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Information for Policymakers
One of the biggest opportunities for addressing the region’s energy needs is to install more combined heat and power. CHP promotes efficiency, economic vitality, environmental quality, greater flexibility, increased energy security, and higher reliability. As noted in a Western Governors Association Clean and Diversified Energy Initiative white paper, “Combined heat and power, using proven and affordable technologies, significantly improves every key outcome from power generation.” A sound energy policy would include CHP at every level. Yet, despite its advantages to end-use customers, utilities, ratepayers, and society as a whole, and despite tat it does not require any public funding, significant CHP development opportunities have been lost over the past couple of decades due to persistent policy and regulatory barriers. By putting in place policies and practices that at the very least level the playing field between CHP and the “centralized plant” approach, the free market can better drive the development of the most efficient and effective energy opportunities. This page is designed to help policymakers remove some of the barriers, by adopting the best models from other states. 1. DISTRIBUTED GENERATION POLICY SCORING TOOLThe first step is to undertake a review of existing policies affecting CHP. The DG Policy Scoring Tool is specifically intended to assist state regulators and policy makers to assess the strengths and weakness of their existing CHP and related policies.
2. ADOPT FERC STANDARDS FOR INTERCONNECTIONLengthy and costly interconnection procedures are consistently cited as a top barrier to the increased adoption of CHP. FERC recently adopted interconnection standards for the transmission level, and states are now adopting this same model for distribution-level interconnections. These standards, developed jointly by utilities and CHP developers, lay out the process, timelines, fees, and technical requirements for interconnecting a small generator to the electric grid. The FERC standards completely and adequately address safety and reliability issues, while providing a more streamlined process. FERC Standard Interconnection Agreements & Procedures for Small Generators
3. ADOPT OUTPUT-BASED EMISSION STANDARDSMost existing emissions standards are based on how much fuel is put into the generating equipment, rather than how much energy is actually produced. Thus, existing emission standards do not encourage efficiency and do not recognize the real emissions benefits of CHP. We recommend states adopt the model output-based emission rule developed by the Regulatory Assistance Project in a collaborative process involving utilities, industry, government, and other stakeholders. Model Emission Standards for Smaller-Scale Generation
Output-Based Environmental Regulations: An Effective Policy to Support Clean Energy Supply
Output-Based Regulations: A Handbook for Air Regulators
Output-Based Emission Standards: Advancing Innovative Energy Technologies
4. SEEK CHP SOLUTIONS TO T&D-CONSTRAINED AREASCHP and DG should be given credit for how they can help defer or avoid transmission or distribution upgrades in constrained or congested areas, or how they can help defer or avoid transmission or distribution expansions into new areas. Instead of the default question, “Where can we put the next line?,” states and utilities should investigate if a CHP solution would be feasible. We recommend that states adopt the “Distributed Resource Distribution Credit Pilot Program” designed by the Regulatory Assistance Project, which provides a fair, realistic, and workable plan for giving incentives to CHP owners/developers to locate in distribution-constrained areas in a way that is beneficial to them and to the distribution utilities. Distributed Resource Distribution Credit Programs
5. UNDERTAKE A REVIEW OF RATES, INCLUDING STANDBY RATES, TO MAKE SURE THEY ARE NOT DISCRIMINATORY TOWARDS CHPImplementing rates that are both fair and rational is critical to the long-term success of this innovative energy option, as well as for realization of all the benefits that CHP can offer. Standby or backup rates are one area that needs particular attention. While some level of standby rates may be appropriate, existing standby rates have tended to be unnecessarily high, imposing undue discriminatory economic barriers on potential CHP customers. These financial requirements are all too often established for anti-competitive reasons, rather than legitimate financial return for service provided. Standby rates should be based on actual in-field data, should quantitatively compared CHP to normal load variation, and should recognize the system benefits CHP creates for utilities. Utility Rates: Designing Rates to Level the Playing Field for Clean Energy Supply
Utility Rate Structures for Customers with On-Site Generation
Emerging Approaches: Removing Unintended Barriers to Distributed Generation (from Clean Energy-Environment Guide to Action)
6. INCORPORATE POLICIES THAT WILL PROMOTE CHP IN STATE UTILITY LEAST COST PLANNING AND INTEGRATED RESOURCE PLANSCHP assets are usually purchased, deployed, and operated at no cost to ratepayers, even though the grid benefits from CHP are shared by all. Customer-sited CHP investments ought to form a critical component of least-cost planning activities that seek to minimize ratepayer-funded investments in system load growth. 7. ADD CHP TO DEMAND SIDE MANAGEMENT AND OTHER ENERGY EFFICIENCY PROGRAMSCHP is inherently an energy efficiency measure and should be regarded as such. It should be eligible for energy efficiency incentives and rebates. 8. DECOUPLE UTILITY REVENUES FROM THROUGHPUTUnder the current regulatory structure, utility revenues are tied to sales volume (in kW and kWh). In other words, the more they sell, the higher their profits, and the less they sell, the lower their profits. This often leads utilities to discourage energy efficiency measures, including CHP, that reduce electricity sales. Decoupling revenue from throughput would fix this incentive problem. Decoupling could be combined with a sliding scale or range of earnings potential that rewards increasing efficiency. 9. SEE HOW INCREASED CHP CAN LEAD TO LOWER NATURAL GAS PRICES FOR EVERYONEStudies show that an increase in CHP penetration will reduce gas consumption (because of the high efficiency of CHP and zero electric transmission losses with the onsite electricity generation), and a subsequent reduction in gas prices. However, end users are concerned about high natural gas prices, and are, therefore, less likely to invest in and install natural gas-fueled CHP, or even run the CHP systems they already have in place. This leads to a market externality that strategic regulation ought to tackle. Rather than wait for private individuals to risk their own financial gains for the good of society at large, a robust energy policy ought to provide some incentives to CHP adopters to accelerate the realization of CHP benefits for the natural gas market.
10. SEE HOW CHP CAN COST-EFFECTIVELY MITIGATE CARBON EMISSIONSResearch indicates that CHP expansion can not only make a major contribution to carbon emission reduction in the power sector, but can also deliver cost savings in energy generation and supply. If the various institutional and regulatory barriers to CHP that exist in most countries today could be eliminated, then the full cost-saving potential and carbon-mitigation potential of CHP could be achieved in a relatively short period of time.
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