part 1: overview of cogeneration and its status in asia - Fire

32 Part I: Overview of cogeneration and its status in Asia
In reality, the enterprise concerned may prefer to save the capital for financing its main
activity that may present a smaller risk and can be a source of greater financial profitability.
As an alternative, borrowed financing may seem more attractive because the suppliers of
debt capital do not get a share of the profits accrued from the use of their capital. Here, a
fixed rate of profit, or value of money, must be paid to the supplier of the capital and the
repayment of the borrowed funds is negotiated on the basis of the amount borrowed,
duration, and the interest rates. Normally, the terms of the borrowed financing (loan) may
place some restrictions on the uses to which the funds may be put. Moreover, any amount
borrowed will require a certain percentage of equity investment and guarantees may be
required in the forms of mortgages or securities.
Leasing is only one of the several ways of obtaining working capital and a decision to lease,
rather than purchase, should be based upon the cost of capital financing by other possible
methods, some of which have been described above. The leasing company guarantees full
financing of the cogeneration plant, which remains its owner till the user buys it back
according to the conditions of the contract. Most leases cannot be cancelled, or cancelled by
incurring costly penalties, whereas borrowed financing works on some fixed obligations and
may provide better terms.
Some indirect costs, which are difficult to determine in most cases, are associated with the
ownership that may not apply to the equipment under lease. In many cases, leasing turns out
to be cheaper than owning, but the actual comparative costs and all other factors must be
considered before a decision is taken.
An Energy Service Company (ESCO) often does third party financing which, after preliminary
analysis of the requirement of the client and feasibility study of the cogeneration project,
implements the project in agreement with the client. When the ESCO covers the whole cost
of financing the project, it is repaid by sharing the actual savings realized according to a
predetermined contract. Accurate measurement of the actual monetary saving is essential to
assure fairness to the ESCO as well as the client. Here, the client does not have to
investment in the cogeneration project and starts getting benefits from the day the
cogeneration plant is in operation.
The concept of facility management is not very different from third party financing, except that
the facility manager does more than an ESCO in meeting practically all the requirements of
the site which are not directly involved with the main line of activity of the client. For example,
a facility management firm can assure the supply of all utilities including electricity, steam,
compressed air, water, etc., to the client, while also handling the wastes or effluents
generated from the production process. This firm signs a contract with the client to meet the
present and future requirements of the site and invests in the development of infrastructure
and undertakes to operate and maintain it. By adopting innovative schemes such as
cogeneration, sizing the components appropriately, operating the facility reliably and
maintaining it efficiently, the facility management firm manages to reduce the overall cost
considerably. Moreover, a part of the benefits accrued is shared with the client in the form of
reduced bill.
Facility management is normally feasible for bigger clients or where one firm can cater to the
needs of several clients in the same locality. Then it becomes economical to make
investment on a bigger facility and employing a limited number of personnel who can deal
with several clients at the same time.
3.5 Tools for Financial Analysis of Cogeneration Projects
Regardless of whether the cogeneration project is a totally new facility or a retrofit of an
existing operation, the project will materialize only if it is financially attractive. There are a