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Gas supply strategy for CHP projects

November 2018

The e-mail was from an organization that is not a client of ours. It was marked urgent, 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.

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. 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 the CHP proposal include a sound strategy for addressing this risk, and does management understand it? 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 the choice being made to reflect 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, and evolving the strategy as the project evolves, in an integrated way.

Gratifying is the e-mail that reads “We’re considering a CHP project and we want to make sure we’re incorporating reasonable cost assumptions and a sound gas supply strategy. Can you help?”

We sure can.