Many commercial property owners could profit from the energy cost savings afforded by CHP technology, but don’t have spare capital to purchase equipment or expert personnel to manage its operation properly. Here, Barry Sanders explains the concept of an on-site utility, which both takes charge of the CHP project and guarantees discounted energy rates.

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Stevens Institute of Technology, New Jersey, US

Technologies that improve energy efficiency, like combined heat and power (CHP), offer commercial property owners the opportunity to save money by reducing their operating costs. Also, research shows that energy-efficient properties are more marketable, commanding a premium in rent and sales price, as well as higher occupancy rates.

But CHP systems have not yet evolved into ‘plug-and-play’ appliances. Most property owners and facilities managers are accustomed to purchasing electricity from their local utility and relying on boilers to supply heat and hot water.

A more complex CHP system, which would generate electricity on-site and use recovered heat to meet thermal loads, can be a challenging project to property owners and managers who have no experience with CHP technology, any knowledge of the regulations that apply to these systems, nor simply neither the time nor funds to persue.

The fact is that CHP is still a difficult business for people without experience. To save money for property owners, the technology requires specific knowledge and expertise, not only to design and install the system properly, but also to operate it for maximum performance, efficiency, and energy cost savings.




What if a commercial property owner could reap the benefits of CHP technology without any risk? That’s essentially what an on-site utility does for its customers. The business model is based on a contract which guarantees a percentage discount – typically 5%-15% below the building’s current energy costs – over a period of time, usually 15 years. In fact, the length of the term of the agreement is the only potential drawback to the property owner.

Property owners need not risk capital to increase cash flow, and the work required to operate and maintain the equipment is taken out of the equation.

Several other options exist for property owners to implement CHP technology. Owning and operating a system could provide the greatest return on investment, but the owner assumes all of the risks. Also, the recent credit crunch has made financing difficult to obtain. Hospitals and universities especially are feeling the pinch as donations are scaled back.

Leasing is another alternative, where the property owner avoids an up-front investment but pays a monthly fee, plus all of the CHP system’s operating and maintenance costs. The idea is for the energy cost savings to exceed the lease payment.

Another business model is the shared-savings or performance contract. These are the domain of energy service companies (ESCOs), which handle the CHP equipment engineering, purchase, and installation. The ESCO and property owners share the responsibility for operating and maintaining the equipment, and the ESCO receives a majority of the actual energy cost savings, typically 60%. However, these deals include many special fees for the ESCO and often still have a financing component.

Although capital investment and some risks are avoided, the customer is still exposed to the risk of equipment reliability and performance.

If the CHP system is shut down for maintenance or if it’s operating inefficiently, the property owner’s savings can disappear or become a loss.

With either a lease or a shared-savings agreement, fuel prices pose another risk. Property owners can cut a deal with a fuel supply broker, but they have to lock into a price on the open market. This leaves the customer vulnerable to volatile energy prices, which can be severe for natural gas and oil.




This business model is a type of ‘out-sourced’ agreement, where experts manage the entire CHP project and assume all of its risks. As a leading on-site utility, American DG Energy not only finances, designs, and installs the CHP equipment, but also operates and maintains it at no cost to the property owner. The only risk, a minimal one, is the relatively long term of the agreement, which still can allow customer ownership if the equipment is later purchased via a standard ‘buyout’ clause.

The process is ‘seamless,’ without any perceptible interruption in the day-to-day functions of the property. The property owner’s cash flow begins to increase as soon as the equipment starts running, usually within three to four months of signing the agreement.

To some customers, this might sound too good to be true, but the crucial factor is that the company specializes in CHP and the on-site utility business. This requires using proven equipment, components, system designs and employees. An established, multi-tiered team of dedicated, operations specialists are ready to properly monitor, control and then quickly react, 24/7, to any operations or service issue in its fleet of owned and operated CHP sites.

These factors provide the critical efficiency that a property owner can never achieve. In addition, the company has the experience, insight and knowledge to select only good CHP projects. There is no incentive to make a ‘one-time equipment sell.’ American DG must live with the project (and more importantly the customer) for the term of the agreement.

This business model offers customers ‘one-stop shopping’ and the property owner pays only for the energy that is actually used by the building, without any fixed fees, minimum bills or take-or-pay requirements.

In contrast to the shared-savings model, the property owner’s energy rates are guaranteed to remain lower when utility rates go up or down. This eliminates the gamble on future fuel and electricity prices.

The property remains connected to the electric grid and local gas utility, and the customer retains control of the thermostat, hot-water temperature and other energy consumption or site ‘demand’ variables. Also, American DG tailors each agreement to individual customer needs, with energy rate discounts formulated to respond to the property owner’s concerns.

As a business model, the on-site utility adapts well to changing markets. When fuel prices escalated in 2008, property owners became motivated to reduce energy costs, stimulating the CHP market. Then when the financial system became unstable and energy prices dropped, property owners’ interest shifted toward preservation of capital. The on-site utility business model responded to that motivation as well.




The first step is to collect at least a year’s worth of the property’s utility bills and review its electrical and thermal loads. This leads to a rough estimate of the potential cost savings from a CHP project.

If results are promising, the next step is a site visit to verify the property’s energy loads. Commercial properties usually need a significant thermal load for a CHP project to make economic sense, because efficiency and cost savings typically depend on utilizing recovered heat. Properties that have a thermal load 12 months a year and approaching 24 hours a day are the ideal candidates. Matching the CHP equipment to the property’s domestic hot water load is a common method.

In the past, CHP equipment has sometimes been over-sized or otherwise designed incorrectly, resulting in excessive capital investment, disappointing performance and higher-than-expected operating costs. Matching the CHP equipment solely to the maximum property electrical demand is the most common mistake that leads to over-sized projects. However, American DG Energy seeks to match the CHP system’s capacity as closely as possible to the property’s actual thermal and electrical loads. That’s because both the on-site utility and its customer benefit from utilizing the maximum output of the equipment. Everyone wins when efficiency is the goal.

During the site visit, company engineers also examine the property’s layout to see whether thermal loads are located close enough to be served efficiently and where the CHP system would be tied into the existing infrastructure, such as the natural gas and electricity feeds.

Once the property’s energy loads have been verified, American DG estimates total installed cost and decides whether to make an investment in the project. If cash flow is sufficient the on-site utility proposes a discount rate and contract term.

A simple energy balance sheet can reveal a realistic number of operating hours, . Then plugging in the prevailing electricity and natural gas prices results in a more realistic estimate of cost savings. As a long-term ‘owner’ and investor with an on-site utility, American DG is only motivated to create realistic values, versus inflated numbers used to make a one-time sale.

The detailed design process begins as soon as the property owner signs an agreement. Company engineers begin engineering work using its proven design as the basis, prepare the equipment, obtain state and local permits and follow procedures for interconnecting the CHP equipment with the electric grid. Once installed, the equipment must be approved by the utility before the system can be commissioned. All work performed by American DG at no cost to the property owner.

The entire process, from signing the agreement to turning the CHP system on, ttakes a total of three to four months. The customer sees an immediate increase in cash flow when the equipment starts operating.

American DG has gained experience with several types of commercial properties, including apartments/condominiums, nursing homes, hospitals, schools, colleges, hotels and health clubs. The design process is by no means a ‘one-size-fits-all’ or ‘cookie-cutter’ approach, but the company’s experts in CHP applications are able to streamline the process.




In the on-site utility business model, the more time that the CHP equipment is up and running efficiently, the more money it saves for both American DG Energy and the property owner. The on-site utility has a strong incentive to keep the CHP system in top-notch shape. The performance of each module is monitored real-time, constantly by American DG engineers.

To operate at maximum efficiency, the CHP system follows the property’s thermal and electrical loads while tracking the power being imported from the electric grid. Automatic controls and modulating valves are built into the system. Each unit is programmed with setpoints to keep its electrical and thermal outputs within certain parameters. Typically, CHP equipment supplies around 50% of the property’s electricity and often 80% of its thermal energy (the remainder is supplied by the existing on-site boiler).

As the on-site utility, American DG compiles daily and monthly reports on the CHP system’s performance. These analyses reveal how the system might be optimized to increase its efficiency or what time of day a particular maintenance chore would best be performed. The company manages the equipment’s operation and maintenance to maximize energy efficiency, as opposed to relying on a routine schedule.

Real-time remote monitoring of the CHP system by company engineers ensures that technical issues are addressed promptly. If a problem arises, the equipment automatically sends out alerts via pagers, cell phones, e-mail messages, etc. A service technician from an extensive network is sent to the site immediately if needed.




The first CHP system installed by American DG Energy at Stevens Institute of Technology has performed so well that the school is already planning additional on-site utility CHP projects. The CHP equipment is also helping the campus reduce its carbon footprint while serving as a ‘live laboratory’ for students to learn about green engineering.

The Stevens Institute, which provides educational programmes addressing environmental sustainability and other global issues, is committed to using clean energy systems on its campus in Hoboken, New Jersey. American DG’s CHP system began operating in February 2009 at the school’s Schaefer Center, where it supplies 75 kW of electricity and up to 490,000 Btu/hr of heat in the form of domestic hot water. In addition, a natural gas-fueled engine-driven chiller provides 200 tons of cooling at another location on campus.

The Schaefer Center is the school’s athletic facility, containing a gymnasium, fitness center, and swimming pool. Because the building offers ample thermal loads to use recovered heat, the CHP system runs about 90% of the time. The chiller operates year-round at an average 80% capacity.

Because of its tight budget, the Institute looked for a third-party company that would finance the CHP project, as well as install, own, and operate the equipment. With the on-site utility, Stevens Institute has saved over $1 million in capital expenditure.

Besides increasing the school’s cash flow, the CHP system saves an estimated 370 tonnes of carbon dioxide annually, compared with buying power from the electric grid and burning fuel in a boiler.

Another important benefit of the CHP project is that it helps the Institute market its educational programmes and attract prospective students. ‘Having sustainable energy systems on campus for students to learn from gives Stevens a competitive edge,’ said Norman Forster, Director of Physical Plant.

Soon the Institute will get more of its power, heat and cooling from American DG under an expanded agreement. A likely candidate for CHP expansion is the campus’s central plant, where up to 500 kW of capacity might be a good fit. Multiple CHP modules would be installed, adding redundancy and reliability to the system. The design incorporates provisions for additional units if the school’s thermal loads warrant them.




High energy prices, along with a limited budget, prompted the River Point Towers Cooperative, Inc., to investigate CHP technology. River Point Towers is a 25-storey, 412-unit luxury apartment building where residents own their individual units (a ‘Co-op’). The building is 46 years old (vintage 1964).

The cost of the building’s central heat, air-conditioning and electricity had become one of the Co-op’s most significant expenses. Electrical demand was peaking at 600 kW, and natural gas use was high even in the summer, because a natural gas fed, steam-driven absorption chiller was used for air conditioning. Two steam boilers provided space heating and hot water.

To reduce energy costs without investing any capital, River Point Towers turned to American DG Energy, which designed and installed a complete CHP system and two engine-driven chillers. River Point Towers pays only for the energy used by the building, with no operating costs or equipment maintenance responsibilities.

Actual savings over the past 2.5 years have averaged $80,000 per year, totaling more than $200,000. ‘The savings we have received has helped to contribute to other capital improvement projects, including exterior masonry rehabilitation, lobby improvements and security system upgrades.’

The River Point Towers CHP system consists of four 75 kW natural gas-fueled engine-generator packages, for a total capacity of 300 kW. To meet air-conditioning demand, American DG installed two 200 tonne natural gas engine-driven, water-cooled chillers and rebuilt an existing 780 tonne cooling tower. The new chillers can handle the building’s entire cooling load, curtailing the use of the old, less efficient 600 tonne absorption machine.

Almost 2 million Btu/hr of waste heat is recovered from the CHP system as 110°C water.

In summer 2010, American DG plans to implement a ‘demand-response’ strategy, which requires the CHP system to maximize output in the summer when the utility encounters its highest peak loads.

Barry J Sanders is president and COO with American DG Energy, Inc, US.



Stevens Institute of Technology – Schaefer Center

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A cogeneration unit at the Stevens Institute





One 75 kW Tecogen CHP module, operational February 2009

One 200 tonne Tecogen engine chiller, operational June 2009




Capital avoidance >$1,000,000

371 tonnes of carbon dioxide per year

5,570 tonnes of carbon dioxide over 15 year term


River Point Towers





Four 75 kW Tecogen CHP modules (300 kW),

operational February 2007

Two 200 tonne Tecogen engine chillers, operational June 2007

One 780 tonne cooling tower rebuilt

Two 150 kW natural gas back-up generators





1500 tonnes of carbon dioxide per year

22,500 tonnes of carbon dioxide over a 15 year term


Best candidates for an on-site utility



  • at least 150 rooms, beds or apartments
  • natural gas available on-site
  • heating and hot water supplied from a central boiler
  • thermal load greater than 3000 therms/month
  • central electric meter
  • at least 10 cents/kWh average electric rate


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