Cogeneration Financing Issues

Abstract

ABSTRACT Cogeneration is not new to the chemical and petroleum industries, which have been traditional heavy users of both steam and electricity. The enactment of the Public Utilities Regulatory Policies Act of 1978 (PURPA) permitted private unregulated production and sale of electrical power and required the purchase of that power by the electric utility which serves the area in which the facility resides. This law has created a renewed interest in the chemical, refining, enhanced oil recovery and other industries as a means of reducing overall costs in a very competitive environment. The purchase price of the power under PURPA is established by the law to be the avoided cost of the purchasing utility for the next unit of power. The exact method of determining this "avoided cost" has been hotly debated by cogenerators, utilities and public utility commissions throughout the country. With the current declining prices of various forms of energy, utilities' "avoided costs" have also declined. Decreases in residential and industrial use of electric power and an increase of industrial production of power have slowed the rate of growth in electrical energy demand. This has resulted in utilities being faced with dismissing plans for new generating facilities and cutting back production from existing higher cost facilities. These factors have a negative effect on the economics and development of new cogeneration facilities. The economics of cogeneration vary with the input fuel, the capital cost, the operating cost, the fuel structure of the purchasing utility, and many other factors inherent to such facilities. Therefore, the financing of cogeneration facilities may be accomplished by many different financing structures. Several structures, which have been used to date, are construction and term financings which include leveraged leasing and off-balance sheet joint venture partnerships. Various factors for financing such as guarantees, tax issues, clawbacks, escrow funds, and other mechanisms are addressed and explained. Sensitivities of fuel prices on gas-fueled projects are explored.