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Should Manufacturers Make Electricity?

Customer-owned generation is not a new concept but due to changing energy markets and improved Combined Heat and Power (CHP) technologies, it’s becoming more feasible for more customers. Consumers who are considering generating their own power to bypass rising utility distribution rates, or those needing to replace a boiler, may find this technology penciling out favorably. More professionals are entering the CHP development space challenging customers with this “make or buy” decision. What factors make a CHP project work?

Need Heat

Standalone customer-sited generation is generally not efficient enough to beat the sum of market generation rates and utility distribution rates. The heat rate (the amount of Btu input needed to make 1 MW of power) is around 16,000 MMBtu per 1 MWh. Considering a delivered price of natural gas of $4/MMBtu, this puts the produced MWh around $64 without even considering operating and maintenance costs. That is not going to work as delivered electric prices for most manufacturers in Ohio are between $50 to $60 per MWh.

What makes CHP viable is the ability to capture the heat generated from burning natural gas and using that heat elsewhere in the plant. This captured heat displaces fuel that would be otherwise be required to satisfy the thermal demand in the manufacturing process. This is the classic double dip. Use the benefits of the fuel twice, once to generate electricity and once to make heat. The value of the heat benefit starts closing the gap in customer-manufactured MWhs to where it can be a winner.

No brainer opportunities come into play when an existing boiler has come to the end of its useful life. Instead of purchasing a new boiler, CHP should be considered in the design engineering. The CHP engine will reduce the size of a new boiler if not eliminate it altogether. The byproduct of burning natural gas in the engine is kWhs generated right at the plant site, eliminating the need for moving the power across inefficient transmission and distribution lines. Talk about buying local!

Need High Tariff Rates

If you can shop for generation supply (i.e., your facility is not taking power from a municipality or cooperative) then you are likely receiving very low generation rates. The energy market is near all-time lows and the capacity markets into the future have dropped to very low levels, as well. All this makes for low generation rates. The distribution rates are another matter. Rising transmission rates due to utility infrastructure improvements, as well as a basketful of non-bypassable charges have raised customer distribution rates significantly over the past five years.

For those customers located behind municipalities or cooperatives this could be an opportunity to finally take control of your energy costs. Without on-site generation, there is no other mechanism besides reducing consumption to really control electricity costs if you are unable to shop for generation service. Typically, municipalities and cooperatives have high demand charges ($/kW) associated with their tariffs. These high demand charges can drive the overall rate up considerably especially if the load factor is less than 80%.

When talking about tariffs I cannot go without mentioning the dreaded deal-killing standby rates. Standby rates are charged by the utility to the customer when the CHP is not operating. If the CHP goes offline, the full load of the facility would move to grid power. In doing so, a new demand for the full load would be established. Depending upon the utility, the customer may be required to pay a majority portion of the new demand charge for the next year, even during those months when the CHP is fully operable. Working these standby demand charges into the deal can pull the plug on any economic benefits.

Need the Right Structure with the Right Partner

A continuum of deal structures exists for implementing CHP from the customer owning the asset, leasing the asset or just purchasing the energy and heat from the asset. Each of these structures comes with its own set of risks and benefits. From a pure financial play, the customer owning the asset will bring the greatest value but the greatest operational risk and requires mega capital. Partnering with developers that will design, construct and own the project with a lease agreement back to the customer helps alleviate the need for capital investment but the customer will be required to share the benefit with the owner. The final structure which looks like a power purchase agreement also alleviates the need for capital and is a very easy structure of price per unit of heat and energy, but this structure also shares the project benefits with the developer.

Just like most things, finding the right partner to implement CHP for your company is critical to the success of the project. Borrowing rates, performance guarantees, price escalators, and off-balance sheet accounting are all the details that can make or break the implementation of CHP. Many developers and even traditional commodity suppliers are now offering CHP development, but there are relatively few completed projects. There can be benefits to using the “new player in town” but more than likely they will be learning on your project which is not a very comfortable position as the customer.

However, under the right conditions, CHP can offer a huge benefit that converts uncontrollable electric tariffs to more manageable natural gas costs. Through risk management strategies, it is possible for CHP to produce the benefits of lower cost and more price control.

Susanne is a contributor to The Ohio Manufacturers’ Association (OMA) Energy Guide blog. OMA’s Energy Guide is the path to customized energy pricing, terms, and smart energy management for Ohio’s manufacturers. To see how the OMA helps manufacturers purchase and manage the costs of energy, please visit:

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