While new federal policies of the Obama administration should eventually start to have an impact on CHP take-up in the US, the bulk of current support measures continue to come from individual states. Elisa Wood reports on a promising, but uneven, situation.
Despite the slow economy, the US combined heat and power industry sees 2009 as a prosperous year. But as of late spring, the driver continued to be the favourable state policies, not the federal financial stimulus which had been promised but not yet delivered.
The federal government boosted its support for CHP – at least on paper – with passage of the American Recovery and Reinvestment Act of 2009, designed to inject US$787 billion (£488 billion) of financial stimulus into the economy. Enacted in February, the new law offers $20 billion (£12.4 billion) for energy efficiency. However, the money has been slow to make its way out of government and into business, leaving many developers frustrated as they watch websites for solicitations or any news about how to apply for funds or tax credits. Much of the funding remains tied up in federal agencies, which find themselves overwhelmed by the task of writing rules for its use.
‘None of these agencies are structured to move this kind of money,’ says Neal Elliott, Associate Director for Research at the American Council for an Energy-Efficient Economy (ACEEE). ‘It is an operational challenge for them.’
Meanwhile, under the shepherding of state governments, the CHP industry is expanding in hotspots, bolstered by healthy spark spread, favourable interconnection rules, incentives, building density and the right industry base.
‘In general, the CHP market seems to be moving forward in the north-east, Texas, and California – areas where the natural gas-electric spark spread (difference in the price of fuel and the price of electricity) is supportive, and a number of state initiatives and incentives are in place or developing,’ says Charlie Goff, a contractor for the CHP Partnership of the US Environmental Protection Agency.
SUPPORT FROM FIVE NORTH-EAST STATES
In the north-east, Mr Goff cites New Jersey, Connecticut, Massachusetts, Maine, and New York as examples of states with programmes and policies that favour CHP. ‘New Jersey has had a co-ordinated, sustained commitment to CHP for some time now. The New Jersey Energy Master Plan, released in 2008, calls for the development of 1500 MW of new CHP capacity by 2020, by building upon existing and developing new, economic and regulatory incentives, and to smooth regulatory and legal hurdles to turn waste energy into useful energy,’ he says. New Jersey already has 3000 MW of CHP so the plan would expand capacity by 50%.
In addition, New Jersey Governor, Jon Corzine, signed a bill into law in late March that channels $100 million (£62 million) toward green energy and efficiency from a state levy on large industrial and commercial energy consumers. Of that, $60 million (£37 million) has been slated solely for installation or expansion of CHP. The programme provides a $450 (£279) rebate for every kilowatt of capacity installed.
The state also has a programme called ‘Pay for Performance’ that helps to promote CHP by offering performance incentives for energy efficiency improvements to businesses and institutions with an annual average peak electricity demand of 200 kW or larger. The programme offers up to $1 million (£620,000) per CHP installation.
Meanwhile, Connecticut has added more than 300 MW in three years, with an incentive programme offering $400–$450/kW (£248–£279/kW) to companies and institutions that install CHP and a $200/kW (£124/kW) incentive to utilities. The state also has paid the standby rates for qualified CHP installations. In addition, colleges, hospitals, manufacturers and other large energy users in Connecticut receive a financial boost from an innovative certificate trading market, which is expected to soon expand into neighbouring Massachusetts. (See box on page 32.)
Elsewhere in the north-east, Maine, in April, passed a new net metering law that helps support CHP. The law makes projects of up to 660 kW eligible for net metering. This puts Maine well ahead of 28 other states, which offer net metering for capacity of only 100 kW or less, but behind 11 states that set capacity limits at 1 or 2 MW. Three states offer net metering for even larger projects: Pennsylvania, 5 MW; California, 10 MW and New Mexico, 80 MW, according to the Maine Public Utilities Commission.
NEW YORK STAYS AHEAD OF THE GAME
New York continues to be a model state for distributed generation, as it attempts to reach a goal of meeting 45% of its energy needs through efficiency and renewable generation by 2015. The New York State Energy Research and Development Authority (NYSERDA), which sponsors demonstration projects, is often cited as a standard-bearer for CHP support. NYSERDA has funded over $85 million (£53 million) in projects which are expected to produce 153 MW.
The downturn in the economy has brought both ‘good news and bad news,’ says Dana Levy, NYSERDA Programme Manager. Falling prices of steel and copper are putting downward pressure on project costs, and installers are offering lower project bids. That is the upside for companies and institutions that want to install CHP. The downside is
that they cannot always secure financing for their projects. ‘Access to funds is more difficult. It is hard to predict how this will affect the timing for when systems come online,’ Dana continued.
On the regulatory front, New York recently agreed to continue to exempt certain CHP projects from standby rates, at the urging of New York City, Aegis Energy Services, DSM Engineering Associates, and others. The exemption will run through 2015 and applies to projects that are up to 1 MW.
New York City pressed for a continuation of the exemption because the city is trying to reduce greenhouse gas emissions by 30% by 2030. To meet help meet the standard, the city wants to see 800 MW of clean distributed generation installed. It is trying to achieve the goal in several ways; among other things, the city plans to require that developers analyse CHP potential for any new buildings over 350,000 square feet (32,500 m2).
Meanwhile, just to the north, the Canadian province of Ontario faces a slowdown in its attempt to attract 1000 MW of large projects. The programme began three years ago with a solicitation that drew seven winning projects totalling 414 MW. Most are now operating or under construction. A second solicitation, launched in June 2007, was less lucky. An initial request to gauge bidder interest drew a strong response, but as the economy sank, the interest declined. The Ontario Power Authority (OPA) closed out the solicitation in April 2009 with
no contracts awarded. However, the OPA is pressing forward with a third request for proposals, issued in March. The request for proposal seeks 100 MW produced by renewable fuelled CHP projects greater than 10 MW in size. Bids were due 11 June, and the OPA expects to award contracts in August.
CALIFORNIA and TEXAS LEAD IN THE WEST
In the western US, California continues to proceed with a ‘somewhat bi-polar’ approach to CHP, says Goff. On the plus side, California’s Global Warming Solutions Act of 2006, more commonly called AB32, requires a reduction in greenhouse gas emissions to 1990 levels by 2020. To help meet this goal, state Air Resources Board has recommended an increase of 4000 MW of CHP by 2020, enough to displace approximately 30,000 GWh of demand from other power generation sources. The state is in the process of developing policies to make this goal a reality.
Another positive was last year’s passage of the Waste Heat and Carbon Emissions Reduction Act, which encourages development of CHP projects of up to 20 MW in California. The act calls for utilities to purchase any excess electricity from CHP projects through a standard tariff. In addition, the utilities must include as much cost-effective CHP as possible in procurement plans. Further, any transmission or distribution upgrades planned by utilities cannot be inconsistent with promoting CHP systems.
And finally, the California Public Utilities Commission will establish a ‘pay-as-you-save’ pilot programme that requires utilities help non-profit and government entities in financing installations. As a next step, the California Energy Commission is working on technical guidelines for the programme, including emissions standards, which it expects to have ready by 18 November 2009.
On the negative side, California tends to have tough standards for nitrogen oxides in the south coast and San Joaquin Valley districts, that make approval difficult for reciprocating engine systems. In addition, standby rate structures for some of the state’s major utilities work against CHP economics, Goff says.
In the north-west, where the paper industry dominates, falling natural gas prices are causing project developers to again consider the fuel for CHP projects, according to Dave Sjoding at the Northwest CHP Application Center. ‘(Previously) people had been backing away to anything natural gas-based. This is a real shift,’ he says.
In Washington state, however, the most aggressive play continues to be dairy digestion, because of its economic and environmental benefits. In Snohomish County, the highest milk-producing area of the state with 1200 dairy farms, Qualco Energy recently developed a 450 kW CHP digester project for three dairies with 1600 cows.
Texas leads the nation in CHP installations with more than 17,000 MW. Nearly three-quarters of the capacity is associated with chemical and refining facilities, according to a report by Summit Blue Consulting, ‘Combined Heat and Power in Texas: Status, Potential and Policies to Foster Investment.’ That state could develop an additional 13,400 MW of economical CHP by 2023 – all but 2% of that in the industrial sector.
The mid-west and south-east have shown less interest in CHP development, but have recently gravitated toward biomass and digester gas CHP, Goff says. Waste heat CHP also is gaining attention, especially in states that allow its use toward meeting their renewable portfolio standards – requirements that a certain percentage of energy must come from clean energy or efficient sources.
A STATE-BY-STATE ENDEAVOUR
States expect to see promised federal stimulus money for green energy and efficiency projects flow their way in 2009. While little money is slated specifically for CHP, funds are designated for efficiency projects, which can include CHP installations – depending on state programmes and preferences. On the federal level, the Department of Energy on 1 June issued a notice that it intends to offer $156 million (£97 million) of federal stimulus money for grants to CHP, district heating, waste heat and efficient industrial equipment.
One area that remains stalled is a 10% investment tax credit for CHP, approved by Congress in late 2008. The credit is available for the first 15 MW of a project that is up to 50 MW in size, but the Internal Revenue Service has yet to issue official guidance on how the tax credit works, leaving many companies hesitant to base project economics on its use. ‘Anybody who moves forward with the intent of claiming the credit does so with some degree of risk,’ Elliott says. There is particular confusion about waste heat recovery and whether it qualifies for the credit.
Fairfield University, Connecticut
Meanwhile, Congressional members have been floating the idea of introducing improvements to the credit, including increasing eligibility to the first 25 MW of a project, eliminating the 50 MW system cap and raising the credit to 30%. These changes had yet to make it into any legislation at press time.
Whatever should happen, the credit remains only one part of what will spur CHP in the US, ACEEE’s Elliott says. ‘Just the presence of incentives, whether they be federal or state, don’t seem to be sufficient,’ he says. The real key to growth goes back to resolving regulatory barriers, issues the industry has been trying to correct for years, such as poor interconnection standards and weak net metering rules. While there is talk of removing these barriers on the federal level, it continues to be within the states where rule changes are most likely.
So while support from the federal government helps, CHP growth in the US market continues to be largely a state-by-state endeavour. It is a task of persuading 50 legislatures and 50 state public utilities commissions, that CHP will improve energy efficiency, economics, reliability, and the environment. No small task, but one that the industry, step-by-step, gets closer to achieving.
Elisa Wood writes from the US for COSPP
American DG uses power purchase agreement model
Barry Sanders, President and Chief Operating Officer of American DG, says financial incentives play only a small role when the company identifies good candidates for its on-site utility programme. ‘Our first step, always, is to look for both state rate structures and customer profiles that offer sound economics,’ he says.
American DG offers customers a kind of long-term power purchase agreement model, which it calls ‘on-site utility.’ The company installs a combined heat and power system at no up-front cost to the customer; the customer instead pays a regular energy bill for use of the system – much as it would if it were buying power from a traditional utility, except costs are lower.
The approach led to hefty sales for the Waltham, Massachusetts company. Even as the economy declined in 2008, annual revenue grew 13%; the key driver was its on-site utility programme, which saw a 57% jump in revenue.
American DG focuses on the north-east markets where energy prices are high and its CHP system can offer 5%–15% in energy savings for projects that are typically 75–750 kW. Its customers are often hotels, schools, hospitals, athletic facilities and multi-residential buildings.
‘Our first step always is to find good projects,’ Sanders says. ‘The majority of our projects are still unfunded. There is not an incentive out there for them.’
American DG recently installed a 75 kW system with a 200 ton (181 tonne) natural gas engine chiller at Stevens Institute of Technology, a technological university in Hoboken, New Jersey. American DG will continue to own and operate the equipment, as part of the on-site utility programme, so will handle all service, maintenance and repair.
‘Capital is always tight in an institutional setting,’ stated Mark Byrd, the college’s HVAC manager. ‘When we searched for companies who would finance, install, operate and execute a power purchasing agreement for CHP and chillers, we found only one. Only American DG Energy was able to meet all our needs.’
Certificate trading takes root in Connecticut
For most of the US trading ‘white tags’ is a novel concept. But in Connecticut a market is well underway, and it is supporting new CHP development.
In 2007, Connecticut became the first state in the nation to institute a trading programme for white tags (also called energy efficiency certificates or renewable energy certificates, RECs), an outgrowth of the state’s renewable portfolio standard. Among other things, the standard requires that CHP, waste heat recovery or efficiency, comprise of 3% of the electricity sold by utilities and retail suppliers. The requirement rises to 4% in 2010. Utilities and suppliers can meet the standard by purchasing certificates earned by companies or institutions that have installed CHP systems. One MWh of energy savings equals one certificate.
Nexant Clean Energy Solutions is a leading player in the Connecticut certificate trading market, where it has handled transactions for one billion kWh of certificates generated by CHP installations. The company helps CHP projects measure and verify certificates to win regulatory approval, and then assists with the bilateral sale of the certificates.
‘It is a small state, but we probably deal with 15–20 entities out there that need to procure these RECs to satisfy requirements. It’s a robust market,’ says Paul MacGregor, Vice President of Nexant Clean Energy Markets.
Certificate prices fluctuate based on demand, but were in the $20–$25 (£12–£15) per MWh range in the late spring. The certificates offer substantial revenue for companies that install CHP. A 5 MW project with a 95% annual run-time that produces 41,600 MWh/year, will generate annual revenue of $1.04 million (£648,000) from the certificates, according to Nexant.
White tag trading is increasingly being eyed by other states. Neighbouring Massachusetts recently put in place regulations that are also expected to spur a robust market for certificate sales by CHP projects.
Nationally, Congress is considering a national energy efficiency portfolio requirement that could create a 50-state certificate trading market. While certificates could come from many forms of efficiency, MacGregor sees CHP as generating a substantial portion, opening up a potentially large, new revenue source nationwide for the resource.