Trigeneration - Tips and Traps for the Uninitiated - Baker & McKenzie

Sydney
Client Alert
May 2013
In This Issue:
What is Trigeneration?
A typical Trigeneration System?
What are the reported benefits of
using a Trigeneration system?
What issues need to be considered
regarding Trigeneration?
Conclusion
Trigeneration - Tips and Traps for the Uninitiated
Given the escalating costs of energy and increasing corporate focus on
sustainability, building owners and occupiers are increasingly seeking ways to
produce and use energy more efficiently.
Trigeneration is a potential solution to these problems, offering multiple
economic and environmental benefits. However, owners contemplating using
Trigeneration need to be aware of some of the significant potential issues in
both installing and effectively using a Trigeneration system.
In this article, we will explore:
• what Trigeneration is and how does a Trigeneration system work;
• the benefits of using a Trigeneration system; and
• potential traps when installing and using a Trigeneration system and how
to avoid them.
What is Trigeneration?
Trigeneration is the production of electricity, heating and cooling in the one
process.
A Trigeneration system uses natural or renewable gas to power an engine to
drive a generator. The generator produces electricity. Heat, a by-product of
the generation process, is captured and used to heat and cool (using an
absorption chiller) the building.
Trigeneration systems are sometimes referred to as a combined heat, cooling
and power (CHCP) unit.
A typical Trigeneration System?
A Trigeneration system is a form of ‘decentralised’ production of energy; the
energy is produced at the site where it is to be used. In contrast, traditional
forms of energy production, such as coal-fired power stations, are a form of
‘centralised’ production of energy; the energy is produced in a central location
and exported to distant end users.
Currently, approximately 5 percent of Australia’s total energy production
comes from decentralised sources (including solar sources), compared to 40
percent in the Netherlands and 55 percent in Denmark.

What are the reported benefits of using a Trigeneration
system?
Efficiency → savings on energy costs
A Trigeneration system is claimed to capture 80 percent to 90 percent of the
energy the system produces. In contrast, coal-fired power stations, convert
only 35 percent of the energy used into electricity.
A Trigeneration system’s efficiency is achieved by:
• capturing the heat (a by-product) for use in heating and cooling the
building. In a coal-fired power station, this heat is normally lost by venting
the heat to the atmosphere through cooling towers; and
• avoiding energy distribution losses (as the energy produced is used on
site and therefore does not have to be transported to the end user). Such
distribution losses can amount to approximately 10 percent to 20 percent
of energy produced in a coal-fired power station.
This efficiency offers cost savings for owners as:
• owners pay less for fuel (as less fuel is needed to produce the same
amount of energy); and
• owners are not required to contribute to infrastructure costs of
transporting electricity to site (which transportation or distribution costs
are said to make up approximately 50 percent of the cost of electricity
generated by coal-fired power stations).
Some owners using Trigeneration systems have reported a 30 percent saving
of their energy costs.
Reduction in greenhouse gas emissions
Proponents also claim Trigeneration systems offer a 40 percent to 60 percent
reduction in greenhouse gas emissions (compared to coal-fired power
stations). This reduction is achieved by the use of cleaner burning gas rather
than coal used for centralised electricity production.
This offers benefits to owners in enhancing their corporate image and by
assisting in achieving ‘Green’ rating benchmarks (see comments immediately
below).
Lettability and reputation
Use of a Trigeneration system in a building also assists that building in
achieving a higher NABERS (National Australian Built Environment Rating
System) and Green Star rating. Studies have shown that buildings with higher
NABERS ratings are more attractive to quality clients (e.g government
entities) and achieve consequently higher leasing and sale valuations.
Back-up power
As the electricity produced by a Trigeneration system is not sourced from the
grid, owners are insulated from the consequences of power outages. This
benefit is highly significant for owners and tenants with business operations
that are particularly sensitive to the consequences of a power outage, for
example, hospitals and data processing centres.
2 Trigeneration - Tips and Traps for the Uninitiated ⎜10 May 2013

What issues need to be considered regarding
Trigeneration?
Owners must, however, consider a range of potential problems in tandem with
the potential benefits of Trigeneration. These potential problems are
discussed below.
High capital costs
Installing a Trigeneration system requires a significant capital investment from
owners, with some commentators estimating that the cost of installing a
Trigeneration system at 5 percent of the total cost of the building. For
example, the Trigeneration system installed by the National Australia Bank in
its data centre in Melbourne was reported to cost A$6.5 million, the system in
the Toyota headquarters in Melbourne A$1.5 million and the system in the
Rooty Hill RSL Club A$4.2 million.
Owners report, however, that such systems generally pay for themselves
within about 5 to 7 years.
The capital investment may be offset by leasing (or selling) the installed
Trigeneration system to an energy provider. The lease payments (or the
proceeds of the sale) can be used to offset the capital outlay.
Technical issues
For optimum efficiency Trigeneration systems need to run at near maximum
capacity. It is therefore essential to install an appropriately sized system to
meet the energy demands of the building. Complex calculations are required
in selecting the appropriate sized system given the many variables involved.
Such variables include the different business activities and energy demands
of tenants and the cyclical nature of energy use driven by seasonal and tenant
and business activity fluctuations.
Impact on construction and operation agreements
A Trigeneration system that is over sized (and therefore produces electricity in
excess of the building’s needs) may need to be turned off where the export of
excess electricity to the grid is not feasible. Additionally, a Trigeneration
system that is over sized for the needs of the building may also create a
perverse incentive for owners to stimulate higher energy demand in an effort
to use all the electricity produced by the system.
In the absence of the ability to form a Trigeneration precinct (see section
below), owners need to consider carefully the form and content of the contract
under which a Trigeneration system is to be installed. For example, use of a
design and install contract will ensure the supplier of the Trigeneration system
remains liable for selecting the appropriate sized system. If using a design
and install contract, a fitness for purpose obligation should be included clearly
expressing the owner’s requirements.
Precinct agreements
One solution is for owners to co-operate in forming a ‘precinct’ of power
generation and user sites. In CBD developments, this may mean tapping into
the City of Sydney’s proposed CBD trigeneration precinct. Under a precinct
arrangement, the owner of a building with a Trigeneration system enters into
an agreement with an energy provider under which excess electricity
produced by the Trigeneration system is exported to the grid and used by
other buildings. At this stage, it is more difficult and expensive to export the
3 Trigeneration - Tips and Traps for the Uninitiated ⎜10 May 2013

heat produced by a Trigeneration system to other buildings and, as a result,
currently only electricity is usually exported.
Gas price
A Trigeneration system is generally fuelled by natural gas. Commentators
predict a shortfall in natural gas supplies by 2014, potentially resulting in a
doubling of natural gas prices and consequently reducing the cost advantage
of using a Trigeneration system over traditional centralised coal powered
generation.
Given this potential volatility in gas prices, owners contemplating installing a
Trigeneration system should consider entering into long term gas supply
agreements which either lock in a gas price or limit the potential for gas prices
to increase.
NABERS and Trigeneration precincts
The NABERS Energy rating system does not currently reward the recipient
buildings to which electricity is exported as part of a Trigeneration precinct.
For example (when assessing the rating), the building in which the
Trigeneration system is located (Building A in the diagram below) is given the
energy efficiency benefit of using natural gas to produce its energy, whereas
the building importing the ‘clean’ electricity produced by the Trigeneration
system (Building B in the diagram below) is treated in the same way as if the
electricity was provided from a coal-fired power station.
Submissions have been made by different groups to the Office of Environment
and Heritage to address this apparent disincentive to establish a Trigeneration
precinct arrangement.
Regulatory hurdles
Owners contemplating installing a Trigeneration system face a complex and
difficult connection process and regulatory barriers.
In order to sell electricity to end users (e.g. tenants), owners need to either
hold an ‘electricity retailer authorisation’ or obtain an exemption from the
requirement to hold such an authorisation. Owners of Trigeneration systems
should be eligible for an exemption in most cases. However, the class of
exemption, and whether an individual application to the Australian Energy
Regulator (AER) is required to obtain such an exemption, will depend on a
number of factors including the identity, number and electricity usage
requirements of the relevant customers.
ClimateWorks Australia produced a report in 2011 titled ‘Unlocking Barriers to
Cogeneration’ which proposed a number of initiatives to facilitate the process
of enabling owners to connect to the grid, as follows:
• Change the National Electricity Rules (NER) to streamline and
standardise the process for the owners of Trigeneration systems seeking
connections to the grid;
• Extend the NER existing concept of automatic access standards as
currently exists for household solar panels to certain sizes of
Trigeneration systems; and
• Put in place processes which encourage greater engagement and
information exchange between distribution network service providers and
Trigeneration system owners.
4 Trigeneration - Tips and Traps for the Uninitiated ⎜10 May 2013

www.bakermckenzie.com
For further information please
contact
Alex Hartmann
+61 2 8 922 5176
Alex.Hartmann@bakernet.com
Sebastian L. Busa
+61 2 8922 5382
Sebastian.Busa@bakernet.com
Peter Davis
+61 2 8922 5365
Peter.Davis@bakernet.com
Jennifer Fitzalan
+61 2 8922 5724
Jennifer.Fitzalan@bakernet.com
Level 29 AMP Centre
50 Bridge Street Sydney
NSW 2000 Australia
Given the current regulatory difficulties, presently, owners are effectively
compelled to sell any electricity exported from the building to the local retailer
for their area (e.g. in Sydney, EnergyAustralia).
Ownership structures - sale/purchase and leasing
Where the building is owned through a trust structure, it is important to ensure
that the ownership or leasing of the Trigeneration system (and the sale of
electricity produced by that facility) does not result in the trust being taxed at
corporate income tax rates. It is however possible to ensure that it is not the
building owner that sells the electricity produced by the Trigeneration system.
The building owner can achieve this by leasing the Trigeneration system to an
operator who then generates and sells the electricity.
The sale/purchase and leasing of a building containing a Trigeneration system
will require consideration of:
• the novation of any Environmental Upgrade Agreements or Energy
Performance Agreements to the purchaser;
• the occupational health and safety issues in respect of any known
damage to the Trigeneration system as in most jurisdictions equipment
cannot be sold without disclosing to the purchaser any damage that may
present a risk of harm to people;
• a due diligence review of maintenance, servicing and commissioning
reports and processes for the Trigeneration system;
• whether the Trigeneration system is’ plant and equipment’ for the purpose
of the Personal Property Securities Act 2009, and if so, whether there are
any security interests held over the facility; and
• in respect of leasing:
Conclusion
− who has the obligation for repair and maintenance, including
capital repairs and upgrades; and
− the treatment of outgoings in multi -tenanted buildings.
Trigeneration offers significant benefits to property developers, owners and
investors. However, before installing a trigeneration system, owners and
investors should carefully consider the technical and legal issues involved with
installing and using such a system before incorporating it into their new or
existing buildings.
©2013 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service
organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.
This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.
5 Trigeneration - Tips and Traps for the Uninitiated ⎜10 May 2013