Full audio of the May 16, 2016 meeting on District Energy can be heard here.
The presentation provided to Council (GMHI Shareholder) can be viewed here.
My questions for CFO Sardana were as follows.
1) What are the cornerstones of a successful DE system when implemented correctly?
Sardana: “Yes absolutely, the other successful District Energy Projects in Ontario and around the world have usually started off with an anchor tenant, and, so, let’s talk about Markham District energy for example. IBM was their anchor tenant. It was a huge thermal load that came on and then that allowed them to spread out slowly over time.”
2) So that would lead to immediate returns on investment, to offset the capital outlay required to get these projects started.
3) Given that we now own two 10 MW contracts that we are responsible for delivering on, if we don’t build the plants we lose $300,000 security deposits on both contracts?
Sardana: “Correct we would be violating that (10MW) contract if we decided not to go ahead and the security (deposits) are at risk.”
4) We do not have the projected thermal load in the HCBP? We do not have the customer base to satisfy a 10MW thermal output?
Sardana: “That’s correct.”
5) So to be clear on this point I want to discuss cogeneration (which provides the environmental benefit). In a cogeneration system you’ve got electricity being generated and the side benefit to that is latent heat which goes to the surrounding business through piping. So just to be clear we are not generating electricity now?
Sardana: “That’s correct”
6) So the lack of anchor tenant aside, the lack of immediate returns on investment aside, it’s fair to say that this write down here today is not part of our investment strategy? For some reason we got to where we are now, which is, we’re short an anchor tenant?
Sardana: “That’s correct”
7) So to say that we should still push forward and build them, to maintain this vision, to continue with further capital outlay without the anchor tenant, that is just not sound business?
Sardana: “Yes, my view, I would concur with that. My view is that, no, absent an anchor tenant and roughly four million square feet of usable heat space in both the Downtown and the Hanlon Creek Business Park (that’s eight million total), that’s what we’d need to make this viable.”
8) So, let’s say we’re bold and decide that we are going to build them and we’re going to wait for the thermal load to come, because we want to meet these contracts (for the record I am not for that option). Without the thermal load in place though, we’re burning natural gas to heat and chill water right now, to cool and heat buildings without the secondary benefit of electricity generation. So if we were to build a large 10MW natural gas plant without the thermal load, how would that function in our city?
Sardana: “Well, I’m leaving aside the technical aspects because that’s easy. Ontario does a great job at building generation plants. The contractual obligations we would have to the IESO (Independent Electricity System Operator) would be violated in that the IESO contract is very clear that you have to have a certain amount of useful heat output coming out of that plant, (which is your thought about the waste heat). You have to have the residual heat coming out of that plant to service the thermal loads. That’s where I got the four million square feet in each the Hanlon Creek and Downtown. If you were to build a 10MW plant anyway, we would violate the UHO (useful heat output), that is very clear and very specific in the contract. And the plant would effectively become a white elephant because the IESO would back away from those lucrative payments that they would make for the plant to be standing by in support of the grid.”
9) So it would violate (I heard that) but if we were to build a gas plant (without the thermal load) we’re essentially building a fossil fuel gas plant?
Sardana: “That’s correct”
10) We’re not having any environmental benefit
Sardana: “That’s correct”
11) That’s an incredibly important element for the people of Guelph to hear. That that there is no environmental benefit without cogeneration.
Sardana: “That’s correct I would agree.”
12) On page 8 of your report it states that GMHI was incorporated in 2011 and the Board of Directors was struck. This is something I’ve touched on many times on council and my concern around the composition of the original GMHI board. Being that 5 of 8 votes on the original GMHI board were elected officials. On page 9 of your report we talk about the timeline of events. So in 2011 the board of directors (GMHI) was struck. GMHI was incorporated, then on page 9 of your report (slide 8 of presentation) you talk about the Sleeman Center thermal energy center (commissioned downtown in 2013), and the 10MW (20 year) Combined Heat and Power (HCP) contract for the Hanlon Creek Business Park was signed in 2014. This is going to be a tough question for some members of council but I am going to ask it anyway. What we see there on slide 8 (overall governance structure of GMHI and subsidiary companies) indicates to me that the GMHI board had full control and oversight of those subsidiary companies at the time (posed as a question).
Sardana: “I think the answer is GMHI was the controlling shareholder yes.”
Fellow councillors pose their questions…….
13) Thank you for spending so much time with us tonight, just a few more questions from me. So, we’ve clearly heard (this evening) that the data was flawed and we proceeded anyway. I’m going to ask questions at the council meeting that perhaps I won’t ask tonight because this is a shareholder meeting of GMHI and not the city council (I’m wearing my shareholder hat tonight, not my political hat). In the 2012 GMHI Shareholder report however, there is specific reference to a thermal energy strategy that was being developed for the GMHI board consideration. My question is simple. Not whether it was made, not whether it was shared; but with no anchor tenant identified, with no short term returns on investment contracted (there was insufficient contracted thermal loads going out immediately following construction and commissioning); with nothing on the surface that would indicate this was a sound move to make. What got Envida, Guelph Hydro and/or GMHI to align to a YES?
Sardana: “I think this gets to some of those inefficiencies that I mentioned about how this market has been set up, in that we had to show some sort of commitment to the IESO to say, we are absolutely committed to District Energy for them to even award the contracts. We then, signed up the first customer in the Hanlon Creek Business Park on that basis and that’s why we also set up a temporary plant because we had to show that we were starting. And then the hope was we would get the anchor tenants but again, as I mentioned this is all hindsight now. Were we to do it all over again we would have first said “find the anchor customer” and then sign that customer up to a district energy system (it could have been temporary plan at that time but at least we would have had the mass thermal load that we needed to get started). We didn’t get those learnings until 2015. Until Councillor Wettstein and the Mayor were on that new board, that’s when these facts came out for the first time.”
14) Thank you, so you mentioned we didn’t sound the market correctly. Do you want to say we based our information on flawed data or do you want to say we tried to put too much of a rosy look on this and we tried to convince everyone that it would work. This maybe speaks to political expediency and maybe I’ll wait for our next council meeting. But I do want to ask one last question, something that I’ve struggled with. It’s about interference. Administrative interference, political interference in your group of companies decision making process. Do you believe that there was interference in this process?
Sardana: “I think I mentioned that there was certainly moral suasion and I think that’s as far as I want to take it, that there was pressure. A tremendous amount of pressure to make things happen on the CEI (Community Energy Initiative) side through District Energy. So yes.”
15) So was there pressure and promises made?
Sardana: “No I think there was pressure. Not promises but there was certainly pressure.”