Throughout my years in energy engineering and utility operations, I have seen the development of impressive and successful energy systems. I have also seen potential systems miss the mark, because they lacked a clear vision for success, made missteps during system design and technology selection, or when determining the business model. There are many aspects to consider in development of a successful community energy system, including business dynamics, initial and potential scale, and the viability and diversity of the customer base. Once these are established, a cogent business strategy, system design, and system financing can be pursued. Energy systems are capital intensive and need to be adaptable and viable over the long-term. Pairing smart business strategy with smart system design is key to achieving long-term success for the system and its customers.
To develop a system and secure financing, partners need to have clearly defined goals. Defining the goals early in the process enables project partners to establish priorities, evaluate options, and work through potential conflicts. Goals may also require modification depending on the constraints of the market. For example using renewable energy might be identified as a top priority, but may face economic or financing challenges. To improve market viability, the system development may need to be phased to create viable financing packages for example the system may need to phase in renewables or may need to be designed as a modular system that can adjust to a customer base that is expected to develop over many years. Financing a system to meet the goals may require the addition of a partner that is capable of investing in the altruistic vision of an endeavor. For example, foundations or government partners may be interested in providing grants, long-term capital, or other forms of gap funding to allow a project to shift from fossil fuels to renewables, or make additional investments in energy efficiency. If the system is being developed in partnership with the end-users (customers), they may want to establish a structure that resembles a cooperative to enable the customers to have more influence in the system governance. In a competitive market, customer buy-in is usually crucial to the success of the project and the long-term viability of the system.
Selecting the right business model is also an important step in the development process because it can determine the adaptability of the system as the market conditions change over time. For many years, energy delivery in communities was essentially fixed, but today we are no longer in a situation where utilities make all of the energy decisions for a business or community. From solar gardens, to combined heat and power, to community-based district energy, people and organizations are more interested in playing a role in how energy is produced, delivered, and used. To enable long-term success, it is important to consider the changing marketplace when determining the appropriate business model.
There are many considerations for new energy systems, establishing clear goals as well as sound business and financing strategies is crucial for community energy development. Careful consideration to these steps helps to keep a system development on track, and once these foundational details are in place, the system champions and partners can move the project forward toward success.
Selecting the Right Business Model
The determination of a system’s organizational and financing model will have a lasting impact on the success of the system. The right business model depends upon a number of factors, including the project goals, the needs of the prospective customers, and the objectives of key stakeholders. Some options for potential structures include publicly owned, a private non-profit structure, a private for-profit structure, and a hybrid publicly-owned infrastructure operated as a private non-profit company.
Public business structures can be owned by a municipality like a city, county, or state. In this case, system financing could be based upon long-term customer contracts or it could be part of the municipality’s capital infrastructure budget and rates could be cost-based. A public system approach could provide access to low-cost financing and cost savings by implementing in parallel with other infrastructure projects. However, this approach may have challenges from blending private market development with the public sector model. Our client, Montpelier Vermont, has successfully implanted this model with District Heat Montpelier.
A private business model could be set up as a non-profit or a for-profit business. Both could be operated and managed by a third party, potentially utilizing a customer-represented board and third party operations and management partner, and would raise debt and equity based upon long-term customer contracts. The for-profit version may rely on the investors’ balance sheets. The non-profit model would operate much like a cooperative, which may be more enticing for establishing long-term contracts. However, private financing of a non-profit model may be more challenging in certain markets. District Energy St. Paul, operated and managed by Ever-Green, has successfully used the non-profit model for over thirty years. If developed as a private for-profit company, accelerated depreciation could allow the business to be more profitable in its early development. However, this approach may conflict with the community energy vision if it does not align with the interests of the system owner or stockholders.
There is also the option of a hybrid system with publicly-owned infrastructure and a private non-profit company. Under this scenario, a municipality could invest in the infrastructure for the energy system, but a private non-profit entity could be formed for purposes of the energy business. Governance of this structure could be similar to the private, non-profit model, where the municipality, customers and local stakeholders cooperate in setting the strategic direction for the business. This hybrid model would leverage many of the benefits of each of the other business models. Energy Park Utility Company in Saint Paul, MN is one version of a hybrid model, which is owned by the Saint Paul Port Authority and operated by Ever-Green.
As a community begins to explore new energy projects, business planning is an essential step that will impact the operations, market viability, stability, and success of the system. By exploring the various governance and financing options, stakeholders can find a structure that will support their vision and reach their goals.
Financing: Options for Critical Investments
Financing energy projects and system operations can be a complex process. Since the financial crisis in 2008, financing options for both new and existing projects have changed. Credit enhancement options such as letters of credit have been replaced in many cases by direct revenue bond purchases by financial institutions. Long-term interest rate decreases have led a number of projects to seek funding through public issuance and private placement of long-term debt.
New systems require selecting the business model and corporate structure, analyzing the market and customer base, creating customer agreements, selecting system technologies and reviewing the competition. Existing energy systems looking to expand or integrate new technologies are sometimes entrenched in life-cycle cost analyses and evaluating available capital options. Add to these complexities the emerging technologies that are quickly coming to the market, and it is not surprising that many projects do not make it past the initial evaluation stage.
Energy projects are capital intensive, requiring substantial investments in physical equipment. For district heating and cooling systems, these investment options provide opportunities. The growing trend is for communities, local government, and the customer base to be more involved in district energy development. This opens up the options for business models (ex. public-private partnerships) and increases consumer engagement and financing alternatives that can reduce the cost of the system financing. All of these elements lead to greater choice for consumers and ultimately more rate stability and cost-competition.
Given the level of infrastructure investment, it is crucial that it keep up with the rapid pace of technology changes by improving system efficiencies, reliability, and overall cost. This means both financing mechanisms and capital projects needs to be adaptable. District energy infrastructure is an ideal fit for this approach. With production technologies and building HVAC systems continually improving, they are more likely to be suitable for a hot water and chilled water system than stand-alone alternatives. This has already been proven with recently incorporated technology solutions, such as PEX piping and skid-units, which have reduced up-front costs for operators and customers, while not sacrificing flexibility or efficiency.
Our team has a unique depth of financing experience, driven by the operations and management component of our business. Through our work with District Energy St. Paul and District Cooling St. Paul, we have completed $375 million in system financings to support growth, technology and renewable integration, reduce annual debt service costs and improve system efficiencies and reliability. In 2013, the revenue bonds issued by both companies were assigned a long-term rating of ‘A-‘/Stable from Standard & Poor’s Ratings Services. The rating reflected a series of credit strengths including well-managed assets, stable revenue under long-term contracts with a diverse customer base, base rates adjusted annually to fully recover costs (including debt service), and an adjustable energy charge to recover changes in the cost of fuels. The financial structure has contributed to long-term stable rates with customer paying less today for their energy than they did 30 years ago, when adjusted for inflation.
Ever-Green takes an open approach with our clients and systems to find the right solution for their capital investments, while not compromising long-term flexibility or system efficiencies and reliability. Through managing our utilities and assisting our clients with projects, we have learned key lessons worth sharing; our capital intensive industry requires a long-term investment strategy and customer commitments, the investments need to be adaptable to the market, and the customer life-cycle cost analysis must be technically and financially adept. In an unpredictable energy market, we can bring a unique perspective to these important investments.
Energy Park Utility Company: A Public/Private Partnership
Owned by the Saint Paul Port Authority (SPPA) and managed by Ever-Green, Energy Park Utility Company (EPUC) is an example of a public and private partnership. SPPA is a redevelopment organization focused on expanding the tax base in Saint Paul and creating quality job opportunities for the area. Established in the 1920s to promote commerce along the Mississippi River, in 1962 SPPA started redeveloping properties inland.
In 1980 after environmental remediation of a superfund site, SPPA spearheaded the redevelopment of the Energy Park area (218 acres), transforming it into an urban village that today includes commercial, light industrial, residential, a hotel, medical facility, and a charter school. SPPA saw an opportunity with this development to utilize a district heating and cooling system, connecting all 25 buildings to the Energy Park Utility Company.
The foresight to make this initial infrastructure investment served this area well for 32 years, however, it was also important to continue improving the system to promote energy efficiency, customer satisfaction, and quality of service. In 2012 SPPA invested in the advancement of the business from the existing two-pipe to a four-pipe distribution system, allowing year-round heating and cooling services. In particular, this served a growing data center need for cooling in the winter and allowed domestic hot water service in the summer.
This system is also a great example of blending a long-term vision with short-term construction and development opportunities. Looking forward, the improved infrastructure prepares EPUC to further efficiency improvements, such as integrating combined heat and power, solar generation, and winter free cooling. Also, as adjacent properties are redeveloped, the system is now prepared to grow its geographic reach and expand its customer base.
Creating an Energy Vision for a Local Brownfield Redevelopment: TCAAP Opportunities
Located in Arden Hills, Minnesota, the Twin Cities Army Ammunitions Plant (TCAAP) is a 427-acre site that has recently gone through an extensive demolition and site environmental remediation program, and stands ready to be redeveloped. Ever-Green is leading a team of experts in energy systems and planning to work with Ramsey County and Arden Hills in the development of the TCAAP energy vision and the practical framework necessary to implement immediate energy solutions for this brownfield redevelopment. The team includes Center for Energy and Environment, Fresh Energy, and Burns & McDonnell.
Solutions for electricity, heating, and cooling are a critical upfront infrastructure investment. This presents an incredible opportunity for district energy and a potential microgrid that integrates thermal and electric capabilities for greater efficiency. These opportunities can occur through a range of timelines and at varying scales, allowing for multiple business models to emerge for development.
Given the wide range of potential, several business model scenarios could develop out of a partnership between the local utilities, the Arden Hills Army Training Site (AHATS) adjacent to TCAAP, and site developers. Cooperation between AHATS and TCAAP has the potential to be a very dynamic and beneficial partnership for both sites. Joint projects could include a microgrid, solar installation, or thermal load shifting. While not entirely defined yet, the organizational model that is established to facilitate this collaboration is under discussion and could follow several of the options presented in our business model feature. The selected model will likely be developed based upon the needs of all involved parties, as well as the future expected system customers. It is clear that the partnership involved in this development is committed to an efficient and economically competitive energy infrastructure and operating business model. We look forward to working with them to find the right fit for their short-term and long-term needs.
Andrew Kasid CFO of the Year
We are pleased to share that Andrew Kasid is one of the financial leaders awarded Chief Financial Officer of the year by Minneapolis/St. Paul Business Journal. Andrew is the Executive Vice President and CFO at Ever-Green Energy and affiliate non-profits District Energy St. Paul and District Cooling St. Paul. Kasid has been instrumental to the structural and financial health of our companies for over 20 years, supporting a long history of stable rates for their customers. Andrew also provides financial planning and modeling oversight for Ever-Green Energy’s consulting on development projects throughout North America.