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  • Don't Call It A Comeback, CHP Has Been Here For Years 0 comments
    Feb 10, 2014 9:45 AM | about stocks: ADGE, GE, CAT, RKT, EUSP

    Invented nearly a century and a half ago and used by Thomas Edison in the world's first commercial power plant, combined heat and power (CHP), or "cogeneration" as it is often called, is on the rise globally. The extremely efficient technology simultaneously produces electrical and thermal energy from a single fuel source, such as natural gas, oil, vegetable oil or biogas, to name a few. To make it happen, the waste heat from generating electricity is captured and then used for other applications in residential, commercial and industrial settings, including water heating, space heating and process heat.

    The benefits are fiscal and environmental as CHP increases fuel efficiency, reduces greenhouse gas emissions and lowers energy costs. CHP can also play an invaluable role to communities and the economy as it did in the wake of Hurricane Sandy by getting hospitals and other buildings up and running again long before the electricity grid was back online.

    Leading CHP Players

    From an investor perspective, there are different ways to approach the still fragmented industry, with several major players making their presence felt with large-scale projects. International conglomerate General Electric (NYSE: GE) and Siemens AG (NYSE: SI) are now well established in the CHP industry, but typically on the high-end industrial level. Amongst other projects, GE cogeneration units powered part of the London 2012 Olympic Games and are subsequently now powering East London businesses and residences. Siemens is commissioning a large CHP plant in Poland for energy utility PGE GiEK SA, replacing a coal-fired plant with a CHP plant that has a 138 MW electricity capacity and 90 MW thermal capacity.

    On the mechanical side of things, Caterpillar (NYSE: CAT) sells a full line of turbines used in cogeneration systems through its subsidiary Solar Turbines. The spotlight was cast on Cat's offerings in 2008 when Cornell University chose two 15-megawatt, natural gas-combustion turbines made by Solar Turbines. These turbines will be used in conjunction with heat recovery steam generators made by Rentech (NASDAQ: RTK) as part of an $82 million project to shift the school away from coal-based power generation. The cutting-edge Cornell Central Energy Plant lowered Cornell's carbon emissions by 25 percent and now provides about 180 million kilowatts annually to supply most of the campus' electrical needs.

    Focused on commercial applications, EuroSite Power Inc. (OTCQB: EUSP) and its majority owner, American DG Energy (NYSE MKT: ADGE), are penetrating the CHP markets in Europe and the U.S. with their annuity-based business model as on-site utlility providers. More on that in a moment.

    CHP Projects Abound Worldwide

    The United States has installed capacity of more than 82 gigawatts of CHP at more than 4,100 commercial and industrial facilities, equating to 8 percent of the nation's generating capacity. An Executive Order penned by President Obama in 2012 sets a goal to add 40 additional gigawatts of capacity by 2020. The Order makes responsible sense as the U.S. still wastes more heat energy from electricity generation each year than the total energy use of Japan.

    With 6.5 gigawatts of electricity capacity, Canadians currently generate about seven percent of their electricity through CHP, with the majority (67%) of the cogeneration capacity accounted for in Alberta and Ontario.

    Two large sugar mills in Sindh, Pakistan last year joined a growing list of companies with cogeneration plants as sugarcane producers seek to take advantage of incentives as part of the country's Renewable Energy Policy 2006. The mills are using sugarcane bagasse, a waste product from sugarcane/sorghum juice extraction that can be converted into a biofuel, as a source fuel for the systems. Surplus power is then sold to the government.

    Answering challenges related to power expenses in Jamaica, beer maker Red Stripe invested $7 million last year for its own 3-megawatt cogeneration system fueled by liquefied gas in a bid to save up to 50 percent compared to what it spends on electricity today.

    First-of-their-kind projects are happening in Australia, Singapore and elsewhere in the world, but the true trendsetter is the European Union. Presently, the 28-nation EU generates just over 11 percent of its electricity through CHP, with research showing that figure could expand to 25 percent in the next two decades. Latvia and Denmark are particularly impressive, utilizing cogeneration systems for 47.4% and 46.2% of total electricity generation, respectively.

    Government Support of CHP

    According to COGEN Europe, the European Association for the Promotion of Cogeneration, CHP saves Europe approximately 200 million tonnes of CO2 per year. This figure will continue to rise going forward, thanks in part to efforts such as the Cogeneration Directive passed by the European Parliament in 2004 to encourage member states to use CHP and tax benefits that further incentivize cogeneration power use.

    CHP has found support at all government levels throughout Europe, as policies are often underscored by carbon and greenhouse gas initiatives. Germany's Integrated Energy and Climate Programme has the goal to double electricity output through CHP plants by 2020, meaning 25 percent of the all electric in the country will come from cogeneration.

    In the United Kingdom, the government has a goal of reducing carbon emissions by more than one-third by 2020. In the last few weeks, two hospitals in the UK have committed to making the switch to CHP as part of that initiative. Rapton Hospital in Nottinghamshire has contracted Cofely Energy Services to replace its coal-fired boilers with a 1 MW biomass boiler, a 1.2-MW CHP engine and three high-efficiency dual-fuel boilers that will primarily run on gas. The new system will slash the hospitals CO2 emissions by 8,000 tonnes per year while meeting all of the hospital's heating and hot water demand and 87 percent of its electrical needs.

    Blackpool Teaching Hospitals NHS Foundation Trust has signed a 15-year agreement with EuroSite Power, in which EuroSite will install and operate a CHP system at Clifton Hospital on the Flyde Coast in St. Annes. Per the contract, EuroSite will operate a 100-kilowatt cogeneration system that will produce up to 1.75 million kilowatt hours of total energy run annually. This will save up to 208 tonnes of CO2 emissions, roughly equivalent to taking 44 cars off the road each year.

    Understanding CHP in the EU, a Closer Look at EuroSite Power Inc.

    For EuroSite, the new contract revenues are expected to total an estimated $2.72 million over the life of the 15 year contract, bringing the company's total CHP bookings to approximately $66 million and its total electrical capacity to 2,228 kW. Parent company American DG Energy has approximately $300 million in long-term contracts on its books, showing these two companies are establishing a large footprint in the U.S. and European CHP markets.

    EuroSite has reason to exude confidence with its annuity-based business model that helps companies switch to CHP with no capital outlay. Designated the "EuroSite On-Site Utility Solution," the company architects a custom system for the client, installs it and operates it, guaranteeing a discounted price to energy produced from the system versus their current cost of energy.

    We caught up with Paul Hamblyn, the managing director of EuroSite Power, to discuss the state of the industry in Europe. Hamblyn explained that UK companies currently pay taxes on fuel use in boilers per kilowatt-hour because of the impact on climate change, as well as taxes on each tonne of carbon emitted. A switch to CHP creates significant reductions in these emissions, which translates to lower taxes, in addition to savings on the energy being consumed.

    CHP is gaining momentum on a global scale, but there is still a difference in sales in European Union countries as compared to North America, according to Hamblyn. The shale boom in the States is helping drive down natural gas prices, a key source fuel for CHP. The CHP industry stagnated for a number of years, but is going through resurgence now in North America, but many potential customers still need to "wrap their brain" around how it works and the multitude of benefits CHP provides before making a decision to switch from legacy energy models.

    "CHP has been used regularly in Europe for more than 20 years, so potential clients are very well versed in the benefits without any explanation from us," said Hamblyn in a phone conversation. "The challenge was devising an economically-attractive package from the start. We created our on-site utility model with no capex required from the client as a long-term solution to clean energy initiatives and emissions regulations that are prevalent throughout the UK and Europe. It helps the client, the country and the environment, while securing meaningful revenue for our company and shareholders; so it's a big win for all involved."

    The same business model is employed by parent company American DG Energy. Incidentally, American DG announced on January 23 that it inked a deal with Sunstone Hotel Investors Inc. for a CHP system at the NYC Times Square DoubleTree Suites by Hilton (NYSE: HLT). The contract is worth about $1.3 million in revenues to American DG Energy in 2014 and is estimated to drop the hotel's carbon footprint by 2,208 tons each year.

    CHP Back for Good This Time

    The CHP industry has been around for a long time and has seen its surges, which were typically based upon rising energy costs. It's fair to say that CHP has been in a somewhat latent period for more than a decade, but things are looking different as its popularity is on the rise again. The economic incentive is obvious and a clear driver as companies look to save on utility expenses at every turn. With government incentives - and mandates - the CHP industry is also getting support from an environmental angle like never before. Operating "green" has become a tenet of regulatory policies across the world, providing a catalyst for CHP systems and the players firmly established in the space. With the forces moving in unison, a paradigm shift is in motion that will provide sustained momentum for years to come.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: TDM Financial is a marketing and consulting firm that specializes in creating ongoing communications strategies for public and private companies. For full disclosure please visit: secfilings.com/Disclaimer.aspx

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