Dr. Lawrence Ambs
Co-Managing Director
Northeast Regional Combined Heat and Power
Application Center
Center for Energy Efficiency and Renewable
Energy, MIE Department
University of Massachusetts,
Amherst, MA 01003-9265
www.northeastchp.org/nac
February 13, 2006
Vermont Public Service Board
Chittenden Bank Building, 4th Floor
112 State Street, Drawer 20
Montpelier, Vermont 95620
Re:
Act 61 Implementation – Identifying CHP Implementation Issues
The Northeast Regional CHP Application Center (“NERAC”) submits this letter in response to
the Board’s Notice Soliciting Comments to the December 20, 2005 filings of parties in the matter of
the Possible New Combined Heat and Power ("CHP") Program. The Board expressed a specific
interest that Parties address the comments submitted by the University of Vermont (“UVM
Comments”).
NERAC is a consortium of several universities seeking to promote and support the
commercialization of combined heat and power (CHP) throughout the Northeastern United States
through education, policy outreach and technical assistance.
NERAC is co-directed by the Pace Law School Energy Project and the Center for Energy
Efficiency and Renewable Energy at the University of Massachusetts-Amherst.
The Pace Energy Project was co-author of the report, Combined Heat and Power Market Potential for
New York State, published in October 2002, by the New York State Energy Research and Development
Authority (“NYSERDA”). Other university partners include the U.S. Department of Energy supported
Industrial Assessment Centers at Syracuse University, Rutgers University and the University of
Massachusetts.
Introduction
Clean and efficient CHP or Distributed Generation can be beneficial to both the electricity
customer and the electricity supplier, while reducing overall air emissions and energy use. Promoting
CHP is an established piece of national as well regional energy policy. The U.S. Department of Energy
has set a goal of doubling U.S. CHP capacity over 1998 levels, to 92 GW, by 2010, and identified CHP
as a win-win enterprise with enormous potential for growth in many sectors of the economy.
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Our experience in analyses across numerous economic sectors and states has led to the
conclusion that though the CHP potential is sizeable, a significant proportion of economically viable
projects may not occur due to a variety of market barriers. Many of these barriers have been identified
in the UVM Comments.
Studies of CHP resource potential, by application size, geographic location and business sector
make it possible to proactively respond to the market barriers and are particularly useful for targeting a
state’s programs and outreach to the most productive ends. The market potential study informs
policymakers and key stakeholders which aspects of the market environment are most problematic and
consequently how policy measures might be designed to ameliorate these factors. We have just
completed a Baseline Assessment of CHP for Massachusetts and although we will not be able to
perform the same assessment for Vermont in the immediate future, we will attempt to assist Vermont
by making our procedure and the study available to you. A copy of this study will be available shortly.
It is our intent to provide independent assistance and guidance on CHP issues and to attempt to
see that there is a level playing field when CHP issues are evaluated. Based on these considerations we
are available to meet with the Board and interested parties to discuss specific issues and to provide
those additional services that our resources will allow.
Policy Analysis and Recommendations
The Board has asked that Parties specifically address the comments submitted by the
University of Vermont (“UVM Comments”). In its letter, it has identified many of the barriers to
successful CHP implementation. These can be grouped into policy related barriers and market related
issues.
The market related issues can be ameliorated by a CHP Program of the type the Board is
considering. New York, California and other states, including, in the near future, Connecticut, have
CHP or Distributed Generation market transformation programs. Depending on the structure and
available resources, this type of program can be very successful. Such programs are particularly in
important in states such as Connecticut, which is faced with significant congestion or locational
marginal pricing issues, and areas of New York State that are looking to CHP as an asset that may help
alleviate local grid congestion concerns.
Vermont may wish to investigate how different program designs may provide more or less in
the way of local and transmission level congestion relief. Connecticut, for example, is suggesting a
sliding scale payment that would favor resources that provide ancillary benefits by way of congestion
relief. One of our partner organizations is in process of examining the efficacy of the New York State
DG/CHP Pilot program for locating resources in congested areas. Before the Board initiates such a
program we are willing to assist the Board in evaluating key program “parameters” and applying our
knowledge of best practices in this area.
The Policy related issues identified in the UVM Comments include:
•
•
•
Interconnection requirements with the local utility;
Stand by charges for power; and
Environmental studies associated with/and including air permitting.
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It is our experience from numerous contacts with CHP developers and end-users that interconnection
requirements and standby charges rank at the very top of critical issues for successful deployment of
CHP and DG. Air permitting issues and related studies and compliance expenses are also a concern to
those interested in siting a CHP facility.
Other workgroups (“Act 61 Interconnection Working Group”) are addressing issues in this
arena. Interconnection issues have been handled by many states recently in the Northeast. It may be
said that addressing interconnection is a journey, not a destination. States typically find that this is
necessarily an iterative learning process, both for the utility as well as the end user.
Standby Charges are one of the most contentious issues associated with utility CHP customer
relations. Sometimes justified on the basis of rate class equalization, under some conditions standby
charges can be punitive. The magnitude of the standby charges can become deal breakers in that they
can significantly reduce (or eliminate) monetary benefits thereby greatly lengthening capital payback
periods and making the CHP investment uneconomic.
There is a growing body of experience demonstrating the importance of balancing a fair return
to the utility against the private and public interest in promoting clean, high efficiency CHP. One of
our member organizations has participated in rate hearings where we filed a compromise proposal that
provided a standby rate exemption for renewable DG and high efficiency, clean CHP up to 1 MW in
size. This is just one of an array of possible solutions that might be tailored to meet the needs of all
parties involved.
Our organizations have been working with air regulators in several states to streamline the
permitting process for demonstrably clean, high efficiency CHP. We recognize the necessary and
legitimate interest of the regulator in promoting the public health and welfare by ensuring compliance
with air standards. We also recognize that the case-by-case air permitting system was not designed to
handle a large volume of small distributed generators. We have been working on reasonable
alternatives including standardization, pre-certification, output-based emission standards and
acceptance of pollution prevention measures (as a complement to end-of-pipe/stack controls).
Furthermore, we have been examining how small, clean CHP can participate in market based emission
reduction programs, such as emission reduction credits (ERCs), emission allowances (EA’s) and in the
future, the CAIR programs. These emissions trading programs offer an additional cash flow to the
CHP projects that can take advantage of them. The cleaner the CHP system, the greater the cash flow
with a zero emissions facility being eligible for the maximum compensation. We see this scaling of
payments based on progressively better and better emissions profiles as being a particularly good
incentive system.
The UVM Comments also identified three additional barriers to CHP implementation:



The cost of borrowing capital,
Uncertainty of the availability and costs of fuel over the long term and.
CHP feasibility studies
Capital costs may be addressed without the need to create new institutions and programs. For
example, our Center – NERAC – has been investigating existing state programs and how they may be
used to promote CHP. In New York and Connecticut the Health Care Financing Authorities (DASNY,
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CT-HFA) can issue tax exempt bonds to finance projects, for those entities that are eligible. DASNY
and CHFA have both financed CHP in the past. DASNY has a Tax Exempt Lease (TELP) program
that provides a tax exempt rate for shorter-term, lower capital cost investments.
Investment tax credits (“ITCs”), real property tax credits and other such incentives for specific
economic development zones may provide additional means for lowering initial capital costs for CHP
investments. In addition existing Brownfields redevelopment programs may offer a mechanism for
reducing CHP capital costs. Likewise, the Brownfield Cleanup Program run by New York State
Department of Environmental Conservation provides an ITC ranging from 10% to as much as 22% for
capital equipment & structures (including CHP systems). These credits are increased by 8% for
location in “ENV-Zones”, specially designated, lower income zones. Credits are further increased by
2% for cleanup to the highest level (“Track 1”). These credits are fully refundable; – if taxpayer
liability is less than tax credit, the Tax Department will write a check for the difference. Other
approaches, such as carry-forward and carry-back provisions may be desirable, depending upon the
circumstances. Third party transfer is typically helpful insofar as it greatly improves the liquidity of the
tax credit. Maine’s PineTree Development Zones program is being investigated for usage by some
proposed CHP projects in that state.
Fuel costs and availability over the longer term are driving an increasing interest in exploring
so-called “opportunity fuels”. Our Center recently completed detailed market assessments for the food
and beverage processing industries and the agricultural sector in the Northeast. Both of these sectors
(food and beverage, dairy farms) are well represented in our region and offer the potential for creating
energy from what is now seen as a waste.
Illustrating the importance of the food processing industry, the New York/New England food
processing sector includes:
 113,000 jobs in food and beverage manufacture;
 nearly 4,000 operating establishments;
 approximately $4 billion in wages paid; and
 while jobs in many manufacturing sectors are declining, food processing jobs seem to be
holding steady (more localized markets).1
Recognizing this importance, certain economic development agencies in the region have
designated the food industry cluster as a sector for specific programmatic outreach. Moreover,
NERAC’s State Advisory Board selected food processing as a key industry target.
In similar fashion, NERAC has examined the opportunities for on-farm heat and power
production via anaerobic digesters. According to our analysis, there are over 1,500 dairy farms in
Vermont and about 10,500 across the NY/ New England region. The use of anaerobic digesters has
significant environmental and odor reduction benefits, in addition to the potential for creating onsite
power and heat for the farm. The mixing of food wastes with the manure greatly increases the yield
within the digester, reduces the need for landfilling food wastes, reduces greenhouse gases and can
bring an additional cash flow to the farm (a tipping fee for accepting food waste).
1
"Current and Potential CHP Use in the NY/New England Food Processing Sector", Tom Bourgeois and
Mackenzie Schoonmaker, Pace Energy Project and Doug Hinrichs, SENTECH Inc. (July 21, 2005)
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Opportunity fuels benefit from a host of federal and regional/state incentives that are reserved
for biomass-based CHP. These incentives include the Production Tax Credit (PTC), the Clean
Renewable Energy Bonds (CREBs), and depending upon the state and the technology – inclusion in
RPS programs, inclusion in net metering programs and ability to sell greenhouse gas reduction credits
in nascent greenhouse gas markets.
Number of Farms by Milk Cows and Herd Size: 2002 Census
1 - 99
100-199
200-499
500+
TOTAL
Connecticut
229
50
27
4
310
Maine
461
53
37
5
556
Massachusetts
309
53
17
1
380
New Hampshire
198
42
12
3
255
5,785
1,027
406
170
7,388
38
4
1
Vermont
1,096
249
130
33
1,508
REGION TOTALS
8,116
1,478
630
216
10,440
34.0%
6.2%
2.6%
0.9%
-
New York
Rhode Island
Percent of total
-
43
Many jurisdictions have found that providing technical and economic feasibility assistance
lowers barriers to CHP development. NYSERDA through their Technical Assistance Program has
been very successful in identifying CHP opportunities (A recent solicitation can be seen at
http://www.nyserda.org/wms/docs_funding/932PON.pdf ). The U. S. Department of Energy also feels
that feasibility assistance is beneficial and encourages the Regional CHP Application Centers to
provide feasibility assistance. We have and will continue to provide CHP Technical Feasibility Studies
for potential users in Vermont and the Northeast. Our financial resources limit the number of such
studies so, when a suitable Vermont service vendor is identified, such as Efficiency Vermont, we will
work with them to enable them to provide similar services on a broader scale to Vermont users.
In summary, it is the mission of NERAC to promote a better operating environment for clean
CHP so that more economically viable projects can be brought to fruition. Our objective is to examine
how current market barriers might be reduced or eliminated. We focus on what factors are most critical
for creating economically viable projects – and the sensitivity of the economic and financial analysis to
these key factors. We find several important cash flows opportunities available to support CHP:




Federal ITC (10% Microturbines, 30% Fuel Cells);
Class III Renewables in RPS & Associated Benefits (e.g. CT, PA);
Tax Exempt/Advantaged Financing & Other Economic Development Credits;
For Biomass Based CHP;
o Production Tax Credits;
o Clean Renewable Energy Bonds;
o Renewable Portfolio Standards;
o Net Metering; and
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o Greenhouse Gas Credits.
Conclusion
The Northeastern Combined Heat and Power Regional Application Center strongly supports
the Board’s efforts in this investigation of Act 61 Implementation – Identifying CHP Implementation
Issues.
Policy issues are critical to successful implementation of CHP. We have included with this
comment two recent publications on CHP. One is a recent White Paper for the Western Governors
Association on CHP (http://www.westgov.org/wga/initiatives/cdeac/CHP-full.pdf) and the second is a
paper by Dick Munson, Executive Director of the Northeast Midwest Institute on An Energy Policy for
the Northeast Midwest.
The NEARC appreciates the opportunity to offer comments on the issues involved in
implementing CHP programs in Vermont. We look forward to working collaboratively with all
involved parties, stakeholders, end-users and policy makers who are interested in furthering the
development of more robust markets for clean, high efficiency CHP in Vermont. If you have questions
concerning this submission, please do not hesitate to contact the Center.
Sincerely,
Lawrence Ambs
Co-Managing Director
Northeast Regional Combined Heat and Power Application Center
Tom Bourgeois
Co-Director for Education and Outreach
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