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The addition of a revenue stream that flows from avoided carbon emissions ought to improve the
economic case for many low-carbon projects in the developing world. But how much impact has the
main carbon finance vehicle - the Kyoto Clean Development Mechanism - had so far on proposed
cogeneration schemes? Julie McLaughlin, Pieter-Johannes Steenbergen, Juan Carlos Parreño and
Bodhi Datta find out.
The Clean Development Mechanism (CDM) is one of the three flexible mechanisms of the Kyoto
Protocol and allows for the purchase of Certified Emission Reductions (CERs) by industrialized
nations from sustainable development projects in developing nations (for example projects
concerning renewable energy and energy efficiency) as a means of complying with domestic
emission limits. In addition, CDM projects can be used for compliance under the European Union
Emissions Trading Scheme (EU ETS). The European Parliament approved the scheme in 2003 to
prepare European nations for the entry into force of the Kyoto Protocol. Key European industries
(for example electricity generation, pulp and paper, ferrous and non-ferrous metals, and cement) are
forced to comply with their emission limits.
This article describes how CDM can uplift cogeneration project development because of this
demand for CDM projects under the Kyoto Protocol and EU ETS. First we provide some
background on CDM and the whole process cycle from design to commercializing issued CERs.
Then we provide some financing models to ensure project developers can benefit from CDM. The
current market outlook provides a perspective on what we might expect for the future, so we close
our discussion by looking at potential opportunities for cogeneration CDM project development.
What is the CDM?
The CDM is a mechanism that allows an industrialized nation listed in Annex I of the United
Nations Framework Convention on Climate Change to buy emission reductions which arise from
sustainable development projects that are in non-Annex I (developing) nations (see Figure 1). The
carbon credits that are generated by a CDM project are termed CERs, expressed in tonnes of CO 2
equivalent (tCO2e).
The number of project finance deals in the Remewable Energy sector is growing more rapidly than ever,
Richard Stuebi explains why:
Structured energy project finance has been relatively commonplace in supporting the development of new
energy facilities over the past 20 years. Central to the concept of project finance is disaggregating risk
and parceling it out to specific parties who can accept that risk. As a result, project finance works great
for the 30th or 40th deal of the exact same type, but it is typically very hard to use project finance
approaches for funding the development of facilities using innovative technologies or commercial
arrangements.
Accordingly, project finance has historically been somewhat problematic for renewable energy interests
to procure. Financiers central to structuring the deal were either unfamiliar or uncomfortable with the
risks posed by renewable energy technologies, most of which have not been in commercial operation for
decades. This lack of project finance capacity has thus been a major barrier to the widespread deployment
of otherwise viable renewable energy technologies in commercial-scale projects.
The good news is that project finance capacity is increasingly opening its doors to renewable energy
opportunities. Financial professionals with deep knowledge of the true abilities of renewable energy are
finally beginning to amass capital to deploy in sponsoring the development of renewable energy projects.
Advisory services for the Renewable Energy sector
Our renewable energy group provides M&A transaction support, due diligence, project and structured
finance advice to project sponsors, bidders, investors and borrowers.
Our team has experience of all major renewable energy technologies employed in Europe, the US and the
Pacific region, and has advised on projects with a value in excess of US$1 billion. Backed by a global
network of professionals with experience in renewable energy and sustainable development schemes
operating in more than 30 countries around the world, we are able to offer a fully integrated service to our
clients.
Each project is run by an experienced director who selects the best team for our client's project based on
their blend of skills and experience. By drawing on our international network, we can bring a global
perspective to a project, while retaining a strong regional focus.
We recognize that projects require strong financial advice to deliver appropriate, economically viable
structures that meet stakeholder needs. On all of our projects, our approach relies on financial experience
backed by strong sector knowledge and a proven track record.
Carbon credits finance renewable energy project in Bulgaria
18 September 2007
The EBRD, through its Netherlands Emissions Reduction Co-operation Fund, is purchasing carbon credits from a
hydro power project in Bulgaria that will help significantly reduce Greenhouse Gas (GHG) emissions.
The project envisages the establishment of nine small hydro power plants along the river Iskar, about 40 km north
of Sofia, with the aim to cut 336,462 tonnes of CO2 by replacing electricity generated by fossil fuels with hydro
power electricity, a renewable, zero-emission source of energy. The hydro plants will be built, owned and operated
by Vez Svoge, a company 90 percent owned by a subsidiary of Petrolvilla & Bortolotti, an Italian provider of energy
and energy-related services, and 10 percent by the municipality of Svoge.
The carbon credit sale is in accordance with the 1997 Kyoto Protocol, an international treaty to reduce GHGs that
came into force on 16 February 2005*. The Kyoto Protocol covers six GHGs, including carbon dioxide as the main
contributor to worldwide GHG emissions.
Carbon credits are created when a project reduces or avoids the emission of GHGs when compared to what would
have been emitted without its implementation. The Kyoto Protocol has created a market in which companies and
governments that reduce GHG levels can either use such reductions for compliance or sell the ensuing carbon
credits.
Jacquelin Ligot, EBRD Director for Energy Efficiency & Climate Change, said that by purchasing carbon credits
from this project, the EBRD managed Netherlands Emissions Reduction Co-operation Fund is helping Bulgaria
diversifying its fuel mix. The sale of carbon credits provides an additional incentive that renders such projects
viable, Mr Ligot said.
The GHG emission reductions will be verified by an independent entity to ensure that the emission reductions
claimed have actually been realised. The Government of Bulgaria will then transfer these credits to the account of
the Netherlands. The Netherlands has agreed to cut its 1990 GHG emissions by 6%, which translates into a
reduction target of 200 million tonnes by 2012.
To date, the EBRD, on behalf of the Dutch Fund, has signed three carbon credit projects in Bulgaria, which are
expected to generate 1.7 m carbon credits. These projects include the switch to biomass energy at the Paper
Factory Stambolijski, an energy efficiency investment programme at Svilocell and a portfolio of energy efficiency
and renewable energy projects with bank UBB.
As the Dutch Fund is nearly fully invested new carbon projects in Bulgaria will be developed under the Multilateral
Carbon Credit Fund (“MCCF”), a joint EBRD-EIB initiative which facilitates the purchase of carbon credits from
projects across the high energy intensity countries of central and eastern Europe and the Commonwealth of
Independent States. Typical projects will include industrial energy efficiency, fuel-switch, renewable energy (for
example, biomass, wind and mini-hydro) and landfill gas extraction and utilisation projects.
The EBRD is the largest investor in Bulgaria with more than EUR 1.3 billion committed to projects across the
country. Working with its many partners, the Bank has mobilised more than EUR 5.4 billion for projects in Bulgaria.
* The Protocol requires 36 industrialised countries and countries undergoing the process of transition to a market
economy to reduce GHGs by at least 5 percent below 1990 levels between 2008 and 2012.
Biomass to cogeneration
02-SEP-2005
THE ISSUES
In the 1990s, following the passing of New Zealand’s Resource Management Act, the Ministry of Agriculture
and Fisheries stopped promoting effluent ponds. It now recommends disposing of diluted effluent by spray
irrigation of open pasture, sometimes after storage in an effluent pond if conditions are not suitable for daily
dispersal. Problems with this solution include the contamination of groundwater, leaching of nutrients from the
soil, delay in grazing, and unpleasant odours. In some situations, spray irrigation is impractical or constrained
by soil type. This means that ponds must be used, preferably those with an advanced design and function.
Dairy farming places a considerable load on the electricity grid once or twice
daily at peak times
Dairy farming also requires large quantities of water each day to keep the dairy shed and environs clean, and
cold water is needed to pre-cool the milk in an amount estimated at 50 litres per cow per day. Groundwater is
first used to pre-cool the milk and then held for the shed hosing operations.
Dairy farming also places a considerable load on the electricity grid once or twice daily at peak times, although
twice-daily milking is losing favour to once-daily. New Zealand cows produce more than 3,500 litres of milk
each per year, requiring 116 kWh per head of electricity for harvesting and processing. Some 60% of this
power is used to heat water and to chill the milk, in roughly equal amounts, while 40% is used to power the
milking system, to pump water and effluent, and to provide lighting, etc.
Milk is not always collected daily and must be kept chilled below 7°C. More than 80% of dairy farms have
refrigerated vats. Some water can be pre-heated by recycling the heat removed from the milk. Simple heat
exchangers, such as plate coolers, are used to cool the milk before it enters the refrigerated vats.
Simple measures such as insulating the milk vats, recycling hot water and using non-peak electricity to heat
water may help a farm’s profitability. However, an integrated energy system could save more energy costs and
reduce demand on the electricity grid while conserving water and reducing the odour and other environmental
problems of effluent disposal. Figure 1 shows the operation of one solution, under development by Natural
Systems Ltd, called BioGenCool.
WINNING TEAM
In its New Spirit Challenge competition, the Institute of Electrical Engineers in the UK recognizes individuals
worldwide whom it judges to be making an innovative contribution to sustainability. The author had a winning
entry in the 2003 competition that outlined an integrated energy system to use dairy-shed wastes to
cogenerate the heat and electricity needed to cool milk and provide hot water. The system combines three
core technologies for which a patent filing has been made.
First, an anaerobic biodigester to convert the manure waste into biogas and biosolids. Secondly, a
cogeneration technology, for example a Stirling genset, to use the biogas as a fuel to produce on-site power
and heat. Thirdly, a cold-storage medium, such as an ice bank, with a capacity to cool the milk from cow body
heat down to the required safe milk-storage temperature.
BIODIGESTER
The dairy-shed wastes are fed into a biodigester system in which they will be converted into biogas in a
process analogous to that occurring in the rumen (the first stomach of a cow) in which organic matter is broken
down anaerobically by mixed microbial populations. A biodigester is essentially a heated tank into which the
manure and water slurry is directed. Oxygen is excluded to allow anaerobic bacteria to liquefy the volatile
organic compounds in the mixture and then convert the resulting simple organic acids into a methane-rich
biogas. Anaerobic conditions allow methane-producing bacteria to flourish while inhibiting those that produce
foul odours. The undigested solid residue has not lost any nutrient value and is suitable for storage followed by
land application, or for sale as compost or soil conditioner. The supernatant liquor is generally pathogen free
and can be used for pasture irrigation without the drawbacks associated with raw effluent dispersal.
Anaerobic digestion does not significantly reduce waste volume, so the same amount of waste that enters the
biodigester leaves it each day. The entry pipe can be closed to prevent detergents, medications and other
contaminants entering the biodigester. The biodigester is usually heated to provide optimal conditions for
bacterial growth, and maintained at pH 6.6 to 7.6. A proportion of the heat output of the cogeneration unit is fed
to the biodigester to maintain optimum thermal conditions.
An integrated energy system could save energy and reduce demand on the
grid
The biodigester design will need to be standardized to minimise production costs, although some site
engineering will be required. A two-stage design is being considered with the ability to keep the biodigester
activity alive year-round, even when some farms’ herds are in the period when milk production ceases for a
time, usually over winter. This way, the dairy farmer can have biogas production at the start of the new milking
season and not suffer a delay in starting biodigester activity.
COGENERATION
Biogas is best suited for continuous stationary operation because of its low energy density (about 60% of that
of natural gas) and low level of corrosive contaminants, and the more or less constant production rate from the
biodigester. It is especially suited to fuelling a Stirling engine or appropriate fuel cell. Capital costs will most
likely dominate the choice of cogeneration plant, which today is more likely to be an internal combustion
engine and generator. However, generators driven by Stirling engines and ceramic or molten-carbonate fuel
cells that offer high efficiencies will be used once they become cost competitive.
Table 1. Estimated energy benefits for New Zealand of using integrated energy systems on dairy farms
New Zealand dairy herd statistics in 2003/04 Analysis of BioGenCool yield on a per-site basis
(www.lic.co.nz) (estimates from dairy energy evaluation modelb)
Herd Numbe Percentag Number Percentag Electricit Electricity Water Cooling Peak
size r of e of herds of cows e of cows y load generated (kWh heating energy Load
herds factor per year) electricity displaced Reductio
during displaced (kWh per n (kVA)
season (kWh per year)
(%) year)
10-
4312 33.8 623,399 16.2 0 0 0 0 0
200
200-
3662 28.7 879,065 22.8 58 16,800 3800 7200 6
300
300-
2042 16 687,786 17.8 80 23,100 3800 7800 8
400
400-
1083 8.5 475,342 12.4 93 26,900 3800 12,900 11
500
500-
625 4.9 336,024 8.8 100 28,900 3800 25,300 14
600
600-
384 3 244,387 6.4 75 43,600 6700 29,000 19
700
700-
227 1.8 167,182 4.4 83 48,000 6200 30,200 20
800
800-
140 1.1 117,023 3.0 90 51,900 6200 37,800 26
900
900-
91 0.7 84,627 2.2 96 "center">55,700 10,700 38,600 28
1000
1000+ 185 1.5 236,467 6.1 100 57,900 13,100 42,200 29
3,851,30
Total 12,751 100 100.1a National benefits: 358 GWh per year and 81 MVA
2
a
Rounding error
b
Model developed by Natural Systems
Using biogas in an internal combustion engine presents some problems. It must be of a sufficient energy value
and cleaned of corrosive contaminants. This will usually mean scrubbing out the carbon dioxide and hydrogen
sulphide content. This can be done chemically. For an internal combustion engine, the biogas will also need to
be compressed to give it a pressure suitable for induction. The compressor can be mechanically driven off the
cogeneration set.
An added advantage of having a cogeneration plant on the farm is that it can also be used in electricity supply
emergencies to allow milking to continue. With the large numbers in modern dairy herds in New Zealand (up to
1000 head), it is no longer possible to contemplate hand milking! At those times when the biogas is insufficient,
LPG back-up cylinders or LPG bulk supply tanks can be installed to maintain emergency generation facilities.
In the BioGenCool system the electrical output is mains synchronized and runs continuously to provide power
to the refrigeration unit used to provide the ‘cold storage battery’ for milk cooling. In general, no electricity is
exported to the grid, but a biodigester does offer the opportunity to add more biomaterial to increase the biogas
production and hence create surplus electricity.
Natural Systems has developed a full analytical model for New Zealand dairy farms so that the benefits of the
BioGenCool system can be quantified (see Table 1). Recent analysis of a 50-bail rotary dairy showed that 28%
of power is used for water heating, 26% for milk chilling, 9% for farm water supply, 9% for the variable-speed
vacuum pump, 9% for the wash-down pump, 4% for lighting, 2% for effluent pumping and 13% for other needs.
The model is sufficiently robust to enable it to be configured for dairy farming in other countries.
It is worth noting that over 50% of New Zealand herds have less than 300 cows, which suggests reduced
energy benefits of on-site cogeneration. However, application of BioGenCool offers significant benefits in terms
of reduced water use and reduced peak demand due to water pumping and chiller operation.
The integrated energy system’s estimated net electricity benefit to New
Zealand would be 358 GWh per year
The estimated net electricity benefit to New Zealand (assuming a 100% uptake) is 358 GWh per year, and
demand reduction of the order of 81 MVA during milking periods. This demand reduction would coincide with
network demand in the morning and mid- to late afternoon, although some (3–12 kVA) may already be reduced
because electricity network companies remotely switch off water heaters at peak load times by using ripple
control systems.
COOLING
Cows produce milk at a body heat of 37°C, which means it must be cooled rapidly to prevent spoilage by
microbial action. New Zealand standards are that the temperature must be reduced to 7°C or less within three
hours of entering the storage vat. Usually this is accomplished by using cold ground water from a bore through
a primary heat exchanger. This exchanger, which typically removes 60%–80% of the milk’s heat is used only
once and discarded (it is usually then stored and used for washing down the shed), greatly adding to the
volume of water used by a dairy farm.
Storage vats must keep the milk cool until it is collected by a tanker, which may not call every day. Milk tankers
are not refrigerated, so the milk must be cool enough when collected at the farm to withstand the trip to the
plant without losing its quality. A farmer is penalized if the milk quality is below standard.
A prototype 1 tonne ice bank has been designed by Thermocell Ltd of Christchurch. It incorporates stainless
steel, flat plates refrigerated by using the heat-pipe principle (see photograph opposite).
Ice banks and chilled water tanks are used on some dairy farms in New Zealand. Only 4% of dairy farms used
them in 1996, using mains electricity for power. Electricity generated by the cogeneration set in the
BioGenCool system will power the ice bank on a 24/7 basis to produce ice by running the refrigeration system
continuously at a capacity of 6 kW (cooling) or about 2 kW (electrical) per 300 cows. For small herds, this may
displace the bore water required for pre-cooling of milk.
In operation, the ice bank circulates water to the plate heat exchanger. The warmed water is passed back to
the ice bank while the cold milk is stored in a vat. More ice will melt to produce water at 0°C to be circulated to
the plate heat exchanger.
At the end of a milking, most if not all the ice will have been melted, and ice formation will continue to build until
the next milking session. It is estimated that by this means the refrigeration capacity will be reduced to one
sixth the normal size used to refrigerate a milk vat. Alternatively, a glycol system of cooling could be used,
although the equivalent fluid storage volume would be 10 times greater than for an ice bank.
HEAT
Hot water will be produced for washing use in the dairy shed primarily from the cogeneration set,
supplemented by heat from the refrigeration plant and from any hot water solar collectors on the dairy-shed
roof. Some of that heat is used to maintain optimum thermal conditions in the biodigester system.
Alternatively, there is the possibility to use an absorption refrigeration plant fuelled directly by the biogas plant,
or to use a heat engine to mechanically drive compression refrigeration plant for ice making or glycol cooling.
ON-FARM TRIAL
The South Island Dairying Development Centre is in discussion with Natural Systems to trial the system at its
650-cow demonstration farm at Lincoln University near Christchurch. Detailed design work, once approved, will
begin in the third quarter of this year, with the expectation of it being installed half-way through the southern
hemisphere milking season. A demonstration of the system will be a precursor to the commercialization phase.
Dairy farming is increasing throughout South Island, where some electricity network companies experience
summer peaks that are much higher than winter peaks because of intensive irrigation and milking operations. A
system such as BioGenCool has many features that make it attractive to these rural network companies.
In summary, the BioGenCool system encapsulates the sustainable practice and sensible application of using
an on-site biowaste as a fuel resource for cogeneration, sized to the specific needs of the production taking
place, i.e. milking and storage of milk. BioGenCool has other possible applications, particularly for developing
economies in which a mains supply of electricity is poor or non-existent and where a food product is being
processed, for example fish farming, or fruit or vegetable preparation.
Ian Bywater is an independent energy consultant and a director of Natural Systems Ltd, Christchurch, New
Zealand. Fax: +64 33 65 41 46
e-mail: bywateri@woosh.co.nz
This article is based on an article by Claire Le Couteur, published in 2004 in the magazine of the Institution of
Professional Engineers of New Zealand.
How to maximize availability
02-NOV-2005
Figure 1. The goals that a gas turbine operator and maintenance provider strive for
The inherent design of a gas turbine is naturally a major factor in how reliably it performs in service, but of at
least equal importance is how the equipment is looked after, or maintained, while it is in service. Having
invested a large amount of capital in a gas turbine power plant with all its ancillary equipment, the owner will
want to maximize the return on that investment by having that power plant running at a high level of reliability
while keeping running costs to a minimum.
The power advantages of a gas turbine over, for example, a like-sized diesel engine are offset to some extent
by its need for routine maintenance and its relatively high servicing costs. Gas turbines do not forgive poor
maintenance. It will cause them to stop functioning soon. The repair costs of a poorly maintained turbine can
be frightening, to say nothing of the disruption to the owner’s operation. If a satisfactory balance between
maintenance and cost can be found, then extraordinary reliability is achievable while preserving the owner’s
profitability, as Figure 1 shows. But how is this maintenance carried out, and what maintenance philosophies
exist?
A gas turbine’s power advantages are offset to some extent by its need for
routine maintenance and its high servicing costs
The owner of a gas turbine power plant is not generally in the business of gas turbines so has neither the
ability nor desire to perform the maintenance themselves. Even though some car owners prefer to service their
cars themselves, the majority prefer to leave the job to a specialist. Yet if a car were bought for many millions
of dollars, it is extremely unlikely that an owner would be carrying out the maintenance and servicing!
The car analogy falters when considering that driving a car can be a pleasure in itself. Operating an industrial
gas turbine is not done for pleasure; it is a means to an end. The power that a gas turbine produces allows the
owner-operator to carry on with its core business, be that automobile manufacture, chemical processing or
foodstuff extraction.
Table 1. A typical gas turbine maintenance schedule
Interval Action
Every 4000 running hours Inspection of gas generator inlet
(engine remains installed)
Removal of low-pressure compressor casings to permit
inspection of compressor stator and rotor
Borescope inspection of high-pressure compressor,
combustion section, turbines and integrity features
Inspection of oil filters and chip detectors
Inspection of engine’s exterior
Every 50,000 running hours Full overhaul and reconditioning of complete engine to
(engine removed) return to an ‘as new’ standard
Maintenance, repair and overhaul (MRO) service providers, such as Volvo Aero, take on the challenge of
maintaining gas turbines so that customers can focus on their core business. The more risk that a customer
passes to its MRO service provider, the greater its peace of mind.
MAINTENANCE REQUIREMENTS
There are intrinsic maintenance requirements for any gas turbine. Dynamic and static parts in any machine do
not last forever and will ultimately fail. Being able to predict failures and take the necessary action to prevent
them is the basis of any maintenance philosophy. Thermal fatigue, cyclic fatigue, mechanical stress, erosion,
corrosion and contamination are some common reasons necessitating an intervention to allow either
assessment of damage (and hence remaining-life potential) or correction of defective components or both
actions. The design and development testing of a new gas turbine defines initially how often and to what extent
these interventions ought to take place. Service experience and observations made during the interventions
further modifies the maintenance schedule.
Being able to predict failures and take action to prevent them is the basis of
any maintenance philosophy
There are almost as many maintenance schedules as there are types of gas turbine. However, for the
purposes of this article, a notional schedule for an aero-derivative gas turbine is shown in Table 1. Note that if
any of the scheduled inspections reveal a defect, corrective action will be taken or an assessment made on
whether the turbine can continue running safely until the next exposure of the defective part.
Figure 2. Simplified flowchart of a gas turbine overhaul process
In terms of expense, the full overhaul, in this example at 50,000 running hours, is by far the dominating event
in an engine’s life cycle. During an overhaul, the turbine is stripped down to piece parts, cleaned and inspected
before re-assembly and acceptance test, as Figure 2 shows. A technical decision is made on each inspected
part. This leads to its being:
• acceptable for continued use
• not acceptable for continued use but within limits for repair
• not acceptable for continued use and not repairable, in other words ready to be scrapped.
A logistical evaluation is then made on unacceptable parts to:
• replace them with new parts
• repair them (if feasible) and re-use them
• replace them with used parts that have sufficient remaining life.
Material costs make up the largest part of the total cost for an overhaul, so these logistical decisions have a
great bearing on offer price and profitability.
There are various maintenance agreements that can exist between a customer and an MRO service provider:
• Time and material (or call-out) agreement. Here, the customer pays for exactly the amount of time and
material used for a specific maintenance action at a separately agreed rate per hour and parts price
list.
• Event-based agreement. Here, fixed prices are agreed in advance for specific maintenance activities:
4000-hour inspection, 8000-hour inspection, even full overhaul. The cost for replacement material can
be included or excluded.
• Long-term service agreement (LTSA). This is a form of partnership between the customer and supplier
in which a fixed fee per running hour or calendar period is paid throughout a complete life cycle. No
separate charges are made for specific maintenance activities.
An LM1600 gas turbine undergoes overhaul at the Volvo Aero Corporation in Trollhättan, Sweden
Figure 3. Risk share between owner and maintenance provider for differing levels of maintenance
contract
Figure 3 shows that much risk is transferred to the service provider when level 2 or level 3 LTSAs are in place.
These are an industrial engine equivalent of the all-inclusive rate-perflying- hour aero engine agreements
popular with airlines that are looking for a stable cash flow. These LTSAs let the customer know precisely what
their financial outgoings will be during an engine’s life cycle, irrespective of any breakdowns and unplanned
maintenance. The service provider uses their experience and forecasting to assess and provide for a likely
amount of unscheduled maintenance during an engine’s life cycle. This provides an incentive to maximize
reliability so that both the supplier and customer share a common goal.
PRACTICAL SOLUTIONS
Regular checks of gas turbine operating parameters are vital to health monitoring and failure prediction
There is an increasing trend for gas turbine users to seek a single service provider for maintenance of not just
their gas turbine but also the related gearboxes, alternators, control systems, valves, fire and gas protection
equipment, heat exchangers and so on. Having a single point of contact for customers to turn to, whatever the
problem, reduces administration time and expense for the customer. This has led to the emergence of the so-
called multi-service provider, which bundles support options into packages. Volvo Aero, for example, is a multi-
service provider although its core business is design, manufacture and maintenance of aerospace and
industrial engines. For related services, a network of specialist subsuppliers is used. Volvo Aero then has the
responsibility to call on these sub-suppliers as required. Many gas turbine operators are running their power
plants around the clock and depend wholly on the power and heat produced for their own production lines.
Therefore, having a maintenance contract with a guaranteed level of availability is often an attractive option.
Living up to that availability guarantee is something the maintenance provider has to plan carefully for.
Having a field service engineering team close to the customer’s site is one of the most important success
factors in achieving a high level of availability. The ability to have an engineer on-site to diagnose and rectify
technical problems at short notice is crucial when the difference between achieving and failing an availability
guarantee is a matter of a few hours. An infrastructure must exist to ensure that the maintenance provider
learns quickly of any problems that arise and has the means to act on them.
The conventional 24-hour hotline between the customer and supplier can be enhanced by remote monitoring
equipment that allows the maintenance provider to check in real time on a number of power plant parameters
from a remote terminal or PC. Self-diagnosis software and the ability to modify control systems from afar is
another time-saving step. The more accurate the fault-diagnosis, the more chance a field service engineer has
of being able to rectify problems quickly. Tooling and spare parts also need to be available off-the-shelf. This
ties up an amount of capital. If technical problems arise that are not possible or too time consuming to rectify
on-site, the entire gas turbine is replaced to allow the customer’s production to continue while those problems
are dealt with off-site.
Thankfully, it is rare for gas turbines to fail spontaneously. There are nearly always some warning signs that
enable an turbine’s ultimate failure to function to be predicted. Trend monitoring is hence an important part of a
maintenance provider’s work. A number of parameters are monitored over time: oil consumption, oil-borne
contaminants, temperature and speed for a given power rating, specific fuel consumption, exhaust emissions,
vibration levels and the amounts of wear identified during scheduled borescope inspections, among others.
These are all indicators of a gas turbine’s health at any given point in time. Being able to interpret and assess
these parameters and take the appropriate action, if deemed necessary, is a key factor in how reliable (and
thus available) an individual gas turbine will be.
It is rare for gas turbines to fail spontaneously. There are nearly always some
warning signs
Planning maintenance interventions to coincide with scheduled plant shutdowns is a simple way of improving
availability. If a plant is not in use at weekends or overnight, for example, it is logical to perform maintenance
actions during these periods rather than interrupting production with a requirement for maintenance. This
requires a close liaison between customer and maintenance provider to schedule work to the best of both
parties’ interests.
REDUCING COSTS
We have seen that, with level 2 and 3 LTSAs, there is a financial incentive for the maintenance provider to
attain as high a level of availability as possible for the gas turbine in question. Therefore, the extra costs of
performing some work beyond a minimum work scope during maintenance activities can be justified. In the
notional maintenance schedule in Table 1, the refurbishment of the lowpressure compressor assembly is not
an obligatory action and the gas turbine would surely continue to run for a period were this refurbishment not to
be performed. However, the risk of a subsequent unplanned maintenance intervention to rectify a worn
compressor assembly, with the possibility of consequential damage elsewhere, is deemed as high enough to
warrant this non-obligatory additional work to be done, thus ensuring dependable service.
With the costs of replacement material making up a high proportion of the total cost of operating a gas turbine,
the ability to repair worn and damaged parts rather than replacing them with new is a key factor in reducing
costs. Successful maintenance providers focus on the development of repair schemes to salvage parts within
the bounds of technical and economic viability. Many companies, large and small, offer specialized repair
services such as:
• shot peening to improve wear resistance
• nickel and chrome plating to restore worn surfaces
• plasma spray to restore sealing features
• welding and brazing of fabricated components
• heat treatment to restore material properties
• thermal barrier coatings to improve heat resistance.
Many of the above principles have been applied at a 15 MW gas turbine cogen plant at Heathrow Airport near
London, UK, operated by Thames Valley Power, which signed an LTSA with the Volvo Aero Corporation in
2003. Before the implementation of an LTSA, an annual availability of some 84% was being achieved at the
plant. During the year to July 2005, the plant availability was 99.4%. This is living proof that a smart
maintenance philosophy with close liaison between customer and supplier gives results.
99.4% availability provides living proof that close liaison between customer
and supplier gives results
Volvo Aero is succeeding similarly on several maintenance agreements elsewhere while remembering that a
maintenance philosophy is never complete but forever being fine-tuned in the quest to balance cost, risk and
availability.
Even today, the gas turbine is not a completely mature product. Its future potential to produce more power by
running faster and hotter – while running quieter, more fuel efficiently and with less impact on the environment
– remains large as material and technological advances continue to be made. In parallel, maintenance
philosophies will also have to advance to keep up with the demands for reducing operating costs and
improving reliability.
Simon Raymond is Marketing and Sales Manager with Engine Services at the Volvo Aero Corporation,
Trollhättan, Sweden, a maintenance provider for industrial gas turbines rated at up to 15 MW.
A new approach to financing - from mini-hydro projects to a portfolio
approach to distributed generation opportunities
Sandeep Kohli
Lower than average rainfall patterns recently mean that Sri Lanka can no longer rely on its hydroelectricity
schemes for power supplies, not even the decentralized, mini-hydro schemes built recently. Moves are being
made to find ways to expand financing models to include other distributed generation technologies such as
CHP - as Sandeep Kohli reports.
Sri Lanka, a tear-drop shaped island in the Indian Ocean, has been different things to different people - a
tropical paradise, a spice island, a leading tea producer, and more recently, a place where renewable energy
has built some serious inroads. The island nation has over 2500 MW of built capacity; half of it being large
hydro units, while the other half consists of diesel-based generation. There is, however, another piece of this
story: about 100 MW of mini-hydro capacity in operation, with an additional 100-150 MW under planning.
Decentralized energy projects in developing countries present their own unique financing challenges, some
flowing from unfavourable national energy policies and the lack of suitable business models. Here, Sandeep
Tandon describes project financing experience of USAID to support bagasse-fuelled cogeneration, and
discusses opportunities for rural energy projects in developing countries.
Two developments in recent years have started exerting a pincer-like grip on the global economy: first, the
broad recognition of climate change as a growing threat to all countries, and second, the surge in demand for
fossil fuels among strong as well as growing economies. The former has compelled countries to develop
action plans to mitigate the effects of climate change by reducing the emission of greenhouse gases. The
latter has given rise to increases in the prices of fossil fuels (both oil and gas) due to a widening gap between
supply and demand, especially in growing economies.
Garbage in, energy out - landfill gas opportunities for CHP projects
Brian Guzzone
Mark Schlagenhauf
The LFGcost comparison assumed a 6.4 km pipeline between the landfill and thermal host. In addition, the
waste heat application was assumed to be 160 metres from the engine. It also assumed that both projects
operate year-round.
LMOP also compared the environmental benefit of displacing conventional electricity generation and, for the
CHP project, the additional displacement of a thermal energy demand fired by natural gas.
As shown in Table 1, CHP LFGE project financials can be as much as 100% better than a traditional engine
generator project using LFG.
These LFGcost analyses are preliminary estimates and should be used for general guidance only. Projects
for specific landfills require unique design modifications and may add to the cost predicted by LFGcost. A
detailed final feasibility assessment should be conducted by a qualified LFG professional prior to preparing a
system design, initiating construction, purchasing materials or entering into agreements to provide or
purchase energy from an LFGE project.
Using the heat and power output
Potential LFG users may not have considered the benefits of LFGE for several reasons. First, it is not a
common fuel. The end user may be concerned about its reliability or may believe their process requires
commercial fuels and energy systems.
Users must also determine how their energy demand corresponds with the relatively stable LFG production
rate from a nearby landfill. If an industry’s energy demand is seasonal, CHP applications provide an
opportunity to balance LFG use between electricity and other energy demands. Natural gas can be blended
with LFG or other auxiliary fuels to add energy if necessary during peak periods. Operating risk can be
minimized through power purchase agreements (PPAs) that tie LFG costs to the price of the commercial gas
supply.
Financing can pose a barrier to LFGE projects due to high upfront capital costs or competition with low
electricity prices in some markets. The collection system, pipeline and project investment can be significant
for a landfill that has not yet developed a gas management system. But an end user interested in green
power can offset some of the financial risk with long-term agreements that provide steady future revenue for
the landfill and continuing energy cost savings for the user.
Another potential source of funding for CHP LFGE projects is through the sale of carbon credits on a carbon
market. These credits are generated as a direct result of the collection and destruction of methane and as
offsets from using a renewable energy source to generate electricity.
The Lancaster County Solid Waste Management Authority (USA) in Pennsylvania, mentioned in the case
study above, has sold some of the carbon credits from its CHP LFGE project on the Chicago Climate
Exchange (CCX). CCX is a voluntary, but legally binding, greenhouse gas reduction and trading programme
in North America which verifies the CO2e reductions from renewable projects and creates so-called carbon
financial instruments that can be sold to other CCX members.
Project development challenges
One important issue for project development in many developing countries is that open dumps and
unmanaged landfills are the predominant disposal options. These sites can be less than optimal candidates
for LFG energy development and, to CHP projects especially, can be a challenge because they produce
small amounts of methane (resulting from aerobic degradation and rapid waste decomposition). Also, the
industries that would benefit from CHP may be limited. On-site CHP LFG is limited due to low demand for hot
water or steam at a landfill. However, many developing countries are transitioning to engineered landfills from
more uncontrolled systems. Landfills will provide a more environmentally sound disposal option for these
countries, but they will also produce more methane. The Methane to Markets Partnership can help facilitate a
transition to landfilling by sharing information on effective landfill design and management, and how to
integrate landfill methane capture and beneficial use into these planning processes.
Another important issue for the viability of LFGE projects in both developing and developed countries is
energy price structure. Government policies on energy and solid waste management can promote or hinder
the beneficial use of LFG. An uncertain regulatory environment is often a concern among potential investors.
For example, project developers can be subject to different and sometimes conflicting laws at the local,
regional and national levels. Moreover, a lack of regulations governing landfills and LFGE projects in some
countries (in other words, there being no requirement or incentive to collect and combust LFG) can inhibit
project development.
As countries begin to implement laws, regulations and policies to improve solid waste management
practices, promote alternative energy and address greenhouse gas emissions, the economic viability of
traditional LFGE and LFG CHP projects will improve. Moreover, creating an atmosphere where potential
investors (private sector investors, international development banks and financiers) are secure in the
technical and policy framework that supports LFGE projects will be essential to project development.
The Methane to Markets Partnership brings together the collective resources and expertise of the
international community to address technical and policy issues and facilitate LFGE projects. Early initiatives
will likely include:
• assisting with solid waste management capacity building
• identifying potential landfill resources
• performing initial gas generation and feasibility studies, including CHP applications.
Conclusion
LFGE projects, especially CHP projects, are becoming even better prospects in today’s escalating energy
market, which is acquiring a taste for local renewable power. LMOP and Methane to Markets are providing
support for the development of these projects, which produce more environmental benefits than a typical
LFGE electricity project and make more efficient use of the renewable LFG resource.
Today, only a few LFGE projects benefit from CHP design. However, LMOP and Methane to Markets are
working with more and more municipalities and businesses that are installing CHP LFGE projects in their
facilities to cut energy costs and reduce greenhouse gas emissions.
LFGE projects using CHP technology are win-win-win opportunities. They represent renewable energy
achievements that result in higher efficiency, environmental gains and an improved bottom line.
Brian Guzzone is Team Leader at the Landfill Methane Outreach Program at the US Environmental
Protection Agency, Washington, DC, US.
e-mail: guzzone.brian@epa.gov
Mark Schlagenhauf is the Global Oil and Gas Advisor at the Economic Growth, Agriculture, and Trade
Bureau of the US Agency for International Development, Washington, DC, US.
e-mail: mschlagenhauf@usaid.gov
The Methane to Markets Partnership centres on identifying landfill sites for methane recovery and on
promoting cost-effective electricity generation or direct use of the resource. Efforts include the identification of
barriers to project development, the improvement of enabling legal, regulatory and institutional conditions,
and the creation of efficient energy markets. The active involvement by private sector entities, financial
institutions and other non-governmental organizations is considered essential to build capacity, transfer
technology and promote private investment that will ensure the Partnership’s success.
The EPA Landfill Methane Outreach Program (LMOP) is a voluntary assistance programme that helps to
reduce methane emissions from landfills by encouraging the recovery and use of landfill gas as an energy
resource. LMOP forms partnerships with communities, landfill owners, utilities, power marketers, states,
project developers, tribes and non-profit organizations to overcome barriers to project development by
helping them assess project feasibility, find financing and market the benefits of project development to the
community.
EPA launched LMOP to encourage productive use of this resource as part of the United States’ commitment
to reduce greenhouse gas emissions under the United Nations Framework Convention on Climate Change.
The LMOP website (www.epa.gov/lmop) contains a variety of tools and services to assist stakeholders in
evaluating project potential, technical documents, case studies and funding opportunities.
This article is on-line: www.cospp.com
CHP LFGE case studies
WADE has a long history of planning timely and authoritative conferences, strategy meetings and events. If
you have an idea for an event related to decentralized energy that you would like to see organized WADE
can help make it a success.
Some of the events WADE is currently organizing are highlighted below. Please contact us if you require
more information or would like to participate
Bagasse-fuelled cogeneration in Kenya
01-SEP-2004
Kenya could generate 10% of its electricity needs from cogeneration plants fuelled with bagasse from
sugar cane. Bernard Osawa and David Yuko examine how this could be achieved, and describe the
benefits that such a move would have for cane farmers, local economies, electricity consumers and
the environment.
As in most sub-Saharan countries, biomass fuels, used mainly in households, constitute an estimated two-
thirds of Kenya's energy mix. Petroleum and grid electricity constitute the remaining third of the total energy
used in industrial, commercial and household sectors. Access to grid electricity for households currently stands
at a low 15.3% nationally and less than 2% in rural areas. Total installed grid-connected generation capacity is
1230 MW, dominated by hydropower at 56%, while thermal and geothermal contribute 32% and 10%
respectively. Consumption of electrical energy is dominated by the industrial sector at 63%, followed by
domestic and small-scale industrial at 33%, while consumption by rural electrification customers comprises
only 4% of the total demand.
Investment in the power sector has lagged behind growth in demand, with the effect of this situation being felt
throughout the Kenyan economy, largely in the form of lost production due to inadequate power supplies. The
principal challenges facing the power sector are to:
• ensure provision of reliable, efficient, and cost-effective power supplies
• increase the population's access to electricity as a means for stimulating income and employment
growth
• improve the efficiency of power distribution and supply through reductions in technical and non-
technical losses and collection of revenues
• strengthen the regulatory framework
Over the last decade, the intensity of commercial energy use has been on the decrease, indicating a decline in
economic growth. While the cost of, and accessibility to, energy for industry has been cited as the reason for
poor economic performance leading to a low demand for power (786 MW), it is believed that demand is
suppressed by the prevailing poor economic conditions, a cyclic situation. Historical average demand growth
rate over the past five years has been a low 1.4%.
Unlike other industries that only consume energy, the sugar industry
can generate surplus power over and above its internal requirements
While some of the job losses can be credited to increased mechanization in the farms, the bulk of the
reductions are attributable to poor economic performance of the sugar factories and increased competition
from cheap imports. The resulting poor sales of sugar from local factories impact negatively on payment to
farmers, hence the downward spiral. Additional revenues from power generation, and the improved efficiency
accompanying new investment, should help to revamp the industry.
DEVELOPMENT OF COGENERATION
Experience from Réunion, Mauritius, India, Brazil and Cuba confirms the practical potential for cogeneration in
Kenya, where it has hitherto been limited by the technology employed, financial and technical resources
availability, and legal and regulatory frameworks. In the case of the success story countries, the development
of cogeneration evolved along the well-established stages of own generation, intermittent power, continuous
power and firm generation. In Kenya, one sugar factory has the capacity for intermittent power supply, but has
been constrained by regulatory barriers. During the electricity crisis of 2000 this factory was able to sell power,
but was limited by the capacity of interconnecting transformers linking it to the grid.
It would seem natural for Kenya to avoid the intermediate steps and 'leapfrog' from own generation to firm
power supplies by learning from the experiences of Réunion, Mauritius and Brazil. Kenya has the advantage
that the crop season lasts an estimated 300 days a year, while the out-of-cane season is usually during the wet
season, coinciding with the duration of maximum hydro availability and making firm generation attractive.
Annual maintenance could be carried out during this period.
The power and process steam requirements in a sugar plant can be met in one of two ways:
Conventional cogeneration deploys a bagasse-fired boiler in conjunction with an extraction-condensing and/or
back-pressure steam turbine coupled to an electrical generator, or a double extraction-condensing turbine
coupled to an electrical generator. This is the predominant method currently used in Kenya with pressures of
20-25 bar and with resultant efficiencies of less than 10%. System efficiencies of up to 25% can be achieved
for steam pressures of 45-66 bar, permitting electricity exports of up to 100 kWh per tonne of cane crushed.
Plant performances of 110 kWh (82 bar) per tonne of cane crushed are operational in Réunion, Mauritius, India
and Brazil. This means that the process of generating more power from sugar factories for export to the grid is
essentially an efficiency upgrade exercise accompanied by a modernization and capacity improvement of
sugar mills.
Integrated gasification cogeneration with combined cycle (IGCC) uses an external gasifier to produce
combustible gases from the bagasse, which are then fired in a modified gas turbine. Hot exhaust gases are
passed through a waste heat recovery boiler for generating steam; some of the exhaust gas is used for drying
bagasse. Efficiencies achieved in the conversion of biomass to electrical energy can be as high as 37%. The
IGCC system is still largely in a stage of commercial infancy, with a few installations in Brazil.
COST IMPLICATIONS
For cogeneration plants, the investment costs vary with net export capacity, from $1.4 million/MW at the lower
pressures, through $1.8 million/MW mid-range to $3.1 million/MW at the top end. This compares with $1.1
million/MW for heavy fuel plants, $2.25 million/MW for geothermal and $2.5 million/MW for hydro power plants.
Thermal power plants have significant fuel costs that are passed directly to the consumers under current
tariffs.
Except for disparities arising from management performance, three out of the existing six factories in Kenya
have identical capacities of 125 tonnes of cane per hour (TCH), while a fourth with similar capacity currently
operates at 70% of the rated capacity. These four factories are in the league of 3000 tonnes of cane per day
(TCD) and have a planned expansion to 5000 TCD. A fifth factory operates at its full rated capacity of 350
TCH, producing more than half of the country's sugar. The sixth, with a similar capacity as the other four, is
currently under receivership with little signs of being re-opened. Consequent analysis hereinafter - see Table 1
- is therefore based on 5000 TCD capacity and can be adjusted for other volumes. Current operational
performance and the installed capacities will be limiting factors to cogeneration as the cane crushing process
is the source of fuel.
Table 1. Estimates of plant capital costs
Component Possible plant options
Boiler pressure (bar) 45 60 82
Recommended plant capacity (tonnes of cane per day) 5000 5000 5000
Boiler capacity (tonnes of steam per hour) 140 140 140
Bagasse feed rate (tonnes per hour) 58 62 70
Turbine capacity (MW) 25 30 50
Daily power generation, gross (MWh) 420 550 820
Equivalent capacity (MW) 18 24 40
Daily export power, net (MWh) 260 330 550
Equivalent export capacity (MW) 12.5 14 24
Total capital investment ($ million) 18 25 75
Estimated local component ($ million) 4 5 12
Estimated annual revenue from electricity ($ million) 4 5 8.3
Simple payback period (years) 4.5 5 8.8
This means that a 10% bagasse cogeneration contribution to the grid can be achieved by investing in
efficiency upgrades at the five operational sugar factories in Kenya. The total investment costs will vary
according to boiler pressures and efficiencies selected, and the power plant configurations at d
ifferent factories. These costs would typically range between $120 million at 60 bar and $230 million at 80 bar,
delivering an estimated 480 GWh with simple payback periods of 6-7 years and 8-9 years respectively. The
cost figures compare reasonably with recent investment performances for geothermal and hydro plants.
Corresponding estimated annual revenues from sale of electricity is $20-36 million in addition to savings from
current net electricity imports into the sugar factories.
Higher operating pressures offer better efficiencies, and therefore better resource utilization. However, they
also entail higher capital costs and more sophisticated levels of technology. Given the relatively long-term
operation for which power projects are designed, typically 25-30 years, the more efficient units are attractive
over these periods. Like other renewable energy technologies, biomass cogeneration lends itself to modular
implementation, allowing large projects to be broken down into smaller units that can be implemented in
phases. Apart from being easier to finance, these modules reduce the impact of additional capacities on the
grid system, enabling power sector planners to match demand with supply.
Of the total capital costs of putting up sugar factories, on the order of 60% is attributable to the cost of the
cogeneration power plant. Given that a number of the factories are planning capacity expansions, with most in
need of a large degree of reinvestment to replace obsolete plant, cogeneration provides an ideal platform for
the upgrade. In this case, the power plants should be designed to take expanded capacity in future. At present,
all the factories are net importers of power, either due to inadequate capacity or, in the case of one factory,
inadequate arrangements for generation when the factory is under maintenance. In the cogeneration scenario,
the factories consume an estimated 30% of the power generated by the plant in exchange for bagasse fuel,
effectively saving on their energy bill.
IMPACTS OF COGENERATION
Based on 2002 figures, annual bagasse production is estimated at 1.76 million tonnes, equivalent to 323,000
tonnes of oil worth some $194 million at current fuel prices. Investment in bagasse cogeneration could be used
to generate steam and electricity to power the sugar factories and export up to 550 GWh of electricity to the
national grid, displacing energy currently produced from fossil fuels. At the average consumption of 0.22
tonnes of oil per MWh, this translates to an annual saving of $90 million of foreign exchange.
Efficient cogeneration plants create on average 3.5-5.2 jobs per GWh
directly
With an optimistic job creation target of 500,000 jobs annually set by the current government, development of
cogeneration in the sugar industry could provide numerous opportunities. Industry statistics show that efficient
cogeneration plants create on average 3.5-5.2 jobs per GWh directly. Thus for a total capacity of 500 GWh,
some 2000 jobs could be created directly from the sugar industry alone through cogeneration. Most of these
jobs would, however, be created upstream in sugar plantations.
Current annual turnover of the industry is estimated at $160 million, of which $100 million is due to
independent sugar farmers, otherwise referred to as 'out growers'. Historically, only half of this amount is
normally paid while the rest has always been carried over as arrears due to cash flow concerns within the
factories. Investment in cogeneration would bring the desperately needed benefit of additional revenues to pay
off the farmers for their cane. Improved plant efficiency, coupled with planned production expansion to meet
international competition, would increase industry turnover by 20-40%. Secondary benefits and corresponding
impacts would spread to other sectors, but the biggest beneficiary would be the small-scale out grower, thus
directly addressing wealth creation targets.
Sugar farmers currently frustrated by poor prices and late payments could be motivated to put more land under
cane. With improved factory efficiencies and healthier performance arising from better cash flows and more
reliable steam and power, higher cane output from the farmers is anticipated. Ultimately, cogeneration capacity
would be limited by land available for cane, and by efficient agricultural production, account being taken of the
need to balance food production against commercial sugar cane plantation.
Apart from substituting fossil fuels, cogeneration provides an opportunity for the reduction of greenhouse gas
emissions, while strengthening the infrastructure base in relation to electricity supply. With carbon financing
currently at $5-8 per tonne of carbon dioxide, additional revenues can be accessed to finance the development
of the sector, once clear baselines have been established. This would substantially reduce borrowing to
finance the development of these projects, with a resultant decrease on the national external debt.
POLICY ISSUES
Any efforts to develop cogeneration in Kenya will have to begin with a look at the performance of the sugar
industry and electricity sector in totality. In a situation where all the sugar factories are largely owned by the
government, it will be essential to develop policies that facilitate the accelerated development of these sectors
through the involvement of the private sector. Key issues that policy needs to address include:
• clear bagasse development policy, recognizing bagasse as a resource and facilitating development of
bagasse-based projects
• stimulation of investment by offering tax breaks and other incentives for investment in firm generation
plant and efficiency improvement initiatives; incentives should lower front-end barriers to project
development
• restructuring the national sugar authority to enhance management, development and investment into
the sugar sector and to promote cogeneration and efficiency
• enactment of clear fiscal incentives for cogeneration to encourage investment
• creating suitable and attractive regimes for independent power producer involvement, including pricing
and grid feed-in laws for cogen electricity
• provision of support to indigenous local private sector participation in the energy sector to ensure
sustainability
• the setting of realistic but challenging targets for increased cogeneration contribution to the electrical
energy supply mix
• development of a national pool of multi-disciplinary competence to develop, design and oversee local
implementation of cogeneration projects
• involvement of local and international financing groups to provide finance for investment in the sugar
sector, especially for cogeneration projects
Developing and implementing coherent and consistent policies that cover these areas will ensure
comprehensive and efficient development of cogeneration and the sugar sector, and facilitate the
implementation of projects through private sector involvement.
LOOKING FORWARD
Cogeneration provides a clear potential for diversification of the sugar industry into energy-related activities
such as power generation and ethanol production, and should be accorded high priority. Sugar factories in
Kenya have been unable to meet the national demand for sugar at competitive prices at a time when other
Common Market for East and Southern Africa (COMESA) countries are desperate to sell cheaper sugar to the
local market. By giving requisite attention and support to cogeneration, the sugar industry can bridge the
production gap, thus making sugar farming more attractive.
Furthermore, given more than 100,000 small-scale cane growers currently producing about 88% of Kenya's
sugar cane, the implications for rural livelihood enhancement of this diversification could be very significant.
While cogeneration matches other power generation options in terms of investment costs, it provides an
indigenous source of electrical energy for the nation, saves on foreign exchange, is a tool for employment and
wealth creation and an agent for abatement of environmental degradation.
Left on its own, the sugar industry does not have the resources and capacity to realize the full potential of
cogeneration. Clearly, the biggest hurdles are policy barriers and attitudes on the part of developers and
financiers. A combination of players is required make a 10% contribution by cogeneration a reality.
Asia-Pacific Partnership - an alternative to Kyoto for promotion of CHP?
Christoph Holtwisch
The Asia-Pacific Partnership on Clean Development and Climate (APP), a relatively young international
initiative established alongside the UN Framework Convention on Climate Change, was first covered by
COSPP in the May–June 2007 issue. Here, Christoph Holtwisch takes a second look at the Partnership
and the likelihood of its stimulating new distributed generation capacity.
The Asia-Pacific Partnership on Clean Development and Climate (APP or AP6) is a very new phenomenon in
international climate policy with important effects on the traditional climate regime formed by the UN
Framework Convention on Climate Change (FCCC) and its Kyoto Protocol (KP) and likely impacts on the
development and transfer of distributed generation (DG) technologies. In its own view, the APP is a grouping
of key nations to address serious and long-term challenges, including anthropogenic climate change.
APP partners Australia, China, India, Japan, South Korea and the US represent roughly half the world
economy and population, energy consumption and global greenhouse gas emissions (see Figure 1). For that
reason, this ‘coalition of the emitting’ is – and will be – a central factor in international climate policy.
Wind power, which surpassed 100 GW of installed capacity in March 2008, now receives more investment
annually than large hydro power or nuclear, making it the leading climate mitigation technology in the eyes of
financiers. In some instances renewables subsidiaries have become too large for parent companies and are
being spun-off as independently listed companies.
The Spanish utility Iberdrola, for instance, spun-off its renewables subsidiary through an initial public offering
in December 2007, following the success of France’s EDF in listing EDF Energies Nouvelles. The Iberdrola
initial public offering raised $6.6 billion, six times more than the previous largest initial public offering for a
renewable energy company. With a capitalization of $33 billion, this new Spanish renewables operator has a
larger market value than all but the biggest European power utilities.
Engagement from the finance community has broadened
The quickest growth in sustainable energy capital mobilization has come from three sectors of the financial
community that had previously shown little interest:
• venture capitalists and private equity investors, who provide the risk capital needed for
technological innovation and commercialization (up 42% in 2007)
• public capital markets, which mobilize the resources needed to take companies and projects to
scale (up 114% in 2007)
• investment banks, which help refinance and sell off companies, allowing the all-important exit
liquidity needed for markets to grow and for first mover investors to realize returns (up 52% in
2007).
The involvement of these three new financial players has signalled a broader scale-up in asset financing, the
investment in actual generating plant capacity on the ground (up 61% in 2007). The breakdown of the types
of investment going into the sustainable energy sector in 2007 is shown in Figure 2. Owing to the big names
involved such as Goldman Sachs and some of California’s most prolific venture capitalists, these three new
actors have had a strong knock-on effect that has further strengthened investor resolve to expand the
particular climate mitigation sector.
Perhaps the biggest news for solar was with the later stage financing, both small and large scale, used to
deploy systems on the ground. In terms of asset financing – the funding used to build large-scale projects –
solar came second with $17.7 billion mobilized, after wind at $39 billion.
Financial innovation opening new markets
Small-scale financing approaches are being used to develop solar power. In developed countries solar
equipment manufacturers in the US have led the way, realizing that they could help overcome capital-cost
barriers by acting as financial intermediaries.
One of the main financing tools used is the third-party power purchase agreement (TPPPA), which, according
to some estimates, drove 60% of the solar capacity installed in California in 2007. Under a TPPPA, a third
party designs, builds, owns, operates and maintains the solar power systems and sells back solar-generated
electricity to the end-user. This model removes the burden of significant upfront costs from the end-user, and
also allows the solar contractor, who has significantly greater expertise than the end-user, to assume the
responsibility for system installation and maintenance. Tax credits and accelerated depreciation for the solar
systems help to drive down their cost, as well as reducing the electricity price charged to the end-user.
SunEdison and SunPower are two leading TPPPA proponents. SunEdison first used the model in 2004 on a
commercial installation, and has since installed 34 MW of systems for commercial users financed via
TPPPAs (or SPSAs – solar power services agreements – as SunEdison calls them). SunPower uses a
similar model for its SunPower Access programme.
A variation on this is where a city or county acts as financial intermediary, targeting residential customers. In
Berkeley, California, as part of Berkeley’s Measure G mandate to reduce greenhouse gas emissions, home
owners can finance a solar system through deductions on their property tax bill.
Solar installation financing is attracting heavyweight investors. Goldman Sachs, GE Capital and MMA
Renewable Ventures are all investing. In April 2008, for example, MAA Renewable Ventures announced that
it was to finance 14 roof-top systems on Macy’s California department stores, with SunPower providing
panels and systems integration.
Developing countries, whose need for distributed generation is not so much driven by energy security and
environmental concerns as by lack of grid access, are also benefiting from financing for small-scale
distribution. Many developing countries have rural electrification programmes today and an increasing
number of these rely on renewables and distributed financing models to provide access in off-grid areas.
Besides electrification, many other clean energy systems and services are being installed with a range of
end-user finance approaches.
For example, in Tunisia UNEP has jointly run the Prosol solar water heating programme with the local energy
agency and has seen 35,000 installations gain financing through payments made via customer utility bills.
UNEP has run a loan programme with two of India’s largest banking groups, Canara Bank and Syndicate
Bank, helping to kick-start the consumer credit market there for solar home-system financing. 19,355 homes
where financed over three years and the market continues to grow with other banks now beginning to lend.
These programmes and others like them are now looking to the Clean Development Mechanism (CDM) to
help finance the further uptake of these sectors. Although CDM revenues cover only a small portion of the
capital costs, if appropriately structured they can be used to bring down barriers to end-user financing, which
is often is the key to market uptake.
Engagement has started to shift towards large developing countries
Developing countries accounted for 22% of new investment in the global sustainable energy sector in 2007,
up from 12% in 2004. Developing country investment grew 14 times, from $1.8 billion in 2004 to $26 billion in
2007, with China, India and Brazil accounting for the major share; all three countries are now major
producers of and markets for sustainable energy, with China leading in solar, India in wind and Brazil in
biofuels. The results in the rest of the developing world, however, have been less promising and require
increased engagement from governments and the development finance community. Figure 4 shows the
global distribution of investment across the different regions.
As shown in Figure 5, renewables still represent only 5.4% of global power generation capacity and 4.6% of
production. However, the 31 GW added in 2007 accounted for over one fifth of new power generation added
to the global electricity system last year. It is also equivalent to about half of Spain’s total electricity capacity,
so this is not only about success in Germany and Spain and Denmark. This is becoming a global
phenomenon.
Eric Usher is Head of the Renewable Energy and Finance Unit, Energy Branch, DTIE United Nations
Environment Programme, Paris, France.
e-mail: eric.usher@unep.fr
Notes
1. IPCC
2. Chritian Azar Christian and Stephen H. Schneider, “Are the economic costs of stabilizing the atmosphere
prohibitive?”, Climatic Change 42, pp. 73–80.
3. Global Trends in Sustainable Energy Investment 2008, UNEP SEFI and New Energy Finance. Report can
be downloaded from http://sefi.unep.org/english/globaltrends
4. IEA, 2006 “Energy technology perspectives 2006: scenarios and strategies to 2050”.
5. Realizing the Potential of Energy Efficiency, UN Foundation, 2007.
6. “Investment Flows to Address Climate Change”, UNFCCC Secretariat, Bonn, August 2007.
7. Sir Nicholas Stern et al, “Stern Review on the Economics of Climate Change” (Stern Review).
8. Trevor Morgan, ENERGY SUBSIDIES: Their Magnitude, How they Affect Energy Investment and
Greenhouse Gas Emissions, and Prospects for Reform, June 2007.
9. Schneider, M., Froggatt, A., “The World Nuclear Status Report 2007”, January 2008.
Taking advantage of the markets’ expectations for the sector
European utilities began spinning out their renewables subsidiaries in late 2006, starting with the $691 million
EDF Energies Nouvelles IPO in November 2006. The Iberdrola Renovables IPO followed in December 2007,
and the EDP Renovaveis IPO in June 2008. The decision to finance these renewables operations as free-
standing entities rather than as part of their larger utility operations illustrates how the capital markets are
now distinguishing between old and new energy businesses.
Take the example of Iberdrola in its efforts to raise the capital needed to expand its renewables business. If it
had chosen to raise the capital through a share offering from its parent company, investors would have
valued earnings from the renewables business at around one-third of the value it was given as a separate
listing (based on the prevailing earnings multiples – see assumptions below).
This higher multiple was based on investor expectations of much higher growth potential for a renewables
business than for a traditional utility operation. Whether Iberdrola Renovables’ continued growth will meet
these high projections will take some years to bear out, but it is clear that the capital markets have created a
dynamic for change in the energy sector – one that even market incumbents are now starting to act on.
Notes: As at 31 December 2007, the EBITDAs (earnings before interest, taxes, depreciation and
amortization) of Iberdrola and its renewables subsidiary were €5538 million and €564 million, respectively,
and the enterprise value of Iberdrola €73,318 million. The IPO gave an enterprise value for Iberdrola
Renovables of €23,617 million (this had risen to €25,095 million by 31 December as the share price rose
from €5.30 to €5.65). These figures correspond to EV/EBITDA multiples of 13.2x and 41.9x, respectively.
What now for carbon markets? Recovering from the April 2006 price crash
2006 has been an extraordinary year for carbon trading. In April, the price of carbon dropped by almost 70%
to just €9/tonne, and more trouble may be brewing as national governments get ready to set quotas for their
second phase National Allocation Plans. Candida Jones looks at what effect this turbulence may have on
carbon abatement projects and the next phase of the EU’s Emissions Trading Scheme.
The EU’s Emissions Trading Scheme (ETS), launched in January 2005, is the world’s first international
emissions trading scheme and works on a cap-and-trade basis. The idea is to force companies to emit less
carbon dioxide than their National Allocation Plan (NAP) allows (that’s the cap part) or buy carbon permits
from elsewhere.
The scheme has led to a bustling market in carbon abatement schemes through what are known as the
flexible mechanisms of the Kyoto Protocol - the Clean Development Mechanism (CDM) and Joint
Implementation (JI). These mechanisms encourage investment in carbon abatement schemes either in the
developing world, in the case of CDM, or the emerging economies of Europe, in the case of the JI. Each of
these projects generates carbon credits (Certified Emissions Reductions or Emission Reduction Units
respectively), which can be offset against targets in the investors’ own countries.
Carbon crash - the price of carbon fell by almost
70% in a single day as countries revealed how
much carbon was produced in 2005, showing a
massive surplus of credits in the market (Point
Carbon)
Both the CDM and JI have lead to investment in renewable projects beyond the EU and a flurry of new
companies has emerged, keen to maximize these investment opportunities. However, since the carbon price
plummeted, uncertainty has been hanging over the reliability of these markets, which are linked to the volatile
EU scheme. Mark Meyrick, a carbon trader for EdF Trading who invests in the CDM, confirms that ‘we
became a lot more cautious about fixed price offerings after the collapse’.
Power of industry felt
The collapse in the price of carbon came just days after carbon traded in the EU ETS had reached an all-
time high of €31 per tonne, up from €6 when the commodity was launched just 15 months earlier. The crash
was apparently completely unexpected by sector analysts and marked a low-point in the first phase (2005-
2007) of the scheme (see Figure 1). It was prompted when companies in the scheme had to report their
actual emissions in the first year, 2005.
Click here to enlarge image
Figure 1. Price of carbon (€/tonne) since trading began
in 2006. Source: Point Carbon
Each country’s NAP is based, at least in part, on historic emissions, or at least that’s what governments
believed. However, after lobbying by industry groups, these caps were made far too lenient. Overall, actual
emissions in 2005 came in well below the total cap, so there is a surplus of the tradable credits in the market.
It quickly emerged that France was long, as were the Netherlands, Germany, the Walloon region of Belgium,
Estonia and Finland. Even Spain, which relies heavily on hydro generation and had suffered a drought so
was forced into burning more high-carbon fuels such as coal and gas to compensate, was less short of
reaching its carbon target than experts had predicted.
The impact of this was to devalue carbon, which was now clearly in abundant supply, bringing the price
tumbling. The tumble caused the wholesale power market in Germany, and elsewhere, to drop, thereby
affecting the share price of a number of carbon-related and energy companies.
Carbon companies suffer
Most carbon project developers found their share price immediately drop by up to 15% on news that carbon
had taken a downturn, while even RWE and E.ON saw their share values reduced as the value of carbon is
linked to the wholesale power market. Econergy, Ecosecurities, Agcert and Camco, all of whom develop
projects under the CDM or JI, typically in Latin America, India or China, all saw the value of their shares drop.
Immediately after the collapse, there were fears that the CDM and JI markets would see significant fall-off in
investments, and indeed the market was virtually silent for nearly a month. Andreas Arvanitakis, analyst with
industry specialists Point Carbon, said: ‘The deals came to a halt between the beginning of May and early
June after investors were stunned by the crash.’
Back in the EU market, deadlines for the setting of the second phase NAP are now looming, with the
European Commission expecting, perhaps optimistically, that all countries submit their draft second phase
NAPs by 30 June.