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Can the US add 40 GW of CHP by 2020?

The US federal government’s target of raising the country’s CHP capacity by 50% to 122 GW by 2020 could be reachable, in light of low gas prices and rising environmental considerations, argues Elisa Wood.

It’s a heady time for the US combined heat and power industry.

Embraced as part of the country’s sweep to become more energy efficient, CHP is increasingly viewed as a way to meet environmental mandates, cut costs for recession-weary businesses, and invigorate manufacturing. As a result, the federal government is pushing for a 50% increase in the resource, and states are incorporating it more and more into clean energy policies. All of this comes at a time when CHP enjoys strong economics because of low natural gas prices.

Natural gas outlook (2010$/MMBtu) Source: ICF International

‘You can feel the buzz from CHP. There is a lot going on right now, and everybody knows it,’ said Joe Allen, chairman of the US Combined Heat and Power Association, speaking in October at the organization’s annual conference in Washington, DC.

Where is the industry heading? Big plans are underway for CHP expansion, yet historic barriers to industry growth persist.

The ‘buzz’ described by Allen emanates largely from an executive order issued by President Barack Obama in August that calls for adding 40 GW of industrial CHP by 2020. This is a significant increase, given that the US added only about 3.4 GW of CHP between 2006 and 2011, according to ICF International. CHP now provides about 82 GW in the US, about 87% of that for industrial purposes.

Obama’s executive order is a target, not a mandate, and comes with no financial incentives attached. Still, it was no small event.

‘It is a really big deal when you get the President’s attention on these issues, and he moves forward on an executive order like this,’ said Kathleen Hogan, deputy assistant secretary for Energy Efficiency and Renewable Energy at the Department of Energy, who spoke at the USCHPA event.

The presidential order is just one of several positive developments buoying the industry. Another is the nation’s new abundance of natural gas. Shale gas production has increased 14-fold since 2005, according to ICF International. As a result, prices have fallen dramatically. This is significant because natural gas fuels 71% of US CHP capacity.

‘There is a changing outlook for natural gas in the United States. It’s still a finite resource, but for a long time there is going to be a lot of natural gas in North America at a price that seems to be decoupled from world oil prices,’ said Bruce Hedman, vice-president of ICF. ‘So it really is a resource that I think is going to drive a good portion of this market’.

Goodbye coal, hello CHP?

In addition, CHP has become an environmental play as the federal government imposes new emissions mandates. Regulators increasingly note its favourable environmental profile: the CHP plants that are now operating avoid 1.8 quadrillion Btus (5.3 quadrillion Twh) of fuel consumption per year and 241 million tonnes of carbon dioxide.

Meanwhile, the US Energy Information Administration forecasts that new environmental rules combined with market forces will push 49 GW of coal-fired generation into retirement through 2020, about a sixth of the nation’s coal capacity.

For example, technology-based limits for mercury, arsenic and other air toxins under the Mercury and Air Toxics Standards (MATS) will affect 600 coal-fired plants. A recent report by the American Council for an Energy-Efficient Economy found that CHP could replace a substantial amount of the retiring coal in 12 energy-intensive states. Two of states – Kansas and South Carolina – could replace all their lost coal capacity with CHP.

Another plus for CHP is the US military’s growing interest in energy efficiency. The Department of Defense (DOD) is one of the world’s largest energy consumers and has become a strong advocate for improving US energy security by reducing reliance on fossil fuels. The DOD is striving to make its own energy supply greener, more distributed and increasingly efficient.

‘We need to be more energy independent than we currently are,’ said James Dalton, chief of engineering and construction at the US Army Corps of Engineers. ‘When we have generators overseas in contingency ops [operations] that depend on fossil fuels, it means somebody has to truck in that fuel. Trucking in that fuel exposes us to unnecessary dangers.’

The Environmental Protection Agency’s CHP Partnership this year gave Energy Star awards to two military installations that are saving fuel with CHP systems: Marine Corps Air Ground Combat Centre (MCAGCC) in southern California and Fort Bragg in North Carolina.

MCAGCC – a 2600 km2 desert facility with 25,000 civilian staff, military personnel, and their families – installed a 7.5 MW Solar Turbines combustion turbine generator that provides electricity, hot water and air conditioning. With an efficiency of over 64%, the plant uses 24% less fuel than a conventional system and has saved the base $5.8 million in energy costs.

The US Army Garrison at Fort Bragg has a 5 MW CHP system that consumes 18% less fuel than a conventional energy system and reduces the base’s energy costs by $1 million annually. It serves 67 buildings on the base, and provides power, heat and air conditioning.

Energy efficiency has become such a high priority in Dalton’s office that ‘if you call up and ramble off a bunch of things, and you just say “energy efficiency”, you will probably get an audience,’ Dalton joked.

Californian ‘fanaticism’

That’s the good news. The bad news is that CHP continues to face some of the same challenges it has for years in the US, many emanating from utility attitudes: difficult interconnection rules, exit fees, standby charges and lack of net metering.

California, the world’s ninth largest economy and arguably the most influential state for energy policy, continues to offer both great potential and significant barriers to CHP. The state now has about 8500 MW of CHP, and Governor Jerry Brown wants an additional 6500 MW added by 2030.

But in recent years CHP has suffered under ‘a fanaticism in Sacramento [California’s capital] about renewable energy’, said Keith Davidson, president of DE Solutions. Fuel cell CHP has fared well but not natural gas-fired units. Until recently, customer-sited CHP found itself excluded from most government support.

‘There was a period of time when CHP was the only energy measure that a customer could do that did not get any support from anybody. From a perception point of view that hurt a lot,’ said Davidson.

At the end of 2007, the state blocked conventional CHP from receiving money through the self-generation incentive programme, which offers rebates for distributed energy. Only CHP fuel cells were allowed to participate. Davidson, who attended the legislative debate on the issue at the state capitol, said he heard the words ‘dirty fossil fuels’ used in reference to CHP many times. Later CHP was reinstated into the programme, and now conventional CHP receives $0.5/W and fuel cell CHP $2.25/W.

Two significant events are changing the negative perception of CHP in the state, said Davidson. First, the California Air Resources Board (CARB) included CHP as a cost effective way to reduce greenhouse gases in its scoping plan to meet the state’s climate change goals by 2020. Second, Brown has made CHP a state priority. Because of his backing, state agencies are beginning to talk and work together to overcome California’s barriers to CHP, said Davidson.

But problems persist. California had its first carbon dioxide cap-and-trade auction scheduled for 14 November, and current programme rules disadvantage CHP, according to a recent white paper by staff at CARB. The rules fail to adequately account for electricity consumed on-site from CHP projects. Legislative fixes are under consideration.

‘CHP never clearly fit into a single cap-and-trade category,’ said A New Generation of Combined Heat and Power: Policy Planning for 2030. ‘It overlapped the category designed for boilers and the one designed for electricity generators. The regulation as it exists today creates a disincentive to install CHP.’

That is only one problem obstructing CHP in California. Another is the state’s departing load charge, which developers call excessive and unfair. They range from $13.72/MWh to $22/MWh. No other technology that cuts customer demand – such as efficient lighting – faces these charges, say developers.

CHP developers also describe excessive red tape imposed by California utilities, state rules that continue to favour wind and solar over CHP, difficult interconnection rules, and meagre incentives for CHP compared with those offered to other technologies.

Indeed, California’s difficult CHP rules contributed to the state lagging Massachusetts for the second straight year in the annual state energy efficiency scorecard issued by the American Council for an Energy-Efficient Economy.

The scorecard ranked states on a variety of parameters, such as CHP policies, state financial support, building codes, appliance standards and transportation policies. In the CHP category, Massachusetts continued to come out on top with 4.5 points out of a possible 5, while California ranked number 12 with only 2 points, a surprising position for a state that usually ranks highest in the nation on clean energy endeavours. In comparison with Massachusetts, California fell short in the CHP category over its interconnection procedures, treatment of CHP in its state portfolio standards, and net metering rules.

‘The playing field here is not level. When I tell my West Coast people what happens in New York, Connecticut, Massachusetts and New Hampshire, they are shocked. They [Californians] are picking winners and it’s not working. It’s really who has the best lobbyist in Sacramento,’ said Jeff Glick, a vice-president of sales for Tecogen, a manufacturer, installer and servicer of small gas engine-driven CHP.

Glick showed a chart that listed California regulation for CHP, which he described as ‘about as simple to read as a third world bus schedule’.

While the road may be difficult for CHP in California, other states are increasingly putting in place CHP-friendly policies. Eighteen states now include CHP or waste recovery in their portfolio standards – mandates imposed on utilities and competitive retail suppliers to add a certain amount of clean energy or efficiency by specified dates.

States innovate

For example, Ohio requires 12.5% from advanced energy resources (including CHP) by 2025 and utility energy efficiency of 22% by the end of 2025. Massachusetts has what it calls an alternative portfolio standard (APS), which includes CHP, flywheel storage, coal gasification, and efficient steam technologies. The state began the programme in 2009 with a 1% APS requirement, which increases each year by 0.5% until 2014 and by 0.25% from then on.

Several states, particularly in the US Northeast, also have tax credits, streamlined permitting, capital incentives and other supports for CHP. Connecticut has added 91 MW of CHP since 2005 after offering grants and reducing technical and regulatory barriers. The latest version of the grant programme offers incentives of up to $350/kW for projects up to 5 MW and up to $200/kW for projects up to 1 MW. Connecticut now is exploring how it can add more CHP as part of a draft state energy plan unveiled in October by Governor Dan Malloy.

New York has long been a strong state for CHP because of various incentives and policies from the New York State Energy Research and Development Authority. In addition, New York City Mayor Michael Bloomberg has a goal of adding 800 MW of CHP by 2030 in the city, where 90 MW is already in operation or planned. In addition, the state Public Service Commission in October opened a proceeding to reconsider its net metering limits. It kicked off the examination by raising the net metering caps in one utility jurisdiction from 12 MW to 36 MW. New York’s efforts are driven by a state goal to cut electricity use by 15% by 2015.

Despite all these efforts, CHP advocates say it will not be easy to meet the federal goal of adding 40 GW of industrial CHP. With Congress in search of ways to reduce the federal budget deficit, new federal funding is unlikely. Instead, all eyes are on the states to push CHP development forward. Representatives from federal agencies plan to hold meetings in early 2013 with states to help them advance their programmes.

The stakes are high because reaching the 40 GW goal offers significant benefits. The US EPA partnership estimates that adding 50% more CHP would save 1 quadrillion Btus (2.9 quadrillion TWh) of energy, equal to 1% of all energy use in the US. Consumers would see a $10 billion annual cut in energy costs.

An immediate goal is to simply get the word out about the benefits of CHP, a technology that remains arcane to the public, especially compared with the more familiar alternatives of sun and wind energy.

‘If we are going to achieve the goals that the CHP industry has set and that have been set for us, and perpetuate the momentum that has been built, everyone in this industry must be engaged in the conversation and must be out telling the story of CHP,’ said Jessica Bridges, USCHPA executive director.

Elisa Wood is an energy writer based in Virginia, US.

 


Zero capital upfront

With state and federal budgets tight and incentives waning, the CHP industry is in search of new ways to make upfront costs less daunting for customers. In Connecticut, a small utility known for its energy efficiency innovations, is exploring a new tactic that it calls Zero Capital Upfront (ZCAP).

Now being piloted by United Illuminating, the programme mirrors similar approaches used in solar photovoltaic and energy efficiency financing, where third parties own the energy equipment.

ZCAP marks a departure from today’s conventional CHP development, said Ken Cooper, UI’s senior business development specialist, at the USCHPA annual meeting. Typically, a customer provides the capital and pays upfront for the CHP installation while the utility offers rebates to sweeten the economics. The customer owns and maintains the system.

Under ZCAP, a third party owns and maintains the system and receives any incentives or tax credits, while the customer gains by achieving energy savings and cost reductions without investing any upfront capital. The customer signs a contract to purchase energy from the CHP system at a pre-arranged discount for the life of the equipment.

UI is now facilitating deals between customers and investors to test the ZCAP model. However, the utility’s eventual goal is to act as the third party and own the CHP systems installed for customers.

Whether regulators approve the approach remains open to question – Connecticut is a liberalized state in which utilities are not allowed to own generation. But regulators might let the utility own CHP not as generation but as a distribution asset, said Cooper. This would add a new rate-based asset that could help boost utility profits.

UI is exploring ZCAP with two universities, two manufacturers and four municipalities that are planning micro-grids.

Utilities nationwide now own only 3% – less than 2.4 GW – of CHP in the US, according to the EPA CHP Partnership’s white paper, Combined Heat and Power: A Clean Energy Solution. The paper looks at how the nation can reach its federal 40 GW goal.

Expanding utility ownership of CHP would be a ‘win-win’ for all parties involved: the utility, the developer and ratepayers, finds the paper. The utility gets needed infrastructure, the developer new projects, and the CHP customer stable financing and risk management. But the white paper added that ‘project benefits will need to be appropriately apportioned to stakeholders through well-crafted, fair policies and strategies to ensure broad support’.

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