The e-mail was marked “urgent”. It was from an organization that is not a client of ours, but it wasn’t a surprise. We’ve seen this kind of e-mail many times before.
“Our CHP [Combined Heat and Power] project goes to our board in two weeks, and we have some questions about natural gas supply and costs. Can you help?”
Well, we certainly can help, but it is never a truly gratifying exercise. Because if an organization is looking at these questions at the end of the analysis – in the 11th hour before final approvals – then it has missed a big opportunity for a more integrated look at their energy strategy.
Activity in CHP development has increased sharply. CHP facilities make more efficient use of thermal energy – a necessity in a world of carbon pricing – and CHP generation behind the utility meter is a viable strategy for lowering Global Adjustment costs, and electricity costs generally, for Ontario consumers.
Natural gas supply is one of the key elements of most CHP projects. It only makes sense to address it from the start, in order to develop a sound strategy and a robust set of cost assumptions to inform the evaluation of the project economics. Too often, the client or the CHP developer use some rough assumptions or historical costs “to be refined later”. But would you build a house with a plan to put a good foundation under it later?
A CHP project changes the organization’s gas usage, both the volume needed and the load shape. This could affect the utility rate class the location is eligible for, its utility contract parameters, and other elements of the supply strategy. And, of course, future gas price behaviour may be quite different from past price behaviour. These are just some reasons why it is unsound to use historical average costs as a basis for evaluating CHP economics.
A gas-fired CHP project increases the organization’s gas price risk. Does management understand this change in risk, and does the CHP proposal include a sound strategy for addressing this risk? Locking in a multi-year gas supply can certainly eliminate gas cost uncertainty, but it does not ensure more favourable CHP economics. Does management understand the risk/reward trade-offs and is a choice being made that reflects the organization’s risk tolerance?
Having a sound gas supply strategy is an integral step to ensuring a CHP investment is cost-effective and delivers the expected benefits. That means developing the gas strategy early in the project planning and approval process – when the broadest set of alternative approaches is available – and evolving the strategy as the project evolves, in an integrated way.
Gratifying is the e-mail that reads “We’re thinking about a CHP project and we want to make sure we’re incorporating reasonable cost assumptions and a sound gas supply strategy to manage the risks. Can Jupiter help us with that?”
We sure can.
Uncertainty about electricity demand over the coming months is an important risk factor for those who are considering their option to be Class A for GA purposes under the Industrial Conservation Initiative over the coming adjustment period. Distortions in electricity usage resulting from shut-downs due to COVID-19 are likely to be felt for several months longer and could impact Global Adjustment costs and the allocation of those costs into 2022.read more
The sudden shutdown of operations imposed on many organizations by COVID-19 is having profound impacts on organizations and the people within them.
With sudden and widespread change, it is hard to identify all the necessary actions and prioritize them. For many organizations, the change in operations will affect their need for energy.read more
It is useful to think of risk as “the impact of uncertainty on your objectives”. Nothing in our future is certain, but we need to identify when the degree of uncertainty and the potential consequences of uncertain events are big enough to really matter. If so, then we need to do something to manage that risk. Otherwise, we can just go about our business.read more