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Combined Heat and Power Even More Appealing Amid Spiking Utility Prices

Whitefish, MT / May 29, 2014 / Skyrocketing utility rates put U.S. citizens in an uproar in many parts of the country, with monthly bills doubling or tripling in many cities this winter. Last month, Senator Charles Schumer called upon the Federal Trade Commission to investigate the situation to determine if utility companies are artificially inflating upstate New York electric rates. Most of the country is experiencing rising electric costs, with the Midwest and Northeast hit particularly hard. While it’s fair to say that the massive spikes in costs were attributable to the bitter cold winter, don’t be fooled that it was a temporary hike. Rates are still moving north, a product of an improving economy and rising commodity prices. As The Motley Fool noted in March, “Utilities will benefit from increased economic growth in the United States, as it would leave open the possibility for greater rate increases and transmission growth.” Article author Bob Ciura notes that recent investor presentations by American Electric Power Co. (AEP) and Duke Energy (DUK) cited an improving economy as a fundamental driver of profit targets.

The Public Utilities Commission in Rhode Island in December approved a 12.1% rate increase, effective January 1, 2014, for those buying electricity from the national grid. In Pennsylvania, PPL Electric Utilities was predicting a 4.4% rate decline for customers, but the Public Utility Commission announced at 3.2% rate hike, effective June 1. Six of the seven leading electric utilities in the state have raised their rates effective that day, including West Penn Power jacking prices up 50.6%. Commonwealth Edison, a division of Exelon Corp. (EXC), this month boosted its Chicago customer’s bills by 20% starting in June. The list goes on and on across the country and emphasizes the value in alternative energies and on-site utility providers like American DG Energy, Inc. (NYSE MKT: ADGE) to help reduce strain on the grid and save businesses money.

It’s Not Just the Weather

The rising costs, which happen to work to the benefit of the utility providers by supporting the reliable dividend component that they are known for, are a bit of a case of “don’t shoot the messenger.” Electric bills are derived through two components and a surcharge. One component, the fee to deliver electricity to homes and business, is regulated by government agencies. Nationally, delivery rates actually declined in 2013. The other cost, that for electricity that is used by a customer, are controlled by wholesale and commodity prices, which can vary tremendously based upon supply and demand.

The shale boom in the U.S. has resulted in many utilities switching to natural gas as a source fuel for generating electric due to ample supplies and the fact that its comparatively clean. In the case of the inclement weather this winter, soaring natural gas prices, were instrumental in running electricity prices higher. Moreover, new regulations pressuring the coal industry (historically the cheapest source fuel for creating electricity) that threaten to shut down dozens of coal-fired power plants are being dubbed culprits in rising electric prices.

CHP Shines Bright…For Less Money

Whatever the case may be, rising natural gas prices or rising electric prices, or both, the luster gets brighter on a company utilizing Combined Heat and Power, such as American DG Energy. The reason is quite simple, as Combined Heat and Power, or CHP, is far more efficient than anything the national grid has to offer, allowing ADGE and its customers to benefit.

CHP is a century-old technology that is growing in popularity as a CHP system can generate two types of energy from one source fuel. For the majority of applications, natural gas is used to generate electricity. The key is that the heat (thermal energy) that is created generating the electricity is not wasted in a CHP system; it’s captured and repurposed for an array of uses, such as space heat, hot water or even to power chillers. Traditional electric generation methods are only approximately 33% efficient, versus CHP running as high as 90% efficient.

Because electricity and thermal heat are both produced from a CHP system, the aggregate cost is far less than buying them independently from a utility company. However, American DG is still able to charge the client for each energy independently, guaranteeing a 10% discount on their energy versus current market costs, while booking a profit and still saving the client money. So, to ADGE, it really doesn’t matter if commodity prices fluctuate, only to the extent that it can make the top and bottom lines vary slightly. For customers switching to an ADGE CHP system in cities where utility prices are rising, the conversion will lessen the impact and protect their bottom line, creating value proposition to make the move.

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CHP is currently not a perfect fit for every business because there must be an optimal ratio of use for the thermal heat in proportion to the electricity created to maximize efficiency. As such, businesses from small commercial to large industrial are the best targets because of high demand for thermal energy. American DG Energy primarily focuses its sales efforts on hospitality, healthcare, housing and fitness facilities where there is a constant demand for hot water.

In the typical sales cycle, ADGE eliminates capital expenditures for its clients, which include the likes of Clifton Hospital in Lancashire, UK and DoubleTree Suites, by designing, installing and retaining ownership of the CHP system, selling only the energy that is produced through a long-term contract.

The company says it generally recoups the initial costs over about the first five years of a fifteen-year contract. Most of the company’s 123 systems that are in operation today are still within that initial pay-back period, yet ADGE still generated total gross profit margin in North America in excess of 34%, lending impetus to rising profits as time moves forward. Adding new clients and rising utility costs helped revenue improve 23% year-over-year to $2.53 million during the January through March period.

Traditional utility plays in general have a great deal of appeal for long-term investments, as dividend and slow growth plays. Many majors delivered increased dividends in 2013 – a primary reason investors choose them – which should continue as the economy expands. American DG Energy rewarded shareholders with a piece of subsidiary EuroSite Power (OTCQB:EUSP), a UK-based on-site utility company with the same business model as the parent company whose sales rose 269% year-over-year to $432,184 in the first quarter. The commotion over the spike in prices will get its due lip service and some regulatory changes are possible, such as moves made in Pennsylvania to allow consumers to switch providers more quickly, but the overall trend is upward for utilities, which bodes especially well for driving demand for the products and services of American DG Energy.

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