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Department of Energy

DOE07: Save Costs Through Private Power Cogeneration

Background

Private sector construction of needed new power plants at government installations represents a cost savings opportunity to the federal government. The Department of Energy (DOE) owns and operates under contract approximately 100 steam plants at production centers and national laboratory sites around the country. Most of the plants have been in operation for 40 years or more and are at or beyond the limits of their design lives. Many need either refurbishing or complete rebuilding. New state-of-the-art gas fired cogeneration generators can operate at up to 80 percent energy efficiency (producing both steam and electricity in the same operation) while the average, electricity-only generators operate at about 33 percent efficiency.(1) Refur- bishing older electricity generators to improve performance or capacity or to burn alternative fuels can improve energy efficiency from 5 to 10 percent.(2) Older plants use less efficient technologies, which are more harmful to the environment and more expensive to operate than new state-of-the-art facilities.

In the near term, DOE must either expend considerable funds to refurbish or rebuild these steam plants or provide incentives to utilities and independent power producers in the electrical power industry (power providers) to build and operate new plants for DOE. Many power providers are eager to construct and operate new cogeneration plants (producing both electricity and steam) at government installations at no cost to the government. Such projects offer profit-making opportunities for the power providers while providing both short-term and long-term savings for the government.

Under this arrangement, DOE would avoid the costs of refurbishing or rebuilding the existing facility. In addition, DOE would receive a cost savings of 10 to 25 percent on future steam and electricity bills, depending on fuel and other factors at each installation. In return for these services, the power provider would:

--- own and operate the facility for up to 25 years;

--- contract with the government facility to supply power and steam at lower rates than currently paid by the facility; and

--- sell any excess power to local utilities.

The incentives of a long-term govern-ment contract and the opportunity to sell excess power off-site make such cogeneration projects potential profit-making ventures for the power providers.

Power providers seek these opportunities because they are guaranteed a steady government customer for a long period of time and because the permit process to replace an old plant is less cumbersome than the permit process to build a new stand-alone facility elsewhere.

The obstacle to securing such private sector initiatives is a provision in the 1986 Shared Energy Savings amendment to the National Energy Conservation Policy Act (NECPA).(3) While the amendment provides the only government long-term contract authority (up to 25 years) at non-military government installations, one provision restricts power plants at those installations from selling excess electrical power off-site. However, it is the sale of excess capacity off-site that, in many cases, makes the venture economically viable for power providers. The restrictive legislation effectively prevents the private sector and the government from entering into such ventures. No new power plants using private sector investment have been built at non-military government installations since this restrictive legislation was enacted.

If NECPA is amended to remove the restriction, the government would have the potential opportunity to obtain new power plants at no cost and pay reduced utility bills. A DOE initial analysis of six aging government steam plants reveals the following potential savings in avoided construction costs: (1) if all six plants were refurbished--at the lowest expenditure level--the minimum estimated obligation for DOE would be $183 million; and (2) if all six were rebuilt--the maximum expenditure--the total estimated obligation would be $735 million. Because of the age of the existing facilities, an expenditure somewhere between these two figures must be obligated within the next 10 years by the federal government. If the plants were built by power providers, that cost could be avoided.

Because the new power and steam is produced with high-efficient generators, the utility costs for the new power, spread out over 25 or 30 years, represents a consider-able savings in electricity and steam costs. DOE estimates the long-term utility savings at the six sites would be approximately $1 billion. DOE believes that similar savings potential is available at 11 other government installations that can be considered as potential sites for private sector investment in cogenerated power.

The window of opportunity for one site may have passed. DOE's Savannah River Site (SRS) production facility is powered by a 37-megawatt electrical and steam power plant. The plant has high operating and maintenance costs and is operating beyond its 50-year design life. Refurbishment or rebuilding is needed now. In 1991, the local regulated utility proposed construction of a larger power plant at the site at no cost to the government. The utility would also have provided substantial discounts in electricity and steam costs for 20 years. However, because DOE could not allow the utility to sell excess power off-site, the utility withdrew its offer and has constructed a new plant elsewhere to meet its demand. It is estimated that the SRS project would have saved $72 million in refurbishment costs (which are now included in the fiscal 1995 budget) and utility costs totaling more than $200 million over 20 years. While another power provider may want to pursue such a cogeneration facility at SRS, such an opportunity may be lost because the demand for off-site power should be met by the utility's new power plant.

In a similar situation, DOE's Richland Field Office received an unsolicited proposal from a private developer to build a power plant at the government's Hanford Reservation in Washington State. The proposal has the potential for saving as much as $50 million in refurbishment costs in the short term (including $11 million expended on partial refurbishment in fiscal year 1992) and at least $360 million in energy bills over a proposed 30-year contract period. At present, the Richland Field Office has issued a request for proposals to construct a facility that would power only the Hanford Reservation and not sell excess power off-site. If bidding is unsuccessful, the $50 million refurbishment will have to be obligated at least by fiscal year 1998. If the restrictive legislation is removed, a contract more beneficial to both the government and the private sector could be negotiated.

The restrictive language in the shared energy savings provisions does not apply to military bases. Consequently, power providers are generating electrical power on at least nine military bases and selling that power to those installations and to their local utilities. The arrangement at the China Lake Naval Base in California is lucrative (i.e., the contract generates approximately $3.5 million annual savings for the Navy). The savings will increase steadily to approximately $10 million annually after 10 years. Although specific savings will depend on site-specific negotiations, the China Lake facility represents an example of further cost savings that might be negotiated through the shared energy savings program.

There is no logical reason to preclude the federal government from pursuing shared energy savings opportunities with the private sector. When the restriction was implemented, there was a general surplus of electrical power in the United States. However, there is now a shortage of electrical power in several sections of the country, and local and regional utilities are purchasing increasing quantities of power from privately constructed power plants.

Action

Legislation should be enacted to amend section 804(2)(B) of Title VIII, the Shared Energy Savings amendment of NECPA, to remove the restriction that limits the sale or use of cogenerated electricity to federally owned facilities.

If this restriction is removed, power providers would have an incentive to build and operate cogeneration power plants at no expense to the government at DOE and other non-military government installations. DOE would have the option of refurbishing or rebuilding with government funds or avoiding such construction costs by contracting with power providers. Removal of the restriction would not require that such work be undertaken through private sector initiatives. Rather, it would provide the government and the electrical power industry with the alternative to work together for the benefit of the government, the industry, and the taxpayer.

Implications

On a case-by-case basis, the government would have the option of avoiding the cost of renovating old and constructing new steam plants. The government would receive new plants at no cost. In addition, the government's costs for power and steam generated by new, energy-efficient cogeneration technologies would be substantially less than the amount currently paid for steam and electricity used by the facilities. Cogenerated power would help meet the demand for electrical power in many utility service areas. Finally, new state-of-the-art cogeneration plants are also less damaging to the environment because they use new generating technologies.

Shared energy savings contracts include provisional commitments from the government to purchase designated amounts of steam and electricity over the 25-year life of the contract. Because government policy could change the use of installations (expand, reduce, or close), there may be instances when the power needs of the installation might change. Thus, a contingency clause should be negotiated in shared energy savings contracts to account for possible changes in power needs and reduce taxpayer liabilities.

Within the U.S. electrical power industry, utilities generally supported the restrictive legislation in 1986 when there was little or no demand for additional electrical power. However, many utilities now need additional power generated by independent power producers and would support removal of the restriction because it provides them with increased market opportunities and stimulates industry growth.

Fiscal Impact

The cost to refurbish a facility can be as much as $50 million. New plant construction, depending on the size, is estimated at over $100 million. Whether and when a refurbishment or replacement is conducted depends on the condition of each existing steam plant and the power demand situation for the local utilities surrounding each installation. The generator at Savannah River is scheduled to be refurbished at a cost of $72 million. If it can be replaced by 1996 with a privately funded facility, the costs of refurbishment can be avoided and its annual costs of power will be reduced. Refurbish-ment of the Hanford Reservation generator is not totally obligated at present but must be upgraded before fiscal 1998. These represent over $120 million in direct costs to the federal government that could be saved through shared energy savings contracts for cogeneration facilities.

Indirect savings from reduced electricity and steam utility bills at these two facilities (over 25- to 30-year contract periods) can be roughly estimated at $550 million.

Budget Authority (BA) and Outlays (Dollars in Millions) 
*******************************************************

Fiscal Year 1994 1995 1996 1997 1998 1999 Total ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ BA n/a -72.0 -10.0 -10.0 -10.0 -10.0 -112.0 Outlays n/a -37.0 -10.0 -10.0 -10.0 -10.0 -77.0 Change in FTEs n/a 0 0 0 0 0 0

Endnotes

1. Pestle, J.N., "Is Self-Generation for You," 1990 Cogeneration Project Handbook (Fairfield, CT: Perquot Publishing, 1990), pp. 6-14.

2. U.S. Congress, Office of Technology Assessment, New Electric Power Technologies: Problems and Prospect for the 1990s, OTA-E-246 (Washington, D.C., July 1985), p. 26.

3. U.S. Congress, Title VIII, Shared Energy Savings amendment to National Energy Conservation Policy Act 42 U.S.C. 8201, P.L. 96-294, Sec. 804. For purposes of this subchapter, the following definitions apply: the term energy savings means a reduction in the cost of energy from a base cost established through a methodology set forth in the contract and utilized in an existing federally owned building or buildings or other federally owned facilities as a result of the increased efficient use of existing energy sources by cogeneration or heat recovery, excluding any cogeneration process for other than a federally owned building or buildings or other federally owned facilities.

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