpayer.
The equipment also must meet performance and quality standards in effect at the time the equipment is acquired. The energy property must be operational in the year in which the credit is first taken.
The American Recovery and Reinvestment Act of 2009 repealed a previous restriction on the use of the credit for eligible projects also supported by “subsidized energy financing.” For projects placed in service after December 31, 2008, the limitation no longer applies. Businesses that receive other incentives are advised to consult a tax professional on calculating the federal tax credit. For systems placed in service after December 31, 2016, the credit will expire.
There is a lot of buzz in distributed energy and renewable energy circles that focus on a hope that the federal tax credit will be extended, Wiedetz says, and it impacts both entities.
“We are seeing certain entities like the New York State Energy Research and Development Authority [NYSERDA] that offer specific incentives directed to cogen,” he says. “We see some in Connecticut. The Northeast is well known for that, and it makes sense because it is also a more viable solution for facilities.
“The extender does matter, because it’s not like everybody is flush with cash and can just pour their money into a project like this,” he continues. “Having a third-party investor, or some type of other financial solution, as part of the entire project really does make sense.”
Any efforts that incentivize the investment will continue to drive the trend toward more distributed generation forward. “It helps in reducing costs; it helps with energy security; it helps with offloading or internal risk in situations, such as hurricanes or tornadoes,” says Wiedetz. “Hurricane Sandy is a perfect example of that.”
Public Private Partnerships
The probable expiration of the federal tax credit doesn’t mean there aren’t other financing options. Case in point: when financing is a concern, a public-private partnership can benefit both entities, such as the partnership between the city of Dallas, TX, and Ameresco Inc.
Ameresco Inc. provides energy efficiency and renewable energy solutions for facilities throughout North America, from upgrades to a facility’s energy infrastructure, to the development, construction, and operation of renewable energy plants delivered with tailored financial solutions.
A wastewater biogas-to-energy project that utilizes methane-typically a waste byproduct that is flared off into the atmosphere-produces energy in Dallas for the Dallas Water Utility.
US Environmental Protection Agency (EPA) states that CHP is a reliable, cost-effective option for municipal wastewater treatment facilities (WWTF) that have, or are planning to install, anaerobic digesters. Biogas flow from the digesters can be used in a CHP system as fuel to generate reliable electricity and heat for the WWTF.
The Dallas Southside Wastewater Treatment plant is located on more than 2,800 acres, approximately 20 miles southeast of downtown and is operated by Dallas Water Utilities (DWU). In serving the nation’s ninth-largest city, the plant processes 150 tons of biosolids daily. Its treatment capacity is roughly 100 million gallons of wastewater per day.
Wastewater solids from the city are fed into heated digester vessels where they decompose by anaerobic digestion. The biogas by-product contains 60% methane, which can be used as a green energy source. DWU had used a portion of the biogas to fuel the boilers, which heated the digesters; the remaining gas was flared.
In November 2008, Dallas entered into a 20-year lease agreement with Ameresco for the development of a CHP plant. The partnership emanated from city officials’ concerns over rising energy costs, leading them to set goals to become as green as possible.
The Dallas Southside Wastewater Treatment plant generates about 30,000 RECs per year.
Ameresco designed, permitted, constructed, owns, and currently operates and maintains the CHP plant. Ameresco’s responsibility for operating and maintaining the CHP plant reduces the city’s risk and aims to ensure the plant functions at an optimal level.
The project also helps the city not be as vulnerable to price spikes or shortages associated with the grid because the purchase price for the electricity produced by the cogeneration facility is guaranteed.
The average daily biogas production from the digesters is 1.2 million cubic feet, with an energy value of 550600 BTU per cubic foot. Ameresco sells DWU about 4 MW of energy. That enables the city to buy less expensive energy than the cost of purchasing it from the grid. Biogas is expected to reduce the city’s electricity usage by nearly 4%.
Now the entire amount of the biogas produced by DWU is fed into three Jenbacher Model 420 generators with a combined nominal capacity of 4,200 kW. The heat produced by the engines is captured for use in DWU’s hot water loop to heat the digester solids. The project offers an overall plant efficiency of 80%.
An operator is onsite for 40 hours a week and has alarms tied to his phone, so if there is a problem on the weekend when he’s on call, he is alerted. Ameresco crews will make occasional site visits to maintain the engines. Ameresco persisted to overcome permitting challenges to obtain both the building permit, and the air permit for the backup fuel (natural gas).
Under the Texas standard air permit system, the facility qualified for biogas, but the air permit for the natural gas (backup fuel) required a New Source Performance Standards (NSPS) permit. It took more than a year to get the NSPS permit, which required Ameresco obtain a single boundary agreement with the city. After a lengthy process, Ameresco was granted the necessary construction permits.
The project generates about 30,000 renewable energy credits (RECs) per year. Due to the demand and energy savings realized, the project qualified for incentives under the local utility’s Commercial Standard Offer Program. The 4.2-MW energy project generates an energy savings of 30 million kWh annually and aids the city in meeting state legislation calling for reduced energy consumption and utilization of renewable energy.
Through the city’s partnership with Ameresco, Dallas is expected to save the equivalent of 36,429 metric tons of carbon dioxide per year.
In the time since the project has been in effect, the reduced cost of electricity versus grid-derived electricity is helping the city save money, notes Richard Wagner, P.E., senior program manager for Dallas Water Utilities. He has estimated an annual energy savings of $1 to $1.5 million.
Additionally, “by producing electricity from a renewable energy source, this project further demonstrates the City of Dallas’ commitment to a cleaner and healthier environment,” he adds. “This CHP facility provides a reliable power source for the wastewater treatment plant, making up about 50% of the overall plant’s electrical needs. The project has been an overwhelming success for the City of Dallas.”
Wagner’s advice to other facilities looking to implement a CHP project is to consult with others that have already implemented CHP. “Find out what they liked and didn’t like, and use that information when planning your CHP project-don’t learn the hard way,” he instructs. “Invest extra time and effort into planning the project, and be flexible in your approach.”
This type of project and delivery method was new to the City of Dallas, so a lot of planning needed to be conducted up front, says Wagner.
“We also tried to be as flexible as we could working with Ameresco and their contractors during the design, construction, and startup of the facility,” he continues. “The extra planning and flexibility were key to the successful delivery of this project.”
Bakas points out that energy is not a core business function for most of its systems’ end users.
“For instance, a hospital’s focus is on delivering quality health care for its patients, not producing energy or operating energy facilities,” he says. “But the systems they use to deliver this quality care are energy intensive and very much necessary to their operation.”
While not required, Ameresco offers an option to facility owners and operators by which Ameresco would own and operate the energy asset, investing its own capital, and selling energy back to them. The benefit of the approach is that the end users do not have to invest any capital to implement what can be particularly capital-intensive projects. Nor do they have to bear any operational risk, Bakas adds.
The approach shifts ownership risk to Ameresco while proving facility owners and operators all of the project benefits such as lower energy costs through a more efficient and effective manner of generating energy, along with improved reliability and sustainability, Bakas says.
Even with the impending expiration of the Federal Business Energy Investment tax credit, facilities can still apply for a host of credits, incentives, and grants for CHP plants, Bakas says.
“In some cases, grants can have higher values if the facility does efficiency work as well,” he asserts. “Utilities are trying to incentivize their customers to conserve energy, as well as find more efficient or effective ways to use their energy.”
Some states offer state-based tax credits. Case in point: in Massachusetts, energy generated from CHP falls under the state’s Alternative Energy Portfolio Standard (APS) to complement the state’s Renewable Energy Portfolio Standard program. The program requires that a certain percentage of the state’s electricity comes from renewable energy sources.
The APS program provides incentives and requirements for alternative electricity technologies to businesses, institutions, and governments for installing eligible alternative energy systems, which are not renewable, including CHP. Participants receive Alternative Energy Certificates (AEC), which are tradable environmental credits that represent the clean energy benefits of 1 MW of renewable energy.
“Every state has a different approach as to how it incentivizes or tries to create market opportunity for these systems,” says Bakas.
Getting the Best Funding Package Available
ConEdison Solutions provides power supply, renewable energy, sustainability services, and energy solutions for commercial, industrial, residential, and government sectors. The company’s 360 Energy Integration approach is designed to achieve facility owner and operator energy objectives through the delivery of electricity supply, natural gas (in New York City and PSE&G in New Jersey) consulting, demand-side management, and energy performance contracting services.
Perna points out that for those who are unable to secure the federal tax credit, there are still a number of state- and utility-based incentives, such as that offered by NYSERDA. The NYSERDA CHP Acceleration Program provides incentives for the installation of pre-qualified and conditionally qualified CHP systems by approved system vendors ranging from 50 kW to 1.3 MW.
Eligible facilities must pay the System Benefits Charge (SBC) surcharge on their electric bill or be located within New York City or Westchester County, and the CHP system will be fueled by natural gas that is subject to the SBC surcharge on the gas bill.
Depending on the location and particular system, the incentives can range from $1,500$1,800 a kilowatt, Perna says. “There is a spectrum of federal, state, and local incentives to get the best package available,” he adds.
Perna’s advice to facility owners and operators seeking to leverage such incentives is to work with a company such as ConEdison Solutions, or look at utility websites or www.dsireusa.org. “It’s a great, comprehensive resource of energy efficiency incentives, renewable energy incentives, tax credit information, and renewable portfolio standards information all in one place,” he explains.
“More than ever, there have been some neat financiers who have stepped up and are willing, because of their experience in the energy market, to finance things like CHP, energy efficiency measures, and performance contracting,” adds Perna.
Additional Considerations
There are several factors that need to be considered when contemplating a CHP project.
Those in the public sector, for example, may not have the same internal expertise as a large industrial business that runs boilers and chillers and other large pieces of equipment on their own every day.
“You need to make sure that you find the right partner in order to evaluate how much this will work in your buildings or what other type of infrastructure you may have that could potentially run on CHP-electricity, heat, hot air, steam,” notes Wiedetz.
“The thermal load is extremely important in the evaluation of whether or not cogen will work for a facility, or a group of facilities. If there is no thermal load, that’s really a large red flag that’s going to be difficult to make the economics work. But if there is a thermal load, you need to find the right partner to help you evaluate what is the best size or best opportunity.”
Within Siemen’s Building Technologies Division, there is a focus on partnering with public sector clients such as higher education facilities, municipal buildings, and hospitals.
“Those are the three sectors where cogeneration is probably going to make the most sense economically,” says Wiedetz.
Siemens provides designs and runs the economics; a sister division, Siemens Financial Services, assists in owning and financing the solutions and also will monetize the tax credits.
Facility owners and operators looking to implement CHP need to clearly understand their goals and objectives, Bakas says.
“What are they trying to accomplish?” he asks. “And what is the priority of these objectives? Is it redundancy, sustainability, conserving energy, efficiency, or a combination thereof?”
It’s also important to partner with a company that has experience and success with such projects, he adds.
“Such a company should be brought in on the front end of the project to assist facility owners and operators in deciding whether the project makes good economic sense and, for that matter, is even a good candidate for such a project,” says Bakas.
Ameresco has some projects where the economics are “secondary or, in some cases, tertiary,” he states, adding that reliability is the primary driver.
Pharmaceutical, biotech, or database companies typically are not worried as much about the economics as a primary driver-for those entities, it’s about reliability, he points out.
“At risk for them, in the case of energy loss, is millions of dollars in products or services” he says. “It’s a drop in the bucket to pay a premium for the energy to make sure they don’t lose their product line.”
There are many ways to approach financing a CHP project-what makes sense for one facility may not for another. “A lot of these institutions don’t have the tax appetite,” says Bakas. “They’re tax exempt, like most universities or medical facilities.”
As a company outsourced to provide CHP services, Ameresco can monetize the tax credits and pass on the benefit to an end user in the form of reduced energy costs.
“The end result of this approach is that it transfers the risk of ownership to someone who does it all of the time,” he says. “The clients do not have to worry about raising capital, negatively impacting their operating budgets, or inheriting the risk of system performance. At the end of the day, they can save money, potentially reduce their carbon footprint, and increase the reliability of their facility while not having to manage a non-core asset.”
While some clients may still want to actually own a CHP system, many look to outsource the development-not the ownership-of such projects to a company that specializes in doing so regularly, “rather than to recreate the wheel” and run into issues and risks that have already been mitigated by someone previously on prior projects, Bakas says.
Perna says in contemplating CHP projects, facility owners and operators need to be aware of the available incentives and take advantage of them before their expiration.
“The second factor is the location of their fuel options,” he says. “Do they have access to natural gas in the appropriate volume and pressure, or are they looking at some sort of liquid fuel to fuel this installation they’re considering? If they are currently getting heat from an oil-fired boiler and can displace that and put in a natural gas engine, some utilities will have incentives available that will convert from oil to gas if they’re willing to go that route.”
Assumptions are critical when evaluating the economic benefit, Perna explains. “The assumptions are around not only installation costs, but also fuel, run time, and maintenance,” he says. “A trusted partner can work through the assumptions you may get from the manufacturer or the company that wants to install it, and really validate and ask the appropriate questions in doing due diligence so everybody knows what they’re signing up for.”
