WHITEFISH, MT / April 15, 2014 / The amount of carbon emissions the world produces has been correlated to economic expansion over the past decade. According to the Trends in Global CO2 Emissions 2013 Report, a joint effort between PBL Netherlands Environmental Assessment Agency and the European Commission, there was a decoupling of the data in 2012, suggesting that initiatives to cut emissions is gaining wider acceptance. Investors looking to capitalize on a growing trend of cogeneration usage to produce more efficient energy with less greenhouse gases, would be well served to consider companies like General Electric (GE), Siemens AG (SI) and EuroSite Power (EUSP) for global reach or pure play potential.
Cogeneration, often called combined heat and power or CHP, is the process of capturing "waste" heat, which is created as a byproduct of generating electricity, and utilizing it as another energy source. CHP can be up to 90 percent efficient, as compared to about 35 percent efficiency in conventional power plants.
The United States and the European Union are world leaders in CO2 reduction, with the aforementioned Trends report showing that the U.S. (which accounts for about 16% of global emissions) cutting its emissions by 4% in 2012. Europe's 11% share was reduced by 1.6% in 2012 and the latest report this month by Thomson Reuters estimates that industrial emissions in the EU fell by 3.1% in 2013. Even in cases where some countries are still posting increasing CO2 emissions, they are doing so at a slower pace. For example, China, which accounts for a whopping 29% of global emissions, slowed its rate from an average increase of 10% annually to only a 3% increase in 2012.
Siemens and GE, along with Caterpillar (CAT) are leading players globally, with a strong presence in the equipment market in the U.S., Europe and China. The Chinese markets are particularly of interest for these stalwarts because of China's focus on decentralizing energy systems. Approximately 1,000 decentralized energy projects are expected during the next two years as part of a five-year plan by Chinese government for the country to produce energy more efficiently and with fewer emissions.
The government initiatives are bolstering the $4.5-billion Chinese CHP equipment market and keeping margins up for major manufacturers of gas turbine and internal combustion engines, where their offerings, including installations, parts, controls and training can command premium prices. According to China Strategic Research, CHP installations totaled 167 gigawatts in 2010, accounting for 23 percent of total thermal power capacity. That figure has been growing quickly and should continue to do so in the future, considering that large demonstration projects are underway. To name just a couple, Siemens' gas turbines are central to the planned Guangzhou Aoutou Decentralized Energy Station that will provide electric, steam and cooling for businesses in the Aotou Industrial Zone. GE is providing its gas turbines to Chinese power company Guodian Dianli for the large Nanxun power plant in Huzhu.
To the north, a pure play for Europe is EuroSite Power. The on-site utility provider designs, installs and maintains CHP systems for commercial clients in the hospitality, healthcare, housing and leisure center sectors in the United Kingdom and Europe. EuroSite doesn't compete with majors like GE as it focuses on these smaller applications, where their heat byproduct of producing electricity via natural gas can be efficiently used for hot water production or used for chillers. In general, hotels, hospitals and health facilities are leading sectors for CHP in Europe because of the large demand for thermal energy.
The numbers show that EuroSite Power is using the desired source fuel and is targeting the right demographic. Nearly 70 percent of CHP systems in the U.K. in 2012 were powered by natural gas, the only choice of EuroSite Power because of its efficiency. When it comes to evaluating electrical capacity by size, projects over 10 MWe (such as those majors install) represented about 82 percent of total CHP electrical capacity. However, projects less than 1 MWe (such as EuroSite Power's) constituted about 83 percent of all operating CHP projects in 2012.
Of the 1,929 operating projects in the U.K. in 2012, 1,396 of them were in the commercial sector, public sector and residential buildings. In short, big is good, but the smaller projects represent the vast majority of CHP schemes. The number of CHP projects jumped in 2011 and 2012, with 470 of the 1,929 projects (24.4%) installed during those two years after having 1,327 in place in 2008.
The resurgence has been sparked by multiple factors, including a litany of incentives in the U.K., as well at the E.U. Emissions Trading System (EU ETS). The EU ETS is a pillar of European policy to fight climate change and cost-effectively reduce carbon emissions. Amongst other things, the EU ETS puts a ceiling on the total amount of certain greenhouse gases that can be emitted by factories, power plants and more. In the regulations, companies receive or buy emission allowances and have to surrender enough allowances each year to cover their emissions or hefty fines are imposed. As time moves forward, the ceiling is lowered, forcing companies to either spend the money to buy additional allowances or figure out a way to lower emissions.
In the U.K. alone, greater efforts by government and companies saved 15.73 million tonnes of CO2 emissions in 2012 as compared to a basket of fossil fuels. That was an increase of 18.5% from 13.27 MtCO2 in savings during 2011.
EuroSite Power provides businesses the opportunity to meet mandates and capitalize on incentives. EuroSite Power's business model is also substantially different than others in the CHP space as it is not looking to sell equipment, but rather the energy. The company covers all the upfront costs to place and maintain the units and then charges only for the energy produced through a long-term supply agreement that typical last 15 years. If analysts and companies have one negative about CHP, it is that cogeneration systems can be pricey upfront, a problem overcome for customers through EuroSite Power's business model. Further, the company guarantees the energy it supplies to be less than the costs associated with purchasing either power from the grid or using conventional boilers.
With no capex required, a guaranteed discount on energy, lower taxes and greener operations for clients, EuroSite Power is employing a business model that is hard to resist. For shareholders of EUSP, it secures long-term revenues with minimal expense during the three-to-five year payback period that transitions to higher margins during the last decade of the contract.
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Worldwide, governments are not taking carbon emissions and global warming threats lightly. In fact, the noose of tolerance is tightening with readily available alternatives at the fingertips of businesses large and small. The evidence of efforts is clear, as are the benefits that are showing in statistics as CHP and other environmentally friendly processes are becoming mainstream. There are certainly still conventional energy plays that can be profitable, but for long-term play, CHP is looking like a way to go.
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