Overview of Incentive Schemes

The applicability and intended recipients of incentive schemes have been differentiated across many dimensions, including eligible technology types, eligible application sizes (e.g. less than 10 kW or 50kW), and eligible application sectors (farms, residential, etc.), as well as across types of incentive. The very large number of possible variations within these types illustrates the complexity of distributed energy promotion, and also the challenge of identifying which incentive structures work best for which purposes. In a later section we discuss reasons for the wide variety of schemes and some of their relative advantages. In order to frame the policy environment in which the grant structures we analyzed operate, it is useful to inventory the basic incentive types, which all can be targeted to promote particular investments:

Installed Capacity Payments ($/kW) – fixed payments per nameplate capacity rating, sometimes including a performance component (i.e., a number of run hours during peak summer shortages). These payments are sometimes capped, for example available up to the first 1,000 KW of installed capacity.

Project Grants (XX% of project costs, capped at $X Million) – an important variation of capacity payments, which may incorporate technology, application type, innovation, or efficiency goals

Peer Reviewed Project Grants – grants, up to a percentage of total project cost, awarded

following review by a technical committee and subject to certain goals and program standards

Production Tax Credits (PTC) – provides an offset to taxable income of the project owner based upon the volume of kWh of energy produced

Investment Tax Credits (ITC) – tax relief to project owner based on the initial capital cost of the installed DE project.

Low-Interest Loan Programs – provides financing assistance to reduce the interest expense for funds borrowed to purchase and install the DE system.

Net Metering Payments – ongoing payments to project owners for electricity produced in excess of on-site consumption (may use a variety of pricing models)

Renewable Portfolio Standards (RPS) / Utility Purchase Obligations – obligations on utilities or energy service companies to procure a set percentage of delivered power from certain types of generators

Intended Outcomes of Incentive Policies

Legislatures and executive government, as representatives of taxpayers and societal interests have articulated several objectives when Clean DG programs are put in place. Incentive programs have been justified on the basis of the following projected outcomes

Economic Benefits

• Improved competitiveness, productivity, and economic growth

• Create new jobs in a state or region

• Promote/nurture the development of a new industry (“infant industry” argument)

Environmental Benefits

• Reduced emissions of criteria pollutants (NOx, SOx, Hg, PM, etc)

• Reducing greenhouse gas emissions (primarily CO2 and CH4)

System Benefits

• Reduced reliance on imported fossil fuels (several studies have shown that increased CHP deployment significantly decreases net natural gas consumption in a region. ³)

• Reducing grid congestion

• Lowering peak demands and impacts on prices and/or stress on the T&D grid

• Improving the diversity of energy supplies in a region

Security

• National security arguments

• Reliability during outages/disasters (“safe havens”)

Representative Statements of Public Purpose

One way to gauge the intended effect of various incentive schemes—which is necessary to evaluate them according to their effectiveness in achieving their stated goals—is by analyzing the Statements of Public Purpose in the enabling legislation or other foundation documents. Cataloguing these statements of purpose allows judgments regarding whether the resulting incentive programs deliver any of the benefits that were intended.

California

California recently passed legislation that set a target of generating 20 percent of total retail sales from eligible renewable resources by the year 2010. It is instructive to examine the stated public purposes that are enumerated in the bill language. The purposes include diversity, reliability, public health and environmental benefits

SEC. 13. Section 399.11 of the Public Utilities Code is amended to read: 399.11. The Legislature finds and declares all of the following:

(a) In order to attain a target of generating 20 percent of total retail sales of electricity in California from eligible renewable energy resources by December 31, 2010, and for the purposes of increasing the diversity, reliability, public health and environmental benefits of the energy mix, it is the intent of the Legislature that the commission and the State Energy Resources Conservation and Development Commission implement the ⁴

At the same time, California is removing fossil fuel based CHP from the flagship program, which has supported distributed generation in the past. The California Self Generation Incentive Program (SGIP) has been the primary incentive program for smaller scale renewable power generation (solar PV, wind less than 5 MW, renewable based fuel cells and renewable based CHP systems) and has included non-renewable power from fuel cells, microturbines, small combustion turbines and reciprocating engines.

AB 2778 (Sally Lieber, D-Mountain View), which removes fossil fuel combustion technologies from the Self-Generation Incentive program (SGIP) was also signed into law. Under the bill, starting Jan. 1, 2008, the SGIP is limited to fuel cell, wind and qualified waste gas applications. AB 2778 eliminates the most efficient technologies within SGIP – technologies that provide significant grid reliability and environmental benefits to California. One such technology is natural gas combined heat and power (CHP), also known as cogeneration, where heat that would otherwise be wasted is used to generate electricity.

CHP provides an important environmental benefit by reducing GHG emissions, as noted in the state’s CEC "Integrated Energy Policy Report".⁵ The Climate Action Team report targets CHP for 2.4 percent of 2020 GHG emissions goals. Furthermore, according to the 2005 CEC "Integrated Energy Policy Report", natural gas CHP is the most cost-effective form of distributed generation.

Connecticut

Connecticut stated an explicit interest in creating “several initiatives to reduce charges associated with congestion on the electric transmission system”. In so doing, the legislature specifically identified customer sited distributed resources.⁶ Furthermore, there was a directive to the existing incentive funds to consider transmission and distribution system congestion as an important criteria when making budget allocation decisions—contacts in the state emphasize that offsetting FERC transmission charges was the primary motivation for new incentives. The bill did not explicitly mention greenhouse gas issues.

New Jersey

The initial 1999 legislation that enabled the New Jersey Clean Energy Rebate Program, the Electric Discount and Energy Competition Act, did not mention greenhouse gases. Instead, the legislature seemed intent on economic restructuring, competition and cost issues. (It is worth noting that the CHP program was not added to NJ’s suite of incentives until 2004 through a regulatory process, so no legislative statement directly relating to CHP is available.)⁷

New York

New York State Energy Research & Development Authority (NYSERDA) is responsible for overseeing the entire portfolio of programs that are supported by funds from New York State’s System Benefit Charge (SBC).

The “Theory/Logic” of the program is stated to be Value/Cost as guided by a (Peer Review) Assessment

5.7.1 Program Description

The goal of the DG-CHP Demonstration Program is to contribute to the growth of combined heat and power and other distributed generation applications in New York. The program provides funding for site specific feasibility studies and demonstrations and seeks to improve awareness by end-users and project developers of DG-CHP. The program also seeks to address DG-related issues such as DG permitting; SIR; utility standby service; tariffs; technology risk; and renewable fuel options such as anaerobic digester and landfill gas; and impact of fluctuating prices of natural gas.

The program uses financial incentives to encourage customer-sited DG using commercially available DG technologies such as reciprocating engines. The incentive approach will co-exist along with similar offerings from RPS Customer-Sited tier and Consolidated Edison’s System Wide Demand Reduction programs. The total program budget is $67.1 million.

California—SGIP Program

Since 2001 California’s Self-Generation Incentive Program (SGIP) has supported both renewable and efficient fossil fired CHP, with success as noted below. However, as of January 1, 2008 the SGIP program in CA will no longer provide incentives for fossil fuel based CHP.

During PY05, SGIP projects delivered over 480,000 MWh of electricity. As SGIP projects are located at customer host sites of the Investor-Owned Utilities (IOUs) to help meet on-site demand, this represented electricity that did not have to be generated by central station power plants and delivered by the transmission and distribution system. Thermal cogeneration systems (Level 3/3-N/3-R engines and turbines) provided over 80 percent of the electricity delivered during 2005. Level 1 PV projects supplied the next largest amount at approximately 14 percent of the total.

The table below summarizes the costs of the SGIP incentives in terms of incentive $’s per MWh of energy production and in terms of Incentive $’s per kW of installed capacity.⁸

Connecticut – Customer-Side Distributed Generation Incentives

Over the past two years Connecticut has initiated an array of incentives for CHP development that complements the state’s existing renewables programs. The key feature of the Connecticut program is a $450 or $500 per kW grant that is available to CHP or other generation that will operate during peak periods. The higher value is available to generation sited in transmission-constrained Southwest CT. In addition to the capital grants, the program includes low interest loans, discounts for the cost of natural gas, an exemption from certain electric costs for backup service, and the ability for customers that use a ‘clean’ fuel, or install a combined heat and power project, to earn renewable energy credits that can be sold in the wholesale electric market.

Since this program was initiated, 141 projects comprising 344 MW of capacity have either been approved to enter the development pipeline or are pending approval. Of these 141 projects, 45 of them, representing 231 MW of capacity, are CHP. It is too early to know with certainty how many of these will eventually be built, but given the large dollar incentives the authors believe that a majority will be completed. The average grant amount associated with the approved CHP projects approved so far is $75,515,763, or roughly $460 per kW.⁹

New Jersey – Clean Energy Program

New Jersey offers a tiered system of grant financing to renewable and CHP projects, with different incentive levels per Watt depending on the project size and technology type. These grants range in value from $150 to $5,000 per kW, with higher values directed at smaller and renewable projects.

Between 2004 and 2005 grant years, $11.4 Million was spent on CHP projects. In the initial 2004 allocation, the $7.4 Million expenditure resulted in 10 projects totaling 18 MW, at approximately $411 per kW.

By contrast, in New Jersey’s RE programs from 2001 to 2006 spent roughly $600 to $4,400 per kW of capacity (wind took the least incentive, PV the greatest). Wind appears to be a good value; New Jersey’s Clean Energy Program has provided $3.3 million in subsidy for 7.5 MW of wind capacity since its inception in 2001 ($441 per kW).¹⁰ Note that wind is a Class I RE resource eligible for Class I RECs toward satisfying the NJ RPS.

New York – NYSERDA Programs

The NYSERDA DG/CHP Program is housed within the suite of SBC-funded R&D programs. On December 31, 2005 the New York State Public Service Commission (PSC) extended the SBC from July 1, 2006 to June 30, 2011 and increased the funding levels from approximately $150 million per year to $175 Million annually. The total program allocation for viable DG/CHP projects is $55 million. This allocation will support 100 projects and represent 130 MW of installed capacity.¹¹

The Clean Energy Infrastructure program, formerly the End-Use Renewables program, funded 438 PV systems and 15 small wind systems as of 12/31/2006, under Program Opportunity Notice 716.¹² The dollar value of incentives paid for PV’s in this program was $10 million, with an additional $333,712 paid for small wind systems. Cumulative energy generation through the end of the review period was 4,619 MWh. There were 2.1 MW of installed clean generation at the close of the period, which nets to a value of $4,870 per kW of installed renewables, for the combined total of wind and PV projects. Aggregating the wind and PV values masks the per kW cost of either. Also, similarly to the NYSERDA CHP project outcomes, it should be noted that NYSERDA’s emphasis on high efficiency and technology demonstration projects may include some marginal costs that benefit society through technology transformation but appear to increase installed costs.

SGIP Method

The ITRON Program Year 2005 (PY2005) Evaluation Report of California’s SGIP program provides estimates of the GHG reduction potential of the various technologies receiving incentives. We have added our own calculations of the incentive dollars per MWh and dollars per ton of GHG reduction in two additional columns.

ICF Analysis

Other estimates of GHG reductions attributable from natural gas fired CHP systems show far better results. For example a report by Dr. Bruce Hedman of ICF International, using a 5 MW gas combustion turbine as the proxy CHP system, shows a potential value of 0.60 tons of CO2 reductions per MWh. This is essentially the same factor determined for Solar PV in the 2005 SGIP Evaluation Report.

Dr. Hedman’s estimates were by his own admission only a rough approximation. His assumptions included a 75% efficient, 5 MW combustion turbine that would displace the national average fossil fuel generation mix as reported by the US EPA in the E-GRID database. Obviously different sizes, thermal applications and many other real world differences would affect the result.

Suppose that the true value of GHG reductions from CHP was 0.30 tons of GHG reduction per MWh, or about 50% of the estimate made by Dr. Hedman, but three times that of the ITRON study. In that case, CHP still is clearly an important GHG reduction measure, and one that is considerably less expensive than investments in solar PV and smaller scale wind systems.

Using the CA SGIP data and the 0.30 tons of GHG reduction per MWh figure we calculate an incentive cost per ton of $484. The same analysis in New York and New Jersey shows costs per ton of $383 and $372 respectively.

If Dr. Hedman’s figures were accepted and reduced by 50%, we see a dramatic rise in the cost-effective GHG potential that could be available via a more aggressive program of incentives for CHP Projects.

Turning to other states, in New Jersey, the renewable energy programs operating during 2001

– 2006 spent $127 Million to produce roughly 37 MW of renewable energy investment. With calculations and assumptions based on California’s SGIP report for consistency, the payouts translate into GHG reductions at slightly more than $1,000 per ton.

For CHP, the $440 per kW of capacity New Jersey spent on CHP incentives in 2004, again using the model of California’s SGIP report for consistency, translates into an expenditure of just over $1,000 per ton. This is significantly higher than the $372 per ton estimate using the conservative version of Dr. Hedman’s estimate, so clearly the methodological issues of this analysis merit further investigation.

Relative Benefits

Across the states examined and for which data were available, the average incentive cost per annual ton reduction of GHGs was computed as $3,058 with the SGIP methodology. For CHP this average was $735 per ton with the SGIP method, and $413 using the conservative version of Dr. Hedman’s method. Many factors affect the validity of comparison calculations and specific conclusions about the efficacy of the subject incentive programs, including differences in reporting, annual run hours in various contexts, and the possibility of RPS and tax incentives, interconnection policy, standby rate treatment and other legal or regulatory differences. However, the magnitude of difference does indicate that from a GHG perspective the relative benefits of CHP incentives should not be overlooked.