Prospects for CHP in the US are good right now, thanks in part to new regulations from the EPA and support from some states in the form of tax credits, loans and grants. But which incentives have really worked to encourage new capacity to be built? Anna Chittum reports, using the findings of research by the American Council for an Energy-Efficient Economy.

Combined heat and power (CHP) efficiently supplies the US with over 10% of its electricity. It saves money, reduces overall energy-related emissions and can be deployed at a fraction of the time and cost of more traditional, centralized generation. Both the US Department of Energy (DOE) and the national State Energy Efficiency Action Network, a joint effort of the DOE and the Environmental Protection Agency (EPA), have endorsed aggressive goals for CHP development through 2020. At the state level, lawmakers, regulators and utilities are increasingly looking to CHP to meet near-term energy needs. Perhaps most importantly, facilities looking to lock in long-term savings and reliability have been investing in or considering new CHP systems despite the recent economic recession.

This trend is a shift after a rather dormant period of CHP. After recording less than 1 GW of new installed capacity each year since 2006, ICF International now estimates that 2400 MW of new CHP capacity is currently in the works.

A number of factors are converging to give CHP this boost. New regulations from the EPA are expected to hasten the retirement of ageing boilers and utility coal plants. This will create opportunities for CHP, since replacing an old plant with CHP is often more cost-effective than retrofits. In some cases CHP could offer an attractive return on investment, providing benefits far beyond just compliance.

Other possible drivers are on the horizon. States with energy efficiency resource standards and other portfolio targets are requiring that utilities meet increased efficiency requirements with new investments, in some case including CHP. In addition, new EPA regulations explicitly encourage CHP and other efficiency investments as compliance mechanisms for affected equipment. And as manufacturing capacity returns to the US, firms are considering reinvesting in CHP.

Despite these nationwide factors, the US CHP market still varies dramatically from state to state and developers face a hodge-podge of policies and regulations. This can make certain states ‘non-starters’ for CHP, while others remain much more attractive, according to research conducted by the American Council for an Energy-Efficient Economy (ACEEE) in 2010 and 2011.1

The research conducted by the ACEEE focused on the attitudes of CHP developers in markets around the country. CHP developers were asked to highlight CHP markets that they found to be highly favourable, as well as those in which they currently saw little or no development potential. While a number of regulatory and policy issues were unique to particular states or regions, larger economic and financial barriers exist across the country. These included lack of financing, lack of funding for initial feasibility assessments and a general aversion to new debt by cash-strapped companies concerned about their long-term financial health.

As the US looks to CHP to provide a greater percentage of its future energy supply, it is critical to understand which policies and programmes are mostly likely to stimulate CHP projects. Figure 1 shows the number of CHP systems installed state-by-state in the US between 2005 and 2010 – a total of 617 systems.

WHAT HAVE WE LEARNED ABOUT INCENTIVES?

CHP projects are eligible for a variety of federal, state and local tax credits; low interest loans; loan guarantees; and grants, and CHP developers have happily used them where available to improve the economics of their projects. Financial incentives remain popular policy tools, but certain ones have proven to be more enticing or effective than others.

Developers reported substantial interest in CHP-focused incentives developed as part of the federal bailout and stimulus legislation, including those established by the American Recovery and Reinvestment Act of 2009. In particular, developers showed significant interest in the ‘Section 1603’ payments for energy property in lieu of tax credits, which were only available for CHP projects placed into service by 2011. This finding was echoed last year by a study from the Bipartisan Policy Center, which found that such cash grants were far more effective than tax incentives at encouraging other forms of alternative energy resources. In fact, the available federal 10% investment tax credit for CHP has only been used by companies also able to use the Section 1603 payment-in-lieu provision. It does not yet appear that companies are rushing to take advantage of the tax credit on its own.



Figure 1. Installed CHP systems, 2005–2010 Source: ICF International

Similarly, it appears the new 35% investment tax credit available to CHP projects in North Carolina has failed to encourage a single new CHP project. Tax credits by themselves do not appear to be moving projects forward.

Grants remain popular, as the DOE’s industrial energy efficiency grants funded through the stimulus were oversubscribed by a factor of 25. In the end, $155 million was awarded, $100 million of it to CHP projects. Similarly, the federal State Energy Program and the Energy Efficiency Community Block Grant programmes supported dozens of CHP and distributed generation projects as part of the stimulus. Cities and counties around the country sought support for new or expanded CHP and distributed energy projects, including district energy.

However, recipients have reported that some of these projects have stalled, been cancelled or otherwise scaled back. Some stimulus-funded projects were cancelled after developers and other stakeholders determined they could not satisfy the requirements of the funding agreements. Others acknowledged that they did not foresee political hurdles and had to cancel projects after their local leaders proved unable to secure necessary financing. And others used the funds to explore the feasibility of certain projects and determined that they did not make sense – a laudable use of funds, but not one that resulted in new projects.

These difficulties in the execution of actual CHP projects are not unique to the stimulus funds. Historically, financial incentives for CHP projects have not by themselves overcome other project barriers. They do help, though, and developers noted that incentives were still necessary to overcome treatment of CHP projects they view as inherently unfair compared to renewable energy projects. They noted a strong preference, especially for incentives that were persistent, based on some contractual agreement, and relative to some measure of power production, such as feed-in tariffs, standard offer programmes and production tax credits. Multiple developers cited New York’s per kWh and per kW performance-based incentive as a great example of this type of programme.

One type of incentive that did not appear to be making significant impacts on CHP markets yet, but might in the future, was portfolio standards. Renewable-powered CHP and waste energy can qualify as a renewable resource in some states’ Renewable Portfolio Standards. While most states relegate such projects to Tier III status – meaning they are generally eclipsed in importance and priority within the portfolio standard by solar and wind energy – the fact that they are included is a step in the right direction, according to developers. But such a minimal inclusion has not yet made a big impact on the market.

Similarly, CHP qualifies as an eligible efficiency resource in some states’ energy efficiency resource standards. While the goals for these types of standards are still fairly low, they are almost all set to ramp up over the course of the next decade. Most CHP developers believe that, as utilities face rising renewable energy and energy efficiency goals, they will begin to turn to CHP in earnest to meet those goals in a highly cost-effective way.

WHAT EXCITES CHP DEVELOPERS TODAY

Beyond the slew of financial incentives, other policies, programmes and regulations are making certain markets much more attractive to CHP than others. These bright spots in local CHP markets continued to attract notable developer interest in spite of the recent recession.

New Jersey

In New Jersey, a piece of legislation enacted in 2010 defined ‘contiguous’ property as two pieces next to each other, even if they are ‘separated by an easement, public thoroughfare, transportation or utility-owned right-of-way.’ It also defines two properties as contiguous if one produces thermal energy purchased by the other, even if they are not geographically located next to each other. Such a definition is unheard of among CHP developers. The legislation goes on to indicate that customers may sell electricity using existing utility infrastructure to any customer on a contiguous property.

This law attracted attention among developers all over the country, and may serve as a model for other states, according to CHP advocates.

Massachusetts

In Massachusetts, the 2008 Green Communities Act required that utilities evaluate CHP as they would any other energy efficiency project eligible for incentive funding. This requirement has yielded robust financial incentives offered by all the major regulated utilities in the state.

Additionally, Massachusetts developed an Alternative Energy Portfolio Standard (AEPS) separate from its efficiency goals and Renewable Portfolio Standard. This AEPS ramps up to a 5% goal for utilities by 2020, and includes CHP as a primary qualifying resource. Developers and policymakers view this portfolio standard as one designed primarily to encourage CHP, and of the 129,925 MWh reported by Massachusetts utilities in their compliance reports for the standard, only 1 MWh was generated by a non-CHP resource. Developers indicate that these two aspects of the 2008 Act have created a highly attractive market for CHP in Massachusetts.

Texas

In Texas, the 2011’s House Bill 3268 ordered the Texas Commission on Environmental Quality to establish a ‘standard permit’ or ‘permit by rule’ for natural gas-powered CHP systems. Such a permit would give CHP owners and developers a clear path by which they could move their CHP systems through air quality permitting processes. The bill also requires that such a permit provide for output-based emissions limits, which gives CHP systems credit for their increased efficiency over standard generation.

OTHER OPPORTUNITIES ON THE HORIZON

The near future for CHP will largely be determined by actions at the state level. Even federal efforts can be strongly impacted by decisions made by state actors. For instance, the federal Cross-State Air Pollution Rule, which affects most Midwest and Eastern states, develops allowance allocations based on a Federal Implementation Plan, which can then be replaced by a State Implementation Plan beginning in 2013. These individual state plans could rely on output-based emission standards to encourage highly efficient technologies such as CHP. State air quality authorities will be instrumental in determining how to respond to these new rules.

Finally, state utility commissioners could also heavily influence policies and regulations to stimulate more near and longer term CHP. Some states are beginning to seriously consider encouraging or allowing their regulated utilities to change their business models in favour of ones that allow utilities to earn rates of return on customer-sited CHP, just as they do on large centralized generation assets. Utilities, much like hospitals, universities and other classic CHP customers that can take very long-term views of their capital investments, are primed to help expand the CHP market to meet growing domestic energy demand.

As utilities plan for the decades ahead, investments in CHP systems could make more economic sense than retrofitting existing plants or investing in new costly centralized generation, especially if they are guaranteed some return on their CHP investments. Electric utilities desire to be compensated to some degree for their initial up-front investments, as well as their long-term loss of revenues as customers switch to CHP-generated power. In the win-win scenarios currently being explored by utilities and their regulators, both the utilities and their customers will share the environmental and economic benefits of increased CHP deployment.

Such regulatory models could effectively encourage immense amounts of the highly reliable and sustainable power produced by CHP.

Anna Chittum is a senior policy analyst with ACEEE. Email: achittum@aceee.org

For more on ACEEE’s work in the CHP field, visit: https://aceee.org/topics/chp

REFERENCE

1 The full 2011 ACEEE report on CHP barriers and opportunities can be found here: https://aceee.org/research-report/ie111

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