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American DG Energy And Pepco Well Positioned As Coke, eBay And More Employ Cogeneration Systems

Mar. 11, 2014 9:50 AM ETADGE1 Comment
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For decades the world has depended on inefficiently burning fossil fuels for its energy needs, but with the boom in U.S. shale gas production recently and government support of cleaner technologies, combined heat and power (CHP) systems are rising in popularity. CHP, also known as cogeneration, more efficiently and reliably supplies energy needs in commercial and industrial applications where there is continuous demand for both electricity and heat. Navigant Research stated this month that "the confluence of a number of drivers points to renewed interest in this proven technology [CHP] platform across all regions." The market research firm forecasts worldwide revenue from industrial CHP to rise from $19.7 billion in 2013 to $29.8 billion in 2023. On that point, the increased use of CHP has created significant growth opportunities for leaders in the industry, such as Pepco Energy Services, Inc., a wholly owned subsidiary of Pepco Holdings, Inc. (NYSE: POM) and American DG Energy, Inc. (NYSE MKT: ADGE).

What is CHP?

CHP generates two forms of energy - typically electrical and thermal - from one fuel source. In most cases, the source fuel is natural gas, but there are many other alternatives, including biogas, oil, or biomass. Cogeneration systems use the source fuel to generate electricity, a process that creates heat. Instead of wafting into the atmosphere, the waste heat is captured and used to supply space heating, heating domestic hot water, laundry hot water or to provide heat for swimming pools and spas.

CHP systems can run in parallel or independent of the electrical grid to maximize efficiency in meeting hot water demand, with engineers customizing each system to the requirements of the specific facility. This ensures a reliable energy supply with far greater efficiency. Generally speaking, today's power grid operates at approximately 33 percent efficiency, meaning that twice as much energy is lost (released as heat or up the smokestack) as compared to what is delivered to the end user. CHP has been demonstrated to run at up to 90 percent efficiency.

Who is Using CHP and Why

There are copious benefits to CHP, making it an attractive option to relying solely on the power grid. As just mentioned, it's far more efficient than the existing grid system, while protecting against losses from power grid outages. In the wake of disasters like Hurricane Katrina and Hurricane Ike, some states have passed legislation mandating a CHP feasibility analysis before any construction or renovation can be performed at government facilities integral to disaster preparedness and emergency response.

The other primary benefits are environmental and financial. CHP vastly reduces pollutants released into the air and does not require water resources like traditional power generation. Compared to coal, natural gas used in CHP produces up to 65 percent fewer carbon emissions. The natural gas-powered CHP plant powering Pfizer's (NYSE: PFE) Sandwich, UK facility generates about 60 percent of all the buildings' electricity needs, while slashing carbon dioxide emissions by 38 percent, sulphur dioxide emissions by 52 percent and nitrogen oxide emissions by 41 percent.

The energy from CHP systems delivers cost savings to users. The Coca-Cola Co. (NYSE: KO) has been running a 6.5-megawatt cogeneration plant at its syrup factory in Atlanta, Georgia for about two years now. The system is fueled by methane gas piped in from a landfill owned and operated by Republic Services (NYSE: RSG). Mas Energy actually owns the project and sells the energy being generated by three reciprocating engine generators made by General Electric (NYSE: GE) to Coke. Sustainability manager for Coke's North American operation Richard Crowther told the Guardian that the beverage giant has lowered its energy expense because of the CHP system, which is estimated to reduce Coke's carbon footprint by 20,400 tons annually.

Exemplifying just how large the savings can be, Middlesex Hospital in Middletown, Connecticut installed a natural gas-powered CHP system in April 2013, which generates 90 to 100 percent of the hospitals power needs. The hospital estimates that it will save $500,000 to $750,000 annually because of the new system.

Other Household Brands Employing CHP

The installed capacity of cogeneration systems in the United States is currently about 82.5 gigawatts, with chemical companies and fuel refining companies comprising nearly half of the capacity. More and more commercial facilities are turning to CHP, though, as a means to contain costs and operate in a more environmentally friendly manner.

Some household brands that are currently using CHP systems at their facilities include, eBay (NASDAQ: EBAY), Lockheed Martin (NYSE: LMT), Toyota (NYSE: TM), Red Stripe Beer, Viacom's (NASDAQ: VIA) Paramount Pictures, Choice Hotels International's (NYSE: CHH) Clarion Hotel and DoubleTree by Hilton (NYSE: HLT).

Some recently installed natural gas-powered CHP systems at DoubleTree Suites were designed and installed and now managed by American DG Energy. American DG overcomes upfront costs with its turnkey on-site systems by offering a no-capital solution to its customers. With its annuity-based business model, the company provides and maintains all of the equipment and charges only for the energy consumed by the facility, guaranteeing the costs to be 5% - 20% less expensive than the rate charged by the current energy provider.

Access additional information about American DG Energy (NYSE MKT: ADGE) and their win-win proposition to consumers and investors here: http://www.tdmfinancial.com/emailassets/adge/adge_landing.php

American DG occasionally steps outside its model of only selling energy, as evidenced by a contract with Sunstone Hotel Investors (NYSE: SHO) announced on January 23 to upgrade the DoubleTree Suite in Times Square. The contract is estimated to generate $1.3 million in revenue for ADGE in 2014. In this instance, American DG is overseeing a complete energy plant conversion at the property to reduce dependency on utility steam and the electric grid by installing a natural gas-based energy system. The hotel is responsible for maintenance of the system subsequent to installation. The new system, which includes five 2-MMBTU boilers, two 5-ton chillers and a 200-kilowatt CHP system, is expected to add to Sunstone's bottom line as well as cut CO2 emissions at the hotel by 2,208 tons per year.

The U.S. government is actively taking a role in supporting CHP usage as part of objectives to add 40 gigawatts of new CHP in the country by 2021 and reduce military energy usage by 30 percent by 2015. Pepco Energy Services was awarded a task order in December to implement a comprehensive Energy Savings Performance Contract (ESPC) at the U.S. Army Natick Soldier Systems Center in Natick, Mass. Part of the $8 million ESPC includes a packaged cogeneration system that will work to lower heating, cooling and electricity costs at Natick. Pepco is also responsible for maintaining the CHP system throughout the 23-year performance term of the contract.

With the cumulative new energy conservation measures (including lighting, windows, CHP, etc.), the Natick Soldier Systems Center will have met its goal of 30-percent energy reduction.

Not Always the Answer

Cogeneration systems aren't a perfect fit in every instance. In order to reap the full rewards of the system, facilities must require a constant demand of thermal energy and electricity simultaneously. Even with that in mind, there are still tens of thousands of facilities around the globe where CHP provides a viable solution to ameliorate bottom lines, reduce grid dependency and slash emissions, leaving a solid upside to companies entrenched in the industry. With Navigant predicting a 50 percent rise in the industrial CHP business in the next decade, investors would be well served to perform their due diligence on this space.

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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