Intrinergy: Carbon Offsets (a)
6 Pages Posted: 7 Apr 2010
The A case describes the decision the BurMills textile company will make regarding whether to change from producing their own steam to outsourcing their steam production to Intrinergy. BurMills can calculate the present value of cost flows for three alternatives: producing their own steam from burning natural gas, outsourcing to Intrinergy with either a fixed price contract, or with a price contract that floats with the natural gas price at Henry Hub. In addition to the standard costs associated with steam production the case adds depth by providing the possibility of revenue from carbon credits. These credits are earned because the energy in the Intrinergy plant is created from biomass. A proper analysis will include a Monte Carlo simulation based on an arithmetic random walk for carbon credit pricing, a mean-reverting arithmetic random walk for Henry Hub natural gas spot prices, and other distributions. (A student spreadsheet is available to accompany this case: UVA-QA-0737X.)
January 14, 2010
INTRINERGY: CARBON OFFSETS (A)
In July 2009, Intrinergy was preparing a contract to provide steam energy for Burlingdale Mills (BurMills) at its Virginia textile plant. BurMills had always produced its own steam, but now it had an opportunity to outsource steam production to Intrinergy under either a fixed price contract, or a floating price contract tied to the price of natural gas. Intrinergy would produce the steam from converting biomass into clean energy, earning carbon credits in the process. The yet-to-be-determined value of these credits would play a role in the ultimate terms of the contract.
Intrinergy's Business Model
Intrinergy was founded in 2004 by a group of professionals with experience in managing industrial operations, project finance, and energy infrastructure. Several of the company's founders conceived the business model three years earlier while enrolled in the MBA program at the Darden School of Business. As students, they had provided consulting services for a company seeking to expand market penetration of the biomass-to-energy conversion equipment it manufactured.
Through their research, the founders realized that of the three primary uses of fossil fuels—electric power generation, transportation, and manufacturing—the manufacturing sector was relatively underserved by the evolving renewable-energy markets. They founded Intrinergy with the mission of delivering renewable energy solutions to industrial users of fossil fuels.
Of the various types of renewable energy that might displace fossil fuels, namely solar, wind, geothermal, and biomass, Intrinergy found that biomass presented two key advantages in industrial settings. First, biomass could be either stockpiled or used on a continuous 24/7 basis as needed, unlike solar or wind resources, which generated energy only when the sun was shining or the wind was blowing, or geothermal resources, which were site-specific. Second, combusting biomass generated large quantities of thermal energy, which most heavy industrial energy users consumed in large amounts, typically as industrial-process steam. High-efficiency combined-heat-and-power (CHP) cogeneration technologies were highly suited to such settings.
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Keywords: NPV, outsourcing, carbon credits, Monte Carlo
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Intrinergy: Carbon Offsets (a)
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