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 This dynamic does not lend itself efficiently to applications for rate revisions, e.g. to a provincial authority, which are more suitable for monopolies and rate applications that will affect many customers, most of whom have low bargaining power. In Canada, as far as we are aware, the only provincial rate regulator with jurisdiction over DE is the B.C. Utilities Commission. Even in BC, city owned utilities are self-regulated. There are a few cases known to FVB where DE companies have lost control of rates, e.g. where a customer or customers have significant local political influence. The results include inequitable treatment of other customers and a weakened financial position for the DE provider leading to little or no expansion and therefore sub-optimal achievement of associated community goals such as energy self-sufficiency, sustainability and economic development. One approach that can reduce this risk would be to establish a corporate governance structure for the DES early in the development process (i.e. ideally prior to the need to negotiate customer contracts). This would provide management with legal rights to support the decisions that the business needs to make, specifically buying and selling of energy, and price setting. Creating such a corporate structure allows for the development of a financially healthy DES. Energy Commodity Prices Energy commodity prices are usually of the utmost concern to a DE company from the perspectives of both input costs and customer avoided costs (which affect revenue possibilities). Over the 20 year life of a typical DE customer contract, both the input energy costs and the avoided customer energy commodity costs may be the largest components of system costs on one side and revenue on the other. These costs are unpredictable and can be volatile. The most commonly used and effective energy commodity price risk mitigation measure is to adopt a price formula that “passes through” input energy costs to the customers. In many cases, the customers will still enjoy some mitigation of commodity risk because the DES is more efficient, using less energy to provide the required thermal energy needed for heating and/or cooling. As discussed in the section on Contracts and Pricing, a Two Part Rate, consisting of a Capacity Charge and an Energy Charge, with the Energy Charge tied to input commodity costs, will protect the DE Company from commodity risk. The other major commodity price risk mitigation strategy is to invest in more efficient and renewable energy technologies that minimize dependence on energy commodities. This is something that a DES can do on behalf of a whole community more effectively than could individual building owners due to economies of scale and site issues. For natural gas, commodity price risk mitigation together with many other factors relating to minimization of delivery and storage costs would be managed better by a DES to the extent that economies of scale warrant more management attention, including employment of gas consultants. For electricity, there is usually less scope for supply management but sometimes scope for demand management. Again, the economies of scale of a district wide system may better justify demand management systems. 59
TRCA Pearson Eco-Business Zone District Energy Feasibility Study 10 April 2012 Risks Measures to Control Risks Failure of any of the participants whose commitments are relied upon to perform – (sponsors, contractors, suppliers, customers, insurers, guarantors) Performance bonds, letters of credit per requirements Involvement of experienced, competent participants in their respective fields, and, possibly, turn-key supply/design/build for power or combined heat and power island) Credit worthy customers (government owned buildings are considered to have high creditworthiness) Closure of the Energy Source Contractual protection in energy purchase agreement Table 16 Summary of Operations Business Risks 7.2 Risk Summary The matrix shown in Table 18 presents the relative impacts of each of nine risk categories. . Risk Categories Financial Impact Operational Impact Customer Impact Planning High Low Low Marketing High Low Low Contracts and Pricing Medium Low Medium Safety Low Medium Low Environmental Low Medium Low Other CHP Related Medium Medium Low Design Medium High High Construction High Low Low Operations Medium High High Table 17 Matrix Comparing Risk Severity Assessment of Relative Risk Severity In any type of commercial utility DES, the market risk is usually one of the most important hazards to be managed. This arises from realities in this industry. The first is that revenue is absolutely intrinsic. Without a credible projection of sufficient revenue the project will not proceed. If it does proceed and revenue proves to be inadequate there will be insufficient return on investment The second reality is the high front ended nature of the investment. Once this money is spent, the economics would be adversely affected should revenue-generating load fail to be realized. 60
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