A New Market Risk Mitigating Approach to Combined Heat and Power Project Finance Without the Benefits of a Power Purchase Agreement

Abstract

This article describes a new market risk mitigating model for future combined heat and power (CHP) project finance. The need arose from the fact that federal legislative changes in 2005 no longer entitle cogeneration project financings by law to receive the benefit of a power purchase agreement underwritten by state investor-owned utilities. CHP project investment represents a potentially enormous energy efficiency benefit through its application by reducing fossil fuel use up to 55% when compared to traditional energy generation and concurrently eliminates constituent air emissions up to 50%, including global warming gases. As a supplemental approach to a comprehensive technical analysis, a quantitative multivariate modeling was used to test the statistical validity and reliability of host facility energy demand and CHP supply ratios in predicting the economic performance of CHP project finance. The resulting analytical models, although not statistically reliable at this time, suggest a radically simplified CHP design method for predicting future profitable CHP investments using four easily attainable energy ratios. This design method shows that financially successful CHP adoption occurs when the average system heat-to-power ratio is less than or equal to the average host convertible energy ratio, and when the average nominally rated capacity is less than average host facility load factor demands. New CHP investments can play a role in solving the worldwide problem of accommodating growing energy demand while preserving our precious and irreplaceable air quality for future generations.

Notes

(Net) capacity factor, as defined by the U.S. Nuclear Regulatory Commission (2005) is “the ratio of the net electricity generated, for the time considered, to the energy that could have been generated at continuous full-power operation during the same period” (2005, p. 1).

∗Note. These 25 sites represent 47 individually operating CHP units.

∗Note. CHP-3 was eliminated from Industrial Group for inordinate numbers of zeros and outliers.