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Home Dr. Eugene Preston

A New Way to Finance High Capital Cost Projects Using an Energy Annuity

by Eugene G. Preston, PE, PhD.

www.egpreston.com

Definitions:
An annuity is a financial instrument designed to provide a more secure financial future. 
An energy annuity allows electric customers and the electric utilities to work together to provide a more secure and diverse electric system than would otherwise be possible.

Energy Annuity Mechanics:
A generation developer announces interest in building a new power plant such as a centralized solar plant (CSP) or nuclear plant.  An interested electric utility customer sees the offer and wants to purchase “x” kW of the new plant capacity.  The customer signs an agreement with his local provider.  The local provider handles the billings to the customer, which will now include the fact that x kW has been purchased.  The customer makes real time cash flow payments to the plant builder as they occur during plant construction.  When the plant is finished and begins running, power agreements between the customer, service provider, and generator handle all the accounting and generation scheduling.  The customer sees the energy on their monthly billing that was received from the x kW investment.  The x kW energy cost will be low because the customer had already paid the capital cost in advance.  The bill includes other charges to cover all the operating costs of both the service provider and the new generator.  This arrangement continues for the life of the plant the customer had purchased an interest in.  It could extend up to 30 years for a solar plant and 60 years for a nuclear plant.  The energy annuity should have a provision for transferring the investment to a new address within the electrical service area where the plant is operating.  I.e. the customer must maintain an electrical path to the new address if the address changes at some point in the future.  To protect the interests of the service provider, the energy annuity should be limited to actual electrical customers on the system, i.e. it should not be used as a purely financial instrument.  The service provider also should be allowed to add fees to cover other expenses, such as local taxes, in addition to all the electrical costs and administrative costs for providing the energy annuity service.

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Eugene Preston

Eugene Preston has had a long career as a power system engineer, performing generation planning, transmission planning, and distribution planning for Austin Energy. He is currently doing transmission studies for wind developers.  He wrote all his own modeling software including the current network model used to perform his consulting studies.  His PhD dissertation was in power system reliability, a composite generation and transmission probabilistic model, and is posted on his web page.