Financing Proposal Wastewater Treatment Plant Project

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					CITY MANAGER’S OFFICE
                                        AGENDA REPORT
DATE:           July 28, 2009

TO:             Mayor McLaughlin and Members of the City Council

FROM:           City Engineer and City Manager

SUBJECT: COGENERATION AT THE WASTE WATER TREATMENT PLANT


STATEMENT OF THE ISSUE:

As part of the current Richmond wastewater treatment plant performance upgrades, cogeneration
technology should be installed. This presentation will update the City Council on the current digester
upgrade enhancement project being undertaken and plans to incorporate cogeneration as part of these
improvements.

RECOMMENDED ACTION

1. APPROVE accepting C. Overaa/Waterworks design/build proposal for a internal combustion engine
   co-generation system and integrating it into the digester enhancement projects current underway at
   the at the wastewater treatment plant.
2. PROVIDE DIRECTION to staff regarding financing options to implement cogeneration to use the
   plant’s waste heat to produce electricity and reduce greenhouse gas emissions as part of the current
   plant performance upgrades.
3. ADOPT a resolution declaring the City’s intent to use proceeds of indebtedness to reimburse itself for
   certain expenditures in connection with the development of a biosolids dewatering facility at the waste
   water treatment plant.

FINANCIAL IMPACT OF RECOMMENDATION:

The estimated cost for the construction of the dewatering facility is $2.8 million dollars. Annual operating
and maintenance costs are estimated to be $45,000. The City has applied for American Recovery and
Reinvestment funds through the Clean Water State Revolving Fund Program but is also making the
necessary arrangements to finance the project if federal funding is not available.

DISCUSSION:

Project Background

The City desired to investigate the beneficial use of biogas from the anaerobic digesters at its Wastewater
Treatment Plant (WWTP). An initial proposal by Distributed Energy Resource Group was presented to
the City in 2007 for use of a fuel cell to convert methane in the biogas to electricity and heat. At the time,
little was known about the ability of the digesters to produce biogas in sufficient and consistent quality to
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adequately operate the unit, and the cost and benefits to the City were not adequately understood.
However, the initial proposal did provide a basis for further investigation. As described in the following
sections, the City solicited proposals via a technology- and financing-neutral, performance based request
for proposals (RFP). The results of the proposal evaluations, selection of an approach, and subsequent
design integration activities, are presented.

Applicability and Benefits of Cogeneration to Richmond

Cogeneration technology (creation of combined heat and power from a source of methane or natural gas)
has been combined with anaerobic digestion technology for many years. Biogas from a common
anaerobic digester is comprised of roughly 65% methane, 35% carbon dioxide, and trace amounts of
hydrogen sulfide, siloxanes, and other gaseous products. The heat value of this gas is therefore about
650 MMBtu per cubic foot and can generate a significant offset to energy requirements at a plant. The
WWTP provides a stable source of fuel to create such biogas; the anaerobic digestion process is
producing a valuable byproduct which now can be harnessed to supply heat and electricity back to the
plant operation. The resulting effect is to reduce the cost of purchased electricity and natural gas at the
WWTP.

Creation of the RFP

On May 1, 2008, the City Engineer (with the assistance of TetraTech) distributed a hybrid RFP which
solicited vendors to propose to design and build a cogeneration system at the WWTP based on the
available digester performance data, site layout, and proposed location. Although the RFP requested a
detailed cost estimate from the vendors, the RFP stated no preference for any specific form of
cogeneration technology, or means of financing the project. Therefore, vendors proposing various
technologies could present their costs of the design/build project, and propose the project to either be
financed by the City by means of a conventional services contract, or to be financed by the vendor, with
compensation based on the heat and electricity produced by the system. An option for operation services
was also provided.

Evaluation of proposals, including technology and financing mechanism

Proposals for the Cogen project were submitted July 1, 2008. The RFP invited vendors to propose both a
cogeneration technology believed applicable to the wastewater treatment plant (WWTP), and a method of
financing (either vendor financed or capital financed). The following vendors submitted proposals:

Table 1 – Profile of Vendors, Proposed Cogeneration Technology, and Financing Mechanisms

                          Vendor            Proposed Technology           Proposed Financing
                LoganEnergy                Fuel Cell                 Capital (Design/Build)
                Quanta Services            Fuel Cell                 Power Purchase Agreement
                C. Overaa/Waterworks Eng   Fuel Cell                 Capital (Design/Build)
                                           IC Engine                 Capital (Design/Build)
                MMA Renewable Ventures     IC Engine                 Power Purchase Agreement

An amendment to the RFP was issued in October 2008 to convey hydrogen sulfide concentrations
averaging 7,700 ppmv in digester gas samples collected from the existing anaerobic digester at the
Richmond wastewater treatment plant. The data were collected by Veolia in May 2008 and made
available to the City after the release of the RFP. Subsequently, two of the four vendors, MMA
Renewable Ventures and C. Overaa/Waterworks Engineers submitted revised proposals on November
21, 2008. A summary of the technical and financial proposals (as revised) are provided as Attachment A.

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TECHNOLOGY COMPARISON

In reviewing the relative benefits of IC Engine and Fuel Cell technology, either could produce electricity
and heat using methane from the anaerobic digester biogas. However, fuel cell units (a) are relatively
complex, (b) require increased level of gas conditioning to run effectively, and (c) are sensitive to
fluctuations in gas quantity (or to shutdown of the gas stream). The complexity, additional capital cost,
and sensitivity of the fuel cell technology is less technically favorable compared to the more
straightforward, flexible design of internal combustion (IC) engines. Staff concluded that IC Engines are
preferred over Fuel Cells for use at the Richmond WWTP.


FINANCING COMPARISON

Power Purchase Agreements (PPAs) require the City to purchase electricity provided by the Cogen
system owned and operated by the vendor at a specified rate and annual escalation factor, regardless of
the market rate available through a utility. By contrast, ownership of the unit by the City of Richmond
would allow the City to control and use electricity produced by the Cogen system, and net-meter (offset)
excess power back to the utility in a variety of ways. In addition, ownership of the system would enable
the City to expand and integrate cogeneration with other improvements to the anaerobic digester,
including adding waste streams that could significantly increase biogas production and thus power/heat
output. Staff concluded that financing of the project by the City is preferential compared to a Power
Purchase Agreement with a vendor who would independently own and operate the cogeneration system
at the WWTP.


COST COMPARISON

In order to normalize the potential value of proposals received, a model of costs and potential benefits
was developed. For example, different proposals provided differing timelines for maintenance costs,
which were normalized to an assumed 15 year lifespan of the system. Also, a PPA proposal may have
included all operation and maintenance costs, but would have precluded the City from the benefit of
certain credits and incentives.

The vendor’s proposed costs, including capital and operation costs, and other cost inputs and value
streams over a 15-year period were analyzed. Using data from revised cost proposals by MMA
Renewable Ventures and C. Overaa, Tetra Tech created a set of financial pro forma spreadsheets to
estimate the relative cost of each proposal, which is provided as Attachment B. Assumptions regarding
market rate cost of electricity and natural gas, operation and maintenance costs, as well as the cost of
financing, were estimated over a 15-year period. Also, the anticipated value of renewable energy credits
(REC) and greenhouse gas emissions offsets were incorporated into the cost analysis as offsetting the
capital and operating costs over a 10-year period (this is the period of eligibility for these potential
credits). The net present value (NPV) of each proposal was compared to the NPV of accessing market
rate electricity over 15 years at the WWTP.

A summary table of net benefit of each potential project is provided below. The analysis was performed
solely for comparative purposes using best available information; project costs and revenue may vary
significantly.




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Table 2 – Profile of Cost Proposal Evaluation Results

                Proposed System     Vendor         NPV Cost of Baseline NPV               Difference
                                                  Co-generation of electricity
                                                                 purchase
                IC Engine           MMA                $6.5             $6.1                   ($0.4)
                IC Engine           C. Overaa          $5.9             $6.1                    $0.2
                Fuel Cell           C. Overaa          $7.4             $6.1                   ($1.3)

Table 2 shows that the costs of C. Overaa’s capital financed IC Engine design/build
approach appear to be the best value to the City. This preference is consistent with the
Technical and Financing analysis presented above.

Evaluation of AD Performance and biogas production post-upgrade

Tetra Tech estimated anticipated energy production by the cogeneration system under anticipated dry
weather and maximum monthly flow rates, given anticipated biogas production under those conditions.
These estimates yield 170-300 kW of electricity and 0.9 to 1.4 mmBtu of heat, with higher amounts
possible with improvements and amendments to the digester system.

As a precursor to integrating the designs for the Anaerobic Digester upgrades and Cogen system, WWE
performed modeling analysis in order to project anticipated performance post-upgrade. WWE used
WWTP monitoring data provided by Veolia, as well as input from the WWTP Master Plan to evaluate
process factors such as solids loading and sludge production in order to develop predictions of waste
inputs and biogas production at the Anaerobic Digester. The results of the modeling provided a basis for
average daily biogas output that had not been available previously.

The WWTP Master Plan provided for a growth rate of 1.5% per year for wastewater flow to the plant.
This growth factor was incorporated into the biogas production calculations. Based on these results, it
was determined that a range of 2.7 Million to 4.3 Million liters per day of biogas would be produced at the
anaerobic digesters over a course of 15 years. This range of biogas output would provide roughly 210 to
240 kW of electricity, and 1 to 1.1 mmBtu of heat, via the cogen system. These results confirmed earlier
predictions.

Table 3 – Original and Revised Assumptions for Cogen System Design Based on updated biogas information
                                     Original Assumptions                Revised Assumptions
Basis of Assumptions                 Performance at Capacity             Post-Upgrade Average Performance
Biogas Output                        3.8 million liters/day              2.7 million liters/day
Electricity Generation               300 kW                              210 kW
Heat Generation                      1.4 MMBtu                           1 MMBtu


Integration of AD Upgrade Cogen System Designs

At the same time staff was evaluating the Cogen project, Veolia was designing the anaerobic digester
upgrades. This project rehabilitates and relocates the digester heating and mixing systems for both
digesters and includes new boilers and heat exchangers. Digester # 1 will be upgraded and put in
service. This project provides reliability of the sludge digestion since Digester #2 will now have a back-
up and can then be taken out of service for maintenance and grit removal. Both gas quality and the gas
production will increase for the utilization in the cogeneration and in the future will support the stability of
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the sludge dewatering process. Improved primary treatment will also improve effluent quality. These
upgrades will also increase the operating temperature and solids concentration thus decreasing odors at
the plant.

Since some of the original assumptions for the Cogen project, such as facility location, were based on
information available prior to the upgrade design activities as well as assumptions regarding layout of the
Anaerobic Digester ancillary facilities, such as heat exchangers and boilers, these had not been
incorporated into the initial Cogen system design. Therefore, the city convened a series of design review
meetings attended by Veolia and its subcontractor Herwit Engineering, the team of C. Overaa and WWE,
as well as the City and Tetra Tech to align the two designs. As a result of the meetings, some design
assumptions and facility locations were adjusted to accommodate the needs of both projects.

Planned Costs and Benefits

C. Overaa and WWE revised their design-build IC engine quotation to reflect a change in facility location,
changes in piping and electrical connections, as well as the revised engine requirements based on biogas
production. Increases in piping and electrical costs due to relocation were offset by changes in engine
size, resulting in a net $33,500 savings. A further $155,000 savings (for a total of $188,500) resulted by a
change of engine make/model, with no loss in predicted efficiency or reliability. The revised cost of
design/build services for the Cogen system was therefore reduced from $2,895,500 to $2,707,000.

Other costs and benefits that the City should consider include the following:

    • The cost of supplemental natural gas, approximately $7,500 per year.
    • For an annual estimated cost of operations and maintenance $45,000.

These costs may be offset by benefits of the system, which include the following:
   • Production of approximately 200 kW of electricity up to 8059 hours per year, offsetting
      approximately 40% of the WWTP energy needs ($190,000 annual value at $0.12/kWh)
   • Production of approximately 1 MMBtu/hr of heat, offsetting up to $29,000 in natural gas cost per
      year.
   • Generation of Renewable Energy Credits of $0.015 per kWh, a value of up to $25,000 per year
   • Project’s net benefit is $500,000 over 15 years while reducing the city’s purchase of electricity from
      PG&E and the plant’s greenhouse emissions.



Path forward (construction schedule)

A schedule of activities for the Cogen project is including as Attachment B. During the month of August,
the air permit and a financing plan will be prepared.


Future Considerations

The initial cogeneration system has been sized to accommodate the known and projected quantities of
biogas that would be produced by the WWTP based on wastewater inputs alone. However, the design
for the Anaerobic Digester Upgrade and Cogen projects does take into consideration additional cogen
units to accommodate additional biogas. Such additional biogas would be generated from processing
additional waste streams at the anaerobic digester. The most straightforward waste stream to consider
would be addition of fat, oil, and grease (FOG) at a receiving station adjacent to the anaerobic digester
system. FOG waste, either collected by the City or disposed by local businesses, would be heated and
fed into the anaerobic digester system. Waste amendments such as FOG can yield a significant increase
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in biogas because they are by nature a hydrocarbon material, thus easily broken down to methane.

With inclusion of FOG and addition of cogeneration engine capacity at the WWTP, it is conceivable that
the City could entirely offset the electricity and heat demand of the WWTP. For example, a recent study
conducted by EPA on the East Bay Municipal Utility District’s food waste and cogeneration program
indicated a tripling of biogas output over that of wastewater alone. Such measures should be carefully,
but aggressively considered by the City.

DOCUMENTS ATTACHED:

Attachment A-Summary of the technical and financial proposals (as revised)
Attachment B- A set of financial pro forma spreadsheets to estimate the relative cost of each proposal
Attachment C- Schedule of activities for the Cogen project
Attachment D- Resolution declaring the City’s intent to use proceeds of indebtedness to reimburse itself
for certain expenditures in connection with the development of a biosolids dewatering facility at the waste
water treatment plant.




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