Maximizing Energy Revenues - Providing the Best Incentive to the Contract Operator

Transcription

1 14th Nrth American Waste t Energy Cnference May 1-3, 2006, Tampa, Flrida USA NAWTEC Maximizing Energy Revenues - Prviding the Best Incentive t the Cntract Operatr Anthny LRe, P.E., DEE, Principal Camp Dresser & McKee Inc. 50 Hampshire Street Cambridge, Massachusetts Paul Stller, Vice President Camp Dresser & McKee Inc. 50 Hampshire Street Cambridge, Massachusetts Rbert Hauser, P.E., Operatins Manager Pinellas Cunty Utilities Department f Slid Waste Operatins tb Avenue Nrth St. Petersburg, Flrida ABSTRACT Cmmunities that wn waste-t-energy (WTE) facilities rely heavily n the revenues generated by their facility t help pay fr the csts t finance, perate and maintain these facilities. The tw primary revenue streams are tipping fees and energy sales, generally in the frm f electricity. While cmmunities ften retain all f the tipping fee revenue, revenue frm the sale f energy is nearly always shared with the cntract peratr. In sme cases the shared energy revenues include bth capacity and electricity payments. The basis f this strategy is t ffer the cntract peratr an added incentive t maximize this revenue stream thrugh mre efficient peratin and, in the case f capacity payments, t meet certain capacity cmmitment criteria required by the energy purchaser. This strategy recgnizes that the cntract peratr has sme degree f cntrl ver the factrs that affect energy prductin. Under mst existing service agreements, which date back t the 1980s, energy revenues are shared n a basis, with 90 percent ging t the cmmunity. Nw that many f these service agreements are cming up fr renewal r are expiring, cmmunities will need t revisit hw best t share energy revenues with the cntract peratr in rder t maximize the ttal revenues retained by the cmmunity. This paper analyzes several different appraches t sharing energy revenues in light f the peratinal experience gained ver the past 20 plus years and cncludes that, while energy revenue sharing is still in the best interest f the cmmunity, the widely emplyed strategy f a split may nt ffer the best incentive, and therefre may nt lead t the maximizatin f energy revenues t the cmmunity. INTRODUCTION As f 2004, there were 89 WTE facilities perating in the United States [1]. Mst f these prjects were develped in the 1980s and early 1990s and are appraching 20 years f peratin. Mre than ne-third f the WTE facilities are publicly wned, with the vast majrity f these plants being perated and maintained by private firms under 20 r 25 five year service agreements. The cntract peratr's cmpensatin typically cnsists f either an annual service fee r a prcessing fee fr each tn f waste prcessed and, in many cases, a share f revenues frm the sale f energy and metals recvered frm the waste and/r ash streams. Mst f the riginal service agreements fr publicly wned facilities will be cming up fr 47 Cpyright 2006 by ASME

2 renewal r will be expiring within the next 5 years, which will require these cmmunities t negtiate new service agreements either with the current peratr n a sle-surce basis r as part f a request fr prpsal prcess. This presents an pprtunity fr the cmmunity t review the terms and cnditins f the riginal service agreement in light f the peratinal experience gained ver the first term including the merits f sharing a prtin f the energy revenues with the cntract peratr. Energy revenues have histrically been a significant surce f additinal revenue t the cntract peratr, representing as much as percent f their ttal revenues. PAST ENERGY REVENUE SHARING PRACTICES Energy sales are als a significant surce f revenue t the cmmunity and are critical t achieving a cmpetitive tipping fee. Ttal energy revenues can be equivalent t $20-$40 per tn f waste depending n the energy cntract price. Therefre, maximizing energy prductin shuld be ne f the cmmunity's primary peratinal gals. There are a number f ways t maximize energy revenues including: (i) (ii) (iii) generating mre electricity by increasing facility thrughput thrugh higher steam capacity utilizatin and/r higher biler availability; generating mre electricity by ptimizing the efficiency f the pwer cycle; and/r selling a higher percentage f the grss electricity prduced by reducing in-plant pwer cnsumptin. Since the cntract peratr has a large degree f cntrl ver all f the abve factrs, cnsideratin is ften given t sharing a prtin f the net energy revenues with the cntract peratr as a fmancial incentive t maximize these revenues. In fact, mst f the riginal WTE service agreements prvided fr sharing a prtin f the net electricity revenues with the cntract peratr. In the vast majrity f these deals, the municipality receives 90 percent f the ttal net electricity revenues and the cntract peratr 10 percent. In a few cases, the municipality receives 100 percent f the net electricity revenues up t an armual guarantee with the cntract peratr receiving significantly mre than 10 percent f the revenues frm electricity generated in excess f an annual guarantee. OPERATING EXPERIENCE WITH 10 PERCENT ENERGY REVENUE SHARE A 10 percent energy revenue share has, fr the mst part, been adpted as the generally accepted industry standard ver the years. Hwever, actual experience ver the past 20 years suggests that this apprach des nt ffer enugh incentive fr the cntract peratr t ptimize energy prductin. Fr example, the cntract peratr is less likely t undertake maintenance and repairs t increase r maintain perfrmance if his share f the incremental revenue is nt significantly higher than his cst t undertake the wrk. Cnsequently, the cmmunity ften realizes little return fr sharing this prtin f the revenue stream. The cntract peratr, meanwhile, ften has t expend little r n effrt t realize this revenue and may, in fact, reduce expenses by calculating the ecnmic tradeffs f the ptential savings n maintenance expenses versus the ptential lss f incremental energy revenues. Typical maintenance and repair wrk that can be susceptible t such ecnmic trade-ff analyses as a result f this revenue sharing apprach include, fr example, the cleaning frequency f steam cndensing systems (e.g., surface cndensers, cling twers, air cled cndensers) and the replacement f failed cndenser tubes, which are generally capped instead. Deferring this wrk can end up reducing the efficiency f the pwer cycle and result in lwer energy prductin. Hwever, if the reductin in the cntract peratr's share f the electric revenues is less than the savings that the cntract peratr realizes by deferring maintenance, then the cntract peratr is ecnmically incentivized t defer the wrk and reap the ecnmic benefit. Mst f the dwnside f the deferred maintenance is brn by the cntract cmmunity under a 90/10 energy revenue sharing apprach. T illustrate this pint, cnsider the cleaning frequency fr an air cled cndenser. Cleaning an air cled cndenser every ther mnth during the summer mnths has been bserved t Cpyright 2006 by ASME 48

3 result in a ne-half inch mercury abslute (0.50 in HgA) increase in the cndenser pressure during the mnths between cleanings, which lwers the steam turbine-generatr utput by apprximately 1.5 percent. Fr a 30 MW turbine-generatr, this results in a decreased utput f324 MWH per mnth r $16,200 in lst energy revenues based n an energy rate f $0.05/kwh. The cmmunity's share f the lst energy revenues wuld be $14,580 during each f these mnths while the cntract peratr's lst revenues wuld nly be $1,620. In this case, the cntract peratr wuld be unlikely t clean the air cled cndenser mnthly since his cleaning csts wuld mst likely exceed his ptential additinal revenues. Hwever, if the revenue share fr excess energy was 50/50, fr example, the cntract peratr's return wuld likely justify the additinal expense fr mnthly cleaning and the cmmunity's ttal energy revenues wuld als increase. Additinally, the traditinal 90/10 energy revenues split als des nt generally prvide sufficient incentive fr the cntract peratr t reduce in-plant pwer cnsumptin thrugh peratinal and/r prcess changes such as increasing the efficiency f in-plant electrical lads. In-plant pwer cnsumptin represents a significant prtin f the grss pwer generated, typically percent n large WTE facilities and up t 20 percent n smaller facilities. ENERGY REVENUE SHARING OPTIONS Optin 3 - Energy Revenues Percentage Share f Excess Net Under this ptin, the cmmunity wuld share a fixed percentage (e.g., 50 percent) f the net energy revenues frm electricity generated in excess f an annual amunt stated in the service agreement. Optin 4 - Energy Credit Based n an Efficiency Factr Under this ptin, the cmmunity wuld pay an energy credit t the cntract peratr fr perating in excess f a base efficiency factr (e.g., KWH/tn waste prcessed, KWHIKlbs steam). CONCLUSION In rder t maximize energy revenues, it wuld be in a cmmunity's best interest t share energy revenues with the cntract peratr. Hwever, based n perating experience ver the past 20 years, the widely emplyed strategy f a 90/1 0 split may nt ffer the best incentive. While payment f an energy credit based n an efficiency factr wuld tie energy revenue sharing directly t the efficiency f the pwer cycle, efficiency factrs can be affected by cnditins utside the cntrl f the cntract peratr and therefre wuld nt be as fair an apprach. There are several ptential energy revenue sharing ptins that are available t a cmmunity that will need t enter int a new service agreement in the future including the traditinal 90/10 split. The fllwing fur ptins represent a range f different appraches, each with its wn merits. A summary f the advantages and disadvantages f each ptin is prvided in Table 1. Optin 1 - N Energy Revenue Sharing Under this ptin, 100 percent f the energy revenues wuld be retained by the cmmunity. Optin 2 - Percentage Share f Ttal Net Energy Revenues Under this ptin, the cmmunity wuld share a fixed percentage (e.g., 10 percent) f the ttal net energy revenues with the cntract peratr. Sharing energy revenues based n excess net revenues (Optin 3) wuld appear t be the best apprach because it ffers the greatest incentive t the cntract peratr t maximize energy revenues, particularly if the cntract peratr's revenue share f the excess net revenues is 50 percent r higher. Under this ptin, the cntract peratr wuld nly share in energy revenues that were realized by exceeding a predetermined annual electricity generatin guarantee. This apprach ensures that the cmmunity receives a minimum amunt f energy revenues befre the cntract peratr is eligible fr cmpensatin and rewards the cntract peratr slely fr exceeding a minimum threshld. The cntract peratr wuld be mre likely t undertake additinal maintenance and repairs t maximize perfrmance because the ptential return n his investment wuld be much greater. We have prpsed this apprach in the draft service agreement that was sent t the three prequalified 49 Cpyright 2006 by ASME

4 cntract peratrs in February 2006 fr the Reprcurement f a cntract peratr fr the Pinellas Cunty 3,000 tpd WTE facility. We may have sme additinal infrmatin t reprt at the cnference regarding the wisdm and viability f this apprach frm the cntract peratr's perspective. REFERENCES [1] Kiser, J.V. and Zannes, M., "The 2004 IWSA Directry f Waste-T-Energy Plants", Published by the Integrated Waste Services Assciatin, Washingtn, D.C. Cpyright 2006 by ASME 50

5 Table 1 Cmparisn f Energy Revenue Sharing Optins Ul (") '0 '< :J. N 0\ ;l> en Optin I - N Energy Revenue Sharing Percentage Share Based n Ttal Net Energy Revenues Percentage Share Based n Excess Net Energy Revenues Energy Credit Based n Efficiency Factr Advantage Disadvantage Cmmunity retains 100% f Lack f incentive culd lead t lwer energy revenues fr the cmmunity revenues N administrative effrt Wuld likely result in higher service fee since a prtin f this revenue stream wuld nt be available t help ffset the cntract peratr's csts and expected prfit Relatively easy t administer Minr incentive t maximize electricity generatin May result in lwest service fee Cmmunity retains less than the ttal energy revenues, thereby causing the cmmunity by prviding an alternative t increase ther revenues revenue stream t help ffset the cntract peratr's csts and expected prfit Rewards cntract peratr fr bth higher pwer cycle efficiency and increased thrughput, the later f which the cntract peratr wuld als be rewarded if the service fee was based n a per tn prcessing fee Offers greatest incentive t May result in a higher service fee since this revenue stream may ffset less f the surpass the stated energy cntract peratr's csts and expected prfit prductin amunt Cmmunity wuld likely retain Rewards cntract peratr fr bth higher pwer cycle efficiency and increased mre f the ttal energy revenues thrughput, the later f which the cntract peratr wuld als be rewarded if the service fee was based n a per tn prcessing fee Relatively easy t administer Ties energy revenue sharing Efficiency factrs can be affected by cnditins utside the cntrl f the cntract directly t the efficiency f the peratr (e.g., refuse heating value, ambient air temperature, etc.) pwer cycle and wuld nt reward the cntract peratr twice fr increased thrughput under agreements where the service fee was based n a per tn prcessing fee Cmmunity wuld likely retain May result in a higher service fee since this lwer revenue stream wuld ffset less f mre f the ttal energy revenues the cntract peratr's csts and expected prfit