Trigeneration – tips and traps for the uninitiated

By Jennifer Fitzalan

1 May 2013 – Trigeneration offers an attractive solution to the threat of escalating energy and network costs through energy efficient, decentralised production of heating, cooling and electricity. With myriad economic and environmental benefits, and an increasing corporate focus on sustainability, it might seem like a no-brainer for building owners and occupiers, but as Jennifer Fitzalan from Baker & McKenzie notes, there are some significant issues that must first be considered regarding effective installation and use.

What is trigeneration?

Trigeneration is the production of electricity, heating and cooling in the one process.

A trigeneration system uses natural or renewable gas to power an engine to drive a generator and produce electricity. Heat, a by-product of the generation process, is captured and used to heat and cool (using an absorption chiller) the building.

Trigeneration systems are sometimes referred to as combined heat, cooling and power (CHCP) units.

A trigeneration system is a form of decentralised production of energy; the energy is produced at the site where it is to be used. In contrast, traditional forms of energy production, such as coal-fired power stations, are a form of centralised energy production; the energy is produced in a central location and exported to distant end users.

Currently, about  five per cent of Australia’s total energy production comes from decentralised sources (including solar sources), compared with 40 per cent in the Netherlands and 55 per cent in Denmark.

Trigen – The benefits

Efficiency – savings on energy costs

A trigeneration system is claimed to capture 80 to 90 per cent of the energy from fuel. In contrast, coal-fired power stations only convert  about 35 per cent of the energy from fuel into electricity.

A trigeneration system’s efficiency is achieved by:

• capturing the heat (a by-product) for use in heating and cooling the building. In a coal-fired power station, this heat is normally lost by venting the heat to the atmosphere through cooling towers
• avoiding energy distribution losses (as the energy produced is used on site and therefore does not have to be transported to the end user). Distribution losses can amount to approximately 10 to 20 per cent of energy produced in a coal-fired power station

This efficiency offers cost savings for owners as:

• owners pay less for fuel. as less fuel is needed to produce the same amount of energy
• owners are not required to contribute to infrastructure costs of transporting electricity to site (transmission and distribution costs can make up about 50 per cent of the cost of electricity generated by coal-fired power stations)
• Some owners using trigeneration systems have reported a 30 per cent saving on their energy costs

Some owners using trigeneration systems have reported a 30 per cent saving on their energy costs.

Reduction in greenhouse gas emissions

Proponents also claim trigeneration systems offer a 40 to 60 per cent reduction in greenhouse gas emissions (compared with coal-fired power stations). This reduction is achieved by the use of cleaner burning gas rather than coal used for centralised electricity production.

This offers benefits to owners in enhancing their corporate image and by assisting in achieving an environmental rating.

Lettability and reputation

Use of a trigeneration system in a building also assists to achieve higher NABERS and Green Star ratings. Studies have shown that buildings with higher NABERS ratings are more attractive to quality clients, such as government entities, and achieve consequently higher leasing and sale valuations.

Back-up power

As the electricity produced by a trigeneration system is not sourced from the grid, owners are insulated from the consequences of power outages. This benefit is highly significant for owners and tenants with business operations that are particularly sensitive to the consequences of a power outage, for example, hospitals and data processing centres.

Key Issues

Owners must consider a range of potential problems in tandem with the potential benefits of trigeneration.

High capital costs

Installing a trigeneration system requires a significant capital investment, with some commentators estimating the cost of installing a trigeneration system at five per cent of the total cost of the building. For example, the trigeneration system installed by the National Australia Bank in its Melbourne data centre was reported to cost $6.5 million, the system in the Toyota headquarters in Melbourne $1.5 million and the system in the Rooty Hill RSL Club $4.2 million.

Owners report, however, that such systems generally pay for themselves within about five to seven years.

The capital investment may be offset by leasing or selling the installed trigeneration system to an energy provider. The lease payments or the proceeds of the sale can be used to offset the capital outlay.

Technical issues

For optimum efficiency trigeneration systems need to run at near maximum capacity. It is therefore essential to install an appropriately sized system to meet the energy demands of the building. Complex calculations are required in selecting the appropriate size given the many variables involved. Such variables include the different business activities and energy demands of tenants and the cyclical nature of energy use driven by seasonal, tenant and business activity fluctuations.
Impact on construction and operation agreements

A trigeneration system that is oversized – and therefore produces electricity in excess of the building’s needs – may need to be turned off where export of excess electricity to the grid is not feasible. Additionally, a trigeneration system that is oversized for the needs of the building may also create a perverse incentive for owners to stimulate higher energy demand in an effort to use all the electricity produced by the system.

In the absence of the ability to form a trigeneration precinct, owners need to consider carefully the form and content of the contract under which a trigeneration system is to be installed. For example, use of a design and install contract will ensure the supplier of the trigeneration system remains liable for selecting an appropriately sized system. If using a design and install contract, a fitness for purpose obligation should be included clearly expressing the owner’s requirements.

Precinct agreements

One solution is for owners to co-operate in forming a “precinct” of power generation and user sites. In Sydney CBD developments, this may mean tapping into the City of Sydney’s proposed CBD trigeneration precinct. Under a precinct arrangement, the owner of a building with a trigeneration system enters into an agreement with an energy provider under which excess electricity produced by the trigeneration system is exported to the grid and used by other buildings. At this stage, it is more difficult and expensive to export the heat produced by a trigeneration system to other buildings and, as a result, currently only electricity is exported.

• See recent articles in The Fifth Estate, Guy Pahor on why 12 cooling towers at Central Park are better than 30 and City of Sydney’s first EUA at Central Park announced

Gas price

A trigeneration system is generally fuelled by natural gas. Commentators predict a shortfall in natural gas supplies by 2014, potentially resulting in a doubling of natural gas prices and consequently reducing the cost advantage of trigeneration systems over traditional centralised coal powered generation.

Given this potential volatility in gas prices, owners contemplating installing a trigeneration system should consider entering into long-term gas supply agreements, which either lock in a gas price or limit the potential for gas prices to increase.

NABERS and trigeneration precincts

NABERS does not currently reward the recipient buildings to which electricity is exported as part of a trigeneration precinct.
For example, when assessing the rating, the building in which a trigeneration system is located is given the energy efficiency benefit of using natural gas to produce its energy, whereas the building importing the electricity produced by the trigeneration system is treated in the same way as if the electricity was provided from a coal-fired power station.

Submissions have been made by different groups to the NSW Office of Environment and Heritage to address this apparent disincentive to establish a trigeneration precinct arrangement.

• See article in The Fifth Estate, NABERS and district trigen: too many bridges

Regulatory hurdles

Owners contemplating installing a trigeneration system face a complex and difficult connection process and regulatory barriers.

In order to sell electricity to end users (for example, tenants), owners need to either hold an electricity retailer authorisation or obtain an exemption from the requirement to hold such an authorisation. Owners of trigeneration systems should be eligible for an exemption in most cases. However, the class of exemption, and whether an individual application to the Australian Energy Regulator is required to obtain such an exemption, will depend on a number of factors including the identity, number and electricity usage requirements of the relevant customers.

ClimateWorks Australia produced a report in 2011 titled “Unlocking Barriers to Cogeneration,”which proposed a number of initiatives to facilitate the process of enabling owners to connect to the grid, as follows:

• Change the National Electricity Rules to streamline and standardise the process for the owners of trigeneration systems seeking connections to the grid
• Extend the NER existing concept of automatic access standards as currently exists for household solar panels to certain sizes of trigeneration systems
• Put in place processes that encourage greater engagement and information exchange between distribution network service providers and trigeneration system owners
• Given the current regulatory difficulties, presently owners are effectively compelled to sell any electricity exported from the building to the local retailer in their area

Ownership structures – sale/purchase and leasing

Where the building is owned through a trust structure, it is important to ensure that the ownership or leasing of the trigeneration system (and the sale of electricity produced by that facility) does not result in the trust being taxed at corporate income tax rates. It is however possible to ensure that it is not the building owner that sells the electricity produced by the trigeneration system. The building owner can achieve this by leasing the trigeneration system to an operator who then generates and sells the electricity.

The sale/purchase and leasing of a building containing a trigeneration system will require consideration of:

• The novation of any Environmental Upgrade Agreements or Energy Performance Agreements to the purchaser
• The occupational health and safety issues in respect of any known damage to the trigeneration system, as in most jurisdictions equipment cannot be sold without disclosing to the purchaser any damage that may present a risk of harm to people
• A due diligence review of maintenance, servicing and commissioning reports and processes for the trigeneration system
• whether the trigeneration system is ‘plant and equipment’ for the purpose of the Personal Property Securities Act 2009 and, if so, whether there are any security interests held over the facility;
• in respect of leasing get rid of secondary bullets who has the obligation for repair and maintenance, including capital repairs and upgrades; and what is the treatment of outgoings in multi-tenanted buildings?

Jennifer Fitzalan is an associate with Baker & McKenzie.

This article was written with input from the Green Building and Development Group lawyers, including Alex Hartmann, Sebastian Busa and Peter Davis.