Slashing Energy Costs: CHP Provides Major Savings for Ethanol Production

Factors to current need and appeal of CHP systems for ethanol plants.

·???????? Energy Efficiency: CHP helps ethanol plants utilize over 80% of input fuel’s energy compared to 45-55% in traditional separate heat and power systems.?? This improved efficiency directly reduces energy costs.

·???????? Competitive pressure: With ethanol margins tight, energy is one of the largest controllable costs for plants.?? CHP provides a cost advantage versus less efficient competitors.

·???????? Aging Infrastructure: Many ethanol plants are aging and needing boiler/power replacements.? Installing CHP can upgrade these systems.

·???????? Sustainability Targets: CHP reduces greenhouse gas emissions from ethanol production, helping meet environmental goals.

·???????? Policy incentives: Federal and state incentives for CHP like tax credits and grant programs help offset installation costs.

A CHP project for an ethanol company can have several benefits, such as:

·???????? Improved Energy Efficiency: CHP systems recover heat that would otherwise be wasted to generate electricity.? This allows the plant to utilize about 70-80% of the fuel’s energy compared to about 45% in conventional power generation.

·???????? Reduced energy costs: A CHP system can produce electricity and steam with greater energy efficiency than separate systems, which can lower the operating costs and provide a hedge against electricity price increases.

·???????? Increased reliability: A CHP system can provide on-site energy generation, which can reduce the dependence on the grid and increase the power security and quality even in the case of a disaster or grid disruption.

·???????? Lowered carbon emissions: CHP reduces overall emissions compared to separate heat and power systems.? A CHP system can reduce the carbon footprint of the ethanol production process by using less fuel and emitting less greenhouse gases than separate systems.? This can also improve the carbon intensity score of the ethanol product and increase its value in low carbon fuel markets.

·???????? Enhanced sustainability: A CHP system can use renewable or low-carbon fuels such as biogas, biomass, or ethanol itself to generate electricity and steam, which can further reduce the environmental impact and support the circular economy.

·???????? Attractive federal and state incentives: There are often federal and state incentives available to subsidize the upfront costs of installing CHP systems at industrial facilities like ethanol plants.

IRA of 2022 provides the following incentives for ethanol producers to install CHP systems:

·???????? Clean Energy Investment Tax Credits: the IRA extended and expanded tax credits for clean energy investments including CHP.? Ethanol plants can get a 10% credit for CHP systems placed into service before 2032.? This helps offset the large upfront capital costs.

·???????? Bonus depreciation: The IRA reinstated and expanded bonus depreciation for clean energy investments.? This allows ethanol producers to immediately deduct a portion of the CHP system capital costs instead of depreciating over time.

·???????? Production tax credit: Ethanol producers already get a per-gallon production tax credit.? Installing a CHP would maximize production and therefore maximize the value of this existing tax credit.

·???????? Savings on carbon pricing:? With potential future carbon pricing policies, the efficiency gains of CHP would give ethanol plants an advantage in cost savings compared to less efficient competitors.

IRA provides a nice boost to the investment case for CHP at ethanol facilities.

Financing CHP Projects Alternatives

·???????? Debt financing (Tax-Exempt or Taxable): borrowing money from bank or other lender/investor to pay for CHP project, and repaying the loan with interest over time.

o?? Advantages

§? Leveraging the company’s existing assets and creditworthiness

§? Preserving equity and tax benefits,

§? Sharing some of the project risk with the lender/investor

o?? Disadvantages

§? Increasing the company’s debt burden,

§? Requiring collateral and covenants,

§? Reducing the company’s flexibility and profitability.

·???????? Equity financing: raising money from investors and partners to pay for the CHP project, and sharing the ownership and profits of the project with them.

o?? Advantages

§? Reducing the company’s debt load

§? Diversifying the sources of capital

§? Accessing expertise networks from partners and investors

o?? Disadvantages

§? Diluting the company’s ownership and control of the CHP system

§? Giving up some project benefits

§? Dealing with complex legal and contractual issues

·???????? Lease financing: entering into a contract with a third-party owner or operator of a CHP system, who provides the system to the company for a fixed or variable fee over the specified period.

o?? Advantages

§? Avoiding upfront capital costs

§? Transferring some of the project risk to the third party

§? Benefiting from tax incentives and performance guarantees

o?? Disadvantages

§? Losing ownership and control of the CHP system

§? Paying higher long-term costs

§? Depending on terms and conditions of the lease contract

·???????? Project financing: creating a special purpose entity (SPE) that owns and operates the CHP system, and raising money from debt (and equity) sources to finance the SPE.

o?? Advantages

§? Isolating the project from the company’s balance sheet

§? Attracting more capital at lower costs

§? Distributing risk among multiple parties

o?? Disadvantages

§? Requiring complex legal and financial structures

§? High transaction costs

§? Facing regulatory and environmental uncertainties

·???????? Build-own-operate: contracting with a third-party developer who builds, owns, and operates the CHP system on behalf of the company, and sells electricity and thermal energy to the company at agreed prices.

o?? Advantages

§? Eliminating capital costs

§? Transferring all project risk to the developer

§? Ensuring reliable energy supply

o?? Disadvantages

§? Losing ownership and control of the CHP system

§? Paying higher energy prices

§? Depending on the performance and availability of the developer

·???????? Internal Cash Flow: using the company’s own funds to pay for the CHP project upfront or over time.

o?? Advantages

§? Avoiding debt or equity obligations

§? Retaining full ownership and control of the CHP system

§? Capturing the full benefits of the project

o?? Disadvantages

§? Reducing the company’s liquidity

§? Limiting other investment opportunities

§? Bearing the full risk of the project

·???????? USDA REAP Loans: similar to traditional debt financing from a commercial lender in many ways.

o?? Advantages

§? Lower interest rate than commercial lenders

§? Longer repayment period (10-20 years)

§? More flexibility than commercial lending

o?? Disadvantages

§? There is a loan application process including credit checks and approval, akin to commercial underwriting.

§? The application and approval process can take 6 months or longer.

§? Ownership restrictions: Projects must maintain majority local ownership and control.

§? Borrowers must pledge assets as collateral to secure the loan, similar to commercial loan requirements.

§? REAP lenders have senior claim priority in case of default, as with commercial lenders.

§? There are loan covenants requiring certain financial ratios to be maintained, similar to commercial loan covenants.

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Strategic, financial operational, and regulatory questions an Ethanol Company may want to have thought about before moving forward with CHP?

·???????? What is the upfront capital cost of the CHP system and installation?

·???????? What ongoing operation and maintenance costs will be incurred?

·???????? How quickly will the CHP system payback through energy savings?

·???????? Will we need to take on debt to finance the project?

·???????? How will CHP integration impact our current infrastructure and processes?

·???????? How much will CHP reduce our energy expenses and carbon footprint?

·???????? Are there any permitting, utility interconnected, or regulatory requirements?

·???????? What are the risks? e.g. fuel price volatility, grid policy changes,

·???????? What incentives or credits are available to improve ROI?

·???????? Who will own the CHP asset and what agreements are needed?

·???????? Do we have support from stakeholders like management, investors, community?

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