A new market risk model for cogeneration project financing—combined heat and power development without a power purchase agreement

Federal legislative changes in 2006 no longer entitle cogeneration project financings by law to receive the benefit of a power purchase agreement underwritten by an investment-grade investor-owned utility. Consequently, this research explored the need for a new market-risk model for future cogeneration and combined heat and power (CHP) project financing. CHP project investment represents a potentially enormous energy efficiency benefit through its application by reducing fossil fuel use up to 55% when compared to traditional energy generation, and concurrently eliminates constituent air emissions up to 50%, including global warming gases. As a supplemental approach to a comprehensive technical analysis, a quantitative multivariate modeling was also used to test the statistical validity and reliability of host facility energy demand and CHP supply ratios in predicting the economic performance of CHP project financing. The resulting analytical models, although not statistically reliable at this time, suggest a radically simplified CHP design method for future profitable CHP investments using four easily attainable energy ratios. This design method shows that financially successful CHP adoption occurs when the average system heat-to-power-ratio supply is less than or equal to the average host-convertible-energy-ratio, and when the average nominally-rated capacity is less than average host facility-load-factor demands. New CHP investments can play a role in solving the world-wide problem of accommodating growing energy demand while preserving our precious and irreplaceable air quality for future generations.