Ponca City Cogeneration Plant
6 Pages Posted: 21 Oct 2008
An electric utility faces the hard choice between losing their third largest customer or building a cogeneration plant that is very risky to them and appears to take value away from the firm. Students first assess their strategic position and the magnitude of the risk, in the process improving the assumptions of the discounted cash flow spreadsheet model available to them. The task is then to be shrewd and creative in reducing and managing the risk of the project, which, after all, is manageable.
Rev. Jun. 30, 2010
PONCA CITY COGENERATION PLANT
From the time Oklahoma Gas and Electric (OG&E) first learned that the National Oil Company (Natoco) wanted to build a plant to supply its own steam and electricity for its refinery in Ponca City, Oklahoma, Robert Patrick James, OG&E's director of Capital Projects, had treated it as both a serious competitive threat and a strategic opportunity. OG&E could not say goodbye to its third-largest customer, particularly at a time when reduced demand had left the utility with 30% reserve capacity. Other electricity rate payers would then have to bear the cost of Natoco's lost contribution to fixed charges. As the industry moved toward increased competition and decreased regulation, OG&E very much wanted to send a message to Natoco and every other industrial company in the state that it was willing to serve all the needs of its customers.
The Cogeneration Plant
A cogeneration plant was a clever way to use energy more efficiently. The concept was a dual use of energy: once to drive an electric generator, and once again to produce steam. Exhibit 1 shows the engineering design for the Ponca City plant. This design would use natural gas from a pipeline mixed with refinery gas, a waste product low in Btu content (a Btu, or British thermal unit, is a measure of heat energy) and high in impurities that had to be burned off at the refinery's site.
Waste heat from the gas turbine was captured by a manifold and sent to a boiler that produced steam. There, the temperature could be raised by a supplemental firing to obtain additional steam. Supplemental firing was essentially free at Ponca City, because it would be done at a level corresponding exactly to the amount of energy available from refinery gas.
Because of many factors, the overall efficiency of the plant would not be known until it was operating. Efficiency was measured by the heat rate, which measured the number of Btus required to produce one kilowatt-hour (kWh), a measure of the electrical energy. The best projection was a heat rate of 14,000 Btu/kWh.
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Keywords: discounted cash flow DCF capital budgeting project finance simulation
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