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October 27th, 2009:
Article: Cogen Comes To Australian Offices

Commercial buildings in Australia have not formed an active market for cogeneration technology – until last year, when one company started to use a particular business model (against a background of growing demand for ‘greener’ building operation and rising electricity prices) to change this. Nalin Wickramasinghe writes on progress and the  challenges still to be faced.
Cogeneration in general, and commercial building cogeneration specifically, has had extremely low penetration in the Australian market. There is approximately 307 MW of installed capacity in the state of New South Wales1, most of which is accounted for by industrial applications, and almost no installed capacity in commercial buildings and offices. There are several reasons for this situation:

Energy costs

Historically Australia – eastern states in particular – has had very low electricity prices relative to the rest of the world. An abundance of cheap coal-fired generation sources in the eastern states of Australia have supported the low pricing levels for decades. As a result, switching to an alternative energy source, such as on-site cogeneration, usually means paying a higher rate for electricity.

Low cost of environmental compliance

Whilst the Mandatory Renewable Energy Target (MRET – Federal) and New South Wales Greenhouse Abatement (NGAC – State) schemes levy environmental charges on electricity, they still have not raised compliance costs to a level where switching to a cogeneration supply is cost effective. Australia also lagged behind the rest of the world (excluding the USA) in not ratifying the Kyoto Protocol.

Climate

Cogeneration has traditionally been well-suited to northern hemisphere climates with long, cold winters and buildings with a high heating demand. In Sydney, most commercial buildings have insignificant heating demands – most have only a minor preheating requirement at the start of the day in midwinter. In general, Sydney commercial buildings require year round cooling. This means the overall efficiency of cogeneration is much lower as heat needs to be dumped. Whilst there has been minor deployment of absorption chillers in the past, issues of reliability and very low coefficients of performance (COP) of around 0.5, have made this an unattractive option.

High capital costs

Australia is a relatively small market for cogeneration equipment and also a very distant market for equipment manufactured mostly in Europe. This results in a quite high capital cost of cogeneration plant and equipment as well as ongoing replacement components.

For the above reasons, on-site cogeneration as an alternative energy source has not been cost effective locally.

WHAT HAS CHANGED?

Over the past two to three years, there has been a remarkable increase in the acceptance of cogeneration in the Sydney commercial building market. The reasons for this are several – a combination of regulatory and market changes as well as Cogent Energy’s business model.

Rising electricity prices

New South Wales base contract prices for electricity have increased approximately 20% over the past two years2. The prolonged drought conditions experienced by the state have significantly contributed to this increase – water shortages have compelled generators to reduce generation output at times. In addition, there is also an impending shortage of generating capacity. In New South Wales the majority of generation capacity is state-owned and uncertainty of the sector’s ownership – potential privatization – has served as a disincentive to investment in new plants.
Business model

Cogent Energy uses a business model based on majority financing of the cogeneration plant. As Cogent is also a licensed electricity retailer, the building owner is invoiced monthly for metered energy consumed – both electrical and thermal. The key benefits of this approach are:

-minimal up-front capital outlay for the building owner
-Cogent can achieve economies of scale in equipment sourcing
-aggregated natural gas procurement across all projects.

COGENT ENERGY BUSINESS MODEL

Cogent is a licensed electricity retailer and owns, operates and maintains the plant. The capital cost of the plant is majority financed by Cogent’s financier, with the contribution from the client minimal – usually around 10% for a standard installation. Cogent invoices monthly for metered energy consumption, both electrical and thermal. The base building (house services) usage is charged to building owner whilst the tenancy usage is charged to individual tenants.

Pricing and contracting

Cogent’s pricing value proposition is ‘competitive energy pricing compared to 50% green-blend energy from the grid.’ In New South Wales coal-fired grid electricity emits approximately 1060 kg/MWh while the comparative figure for an on-site gas-fired cogeneration plant is 550 kg/MWh. A building owner would need to purchase 50% green-blend electricity to achieve the latter figure. In addition, there are further benefits resulting from the displacement of on-site boilers and electric chillers.

Hence Cogent’s offer is very competitive.

The supply agreement with the building owner is usually a 12-year term, with pricing fixed for the first year. In subsequent years pricing is reviewed using the Wholesale Electricity Pricing Index as a reference. At the end of the 12-year term the options available to the client include renewing for a further period or buying out the plant at its depreciated value. Separate supply agreements are negotiated with individual tenants.

Scope of works

In a typical installation, Cogent designs, configures and maintains plant. The company is responsible for negotiating the natural gas supply contract as well as managing the electricity network connection agreement and approvals with network operators.

Client’s scope includes the provision of suitable plant room with ventilation and sound attenuation. The client is also responsible for bringing the electrical and thermal distribution systems and natural gas pipeline to the plant.

Ownership and responsibility for maintenance of assets is delineated by the plant room – Cogent generally owns and maintains what is within the plant room and the client is responsible for everything external. This also provides clarity in a contractual sense.

PLANT COMPONENTS

Currently Cogent uses gas reciprocating engines from MTU, with capacity ranging from 386 kWe to 2 MWe. The corresponding (and matching) Thermax exhaust-fired double-effect absorption chiller capacity ranges from 292–1245 kWt. Engine jacket heat recovery from these engines range from 231–1018 kWt. Control systems from MDE are used on all the plants.

Plants are configured in parallel import mode with the grid, and are currently sized at approximately 60% of the building’s maximum demand. Energy from the grid is used as top-up. Cogent operates the plant during peak periods (typically 15 hours per day, Monday to Friday).

During the off-peak period the plant switches off and supply is purely from the grid. Currently, this mode of operation is the most cost effective. As there is no commercial benefit from exporting electricity, it is necessary that plants are sized below the building’s peak so that they can operate at constant duty cycle through the day.

The plants can also be configured to operate in standby (island) mode which provides the building better security of supply during a grid outage.

As gas engines can only cope with much smaller load steps in comparison to a diesel generator, correct set up of load shedding steps on the building’s main switchboard (usually through motorized circuit breakers), is critical in ensuring the standby function works effectively.
REMOTE MONITORING AND CONTROL

The cogeneration plant is fully monitored and maintained by Cogent Energy, which remotely monitors the plant for monthly billing and in-depth performance analysis. The remote monitoring facility is able to monitor numerous parameters of the engine such as temperatures, pressures, voltages, etc. This data can be used for live performance monitoring and historical analysis, as well as predictive fault prevention. It is also possible to remotely start and stop the engine and tweak parameters to Each site is modelled within the system and configured according to the plant installed and the level of monitoring required increase the performance of the unit.

The Cogent Energy Backoffice system is intended to allow management, engineering and operations staff access to monitor all plants installed on-site. The system consists of a central server and software. Each site is modelled within the system and configured according to the plant installed and the level of monitoring required. Staff access the Backoffice system on their laptops and alarm ‘flags’ can be received on PDAs.

Through the Backoffice system a range of dynamic screens displaying plant status, single-line diagrams, process and instrumentation (P&I) diagrams, etc. can be accessed, allowing the ability to drill down to check plant operating data and characteristics. Core functionality in the system also includes gathering and collating consumption data to support reporting for NABERS and Green Star ratings. As the major motivation for commercial building owners in choosing cogeneration is achieving high environmental ratings, this is a significant feature of the
Backoffice system.

CURRENT PROJECTS

Since formation in late 2006, Cogent Energy has made significant progress in developing a distributed network of cogeneration plants. The company now employs 15 professional staff and has its head office located in Melbourne. The company currently focuses on the eastern states of Australia, in particular Sydney and Melbourne. To date, it has quoted a potential capacity of almost 100 MW across Sydney, Melbourne, Adelaide and Brisbane. The commercial building market in Sydney was the most responsive and Cogent has installed its first four plants there.

CHALLENGES AND RISKS

Whilst Cogent’s business model and approach have yielded very good progress in developing a network of cogeneration plants, there are many challenges yet to be overcome and risks that need to be managed.

Grid/network connection

Currently the local electricity network operators have no specific commercial terms applicable to cogeneration plant’s operator in terms of demand/capacity charges. Their assessment is based on a site-by-site approach and this misses the overall benefit that a network of distributed plants brings. Electricity grid operators need to take a big-picture view of a cogeneration operation and appreciate the synergies available – the management of grid hot spots and overall peak demand reduction.

Gas networks

The monopoly ownersof gas networks often don’t takea commercial view of connecting greenfield cogeneration sites, and they tend to pass on total network expansion and augmentation costs, making projects unfeasible at times. With greenfield site developments on the outskirts of the city, there can be a substantial augmentation cost to connect gas. The gas network owner may often not factor in the future value of network expansion, thereby allocating all of the costs to the cogeneration project.

Environmental protection

Currently there is a lack of clarity and consistency in relation to NOx emissions standards, and the authorities take a rigid view of cogeneration plants – which tends to frame projects purely in terms of NOx emission levels with no weighting attached to the carbon dioxide emissions reductions. The requirement for selective catalytic reduction could potentially render a project commercially unfeasible.

Plant sizing

There is risk of over sizing a plant based on projected energy loads, particularly with a new development. This is compounded by the parallel import/no-export mode of operation. If a plant is oversized then there is a risk it may not run efficiently. Currently there is no commercial value in exporting, as cogenerated energy does not fetch a premium once exported off site.

Supply of tenancies

Again, there is risk of over sizing a plant if some of the tenants decide not to take supply from it. Tenants have legal entitlement to choice of energy supplier and if there is inadequate take up of cogenerated supply by tenants, it could lead to a scenario where plant is oversized.

SUMMARY

There has been a great opportunity presented by the move to reduce commercial building carbon emissions in Australia – and Cogent Energy has seized this. The company has made progress with over 5 MW committed in Sydney in the past two years. Many other opportunities are also currently being developed. There are still many challenges to be overcome.

Nalin Wickramasinghe is Manager for New South Wales with Cogent Energy.