Project Green District Energy Feasibility Study - Partners in Project ...

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TRCA Pearson Eco-Business Zone District Energy Feasibility Study 10 April 2012 Delays in Converting Existing Buildings Initiation of DE service requires timely action not only by the utility system but also by the customer, who must convert his building system for interface with the district loop. As a result, there are risks of reduced revenues due to delays in converting and connecting buildings. These risks can be reduced through ongoing customer communication and technical assistance during the building conversion process, as well as through contract provisions requiring initiation of payments at a date certain. Metering Appropriate billing of utility customers requires accurate metering. Risks related to inaccurate metering include: Low revenues, resulting in diminished profits High revenues, resulting in potential customer relations problems These risks can be minimized through procurement of high-quality meters and a strong program for maintaining them. In general, modern DES meter water flow using high quality meters that are very accurate. The electromagnetic flow meter (or magmeter) is a high quality meter. Magmeters have low pressure drops, good rangeability and accuracy, while requiring very little maintenance. All thermal energy meters should comply with the Canadian Standards Association (CSA) heat metering standard (CSA C.900), as may be amended or replaced from time to time. This is an adaptation of European Standard EN1434 with Canadian deviations. Reduced Building Occupancy or Conservation Measures There are risks of reduced revenues due to reduced occupancy or implementation of energy conservation measures in customer buildings. The extent of this risk depends on the rate structure. A One-part rate (as discussed earlier under Contracts and Pricing, e.g. a price per MWh) exposes the DES to a variety of risks, including revenue reduction resulting from low occupancy rates or energy conservation measures. A Two-part rate can reduce or eliminate these risks, depending on the specific rate structure and its relationship to costs. Building Shut-Down There are also risks of reduced revenues due to shut-down or demolition of customer buildings. These risks can be minimized through contractual provisions requiring recovery of the cost of connecting the building and other fixed costs which are unrecovered at the time of the shutdown or demolition. General Cost Risks As with any business, there are risks of inflation in operating costs. These risks can be minimized through escalation provisions in the customer contract. Rates typically consist of various components which are either adjusted with fluctuations in the actual cost or by a standard inflation index. Each rate component and escalation provision would be set by contract. Fixed operation and maintenance costs would be escalated by inflation while fuel and other variable costs would be adjusted based on actual cost. Under the commonly used Two-part rate the fixed operation, maintenance and administration costs and the fixed amortization costs may be combined and all escalated by inflation. 57
TRCA Pearson Eco-Business Zone District Energy Feasibility Study 10 April 2012 General Credit Risks As with other energy service business, there are customer credit risks, which can be minimized through the customer contract provisions allowing service termination for non-payment, the posting of bonds or payment of deposits. Rate of Growth The principal concern with rate of growth of a DES is that it could be too slow to attain revenue targets and thereby achieve adequate return on the front-loaded investment. This risk is mitigated by careful design and marketing as outlined previously. Growing too fast would not generally be a problem with DE, except in the specific circumstance discussed briefly in the next few paragraphs. Generally system growth should be in response to specific customer contracts and not undertaken unless sufficient capacity can be economically provided to meet the new demand. It may be a problem to finance the capital required for system growth as fast as some prospective customers might desire. An instance of this may occur if a potential customer has a time-sensitive demand, e.g. either new building construction or an existing building that urgently needs to replace heating or cooling capacity. Difficult decisions may be needed if the incremental capacity would trigger expansion of the generation or distribution assets. Required capital investment would have to be weighed against not only the expected revenue from the potential immediate new customer(s) but also additional revenue possibilities that may be opened up by expansion. But the DES normally has no obligation to serve. Therefore, these decisions can be made freely according to management’s determination of what would be in best interests of all concerned. In these cases, senior government funding assistance may be available, e.g. through the Federation of Canadian Municipalities, for the purpose of expanding a DES to serve new customers. Stability of Customer Base The customer base of a DES is usually stable. With few exceptions, DE customers stay connected for the remainder of the building life. If they were new buildings to begin with they would not have made provision for on-site heating and cooling generation and retrofit would be difficult. Even if the buildings originally had onsite equipment, they may have been removed and the space used for some other purpose. This is not to say that a DE company can be complacent in its customer relations. On the contrary, proactive engagement of customers to ensure their on-going satisfaction is a hallmark of successful DES and an important part of the marketing mix for attraction of new customers. Control of Rates The ability to control rates is a key risk for a DES. DE is not a monopoly service and is usually and ideally, based on contracts voluntarily entered into between equals. Customers tend to be a few owners of large buildings, in contrast to many gas and electric utility customers who may be small residential customers with little bargaining power. The dynamics of DE price setting are such that prices are usually agreed in individual 20 year contracts, with defined escalation, on a one-to-one basis between the DES and individual customers prior to their commencement of service dates (which are usually not all coincidental). 58
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