Part IV
Now, let’s look at the business side of things. Like all companies, ours was in business to provide an excellent service and make money at our enterprise. This business involved huge amounts of capital expenditures to put the systems in place, and then significant ongoing capital requirements (for natural gas, maintenance, parts & labor, etc.). But, if done right, there should be a resulting reliable income stream for fifteen years on each installation.
Alas, heaven forbid anything should be that easy! In an effort to balance political forces with the real world necessity to allow these enterprises a chance of being economically viable, the various governing authorities implemented rules and regulations under which power producers would have to operate. One of the most important components of this is the incentives that are available to Independent Power Producers. That is, in order to encourage entrepreneurs to build and operate CHP systems, and in recognition of the relatively small margins of this very costly business, state and federal incentives were built into the programs, to attract self-generation. These incentives, which are factored into the proformas for each installation, are absolutely necessary to reach a certain IRR (Internal Rate of Return), compliant with investors’ expectations. So, for example, by capturing the incentives available, the systems might yield a 12 – 14% net IRR; without the incentives, the yield might be in the 4 – 6% range, or thereabouts. Even if the systems proved economically “successful,” many investors still viewed these returns as anemic at best – but that’s another story.
Back to the incentives, one of the regulations that was established is called PURPA (Pubic Utilities Regulatory Policy Act), which, among other things, governs many aspects of the design, installation and operation of these on-site energy systems. As it regards CHP, the concept is to incent electrical self-generation that uses as much of the energy generated by the process as possible, including the heat that is a by-product. Therefore, PURPA requires that a certain amount of the “waste” heat must be used in the system – minimizing the energy otherwise lost in the process (which can be substantial). The rule works like this: if you want to generate and use 100 units of electricity, you must also utilize 40 units of the heat generated, in order to get the incentives offered. So, if a building can use 100 units of self-generated electricity, you can generate this, provided the building can also use 40 units of heat. Heat is defined as hot or cold: either hot water or steam OR cold water OR both, along with the electricity. To turn it around, if the building needs 100 units of electricity, but can take only 20 units of heat, then it’s too bad for the power producer – you can only provide 50 units of electricity, and still get the incentives. So, this law, while intended to allow the maximum utilization of the energy needed to generate the electricity – which is a positive thing – also has the negative effect of limiting the electricity you could otherwise provide to the building, when and if the building only needs a limited amount of heat (hot or cold water). And this, in turn, can be viewed as limiting the overall positive impact of self-generation.
For many reasons, we operated primarily in California. And in California, something like 80% of the larger office buildings are within 10 miles of the coast. Therefore, in temperate environments, these buildings needed far less energy to produce hot or cold water (for heating and air conditioning), then, say, buildings on the east coast would.
So, our business model was constricted by this rule which, while well-intentioned, had the paradoxical effect of significantly restricting the “good green” we could put into effect. Less on-site generation means more pollution and higher prices, but oh well!
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