The long, tangled saga of Neumann Systems Group appears to have ended. As Pam Zubeck reported in the Colorado Springs Independent [which is under the same ownership as the Business Journal] yesterday, the company’s website is down, the phone is not a working number and the company’s building is a vacant shell, without fixtures or furniture.
A decade ago, company founder Dave Neumann approached Colorado Springs Utilities with an irresistible proposal. He had developed a radical new technology to remove pollutants from coal-fired power plant emissions. When fully developed, he asserted, the nascent Neustream technology could efficiently and cheaply remove sulfur dioxide, and might even remove carbon dioxide.
CSU and its board of directors agreed that Neumann’s could help. They voted to partner with him in developing the technology, and then contracted with NSG to build S02 scrubbers at the Martin Drake downtown power plant.
To sweeten the deal, Neumann gave the city a revenue-sharing deal amounting to 3 percent of the company’s gross annual sales. Neumann put the size of the market at $700 billion annually, and promised to keep the company’s headquarters in Colorado Springs. Hundreds, even thousands of highly skilled scientists, engineers and technicians would be employed by this locally based powerhouse. We would be the Silicon Valley of emissions control, leading America into a carbon-captured future — at least that was the plan.
That’s not what happened. NSG’s scrubbers, originally estimated to cost far less than a “conventional” scrubber, ended up costing twice as much as projected. Although CSU officials have consistently defended the decision, it’s clear that the Utility and its board used ratepayer dollars on a highly risky venture capital deal.
Neumann could not be contacted for comment. The CSBJ will provide updates if calls are returned.
In April 2015, CSBJ examined the deal in depth. Here’s a lengthy excerpt from the story:
In February 2008, The Gazette reported a possible technological breakthrough by a local company, Neumann Systems Group, that seemed to have limitless potential. According to the firm’s president Dave Neumann, the company’s proprietary technology could be used to remove both carbon dioxide and sulfur oxides from coal-fired power plant emissions.
Moreover, he noted, the potential worldwide market for such removal systems would be as much as $700 billion.
“It could be the first homegrown billion-dollar business in Colorado Springs,” he said.
Neumann contracted with Colorado Springs Utilities to test his system. And although CSU’s 2011 contract with Neumann would include a clause giving the city 3 percent of the company’s gross sales during the next 10 years, the company’s supposed billion-dollar potential didn’t factor into City Council’s decision to approve the initial contract.
“We didn’t really anticipate much return on that,” said Larry Small, who served as vice mayor when the testing contract was approved. “We were more interested in the mitigation it would provide.”
Drew Rankin, who then headed CSU’s Energy Supply Department, was interviewed by The Gazette in 2008. He said that removing sulfur dioxide with then-available technology would require massive investment in scrubbers. Installing equipment at one unit alone at the Martin Drake Power Plant was estimated to cost $65 million plus $5 million in operational costs.
Neumann’s device, according to the story, was estimated to cost less than $20 million per unit. That figure, although often cited by Drake skeptics, apparently did not originate with CSU.
“I don’t know where that came from,” said CSU interim Energy Supply manager Dan Higgins. “It didn’t come from us — we knew even then that the figure would be much higher.”
Has the deal worked out as expected? Was City Council informed, involved and fully aware of alternatives, including a long-term energy purchase agreement with Xcel, closing Drake, and/or building a new combined cycle gas turbine plant? Were CSU managers sold a bill of goods by Dave Neumann, or have things worked out just as expected?
The answer isn’t clear — but careful consideration of the facts suggests that weak policy direction from an often-divided city government forced CSU management to make it up as they went along.
While Neumann testing was in progress, CSU hired a consulting engineering firm, Stanley Consultants, to determine the price of conventional scrubber technology that would bring Drake into compliance with new environmental regulations expected to go into effect in 2017.
The reports put the 2010 capital cost of lime spray drier [LSD] sulfur dioxide [SO2] removal systems for Drake units 6 and 7 at $157.7 million.
That estimate was updated to $212 million by CSU in February using standard metrics to determine cost escalation of large-scale industrial construction projects.
Those initial reports, coupled with encouraging testing results, convinced CSU to contract with Neumann in 2011. The “project target cost” was $98,904,385, a figure that was $32 million higher than the “contract target cost” of $66,853,073. Another estimate, included in the “business case” released in 2011, estimated the eventual cost at $111 million, which included contract-related costs incurred by CSU.
The contract was signed by energy supply manager George Luke, as was an accompanying single-source contract. It was executed two days before Chris Melcher took office as City Attorney, and he informed Mayor Steve Bach that the charter required the mayor to sign off on such contracts.
Bach was incensed.
“The Utilities Director signed the sole-source justification and the contract two days before the new city attorney took office,” Bach recalled, noting that departing City Attorney Pat Kelly had ruled the mayor’s OK wasn’t required on such contracts, despite specific City Charter language to the contrary.
“It had no cap, no ‘not to exceed,’ no performance standards,” Bach said. “I asked in 2011, are we sure that we want to spend at that time $76 million on an experimental technology?”
Yet the technology seemed promising, as the Colorado Department of Public Health and Environment noted in a 2011 assessment.
“CSU-Drake is currently testing a new, innovative NeuStream-S wet scrubber system that appears to be as effective, if not more effective, at controlling SO2 emissions with much less pressure drop (less parasitic load from increased fan demands) and requires a much smaller operational footprint area in comparison to traditional wet scrubbing,” CDPHE reported. “It also uses a dual alkali system that is somewhat unique when compared to most traditional wet scrubbers. In comparison to traditional wet and LSD scrubbers, this new technology will have smaller water and energy requirements.”
By 2013, an internal memo cited total capital costs for the Neumann installation of $121 million and annual O&M costs of $4.2 million, providing savings of $37 million in capital outlay and $2.2 million in O&M costs “compared to other scrubbers on the market.”
In March 2014, another CSU memo put total capital cost at $131 million. And in a Feb. 18, 2015, presentation to the Utilities Board, Energy Supply manager Dan Higgins gave a “cost at completion estimate” of $170 million. That estimate did not include the $27.3 million cost of the 2008-2011 pilot project, which established the viability of the Neumann process. That cost is currently assigned to operations and maintenance, which seems a curious choice.
“I don’t know why they were allocated that way,” Higgins said. “That was an accounting decision.”