Potential proponents of new distributed generation or combined heat and power projects are looking at two new programs recently announced by the Ontario Power Authority to provide a platform for getting their projects off the ground. The programs are intended to help potential project developers address risk and develop profitable projects that provide needed power to Ontario, efficiently and cost-effectively. However, when developing proposals under these programs for natural gas-fired projects, prospective developers must give careful consideration to key elements of their gas supply strategy before they submit their proposal to the OPA, to ensure they have taken full advantage of the OPA programs to manage their risks.
The Ontario Power Authority is conducting its second Combined Heat and Power RFP (CHPII) and is in the final stages of developing its Clean Energy Standard Offer Program (CESOP).
The CESOP and CHP programs are attractive to developers because they are designed to ensure approved projects will earn their required returns. To the extent power sales do not provide sufficient revenues, the contract mechanisms in CESOP and CHP are intended to "top up" revenues to match the project's net revenue requirements. However, some key conditions and assumptions are involved.
The Clean Energy Standard Offer Program (CESOP)
CESOP ("see-sop") is designed to address smaller projects with a "one-size fits all" contract methodology. The OPA is trying to keep the program simple, given that proponents of smaller projects typically have fewer resources and can justify less expense in developing their project. The CESOP contract will set out some parameters for a Net Revenue Guarantee that will be available to approved CESOP projects. The Net Revenue Guarantee is based on the value of this kind of generation to Ontario, and assumptions about the efficiency and operating characteristics of this kind of generation. If a prospective project can operate at the assumed efficiency or better and make money at the Net Revenue Guarantee, then proponents will want to proceed with the project.
Combined Heat and Power
The CHP RFP is aimed at district energy and industrial cogeneration facilities of at least 10 MW that may use natural gas, renewable fuels (eg. Wood waste) or by-product fuels. The CHP RFP is 162 pages, and is accompanied by a contract of 217 pages or a power purchase agreement of 164 pages, so it can hardly be described as "simple". It is most likely to attract interest from experienced developers with significant legal and technical resources. Proponents will submit bids showing the fixed revenue requirement of their project, and other parameters such as their contract heat rate(s), start up costs, and variable operating and maintenance costs. The OPA will rank proposals based on the terms bid, and select only those projects that it deems are economic.
Risks in the OPA contracts
The core assumptions behind CESOP and CHP are the same. There is a definition of how much revenue a project needs to earn its required return. There is the assumption about how much of this revenue is earned from market operations (selling power at the market price) and there will be a net payment from the OPA if necessary to cover the balance of the required revenue.
The risks to project proponent arise from two areas:
There are several potential risks inherent in alternative gas supply arrangements that may not be obvious to project proponents in the early stages of project planning:
For CESOP projects, these factors must be taken into account to determine whether the project will be profitable. For CHP II projects, these factors must be assessed to ensure that the CHP proposal properly captures all the costs, so that the contract, if awarded will be a profitable one.
CESOP, in particular, may be of interest to proponents with "one-off" project opportunities. These may be commercial or institutional complexes, such as hospitals or municipalities, that offer potential for district energy applications. There is a good chance that CESOP proponents are not experienced in district energy project development, creating greater risks that some elements of successful project planning may be overlooked. If you are considering a potential project under the CESOP or CHP II program, consider looking to resources such as the Canadian District Energy Association for assistance in identifying the key risks and variables for your project. A link to the Canadian District Energy Association's resources page appears at the bottom of this article.
If you have questions about assessing gas cost risk within CESOP or CHPII projects, contact John Voss at firstname.lastname@example.org .
To access the Canadian District Energy Association's resources page, click here >>