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CHP Units Expected To Drive Earnings for REP in the Eastern United States
A retail energy CEO told MAGNIFYI this month that his company is expanding in the deregulated northeastern states by adding combined heat and power (CHP) technologies for commercial and industrial customers.
A retail energy CEO told MAGNIFYI this month that his company is expanding in the deregulated northeastern states by adding combined heat and power (CHP) technologies for commercial and industrial customers.
Catalyst Power Holdings recently entered the retail power market in Delaware, where Delmarva Power & Light announced rate increases in December, effective on an interim basis in July subject to refund.
Recent winter weather could drive further increases. “This winter’s price spikes due to arctic temperatures and winter storm Fern provide another example of the danger of not locking in long-term rates to control costs,” Catalyst CEO Gabriel Phillips said.
His company is focused on integrating solutions like CHP with its retail business to help customers increase efficiency and control costs.
“Gas to power conversion is much more efficient than buying from inefficient generation far away,” he said. “Power where it is consumed is going to be the most efficient.”
Catalyst has targeted the underserved market of independent businesses for CHP, or power generation plus waste heat capture for heat production and absorption cooling, along with ancillary equipment.
Phillips foresees placing micro-CHPs, or natural gas reciprocating engines with a heat exchanger manifold, inside of client boiler rooms. The manifold may go into hot water storage where there is a consistent hot water need, be used for peak shaving in the winter or brought into an absorber for absorption chilling in the summer.
The units would be distributed energy resources behind the client meter with a capacity of 75 kW to a “couple hundred” kW.
“This is the year when our combined heat and power business, or just distributed generation more broadly, is going to come up the maturity scale to match what we have had thus far in the retail business,” Phillips told MAGNIFYI.
CHP and the solar energy assets that Catalyst developed in recent years could equal the contribution to company earnings from its retail business by the end of 2027.
Catalyst is active in the New York, New England and PJM markets and will finance, install, own and operate energy equipment at client sites.
“High energy and capacity prices in eastern PJM capacity markets translate into high retail prices for the supply side of the customer’s bill as well as for the distribution and transmission side,” Phillips said.
“So those boxes were checked in Delaware for us as well as in Maryland and Washington, D.C., and everywhere else on the eastern PJM seaboard. The other reasons why Delaware is attractive for us are natural gas availability and the spark spread. The spark spread for a gas-fired asset that is cleaner than grid supply is pretty significant, so we can undercut power costs and provide customers with a hefty savings.”
Customers have gas price exposure when managing delivery either through their utility or through Catalyst, but Phillips explained that the spark spread is so significant that the risk is minimal, and the value of the power output is heavily correlated to gas.
Catalyst establishes a shared energy savings agreement for the CHP units, akin to a power purchase agreement.
“We are incentivized to keep these machines running efficiently because in many of our contracts, we have some exposure to the cost associated with operating the equipment, whether it is fuel or otherwise,” he said. “The customer shares that risk with us. We want our exposure to be directionally the same as the customer.”
Catalyst has tolling agreements with some customers which deliver the fuel to the generator at their site, to be charged for kilowatts produced at their utility’s avoided cost rate, less a fixed discount.
“They are always guaranteed to be saving money no matter what,” Phillips said, “and then they get to keep the thermal energy for free. That tends to be the contract structure when their thermal use is not consistent year-round and they want the flexibility to use our heat or not. With these structures, they are always better off, at least on the power side, compared with the utility rate.”
Catalyst performs a detailed analysis of utility rates for each customer to ensure they are only charged for costs that are avoided.
“Some other providers take the dollars spent and divided by the kilowatt hours,” he said. “And we all know that’s not right. There are non-bypassable charges that you have to account for.” The firm will determine if the Catalyst equipment positively affected each of the individual cost components on a bill, and shares the analysis with customers.
In its efforts to provide infrastructure as a service, Catalyst owns assets such as boilers, electric-driven chillers and gas engine-driven heat pumps. The company can provide other ancillary thermal-related and heating, ventilation and air conditioning equipment to reduce capital expenditures by customers.
The company also is exploring larger reciprocating engines of six MW to 10 MW that produce higher temperature exhaust for use in data centers.
Phillips is also considering battery storage, but “is having a tough time getting it to pencil,” with narrow spreads in peak and off-peak power prices and natural gas prices at $3/mmBtu.
“They [batteries] are not lucrative enough to consume [energy] overnight and dispatch during the day,” he said. “You would think as a retail supplier that has the financial responsibility to pay for customers’ capacity costs and other peak-related charges … that we would be the most exposed and therefore the most able to take advantage of the economic value produced from energy storage. But I cannot get them to pencil.
“We do not know what capacity prices are … many years in the future. The battery economics that can be locked in are too meager to support the return profile.”
Fueling batteries with solar power is not presently economical. The cost of batteries and their installation have a negative impact on internal rates of return, Phillips said.
Catalyst began by adding rooftop solar for clients, he added, but the technology has become very difficult to underwrite, and the company has stopped solar installations because of the volatility in federal incentives.
The Working Families Tax Cut Act adopted last year narrowed the window for solar power developers to be able to claim the 30% federal investment tax credit. Projects must be placed in service by the end of 2027 or start construction by July 4 to qualify, among other new restrictions.
Delmarva Power & Light filed on December 9 with the Delaware Public Service Commission to increase its total revenue from base rates by $67.8 million compared with its 2024 rate case. The increase is comprised of $44.6 million of incremental revenues and a requested transfer of $23.2 million for a distribution system improvement charge.
Residential customers comprise much of the distributor’s rate base, but it also has nine non-residential rate classes.
After its latest standard offer service auction, Delmarva Power said average residential energy supply costs are estimated to rise by 6.95% beginning June 1.
Based on bids received, Liberty Consulting Group estimated that monthly increases would be 5.36% – 6% for small commercial customers, 9.87% – 10.45% for medium general service and 4.76% – 5.39% for large general service. General service primary customers are expected to see rates fall less than 1%.
