Originally Published: October 23, 2012 11:00 AM
Modified: October 23, 2012 11:35 AM
ENERGY GUEST BLOG -- ANDREW THOMAS
Senate Bill 315 could provide little help for combined heat and power
Andrew Thomas is Executive in Residence at the Energy Policy Center of the Levin College of Urban Affairs at Cleveland State University.
Last spring, the state Legislature took up revamping in part Ohio's renewable energy portfolio mandate in what was ultimately to become Senate Bill 315. Before that bill was passed, there were arguments made by various interests about the role of combined heat and power in Senate Bill 315.
Combined heat and power, also known as "co-generation" or CHP, refers to power plants that simultaneously produce both heat and electricity. The electricity is generated by a gas turbine, and the byproduct heat is captured to make steam, commonly used in industrial applications, but also to make hot water or to warm buildings in the winter. Power generation typically has to be on site in order to capture the value of the heat, which cannot be transported long distances. If the heat can be successfully captured, however, it makes for a highly efficient energy system, saving both dollars and harmful emissions.
Advocates of CHP wanted to see it treated as a renewable energy resource, like wind and solar, even though it typically burns natural gas as a fuel. The reason CHP developers wanted this special treatment was that they wanted access to renewable energy credits (RECS), and, more importantly, to net metering that would essentially allow them to sell excess power back to their utility — both provided for previously in Senate Bill 221 for renewable generation.
Others feared that treating CHP as a renewable would diminish the value of wind as a response to the mandates of Senate Bill 221 requiring utilities to provide power from renewable sources. Their argument was that unless fired by biomass, CHP is not renewable, and therefore should be considered as “advanced energy” under SB 221 (it already was) or, in the alternative, as “energy efficiency,” since capturing both heat and power increases efficiencies significantly.
The wind proponents won this debate. Under Senate Bills 221 and 315, CHP may now be considered as either a form of advanced energy or a form of energy efficiency. Since the advanced energy mandate has no benchmarks (and no RECs or penalties to stimulate advanced energy), it is really the energy efficiency side that was intended by legislature to provide new incentive for CHP development.
But it is not entirely clear how this will happen.
This is how it should work: by switching from the grid to CHP, and by increasing energy efficiency (by as much as 40%), merchant energy customers (i.e. more than 750,000 kWh/year) can escape paying some or all of the DSE-2 rider that accompanies all of our bills from our utility. The DSE-2 rider is how utilities recover their costs for compliance with the SB 221 energy efficiency mandates and customers can avoid it with efficiency upgrades.
At Cleveland State, our DSE-2 rider currently runs around $50,000/year. However as the more inexpensive energy efficiency projects are completed, costs for the utilities to comply with the REC mandate increase over time. No one knows exactly where this will end up, but if it works out like it has in New Jersey, where a similar portfolio standard has been in place longer, CSU could, in a few years, be looking at paying several hundred thousand dollars a year for its share of the rider.
So you can see how, on its face, this new classification of CHP as a form of energy efficiency has the potential to be quite valuable to CHP developers.
The problem, however, lay in how the developer comes to realize this value. By switching to CHP, a merchant user will, under most circumstances, significantly reduce its purchase of both energy and capacity from the utility. Indeed, that is the point of on-site generation: only supplemental or back up power will be purchased, and experience has shown that the reliability of CHP units is so high that they significantly reduce the need for both peak generation and transmission capacity – the two major threats to the future cost of power in Cleveland. If there is no significant purchase of electricity from the grid, then there is no significant DSE-2 rider to waive.
So that means that the only time that the classification of CHP as a form of energy efficiency will have value is when the CHP project is off site, and a utility is required to deliver the power from the CHP unit to the merchant customer. But this will normally be of little interest to the merchant customer. He would not then avoid the transmission and capacity charges from the utility, which are the principal incentives to build CHP in the first place. Moreover, the heat may be difficult to capture if the system is too remote.
In short, it would appear that Senate Bill 315 has created a special status for CHP that has marginal value to CHP developers. One might argue that on-site CHP developers have no complaint, since their DSE-2 rider costs are greatly diminished by not having to purchase electricity from the grid. But this was so before SB 315. It appears that SB 315 has created additional value for CHP only for off-site CHP. This can't be what the redactors of SB 315 intended -- off-site CHP normally does not make sense to merchant customers.
I understand that the Public Utilities Commission of Ohio is now looking at how to enable CHP to flourish in Ohio. This is one conundrum I hope that they take up. Unless PUCO can devise a strategy for merchant electricity customers to find value in the classification of CHP as a form of energy efficiency, it would appear that this part of SB 315 is superfluous.