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Project Information Center

STATEMENT OF WORK

Project Title:

Expanding Small-scale CHP Opportunities Through More Efficient Use of Trading Programs: An Analysis of Market Opportunities and Regulatory Issues

Contractor:

NYSERDA
17 Columbia Circle
Albany, NY 12203-6399
(518) 862-1090

Program Area:

Distributed Energy Resources

Partners:

NYSERDA

Connecticut Department of Environmental Protection

Pace Law School Energy Project

Energy and Environmental Analysis, Inc.

Project Description:

This project is a multi-faceted study examining procedures and protocols for facilitating participation by clean, efficient CHP projects in the Northeast region emissions reduction credits (ERC) markets as well as in markets for NOX emissions allowances (EA). The team will determine the magnitude of the opportunity for replacement of aging and inefficient oil-and-coal-fired boilers with high efficiency CHP and recommend a regulatory and administrative framework for ERC/EA creation through small-scale CHP.

Management Plan (Approach):

The unique nature of STAC requires that projects be supported by multiple State entities, and to the extent necessary any other entity. As indicated in the STAC Agreement, it is the Contractor’s responsibility to coordinate the execution of work under the Contract, incorporated by reference hereto. Contractor, in conjunction with the other State entities, and to the extent necessary any other entity, shall conduct the project in accordance with the Management Plan (approach) described below.

Task 1: Quantify the scope of the ERC/EA opportunity for small-scale CHP

The Northeast region has significant numbers of commercial, institutional, and industrial facilities that currently use distillate oil, residual oil, coal and other high emissions fuels for process and building heating needs.  Replacement of these boilers and heaters with low emission CHP systems would provide substantial environmental benefits to the region.  The objective of this task is to quantify and profile the scope of the opportune in the Northeast.  The project team has identified several data sources essential to understanding the size of the high emissions displacement market.

• Permitting records for Synthetic Minor Sources will be examined.  These are sources that do not fit into the Title V category, but maintain a site emissions level below the major source threshold by accepting federally enforceable limits to their operations.
• In New York City the team will obtain the Boiler Registration Database maintained by the NYC Department of Environmental Protection (NYC DEP).
• The team will work with the state and local regulatory bodies in New York, Connecticut, New Jersey and Massachusetts to obtain additional administrative databases that will further our outstanding of the number, the geographic location and key demographics of sites that fit this profile.

Task 1.1. Quantify residual oil, distillate oil, and coal use by commercial, institutional, multifamily, and industrial facilities.

Profile by state and application (e.g., lodging, universities, multifamily, food processing, etc.) This will enable the team to develop an overall estimate of the emissions reduction potential for small-scale CHP and identify target applications for more detailed analysis.

Task 1.2. Based on the output of Subtask 1.1., develop a detailed characterization of the emissions reduction potential for a select group of target regions and/or applications.

Fuel use characteristics, facility demographics (e.g., operating conditions, size distribution) and typical emissions characteristics will be developed for 4 to 6 applications).  Emissions reduction potential will be estimated for each target group based on the current fuel use and emissions profile, the historical use of CHP and other relevant technology trends within the target group, and the potential for economically applying small-scale CHP technologies. This task will provide background information necessary for targeting activities to certain areas within Region I and certain market sectors where the opportunities are greatest.

Primary Performer: EEA will lead this task, taking primary responsibility for developing estimates of boiler fuel use in target markets and applications, and for constructing profiles of prototypical facilities.  Pace will support the data collection and characterization effort by identifying , reviewing, and tabulating information from publicly available data sets.  CT DEP will assist in securing permitting data for Connecticut facilities as an in-kind contribution.

Deliverable: Report to document emission reduction potential for 4-6 CHP market sectors.

Task 2: Describe the administrative, technical and institutional impediments to ERC creation confronting developers of small-scale CHP projects.

In the second phase of the study the contractor will conduct a retailed regulatory analysis designed to identify institutional, technical and regulatory obstacles to the timely and cost-effective participation of smaller scale CHP projects in emission trading programs. The effort will be divided between the issues of ERC certification for new source offset programs and allowance allocation to small CHP programs within allowance trading programs.

Working with NESCAUM, and air regulators in Connecticut, New Jersey, Massachusetts, and New York, we will document the unique aspects of the ERC creation process as it relates to small-scale projects that involve undue time, cost and uncertainty.  There are differences form state to state in the application of protocols governing ERC programs.  However, we believe that there is a core set of consistent issues that arise in ERC programs that would tend to have a greater on smaller-sized projects.  We propose to identify this set of core issues and to ascertain the impact on certification of ERCs from these type of sources.  We will evaluate several methods and procedures that could potentially lower administrative costs while at the same time satisfying the objectives of program oversight; namely, that reductions are real, quantifiable, surplus, permanent and enforceable.  This research will be documented in a policy white paper on ERCs.

The research team has prior experience in the analysis of the ERC creation process as it pertains to smaller scale CHP.  In New York State, Pace is presently engaged in a research project on behalf of NYSERDA that includes a detailed regulatory analysis of the ERC creation process.  The project includes an assessment of potential bottlenecks and opportunities for revisions aimed at making the process more responsive to the needs of smaller-sized CHP facilities.  This could be leveraged to address issues throughout Region I and the NESCAUM states.  The team also has extensive knowledge of allowance trading programs and the opportunities for encouraging clean technologies through allowance allocations and set-asides.

Task 2.1. Identify and interview parties to ERC creation processes.

The team will work with the relevant agencies in Region I to understand the ERC creation process for smaller-sized CHP facilities.  The team will identify all applicable local, regional, state, and federal authorities involved in ERC creation and conduct informational interviews with the regulatory authorities.  The interviews should elicit a discussion of items general to ERC creation, as well as specific to CHP technology.

Task 2.2. Assess current methods and procedures required for ERC certification within target regions.

The team will thoroughly document the ERC creation processes as currently configured.  The Contractor will prepare a report that includes the following elements defining the process:

• Detailed flow charts of the ERC certification process;
• Schematic including parties involved and time sequencing;
• Overview of building owner responsibilities;
• Discussion of market and operating risks;
• Community information talking points;
• Contacts at the regulatory and the market levels;
• Certification forms.

The methods and procedures for quantifying the baseline emissions, the future emissions level and the net creditable emission reduction will be fully described.  The typical costs and average time duration of these protocols will be discussed.

Task 2.3. Identify streamlining opportunities.

Based on our independent analysis and interviews, Contractor will identify CHP operational characteristics and air emissions, air permitting considerations, potential bottlenecks in the ERC creation process, and opportunities for revising the process to be more responsive to the needs of smaller-sized CHP projects (i.e. permits-by-rule or pre-certification), and future regulatory trends. This research will explicitly examine institutional and methodological pre-conditions necessary to support multi-state, regional, or national agreements for streamlining the ERC creation process.  While markets for ERCs tend to be fragmented and specific to a state or regions within a state, there are precedents for inter-state trading using a common regulatory protocol.

Primer Performer: Pace will lead the effort of documenting, comparing and contrasting state ERC processes as relate to small-scale CHP, and for identifying best practices and streamlining opportunities.  EEA, Spectra (and CT DEP as an in kind contribution) will assist in this effort through review and comment on draft documents.  Pace will lead the effort to identify and educate diverse stakeholder, including but not limited to prospective end users, project developers, environmental groups, emissions brokers, regulatory agencies, and owners/operators of multi-family residential buildings.

Deliverables: Report to describe existing ERC creation process and streamlining opportunities.

Task 3: Evaluate the role of CHP in emission allowance-based programs.

Small-scale CHP projects (and the boilers they replace) are not affected sources under state NO_x SIP Call trading rules or new "multi-pollutant" or greenhouse gas rules that are being discussed.  However, some of these states have implicitly or explicitly allowed CHP projects to participate in allowance-based NOx programs through "set-aside" mechanisms (for energy efficiency) or "opt-in" provisions that reward clean and efficient forms of generation.  Federal multi-pollutant legislation is also being actively considered, with the prospect of additional cap and trade markets being created, and the possibility of similar mechanisms by which CHP projects could be incentivized.  Unlike ERCs, which are limited to non-attainment areas, the new cap and trade markets extend to broad regional and national coverage and seem likely to continue to grow in their application.  The RGGI program in the Northeast U.S. may soon become the first mandatory CO₂ emission trading program in the U.S.

While ERC offsets and emission allowances are separate and distinct regulatory programs and separate market instruments, they both constitute potential regulatory incentives to promote CHP market development and both systems recognize the avoided emissions benefits that can result from CHP projects.  Because CHP displaces emissions from a retired boiler in addition to displacing emissions from grid-connected electric generators, these dual benefits can be captured, respectively, in both ERCs and emission allowances without double counting.  The practical issue, however, is that CHP projects have very rarely been included in allowance trading programs.  The obstacle is not one of regulatory policy, but a lack of market understanding and well-developed protocols.

As part of this research effort, the team will describe the current proposed emission allowance programs that could affect small-scale CHP projects.  The research will suggest specific protocols that can be used to include CHP in the trading programs through set-aside or opt-in provision.  The team will also make specific recommendations for regulators addressing issues including emission monitoring, compliance and inclusion of other clean technologies such as renewables and end use efficiency.

Prime Performer:  EEA will lead the review and development of protocols for establishing a CHP set aside within the context of a broader emission allowance program.  Pace and Spectra will assist in collecting and describing the status of, and issues arising from, ongoing regulatory processes such as those in Massachusetts and New York. CT DEP will also critique this effort, and provide limited guidance as an in-kind project contribution.

Deliverables: Report to describe current emission allowance set aside mechanisms and to recommend specific protocols for CHP participation in these programs.

Task 4: Examine the feasibility and desirability of broadening trading markets for ERCs across states.

The project team will study mechanisms for achieving a broader and more liquid market for ERCs by expanding the number of states in the Northeast Region that participate in the ERC Trading Memorandum of Understandings (MOU's).  Presently New York has such an MOU with Pennsylvania.  The benefit of broader interstate trading markets is clear.  Today a clean CHP project creating an ERC in the greater New York severe nonattainment area can not sell those ERCs into New Jersey.  Likewise, a project in the Boston metro area can not sell into an area of equal or higher severity in NY or New England.

Prime Performer: Spectra will have primary responsibility for this task, with review and comment of preliminary findings and recommended actions provided by Pace and EEA.  CT DEP will also provide feedback from a regulators perspective as an in-kind project contribution.

Deliverables: Report to describe feasibility of establishing protocols for regional rading of ERCs, with specific action items.

Task 5: Assess the financial impact of ERCs and EAs on project economics.

The Team will assess the financial impact on several prototype CHP projects that could take advantage of ERCs and EA's.  This analysis will utilize pro-forma operations and financial data for sites that are likely to have an opportunity to secure EA's and ERCs, for example, multi-family buildings, or institutional facilities.  The Project team will compute expected payback periods, NPV of capital investment, ROI for these prototypes given best assessments of site fuel, O&M and capital costs, value of displaced fuel and electricity costs, net return on ERCs and EA's and other relevant financial data.

Prime Performer: The economic analysis will be performed by EEA, with support in the development of input assumptions from Pace.

Deliverables: Report to document financial impact of ERCs and EAs on CHP economic feasibility.

Task 6: Convene Advisory Board

The Project Team will formally request that NESCAUM serve as lead entity in organizing and convening a high level Board of Advisors.  This group will be an efficient means of gauging likely regulatory responsiveness to potential streamlining options within existing state regulatory processes in target Region I states and other NESCAUM member states.  It may also serve as an institutional vehicle for the exploration and development of region wide or nationally accepted regulatory mechanisms for certifying smaller-scale CHP projects.  Participation would be sought from a diverse cross-section of the business and regulatory community, including NESCAUM's eight member states, U.S. EPA, CHP project developers, emissions brokers and others.  The draft report described in Task VII will form the basis for discussion by the Advisory Group.

Prime Performer: Pace will lead the effort to identify prospective Advisory Committee membership, secure their participation and provide administrative support for the information gathering and dissemination process.  EEA and Spectra will assist in preparing briefing materials, and attend Advisory Committee sessions.  CT DEP will provide input on both substantive and procedural aspects.

Deliverables: Two Advisory Committee meetings; meeting minutes

Task 7: Draft and final reports

Results of this research will be presented to our Advisory Group for its consideration and input in the form of a draft report.  The Final Report delivered to US DOE will provide:

• Results of the Task 1 analysis of potential for creation of credits and allowances in target sectors through CHP deployment;
• Information from the Regulatory Analysis on obstacles to ERC creation and emission allowances for small CHP under the current regime (Task 2 and 3 reports), as well as a full description of the new institutional arrangements that are proposed for ERC creation and EA set aside processes suitable for small-scale CHP.
• Recommendations for facilitating seamless markets for the multijurisdictional trading of ERCs and EAs (Task 4)
• Financial analysis of the impact of securing ERCs/EAs on CHP project feasibility for a representative cross-section of applications.

Primary Performer: Pace will lead this task, with substantive contributions from other Project Team members within their sphere of expertise, as described above.

Project Tasks, Status, and Deliverables

Last Updated: 11/09/06