MEMORANDUM
TO:
Anne Bishop, Vermont Public Service Board
FROM:
Blair Hamilton, Michael Socks, and Jonathan Kleinman
Efficiency Vermont
RE:
A Few Thoughts Regarding Need, Opportunity and Possible
Implementation of a Combined Heat & Power Program
DATE:
February 21st, 2006
We appreciate the opportunity to share some of our thoughts regarding the potential need
for, and possible design and delivery of, Combined Heat and Power (CHP) services to the
Vermont market. In developing these thoughts, we have considered the experience of our
staff, reviewed some of the relevant literature and gathered some information on past and
existing Vermont installations. Our thoughts are also particularly informed by discussions
with one technical resource (the Northeast CHP Application Center) and one CHP vendor
(Northern Power Systems).
On the whole, it is our perception that:
o While the Vermont experience sheds light on customer cost-effectiveness of CHP
systems, little has been done to evaluate societal cost-effectiveness;
o There are classes of potential CHP candidates that current “market forces” do not
reach or evaluate;
o There are a set of barriers to CHP project implementation, some of which can be
addressed through a CHP program, others of which need to be addressed through
conversations with interconnecting utilities;
o There is a regional resource – the Northeast CHP Application Center
(NECHPAC) – that can begin providing technical assistance now to Vermont
customers in partnership with Efficiency Vermont.
History of CHP in Vermont
Vermont has at least two decades of experience with CHP projects. According to the U.S.
Department of Energy’s CHP Installation Database, as of May 2005 Vermont had
completed 14 CHP projects providing a total of 36.5 MW of generation.1 These projects
span a wide range of generating capacity (60 kW to 20 MW), fuel sources (natural gas,
propane, oil, wood waste, and methane) and technologies (steam turbines, combustion
1
See http://www.eea-inc.com/chpdata/States/VT.html. Not all of the listed projects are currently in
operation, and more recent projects (e.g., Audets Cow Power LLC, Omega Optical, and Brattleboro
Retreat) are not listed.
turbines, microturbines, and reciprocating engines). The facilities with CHP projects
include:
o Pulp and paper, wood, or wood-processing facilities with a ready supply of “free”
fuel (e.g., wood chips, sawdust) and a significant thermal load;
o Anaerobic digestion (at wastewater treatment facilities or dairy farms) that supply
another “free” fuel source, biogas or methane;
o Educational or government institutions with district heating plants;
o Food processing plants with significant thermal loads;
o Health care facilities; and
o Other miscellaneous industries.
The list of projects in the DOE database is shown in Table 1.
Table 1. Listed CHP Projects in Vermont
Organization Name
Brattleboro Kiln Dry Company
Ethan Allen, Inc.
Aegis Energy Services Inc.
Concept Technology, Inc.
American Tractebel
Essex Junction Wastewater
Treatment Facility
Vermont Marble Company
Simpson Paper Company
Bell Gates Lumber
Middlebury College
Foster Brothers Farm, Inc.
Norwich University
Rock Tenn
Northern Power Systems
Facility Name
Brattleboro Kiln Dry Company
Ethan Allen, Inc.
Crescent Manor Nursing Home
Vermont Energy Investment
Corporation
East Ryegate Wood Energy
Essex Junction Wastewater
Treatment
Florence Project
Gilman Mill
Bell Gates Lumber
Middlebury College
Foster Brothers Farm, Inc.
Norwich University
Rock Tenn
Green Mountain Coffee Roasters
Application
Wood Products
Furniture
Nursing Homes
Capacity
(kW)
380
500
60
Office Buildings
Pulp and Paper
60
20,000
Wastewater Treatment
Minerals
Pulp and Paper
Wood Products
Colleges/Univ.
Agriculture
Colleges/Univ.
Pulp and Paper
Food Processing
60
7,600
4,000
75
1,885
142
300
1,135
375
Are these the only opportunities in Vermont?
Past studies elsewhere of CHP opportunities suggest that, extrapolating to Vermont, there
are far more facilities in Vermont that could utilize CHP than the current set of
installations. These prior studies relied upon certain criteria as a “first screening” for CHP
feasibility assessment:
o Having a minimum electric demand of 20 kW;
o Having a minimum thermal load of 50 kW (or 170,000 Btu/hr);
o Simultaneously experiencing an electric load greater than 20 kW and a thermal
load greater than 170,000 Btu/hr for at least 4,500 hours per year;2 and
o Having a ratio of electric demand to thermal demand of 1.5 or less.3
2
Graham Major. 1995. Learning from Experience with Small-Scale Cogeneration. Centre for the Analysis
and Dissemination of Demonstrated Energy Technologies.
The minimum electric demand establishes an immediate use for generated electricity
(rather than relying solely upon net-metering and exporting electricity to the grid). The
minimum thermal demand ensures a sufficient need for waste heat resulting from the
electricity-generating process, and the coincidence of electric and thermal demand ensure
adequate hours of operation to provide a return on investment. Typically, these systems
are typically sized to meet 50 percent of the locations’ maximum thermal demand.4
The types of locations that generally seem to meet these criteria include:
o
o
o
o
o
o
o
o
Food processing;
Lumber and wood facilities;
Pulp and paper facilities;
Petroleum products;
Educational facilities;
Health care facilities;
Lodging (particularly locations with cooling loads); and
Apartments (also with cooling loads).5
While Efficiency Vermont has not evaluated how many facilities meet these criteria, we
know that this is a significant number of customers in Vermont.
CHP Market Services
Currently, depending upon potential project sizes, there are two different sets of market
services typically available to customers,:
o Custom Engineering Development: One type of system vendor will design and
engineer a CHP system to carefully match the characteristics of a given facility.
According to Jim McNamara, Director of Onsite Generation Business
Development for Northern Power Systems, these engineering studies can cost
between $20,000 to $40,000. Because this engineering cost is not scalable (i.e.,
the engineering costs the same for a 200 kW system as a 20 MW system), these
vendors will tend to approach only customers with potential projects of 2 MW or
greater.
o Pre-Engineered Solutions: A second type of vendor will offer pre-engineered and
constructed systems. The only design work to be done is the interconnection with
a facility’s heating system and their electric grid connection, which can often be
handled by local mechanical and electrical contractors. Costs on these systems are
lower, and can lead to successful smaller projects. However, there can be facility
3
ONSITE SYCOM Energy Corporation. 1999. Market Assessment of Combined Heat and Power in the
State of California. Prepared for the California Energy Commission.
4
Graham Major. 1995.
5
ONSITE SYCOM. 1999.
integration issues with this “boilerplate” approach. And even in this model,
development costs can be high – vendors have found they need to screen potential
customers carefully to avoid expending business development resources on “dead
ends.”
According to both Jim McNamara and David Winslow of CVPS, the group of customers
in Vermont with the highest likelihood of CHP customer cost-effectiveness already have
CHP proposals on the table, either that they have solicited or that developers have offered
to them. These tend to be relatively large projects, where there is significant economic
motivation on the part of either the customer or the vendor to assess the opportunity and
develop a proposal. Because neither customers nor vendors have the economic interest in
assessing the potential of smaller CHP projects, it is difficult to gauge how many of these
smaller projects might be cost-effective from a customer perspective, but not known to be
so.
It should also be noted that virtually all market opinions and assessments of economic
feasibility and attractiveness, for customers and vendors, is based on customer
economics, with customers making the full investment in the systems, savings based on
retail energy costs, with customer-defined discount rates guiding considerations on
required returns on investment. If a broader, societal economic analysis enlarged the
range of projects that would be considered desirable, and public intervention (e.g.,
financial incentives) reflected this analysis, the services offered by the market might be
quite different.
CHP Market Barriers
Our review of how market barriers may be constraining the implementation of costeffective is far from systematic or exhaustive. It certainly seems that much of our
understanding and experience with how market barriers work in energy efficiency
markets is transferable to CHP, but our understanding is certainly not as well-developed
as in energy efficiency.
Barriers to Customer Cost-Effective Projects
There are certain barriers that exist in the CHP market that are not part of identified
energy efficiency barriers, such as:6
o Grid Interconnection Requirements: Electric utilities have interconnection
requirements to ensure the safety and reliability of the electric grid. The ONSITE
SYCOM study concluded, and many agree, that the technical requirements,
inconsistency (from one utility to another), procedural requirements, and
ambiguity surrounding grid interconnection requirements has been a significant
barrier to CHP implementation.
6
ONSITE SYCOM. 1999.
o Standby Charges: Utilities have typically established a standby charges (on a perkW basis) to cover the cost of providing electric demand should the CHP system
be temporarily shut down, for example for routine maintenance. These costs can
be significant, or may present a significant risk. Of more concern is whether
utilities use any “down time” as a period to set a ratchet in rates.
o Stranded Asset Recovery: In some instances utilities have, or would have an
interest in, recovering revenue that they would have collected had a customer not
installed a CHP system..
o Price for Net Export: While smaller systems may or may not be eligible for net
metering, for larger systems that may be net exporters of electricity to the grid, the
“wholesale” price that has been available to many projects has been a constraint
to project feasibility.
o Fuel Sources: While many CHP systems have been installed with propane or oil
as their fuel source, and been of demonstrated cost effectiveness, the conventional
market wisdom is that economically viable CHP is largely limited to natural gas
and “free” sources of fuel (such as wood waste or biogas). We are unaware of any
recent analysis that considers current fuel market developments and new
understandings of how different fuels, and electricity, might be priced relative to
each other in the future. This would seem to be essential to better understand just
which fuels may or may not be worth considering for CHP projects on a forwardgoing basis.
o Permitting and Siting Issues: Depending upon local geography and environmental
considerations, CHP projects may bump into air quality permitting issues (e.g.,
NOx emissions) or siting issues (e.g., noise). Air quality restrictions on CHP
equipment may be more stringent than larger-scale generation. (This may be
particularly true should wood-fired systems play a larger scale role in Vermont.)
Interestingly, only one other barrier was identified in the studies – the financial barrier.
This deals with inconsistent tax policies or depreciation schedules (i.e., CHP equipment
can fall under different categories depending upon “configuration and ownership,” so that
different depreciation schedules apply).7
While the above barriers are very real and have been cited as constraining CHP
development in the past, they would appear to be more regulatory and procedural than
programmatic issues. In any case, they are not issues that we understand to be within the
scope of what we have been asked to comment on at this time.
Market Barriers to Societally Cost-Effective Projects
Efficiency Vermont suggests that the traditional set of market barriers experienced in
energy efficiency also apply to a latent demand in the CHP market, and that services
similar to Efficiency Vermont currently provides can assist in overcoming those barriers.
For example:
7
ONSITE SYCOM, 1999, p. 2-15.
o Information and/or search costs – there are costs associated with determining
whether a particular facility is a good opportunity for CHP (i.e., feasibility
studies) as well as just learning more about CHP. Financial incentives can be
useful in this regard (for example, according to Jim McNamara, the
Massachusetts Technology Collaborative has a program to provide financial
assistance on feasibility studies, rolling this incentive into the project cost should
a project move forward).
o Lack of ability/inability for customers to use available information – most
customers, particularly at smaller facilities, lack the expertise to understand or use
available information about CHP. There is often a need for a third-party
information broker.
o Hassle or transaction costs – As for energy efficiency projects, one of the largest
barriers for customers who are the potential beneficiaries of a project is the
investment of time and the diversion of time involved in investigating CHP
opportunities.
o Difficulties in accessing financing or capital – the CHP market is less about “first
costs” because these projects typically cost more than what any given facility
would have “on hand.” Assistance can be provided in finding capital
arrangements (e.g., loans, leases) and either improving financing terms (e.g.,
buying down interest rates) or direct financial incentives to improve first-year
cash flows as a counterbalance against future year cash flows.
o “Bounded rationality” – another barrier to implementation deals with individual
preferences, prejudices, or predispositions that work against CHP projects.
o Organization policies or practices – businesses may have policies that require
low-first-bid procurement, set short pay-back periods, or prohibit longer-term
investments.
o Split incentives – this can occur where CHP application may occur in a district
heating plant, where costs and benefits of a CHP project may not be equally
borne.
o Irreversibility – CHP represents a significant capital investment, and is more
difficult to reverse than smaller investments should equipment prove troublesome
or fuel costs increases significantly change economics.
o Performance uncertainties – particularly in the case of pre-engineered CHP
applications, there are concerns in the market about equipment performance. It
would be helpful to document case studies to identify “best practices” that can
mitigate against these uncertainties.
CHP Lost Opportunities in Vermont
Considering the signs of “market failure” and the barriers discussed above with respect to
CHP, and our experience with addressing market barriers in efficiency markets, we are
inclined to suggest that Vermont is losing societally cost-effective CHP opportunities.
We offer this suggestion without having conducted either broad or individual project
assessments of current CHP opportunities from a societal perspective. We would note
that CVPS is currently planning some evaluation of the societal cost-effectiveness of
CHP as part of assessing the potential for non-wires alternatives to upgrade of the
Southern Loop. CVPS has indicated a willingness to share the results of this work, which
is expected to be available this spring.
We would offer a few quantitative perspectives on this as well:
o A review of electric accounts with demand greater than 1 MW (the customers
who pay the “industrial” Energy Efficiency Charge) indicates that 26 of the 74
accounts are owned by food processing, lumber and wood, pulp and paper,
educational, and health care facilities. Based upon current conventional wisdom
screening criteria discussed above, it would appear that at least half of these
customers would offer opportunity for economic CHP.
o Health care facilities, educational buildings, and lodging establishments with
minimum electric demand of 20 kW also represent a large number of customers in
Vermont. Because the temperature in Vermont is lower than 50 degrees F for over
half the year (at least historically), many of these facilities may also have thermal
loads of 170,000 MBh or greater for 4,500 hours or more, suggesting that they
could be good candidates for CHP.
Providing Services to Overcome Market Barriers
To date, there have been few or no resources available to Vermonters interested in
undertaking CHP projects unless they were provided by vendors or CHP developers.
Over the past six years, Efficiency Vermont has provided very limited, high-level
technical advice to customers.
A somewhat unknown resource that has emerged is the Northeast CHP Application
Center (NECHPAC), which provides free economic and financial assessments to
businesses interested in pursuing CHP projects.8 NECHPAC has been funded by the U.S.
Department of Energy for the past three years, and has at least one additional year of
funding. The original grant committed the NECHPAC to complete 69 CHP studies.
Currently, half of the studies have been completed, while the remainder scheduled for
completion. Costs of these studies have ranged from $1,000 (typically a high-level
screening indicating that a project is not cost-effective) to $10,000 (a more in-depth study
of a cost-effective application that evaluates alternatives).
According to Professor Larry Ambs, Director of the NECHPAC, the organization could
provide between 10 to 15 studies annually to Vermont businesses given their current
staffing and funding source. There is also a willingness on the part of NECHPAC to train
Efficiency Vermont in performing high-level screenings of customer cost-effectiveness.
8
See http://www.northeastchp.org/nac/businesses/pubs.htm.
The NECHPAC provides a regional perspective on CHP, bringing lessons learned from
elsewhere in the Northeast to the table.
A possible Scenario for Providing Services to the Customer: Option One
The availability of the NECHPAC service, with the discussion of the market barriers
noted above, leads Efficiency Vermont to offer a potential service delivery scenario for
consideration:
Increasing Awareness and Addressing Performance Uncertainties
Efficiency Vermont could develop case study information on certain Vermont CHP
projects and make this information available to customers. These case studies would
screen both customer and societal cost-effectiveness, and communicate the criteria which
customers should use in determining whether CHP might be right for them.
Addressing Information Barriers
Efficiency Vermont could work with customers requesting a high-level screening to
determine whether a more thorough evaluation is warranted. Should the high-level
screening suggest that next steps should be taken, Efficiency Vermont staff could enlist
the resources of the NECHPAC for a more detailed study.
Addressing Transaction and Hassle Costs
Efficiency Vermont would remain active in the process, and following the study would
assist a customer in soliciting and reviewing vendor proposals and searching for capital.
Providing Services to the Customer: Option Two
A second option would involve some level of use of ratepayer funds to “seed” the market.
Not unlike efficiency markets, we see three particular areas where substantial financial
investment might be cost effective and produce results that would not otherwise be
achieved. These could be provided separately or in combination.

Provision of design and engineering incentives to overcome barriers to vendor or
design engineer involvement. In the short term, Efficiency Vermont might partner
with NECHPAC and evaluate the services rendered. Over time, we would
evaluate whether it would make sense to move some of these services in-house or
to another Vermont-based provider.

Funding could be provided to cover a portion of the cost of detailed project
engineering services on CHP projects (perhaps on the order of 50 percent), thus
reducing customer perceptions of risk that on detailed analysis projects will turn
out not to be feasible. This could also be structured so that it would be paid only if
a project did not go forward.

Direst financial incentives and/or financing rate buy-downs could be used to
address customer’s high perceived discount rates.
In pursuing any of these options, we would recommend a phased approach, starting with
a limited number of projects and learning form experience.
In closing, we would note, as we have previously, that Efficiency Vermont customers
have indicated considerable interest in CHP over the past six years. It is an area where
we have not felt that we were able to respond fully to customer expectations. Certain
large customers, who perceive that CHP may be highly beneficial to them (this ranges
from having studies to having a hunch), feel that they should have available to them the
same level of technical assistance and financial incentives as is provided for efficiency
options through Efficiency Vermont. We have done our best to explain, and provide
them with the level of service that we understood to be consistent with current policy on
this issue.