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Policies & Incentives

 

(For information about specific policies affecting clean energy in Louisiana, Oklahoma or Texas, visit the States section. Also see our Emerging Issues section.)

GC RAC works with state and local policymakers, regulators, and local partners to identify and evaluate policy changes that encourage the efficient production and use of energy – including energy recycling, combined heat and power, waste energy recovery, and district energy.

Modernizing key energy-related policies will pave the way for new clean energy projects. Some states have made progress on these issues and have seen the benefits; others still have a ways to go. A few of the most important issues to address are as follows:

Electric rate structures can have significant impact on the economics of clean energy projects. The most common current US rate structure links utility revenues and returns to the number of kilowatt-hours sold, and this is a large disincentive for utilities to encourage customer-owned CHP and other forms of onsite generation. Decoupling revenue from throughput would help fix this incentive problem. Decoupling could be combined with a sliding scale or range of earnings potential that rewards increasing efficiency.

Regional status: Coming soon.

Additional resources:

Standardized interconnection rules provide clear and uniform processes and technical requirements for safely connecting clean energy to the electric utility grid.

A streamlined process reduces uncertainty, prevents delays, and ensures that the requirements are appropriate for the size, scope, and technology of the system. Standardized rules also assure that the project interconnection meets the safety and reliability needs of both the energy end-user and the utility.

The U.S. has seen enormous progress in the adoption of standardized interconnection rules over the past decade, but a few states have yet to enact reasonable standards—or any at all. Others are in need of updating to match current best practices.

The most effective interconnection rules are those that have:


Note that interconnection standards based on net-metered systems are insufficient, because net metering rules are usually limited to only very small systems.

Regional status: Coming soon.

Additional resources:

Similar to air quality regulations for SOx, NOx, and particulates (see above), output-based allocations can be used in climate change regulations. In a cap-and-trade framework, they can be  a simpler, fairer, and cheaper method of allocating CO2 allowances than other proposed methods (lump-sum grandfathering, sector-based allocations, auctioning, carbon taxes, or picking technology winners).

Allocating based on past emissions is a poor choice, because it rewards the least efficient plants and prevents new, highly-efficient plants from competing fairly. Allocating sector-by-sector is also a poor choice, because the industries with the best lobbyists get the most allocations—whether they are efficient or not efficient, high-emitting or low-emitting.  

Here’s how output-based allowance work. First, give all electric and thermal energy producers a set of initial allowances based on the prior year’s national average output of CO2 emissions (per MWh per Btu). Second, require electric and thermal energy producers to acquire allowances equal to their CO2 emissions (i.e. to make up any difference between the national average and what it actually produces). Then, ramp down the amount of allowances over time.

With this approach, electricity consumers won’t see an increase in the average cost of electricity, since the cost of companies purchasing allowances will equal the revenue to companies selling the allowances. In other words, this policy is fiscally neutral—high carbon emitters pay low-carbon emitters.  

All allowances, whether from new or old generators, should be based on a common baseline—the output of useful energy.

Regional status: Coming soon.

Additional resource:

Output-based air emission standards encourage efficiency and pollution prevention as a way to meet air quality goals. With output-based regulations, efficiency is rewarded and inefficiency is penalized.

Even though output-based regulations have been used for regulating many industries, input-based regulations have traditionally been used for boilers and power generation sources. This creates a penalty for clean and efficient generation. Input-based regulations set air pollution limits based on how much fuel is put into a generating unit, rather than how much energy is produced. With input-based regulations, the more fuel a plant burns, the easier it is to meet the standards—thereby discouraging efficiency. Input-based regulations must be changed to output-based regulations.

Recently, regulators have begun to make the switch, as a way to promote pollution prevention, energy efficiency, flexibility, and innovation—while meeting the same air quality standards as before. Connecticut, Indiana, and Massachusetts are some of the states with out-based regulations.

By including energy efficiency and pollution prevention in air quality standards, clean energy technologies such as CHP, waste heat recovery, and district energy are not unintentionally blocked or penalized.

Regional status: Coming soon.

Additional resources:

The majority of U.S. states have enacted a renewable portfolio standard or renewable energy standard (RPS or RES), specifying the amount of electricity that must come from renewable sources. Almost half of the states have enacted an energy efficiency resource standard (EERS), requiring a percentage reduction in energy use from energy efficiency measures. However, in their first iterations, many of these standards neglected to include recycled energy. In most cases, this was simply due to an oversight; policymakers lacked awareness and education on the renewable and efficiency benefits of waste heat recovery and CHP respectively.

Waste heat recovery (electricity generated from industrial waste heat or pressure) is a renewable energy, and should be recognized as such in renewable portfolio standards. It uses no additional fuel and creates no additional greenhouse gasses or other pollutants—making it just as pristine as wind or solar. And it uses energy presently being thrown away. In addition to strengthening the goals of RPSs and the means of meeting them, it adds support from a state’s industrial sector by giving those businesses a way to profitably participate. States that have not yet included waste heat recovery in their RPS should do so, and states without an RPS at all should consider how waste heat recovery makes an RPS economically advantageous to the state.

Combined heat and power is fundamentally an energy efficiency measure. All systems that are more efficient than conventional generation should be included as an eligible technology in meeting energy efficiency resource standards. States that have not specifically included CHP in their EERS ought to add it. ACEEE has released a model standard and guidelines on how to calculate and allocate the efficiency benefits of CHP within an EERS context, helpful for states drafting rules. 

Regional status: Unless fueled with biomass, landfill gas, or other renewable fuel, Texas’ Renewable Portfolio Standard does not include CHP or waste heat recovery as eligible technologies. The GC RAC is working with the Texas CHP Initiative to introduce an Energy Efficiency Resource Standard (EERS) that would incent CHP projects as a natural gas conservation measure. The state of Louisiana is currently considering implementation of a statewide RPS, with strong consideration being given to including CHP and WHR among eligible applications. In May 2010, Oklahoma passed a goals-based (voluntary) RPS that includes CHP and WHR as part of the Oklahoma Energy Security Act.

Additional resources:

An industrial plant that generates excess heat usually has to throw most of that heat away. It is typically not allowed to sell electricity made from that heat to a neighboring plant across the street. A company with operations on both sides of a public street is often not even allowed to deliver power from a CHP on one side of the street to its operations on the other. It is allowed to pipe hot water, chilled water, or steam across the street, but not electricity. It can only sell it back to the utility grid, typically at prohibitively-low price.

An alternative approach would allow qualified a local generator to install private wires that move power to its neighboring retail electric users. New Jersey, for instance, allows sales from CHP to adjacent and across-the-street properties. This would be consistent with the Federal Energy Regulatory Commission's current regulation of natural gas transmission, which allows gas users to apply for a tap on an interstate gas pipeline and construct a private pipe crossing public streets. Alternately, another approach is that of Alberta, Canada, which allows any generator to sell power to any customer anywhere in the province subject to a standard grid "wheeling" charge—as long as the charge is based on distance.

Regional status: Coming soon.

Additional resources:

In our current utility regulatory system, designed decades ago, most utilities face a variety of disincentives to connect small, local generation to the electric grid.

A Clean Energy Standard Offer Program (CESOP) changes this by allowing utilities to obtain clean power at a discount to new conventional plants. CESOP involves two steps:

  1. Utilities and regulators determine the actual cost of developing new conventional generation— and the wires to deliver the power to users. This will establish what new power would cost without a CESOP program.
  2. Utilities then offer long-term contracts to any energy plant that can deliver new clean power for 15% less money. Eligible generation would include all generation that at least doubles today’s delivered fossil efficiency per unit of useful output (or be from non-carbon emitting sources such as renewables). Time-of-use pricing should be included in the contracts, to encourage clean generation that follows the demand for power, instead of randomly encouraging off-peak generation.


CESOP would encourage entrepreneurs to recycle presently wasted energy for a profit, thus strengthening our industrial sector. It would enable utilities to maintain their customer base and profits. And, it would provide consumers with more clean heat and power at a discount. This policy succeeds by making sure that all stakeholders see benefits.

Although this would best be enacted at a national level, state-level policies are important in the mean time.

Regional status: Coming soon.

Additional resources:

Facilities with CHP systems usually require standby/backup service from the utility to provide power when the system is down due to routine maintenance or unplanned outages. Electric utilities often petition the regulators for the ability to assess specific standby charges to cover the additional costs they incur as they continue to provide generating, transmission, or distribution capacity (depending on the structure of the utility) to supply backup power when requested, sometimes on short notice. The structure and makeup of these charges is often a point of contention between the utility and the consumer, and without proper consideration of all benefits and costs can create unintended and burdensome barriers to CHP.

Public Utility Commissions should design appropriate standby rates that do not contain unintended barriers to clean heat and power, and that accurately reflect the true cost of providing standby power.

Most existing standby rates are based on the cost of a local generator having an unplanned outage and needing full power during the utility's peak times, when electricity is scarce or at a premium cost. However, Public Utilities Commissions should assess the likelihood of a generator going down at peak times, and furthermore the likelihood of all interconnected generators going down at the same time during peak times, and reflect those in the rates that onsite generating facilities are charged.

Some states have exempted new onsite generation from standby rates as policy means to encourage clean heat and power. Others are taking a close look at standby rates to ensure they reflect more realistic operating conditions and don't place undue burdens on local generators.

Fair and non-discriminatory standby rates are those that:

  • Are based on actual in-field data.
  • Reflect the statistical likelihood of all interconnected systems incurring an outage at the same time.
  • Reflect the statistical probability of local generators going down during utility peak periods, as opposed to off-peak.
  • Take into account the system benefits that CHP creates for utilities, which are often in excess to its costs.
  • Quantitatively compare CHP to normal load variation.
  • Charge a per-kWh rate (energy rate) not more than that charged to the rest of the normal rate class.
  • Ensure that no standby charges are levied for plant shutdowns caused by events on the utility side of the meter.
  • Provide the option to take standby service or to decline such service and to remain on the otherwise applicable rate schedule (as recently passed in Hawaii and other states).


Regional status: Coming soon.

Additional resources:

Tax policies can significantly affect the economics of investing in new onsite power generation equipment such as CHP. For instance, the 10% federal investment tax credit provides a modest incentive for CHP projects.

CHP systems do not fall into a specific tax depreciation category, and their depreciation periods can range from 5 to 39 years. These disparate depreciation policies may discourage CHP project ownership arrangements, increasing the difficulty of raising capital and discouraging development. Depreciation takes into account that the decreased worth of the CHP equipment caused due to wear and tear, and allows businesses to register a fair current value when assessing the overall net worth of the company. That amount of depreciation is often allowed as a tax deduction for that particular calendar year. The straight-line depreciation method spreads the cost evenly over the life of an asset. Accelerated depreciation method of depreciation allows greater deductions in the earlier years of the life of the CHP equipment

Related resources:

Customer-sited clean energy investments ought to form a critical component of least-cost planning activities that seek to minimize ratepayer-funded investments in system load growth.

Utility generation assets that are purchased, deployed, and operated by regulated utilities nearly always add to the rate base (and therefore increase energy rates for consumers), while those like CHP that are put in by unregulated entities do not factor into the rate base. Thus, grid benefits that are created by CHP deployment are realized at little to no cost to the ratepayer.

CHP investors assume 100 percent of the capital risk when they install their power plant, as compared to utility investments, which spread their risk across all electric consumers. Thus, ratepayers realize all the benefits of good private sector investment decisions while bearing none of the risk for bad private sector investment decisions. This is usually inverted for regulated utilities, where shareholders are consistently insulated from poor investment decisions, since these costs are invariably passed along to ratepayers (as many a nuclear plant cost-overrun will attest).

Seen from the perspective of resource planning, this means that a grid that maximizes CHP will also realize the maximum social benefit per dollar of rate base capital investment. Note that this is true no matter what the economics of the CHP system are, since in virtually all cases, those investments are made with unregulated dollars.

Unfortunately, CHP and other forms of energy recycling are usually overlooked in the resource planning process. While a few states and utility regulatory commissions require a consideration of customer-sited CHP and other forms of energy recycling, most do not.

Regional status: Coming soon.

The Role of Incentives in Promoting CHP Development - ACEEE (2010)

Utility Incentives for CHP - US EPA CHP Partnership (2008)

Funding Database for CHP - US CHP Partnership

 

Houston Advanced Research CenterU.S. Department of Energy Gulf Coast Clean Energy Application Center
4800 Research Forest Drive
The Woodlands, TX 77381

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