Cogeneration plants are one of the most cost-effective and efficient ways to generate electrical and thermal energy, which can take the form of either hot water, hot air, steam, or all three. As the name suggests, cogeneration plants use combined heat and power (or “CHP”) as a fuel source. Natural gas is predominantly used in modern cogeneration plans, but biomass fuels and coal are also commonly used as well.
Cogeneration plants may seem like a newer concept, but the idea has been around since the late 1800s. The energy they use would otherwise be wasted heat (think: a plant’s exhaust) that can now be harnessed as an additional energy benefit. Not only do these power plants operate at a 50 to 70 percent higher efficiency rate than other plants, but they are also better for the environment. There are thousands that are currently operating across the United States and Canada. This may be a smaller number than other power plants, but they are integral to our electrical generation.
One thing to note is that the energy produced by cogeneration plants can either be used on-site or can be collected and distributed to third party companies. This depends on whether the plant is part of a larger facility or is just a stand-alone facility.
Cogeneration plants are more complex and, therefore, more difficult to value. Below are some of the ins and outs of each valuation approach, which all go into determining the final value.
Sales Comparison Approach
This approach determines value by comparing recent sales of similar cogeneration plants in the market. These sale prices are pitted against the subject plant and then adjusted in accordance with size, capacity, age, location, and market conditions.
Cogeneration plants are unique, so it is sometimes more challenging to determine adjustments effectively and reliably. An appraiser needs to determine the tangible assets, which requires applying deductions that can indicate value. Deductions must also be made for intangible assets, which include the workforce and management teams, computer software, as well as operating procedures and manuals.
This method measures value by taking the plant’s present worth and future monetary benefits into consideration. For cogeneration plants, cash inflows and cash outflows must be determined. A cash inflow is forecasted by the sales of electrical and thermal energy. Cash outflows, on the other hand, include costs associated with operating expenses, fuel, and future capital expenditures.
An appraiser will develop these forecasts based on the level of confidence they have in how accurate these inflows and outflows will be. Some industries are more volatile than others, so only a small degree are confidently forecasted out more than two to three years into the future. Additionally, the economic environment of the plant’s industry is determined and could greatly affect how profitable the cogeneration plant will be.
This approach analyzes the physical condition of the plant, its operating characteristics, and its utilization. Additionally, the economic environment and any technological advances in the industry are also taken into consideration. When determining depreciation, an appraiser looks at wear and tear, operating stress, and any effects of prolonged accidents, shutdowns, or disasters.
Modern cogeneration plants also have more inherent value than older plants. Plants that use updated technology tend to have more efficient operations that decrease maintenance, labor, operating costs, emissions costs, and the generation of heat rates.
A final valuation is given once all of these approaches are correlated and compared with one another. Not only does an appraiser need to consider each approach carefully, there must also be a firm understanding of the operations, economics, and electrical generation industry.
At Appraisal Economics, we have an experienced team of engineers, tax, and appraisal consultants that have provided expertise to power plant companies all over the world. You can learn more about our power plant service here.