Transcript Document

DIY: How Businesses Can
Install their Own Generation
Presentation to YPO Energy Summit
April 23, 2009
Sean Casten
President & CEO
Recycled Energy Development, LLC
ISO-New England
Holyoke, MA
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Deep Thoughts
“It’s easy to sit there and say you’d like to have more
money. And that’s what I like about it. It’s easy.
Just sitting there, rocking back and forth, wanting
that money.”
- Jack Handey
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Deeper Thoughts
• It’s easy to operate industrially-sited on-site
generation that creates consistent, long-term value
• But it’s hard to design, finance, build, permit and commission
that generation.
• It’s easy for a typical industrial to buy energy
• But it’s hard for a typical industrial to buy on-site energy
generation.
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Good news: Far easier than it should
be to build generation with innately
lower costs than your utility.
US Electric Industry Fuel-Conversion Efficiency
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
1880
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
~8% of US grid is served by combined heat & power
plants with efficiencies of 50%+, and overwhelming
economic advantages. Why not more?
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CHP / DG industry has been limited
by both regulatory and commercial
constraints.
Regulatory
Environment is anticompetitive, favors
status quo
“Losers cry louder than
winners cheer”
Entrepreneurs & investors
not attracted to disruptive
portion of industry
Absence of strong,
organized advocacy
for regulatory
reform
Energy users not alerted
to opportunity, don’t see
competitive pressure to
deviate from status quo
DG / CHP players
undercapitalized
and starved for
entrepreneurial
talent
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Good news / bad news
• Good news: the world is changing
• Regulatory stranglehold is loosening
• Lots of recent innovation in sector, rising investor activity
• Proof: total US generation capacity additions since 1998, in
rank order are natural gas (200 GW; almost entirely by
unregulated), CHP (45 GW; entirely by unregulated) and wind
(11 GW, largely unregulated). Essentially zero (net of
retirements) by regulated utilities during same time period.
• Bad news: DG industry still not fully mature.
• Too many good opportunities squandered by bad design /
contracting.
• DG industry sales process doesn’t map very well to energy
users’ purchasing process.
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Key design principles underlying
good on-site generation.
• Don’t design for your power needs.
• Designing to thermal demands and/or opportunity (including
but not limited to traditional renewable) fuels delivers much
higher overall returns and minimizes fuel volatility exposure.
• Don’t assume static energy costs or regulation
• Many projects would still be running today if natural gas was
always $3/MMBtu (just like their spreadsheet promised!)
• Energy regulation is in a high degree of state & federal flux;
significant opportunities, but only if you’re nimble.
• Be holistic, and start on the demand side.
• No one wants electricity, but everyone wants cold beer.
Optimize your energy island, not your electricity generator.
• Minimize energy use first, then design energy supply to avoid
stranding capital.
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Thermal matching: simple example
120
45
40
100
80
30
25
60
20
40
15
10
Thermal Demand
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Electric Demand
5
0
0
Jan
Feb Mar
Apr May Jun
Jul
Aug Sep Oct
Nov Dec
Electric Demand (MW)
Thermal Demand (MMBtu/hr)
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Electric-matched
system follows
electric demand,
displaces thermal
as available
Thermallymatched system
follows thermal
demand, displaces
electric as
available
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Thermal matching: simple example
Electric-matched
Thermallymatched
Rated Power Output
40 MW
24 MW
Average Thermal Output
67 MMBtu/hr
67 MMBtu/hr
Annual fuel efficiency
46%
91%
Total Capex
$44 million
$27 million
Annual cash gen
$4.4 million
$4.7 million
20 year pretax ROA
8%
17%
Assumes gas turbine with 9,500 Btu/kWh heat rate @ $1100/kW, 75% thermal
recovery in HRSG, $10/MWh O&M costs, $7/MMBtu natural gas and $75/MWh
electric sale.
Full-matching should also be constrained by supply of
on-site opportunity fuels (waste heat, waste gas, etc.)
to maximize “spark spread” and life-cycle economics.
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Key contracting principles
underlying good on-site generation.
• Think like debt, act like equity
• Stress test models, look hard at downside; but make sure your
whole project team has an incentive for upside gain.
• Typical approach (owner gets upside, suppliers get LDs)
typically fails.
• Overpay for value-creation.
• Value-creation happens during the design stage, valuerealization comes during the execution stage. With $ heavily
back-ended, value creation tends to get short-shrift.
• People who are really good at design unlikely to work for T&M
• Don’t confuse breadth for depth.
• The world doesn’t need any more power plants designed by
failed HVAC engineers!
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Compare this to the “too many
cooks” way that most projects are
staffed…
Task
Who Usually Provides?
Conceptual
Design
• Developers
• Consulting engineers
• Packagers
• Distributors
Equipment
specification
• Owners
• Developers
• Consulting engineers
• Packagers
• Distributors
Detailed
Design
• Developers
• Consulting engineers
• Packagers
Financing
Contracting
Construction
• Banks
• OEMs
• Owners
• Developers
• Owners
• Outside counsel
• Debt providers
• EPCs
• Developers
• EPCs
• Owners
• Packagers
• OEMs
• Developers
Permitting
• Owners
• Environmental consultants
• Developers
Operations
• Owners
• Asset managers
• Developers
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…and the way those cooks are
incentivized.
• Typical contract structure over-penalizes downside,
under-rewards upside.
• Fixed price contracts + LDs/performance guarantees
• RFQ-type solicitations encourage those parties who can add
most to early-stage value-creation to stay quiet, lest their
ideas get “stolen” to go to low-cost bidders.
• Multiple contacts often not well-aligned.
• Do your contracts encourage multiple parties to work together,
or encourage them just to point fingers when things fail?
• Lesson from big projects
• $50M+ projects always have single, sole-coordinator to tie
everything together, smaller ones have 10 sous-chefs.
• Irony: both projects are equally prone to $100K coordination
mistakes; but they are proportionally much more expensive on
small projects.
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The awkward truth: bifurcation in
the DG / CHP industry
Small Projects (<$10M)
Big Projects (>$50M)
Who’s in the
market?
Small balance-sheets, startups
dominate (except OEMs).
Big balance-sheets, deep
experience dominates
Typical
contracting
structure
Many independent contracts
with owner / host
Single umbrella contract with
owner / host
Contracting
challenges
Defining boundaries of
responsibility
Gain-sharing
Who
succeeds in
this market?
Low-cost providers
High-value providers
Odd result – lots of churn in small project space.
Successful companies move to bigger projects where
they can capture more value, or else expand into other
areas (HVAC, ESCO, etc.). Unsuccessful ones exit.
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So how do you do small DG projects
effectively?
1. Look hard at your procurement processes
• Probably work well for purchasing of commodities; probably
don’t work well for purchasing of high value-add services from
non-competitive industries.
2. If equity has expertise, use it.
• If not, find partners who want to be compensated like equity,
with balancing upsides & downsides.
• Execution is a commodity; value creation isn’t. Procure, price
and manage those disparate tasks accordingly.
3. Address demand side first, size for opportunity fuels
and thermal demand second, power needs last.
• This hierarchy applies to system design and to operating
protocols.
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So how do you do small DG projects
effectively?
4. Don’t constrain your analysis too early
• Engineering bias to impose constraints, then analyze, and
artificially limit options to a finite set of prime movers, energy
cost environments, scopes, etc.
• Good on-site generation starts with a much more
entrepreneurial focus, bounded by what you want rather than
what you can’t have.
6. Favor experience, but don’t demand it.
• Can’t be guaranteed to find someone who’s tied together all
the complexities of a project like yours before; a company with
a strong entrepreneurial culture can create far more value
than one that consistently does the wrong thing the right way.
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