Obama pledges policies to support renewables
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Low oil prices and the tight credit system are unlikely to be helpful for the CHP industry in the US, but the strength of policy support is likely to grow substantially as the Obama administration takes office. Elisa Wood takes a look at the current policy picture and how this is likely to evolve.

Combined heat and power appears poised for unprecedented support in the United States as the new Congress and President took office on 20 January. President Barack Obama has vowed to make energy a foundation of his job-building platform, with efficiency and clean energy its basis. This boost comes after an encouraging 2008 for CHP, with new federal and state policies put in place that favour the resource.

‘President-elect Obama made energy policy a cornerstone of his campaign and now has put together a high calibre energy/environmental team that is supportive of energy efficiency and knowledgeable on CHP. I’m optimistic for the growth of our industry over the next four years,’ said Jessica Bridges, executive director of US Clean Heat and Power Association (USCHPA).

The transformation comes after years of groundwork by USCHPA, the American Council for an Energy-Efficient Economy (ACEEE), and others, to educate Congress about the resource. Advocates say they have seen a shift in the nature of the discussions. Before, conversations centred on defining CHP and explaining its benefits, now, leaders know its merits and want to discuss ways to increase its use. ‘CHP has gotten its legs. The bright side of the penny is that we are hearing from the Hill for the first time in 20 years an emphasis on CHP. Not only do they know what it is, but they care about what it can do. I think that is huge,’ said Suzanne Watson, ACEEE policy director.

Exactly what form the new support will take — and whether the weak economy will limit its progress — remains to be seen. Industry insiders see support coming through several possible federal channels: tax incentives, financial stimulus grants, efficiency standards and climate change rules.

CHP advocates are positioning to ensure the resource receives favourable treatment in an energy bill (expected as early as this February) and in climate change legislation, either combined with the energy bill or at a later date. ‘I just talked to energy committee staffer, and she said, “Don’t forget, we really care about CHP, and we want to see CHP front and centre in a climate bill and energy bill,”’ Watson said.

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In addition, USCHPA reports that talk is underway to expand a tax incentive approved in the autumn. Part of a larger clean energy credit package signed into law on 3 October 2008 by President Bush, the incentive provides a 10% tax credit for the first 15 MW of a new CHP project that is up to 50 MW in size. In effect, through 2016, the incentive is expected to spur the development of small- to medium-sized CHP projects.

Congress included the CHP incentive in the Emergency Economic Stabilization Act of 2008, the $700 billion bill passed to rescue US financial institutions and unfreeze credit markets. The bill also extended 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, ACEEE associate director for research.

The incentive was conceived during the Clinton Administration, and the CHP industry had been pressing for acceptance for 11 years. It 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,’ he said.

The tax incentive is expected to benefit 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.’

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.

Discussion is now underway to expand the tax credit by lifting the 15 MW limit and eliminating the 50 MW ceiling, according to USCHPA’s Jessica Bridges.

OBAMA, ECONOMIC STIMULUS AND CHP

At press time, CHP advocates were closely watching Obama’s work on a major economic stimulus package — expected to be unveiled during his early days in office. Details had yet to be worked out, but CHP insiders see opportunity for projects to reap some of the federal dollars. Early information released by Obama’s transition team indicates that the focus will be on green jobs and construction of infrastructure to support clean energy and a smart grid. Obama wants to spend $150 billion over 10 years on initiatives for both clean vehicles and energy projects to create five million jobs.

The energy incentives are part of a broader infrastructure effort that Obama says will be the largest US public-works program since construction of the interstate highway system in the 1950s. Funding will go towards bridges and highways as well as energy projects. The federal government is expected to flow money to the states, which will set rules for grants. High priority will go to projects that are ‘shovel-ready’ i.e. those that have necessary permits and can begin development in 90 to 180 days. The idea is to create jobs in 2009.

‘Jobs are the coin of the realm. It is not BTUs or kilowatt-hours. It is jobs,’ Elliot said. Since CHP will find itself in competition for the money with transportation infrastructure projects, the industry needs to position itself quickly to win support from state policymakers, according to Watson. ‘A ton of money will go to the states. How does that go to CHP projects? The folks out there have got to be aware of the fact that they’ve got to show shovel-ready projects to the state energy offices’.

Government buildings are expected to offer one of the largest, immediate markets for CHP — since Obama says he wants to make government facilities clean energy models. These include universities, state government facilities, schools, hospitals, health facilities and municipal complexes.

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‘The Obama campaign put a lot of emphasis on government leading by example,’ said Anna Chittum, ACEEE research associate. ‘There still seems to be an emphasis on showing there is a leadership position the federal government can take in making energy efficiency investment in federal and state-own buildings.’

Meanwhile, Obama has named the key members of his energy and environmental team. The choices indicate that he is holding true on his word to support carbon-neutral technologies. Nobel Prize-winner Steven Chu will serve as secretary of energy. Chu is director of the Lawrence Berkeley National Laboratory (LBNL), where he has been a strong proponent of efficiency, renewables and other alternatives to reduce greenhouse gases.

‘His appointment should send a signal to all that my administration will value science, we will make decisions based on the facts, and we understand that the facts demand bold action,’ Obama said in announcing the team on 15 December 2008.

Kateri Callahan, president of the Alliance to Save Energy, noted that LBNL was a leader in developing and introducing into the marketplace energy efficiency technologies, such as the compact fluorescent light bulb. She described LBNL as one of the most innovative and effective institutions in applying science and technology to today’s energy problems.

‘Dr Chu also has nurtured and strengthened LBNL’s 50-year-plus relationship with the University of California Berkeley campus; initiated international partnerships in India, China and elsewhere; and collaborated on energy efficiency initiatives with California utilities and the California Energy and Public Utilities Commissions. These relationships are models for the collaborative — nationwide investments needed to attract and retain the brightest young people to careers in energy efficiency and clean energy supplies,’ Callahan said.

Others who Obama has called to his team are Carol Browner, former Environmental Protection Agency administrator, who will serve in the new post of ‘energy czar’; and New Jersey Commissioner of Environmental Protection, Lisa Jackson, as EPA administrator.

CHP AS 20% OF US SUPPLY

Attention to CHP heightened in early December last year, when the Oak Ridge National Laboratory issued a report that examined the impact on environment, economy, locale and the grid — if CHP became 20% of US supply by 2030. See Figure 1. The resource now makes up 12.6% of US electricity generation and 8.6% of capacity. Reaching 20% would require $234 billion investment which would create 936,000 jobs. If it reached the target, the US would avoid 848 million metric tons of carbon dioxide emissions, according to the report.

‘CHP should be one of the first technologies deployed for near-term carbon reduction,’ the report said. ‘The cost-effectiveness and near-term viability of widespread CHP deployment, places the technology at the forefront of practical alternative energy solutions, such as wind, solar, clean coal, biofuels, and nuclear power.’

Several European countries already use CHP for more than 20% of supply. They’ve achieved more widespread penetration than the US because of favourable government policies, climate conditions, building density and a greater use of district energy. The US may not have these attributes, but it does have a large pool of industrial, commercial and institutional facilities that are ideal candidates for CHP, according to the report.

Meanwhile, the states continue to forge ahead with programmes that encourage CHP as an efficiency resource. Eighteen states now have energy efficiency portfolio standards, which typically require that a specified amount of utility demand be met through efficiency. Others have rolled CHP into renewable portfolio standards, which typically require that clean energy sources constitute a percentage of sales from utilities and retail suppliers.

ACEEE has been a major force behind state adoption of efficiency standards. ‘It really does create a situation where utilities will be forced to become supportive of CHP,’ said Neal Elliott. ‘We’re already seeing it in California. Just three or four years ago when we met with Pacific Gas & Electric and Southern California Edison and talked about CHP, faces would scrunch up. In the last 18 months both have come to us and said, “How can we develop a program to encourage CHP?”’

During his campaign, Obama said he supported a national renewable portfolio standard — one that applied to all 50 states. Again, details remain to be seen, but the potential exists to dramatically expand CHP support if it is named as a resource utilities can use to meet the standard.

ACEEE is tracking state progress through an annual scorecard that looks at best practices and leadership in energy efficiency. The organization included treatment of CHP as one of eight key factors in determining a state’s rank — see Table 1. The ACEEE also analysed utility programmes, 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, recently 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.

OIL PRICES, CREDIT CRUNCH

While prospects are up for CHP in 2009, it is far from clear sailing ahead. Obama himself has warned publicly that the recent drop in oil prices is going to make his clean energy agenda a harder sell. He reiterated, however, that bringing more efficiency to the system and rebuilding the grid remains one of his top priorities.

‘We’ve seen Washington launch policy after policy. Yet our dependence on foreign oil has only grown, even as the world’s resources are disappearing. This time must be different. This time we cannot fail, nor be lulled into complacency simply because the price at the pump has — for now — gone down from $4 a gallon,’ he said in announcing his energy and environmental team last December.

Another wildcard is the current recession and how long struggling credit markets will delay energy project financing. Roberta Gamble, director of energy and power systems for Frost & Sullivan, says she is ‘cautiously optimistic’ the energy sector will see a quick turnaround because of the economic stimulus money heading its way. ‘We could recover in the early months of the year and come out relatively unscathed. A lot is riding on these new polices.’

And finally, many of the same problems dodging CHP installations for years continue in several states: interconnection policy, standby rates, and lack of output-based emission standards that recognize the efficiency and environmental benefits of CHP. Work is underway on several fronts to resolve these issues. Watson said: ‘I predict that once this is done — and I predict it can be done — the market for CHP will expand beyond our comprehension.’


Lisa Wood writes on energy matters from the US.
e-mail: cospp@pennwell.com


Questions to Veolia Energy North America


Lawrence Plitch, vice president and general counsel of Veolia Energy North America, discusses why 2009 is likely to be strong year for the US CHP industry. A subsidiary of Veolia Environment, the company describes itself as the owner and operator of the largest portfolio of district energy systems in North America.

How does Veolia expect the CHP (or trigeneration) market to fare under the Obama administration and new Congress?

We are actually quite bullish on the prospects for CHP going forward under the new administration and Congress. For the moment, there seems to be a lot of momentum for energy and climate change, being one of the primary drivers for the stimulus bill that is predicted to emerge in President Obama’s first 100 hours (not days). More and more, policy leaders are appreciating that energy efficiency is the low-hanging fruit in the push to realize meaningful reductions in greenhouse gas emissions. And, as McKinsey, Oak Ridge and the IEA and many others have most eloquently stated, CHP is among the most cost-effective energy efficiency strategies this nation has.

Are there any particular state or federal policies that the company would like to see enacted — or avoided — in 2009 that would help the CHP market?

CHP, like many efficiency measures, has not seen recent growth to the extent one would expect and given its long-term negative costs, obstacles need to be dealt with. We are hopeful that the next Congress will assist by removing some of the existing barriers. For example:

  • tax exempt financing is permitted for district heating and cooling distribution systems but not production facilities
  • despite Congress passing tax credits last October for CHP, many developers cannot take advantage of them, especially with tax equity investors having issues in today’s credit crunch — so making these credits refundable would be very helpful
  • private wire prohibitions continue to stand in the way of excellent CHP projects
  • incentivizing utilities to buy efficiency, including CHP, through a portfolio standard, would make a lot of sense.Interconnection and standby rate policies are evolving. Some states have made great strides, e.g. California and Massachusetts, but there are still many others that need to improve.

Does Veolia have any publicly announced plans at this point to build new CHP projects in 2009?

We are looking at several opportunities in various stages of development, some fuelled by renewable fuels, some to be co-located on our existing district heating networks, and some green field, but none that I can discuss at the moment.

Have you decided to delay any CHP projects because of the recession?

No. Good projects will find capital.

Are there any particular states or market sectors (government facilities, universities, hospitals, manufacturing etc.) that offer best prospects for CHP in 2009?

Our focus for the next year or two is to leverage our existing trigeneration facilities as our base for expansion. We are located in 13 cities across the country — from Boston and Philadelphia to Las Vegas and Los Angeles — and are finding many opportunities in the metropolitan areas that surround our facilities. This is particularly true in those states that are far along in their efforts to fight climate change, such as those states that have joined the Western Climate Initiative or the Regional Greenhouse Gas Initiative.