Credit crunch boost for US CHP

After years of lobbying, the US combined heat and power industry won a 10% tax incentive as part of the larger clean energy credit package signed into law on 3 October by President Bush.

The new incentive provides a 10% tax credit for the first 15 MW of a new project that is up to 50 MW in size. In effect through 2016, the incentive is expected to spur development of small to medium size CHP projects.

Congress included the CHP incentive in the Emergency Economic Stabilization Act of 2008, the US$700 billion bill passed last week to rescue US financial institutions and unfreeze credit markets. The bill also extends existing tax incentives for wind and solar.

‘This means a lot. The idea behind this tax credit is to provide a major incentive for smaller systems. The underlying justification of it is that the smaller systems out there tend to encounter more market hurdles,’ said Neal Elliott, associate director for research at the American Council for an Energy-Efficient Economy (ACEEE).

Conceived 11 years ago under the Clinton Administration, the CHP tax incentive is meant to ease permitting and engineering costs that can trip up smaller projects.

‘Ten percent is not enough to make a non-economic project move forward. But it is enough to overcome the barriers that would prevent a project that is fundamentally cost effective from moving forward. It buys the risk down,’ said Elliott. He sees the tax incentive encouraging new CHP installations for companies dealing in food and wood products, specialized chemical processing, or other small scale manufacturing. ‘In our analysis the sweet spot in the market is in the 5 MW to 25 MW range’, he adds.

Non-profit institutions, such as colleges and hospitals, may also benefit from the incentive, but in a more indirect way, he said. Since they cannot use a tax credit, they can team up with investment partners who will benefit from the credit under arrangements known as synthetic leases or third party power purchase contracts. Such arrangements are now used frequently in the solar industry. A third party who can benefit from the tax credit owns the solar panels or CHP equipment installed at the store or factory, which then buys the electricity generated by the equipment.

The tax credit is likely to encourage more use of CHP in states that offer few incentives for the energy alternative. ‘Our hope is that this will create enough of a sweetener to offset challenges and encourage companies in states where there is little incentive’, Elliott said.

The federal credit is likely to play a smaller role in encouraging CHP in states where strong support for onsite power already exists, according to Elliot.
The clean energy tax credits won approval as Congress prepared to adjourn, so that members could return home and campaign for the upcoming election. The vote marked the end of a two-year battle by wind, solar and efficiency advocates to extend existing credits, revive those that had expired, and win approval of new incentives.

‘Just a few days ago, these incentives appeared to be dead for the rest of the year. But, in Washington, ‘It’s not over ’til it’s over,’ in the words of Yogi Berra; and at the 11th hour bipartisan cooperation and good sense prevailed,’ said Brad Penny, government relations director for the Alliance to Save Energy.

In related news, the ACEEE on 6 October released its annual scorecard ranking best practices and leadership in energy efficiency among states. The organization included treatment of CHP as one of eight key factors in determining a state’s rank. The ACEEE also analyzed utility programs, transportation, building codes, appliance standards, examples of state leadership, research and development and financial and information incentives.

California, Oregon and Connecticut received the highest efficiency rankings. Looking at CHP alone, states that received the most points included California, Connecticut, Oregon, Vermont, New York, Wisconsin, New Jersey, Ohio, Texas and Illinois. States that ranked at the bottom with no points for their CHP policies were Louisiana, Georgia and Wyoming.

ACCEE noted, however, that the rankings may not reflect recent state policy changes. Michigan, for example, this week approved new energy efficiency portfolio standards, not included in the ranking.
State policies are crucial in determining support for efficiency measures because states spend two to three times that of the federal government on promoting efficiency, according to ACEEE.

The ACEEE offers a listing of CHP related policies for each state which may be found at:

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