Michigan ‘roadmap’ outlines opportunities, obstacles to expanding co-gen power plants

Published on August 27, 2018 by Hil Anderson

Michigan lawmakers interested in expanding the number of co-generation power plants in the Great Lakes State will have an important new document waiting on their desks when they return to the capital this fall.

The Michigan Energy Office (MEO) released a new report this month highlighting the hurdles facing the expansion of Combined Heat and Power (CHP) plants in Michigan. The report is intended as a “roadmap” to spur the construction of more such plants in a state where winters are notoriously gloomy, and you often can’t find a cooling breeze during the dog days of summer.

“This report identifies opportunities and barriers to implementing more CHP in Michigan,” said Anne Armstrong Cusack, executive director of the Michigan Agency for Energy, the parent organization of the MEO. “It is based on the feedback from more than 100 individuals and organizations across the state and is a valuable tool to drive the adoption and deployment of CHP in Michigan.”

There was no immediate response to the report’s conclusions and proposals from state lawmakers since the Legislature was not in session in August; however, it will provide much food for thought for legislators after Labor Day. Gov. Rick Snyder has made improving efficiency through “smart energy” technology a priority of his final term in office, and CHP is seen in Michigan as a particularly efficient way to kill the twin birds of generating both heating and electricity for large buildings and campuses from only one source of fuel.

The CHP process features an on-site power plant built specifically for a single large user, such as a factory, hospital, or college campus. In most cases, CHP plants use natural gas to fuel a steam generator that produces electricity for the institution. The steam is then also piped into the heating system to keep its rooms cozy at basically no extra cost.

The idea of CHP is by no means new, but continued improvement in overall energy efficiency has made it a promising strategy in Michigan. The Roadmap said that CHP plants with capacities between 722 megawatts (MW) and 2,360 MW would be feasible in Michigan, where there are currently 88 CHP systems in operation with a combined capacity of 3,500 MW.

Speaking of Cost
But cost is the major bump in the road. While low natural gas prices can help make a CHP project possible, construction costs are steep and may be considered too much of a debt burden for a company or public agency to take on, particularly when the “payback period,” where the energy savings finally cover the construction costs, can be up to 20 years. The report pegged the cost of a CHP plant at anywhere between $700 and $3,000 per kilowatt, which the MEO said can translate to as much as $6 million to build a relatively small 2 MW plant.

Outside financing of CHP plants rely heavily on interest rates and debt markets. The Roadmap cautioned that the cost of construction could make seeking a loan “intimidating” and that recruiting investors could also be a challenge “with a typical CHP project being too small to interest banks or private equity firms without giving away massive equity stakes.”

Moreover, some of the uncertainty in deploying a CHP plant could be mitigated by taking advantage of low natural gas prices, which the MEO said can be locked in with supply contracts covering up to 10 years. Managing gas supplies, however, can also require a CHP operator to add people with expertise in commodity trading and hedging to manage the supply flow.

Still on the Grid
Building a CHP plant, though, will still not be enough for a company to completely cut its ties with a local power company. A CHP plant may certainly slash the amount of electricity that a CHP operator purchases from its utility, but likely not by a full 100 percent. Plants still need backup power supplies in the event of scheduled maintenance or an unplanned outage, and there are fixed costs for remaining connected to the grid that must be paid. The result is a “standby rate” that can cut into the savings.

“Standby charges and the question of whether or not they are reasonable is beginning to be the subject of rate cases before the Michigan Public Service Commission,” the report said. “Standby rates can increase electric demand charges even when a customer decreases overall electric consumption, thus negating many economic benefits to the customer.”

Tweaking the rules on standby rates is one of the courses of action open to the Legislature as a means of increasing CHP installations throughout Michigan. The MEO report also recommended closer collaboration with the CHP industry along with steps such as upgrading interconnection standards and outright financial incentives for CHP installations.

Lawmakers will likely take a closer look at the issue when the Legislature reconvenes in early September and take the next step forward using the CHP Roadmap as its guide.