Optimising New and Existing CHP

1
Optimising New and ExistingCHP

• Energy-Link
• CHPA Offices
• December 2004

2
Why No New Projects?

• Spark Spread still too low to fund major new
  build potential from 2007
• Government Support
• CCL and other embedded benefits critical to
  economics
• Government Energy Paper regulatory uncertainty
• Could refundable grants be made available to
  ensure simple payback in 3-5 years, upside shared
  thereafter?
• For biomass CHP, value of heat not rewarded at
  present heat ROCs?
• EU ETS potential - carbon prices rise?

3
Traditional Structure

• Site contracts for most steam, minimum site
  electricity for 15-20 years
• Developer funds,builds and operates plant
• Fuel price risk transferred to buyer
• Environmental/Tax/Services risks left with buyer
• Termination payments/arrangements

4
Potential Structures

• Contract lengths need to shorten to the
  regulatory uncertainty horizon
• or longer term regulatory environment needs to
  be securitised for new CHP
• or include economic price reviews/benefit sharing

5
Partners

• Utility Developers
• Energy Service Companies
• Self Develop and Re-finance
• Private capital
• Lease major assets
• Project Finance for large schemes (reduce costs
  by up to 3/MWh)

6
Risk Profiles

• Basic decision to hedge electricity and steam
  price risk, or float at market rates
• Attempt to mirror competitors purchase position,
  or seek to gain competitive advantage from taking
  a long term view?
• Partial fixed and floating price

7
Technical Options

• Conventional gas turbine with back pressure or
  condensing steam turbine
• High efficiency reciprocating engine for smaller
  schemes
• Fluidised bed, gasification and pyrolysis for
  alternative fuels and waste
• Any of the above with Community Heating benefit
  of significant grant contribution

8
Fuel Options

• Despite record high gas prices, gas remains the
  initial option, due to high efficiency and low
  capital cost
• Coal and HFO have high capital, operating and
  environmental compliance costs
• Refinery residuals, Orimulsion, petcoke?
• Biomass common in Scandinavia and North America-
  structural barriers in UK

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Problems to Avoid

• A purchase arrangement with inherent commercial
  tension between parties
• Insufficient options for purchasers to gain
  upside over contract duration and/or no viable
  exit terms from purchase arrangements
• Insufficient focus on how to deal with market and
  environmental change
• Imbalance between gas purchase and electricity
  offtake
• Onerous LTSA contract that does not reflect risks

10
Existing Projects

• Many existing projects may not be running
  optimally against daily gas price/ half hourly
  electricity price
• Operational flexibility constrained by CHP QI
• Minor technical enhancement opportunities may be
  overlooked
• LTSA or Self Maintenance?

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Optimisation

• Combined technical and and commercial Diagnostic
  Audits are complimentary accurate valuation of
  technical options
• Requires daily gas price forecast and half hourly
  electricity forecast for up to 10years
• Analyse gas and electricity profiles
• Multi-scenario and stress testing of project
• Major variables, e.g. availability, randomised
• Internally consistent view of regulatory
  framework
• All options calculated as EBIT and NPV

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Tools and Methodology

• Physical and process constraints defined
• GT start up/shut down
• Cold to hot on boilers, etc
• Emission Limits
• Back up fuel running hours
• Integer programming calculates optimum solution
  for profit maximisation
• Net income often gt10 higher that base load
  running profits

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Management Support

• Optimisation requires more active commercial and
  operational management
• Data inputs required for basic market price
  assumptions
• Strategic advice on forward curves, and likely
  trends
• Operational flexibility in process / CHP plant
• Risk analysis and governance advice

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Enhancements

• Significant value exists in the ROC market
  consider change of fuel to full or co-fired
  status
• biodiesel becoming an significant fuel source in
  EU
• on site wind turbine
• Fossil fuel back-up/commercially interruptible
  gas
• Long Term Services Agreements
• Repowering
• Efficiency enhancements
• Renegotiation of service levels

15
Commercial Re-structuring

• Major untapped value in many long term
  contractual arrangements
• General restructuring can release benefits from
  third parties - win-win

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Summary

• Optimisation of existing and new projects
• Commercial
• Technical
• Operational flexibility
• Diagnostic Audits
• Additional support mechanisms required to achieve
  growth targets Government grant linked to
  payback rather than capex

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Energy-Link Partnership Ltd
Carlo Rossini Stephen Mooney
Energy-Link Partnership Ltd 158 Oakbank Road,
Perth, PH1 1HA TEL [phone] www.energy-l
ink.co.uk