CHP Policies and Incentives
Combined heat and power (CHP) systems offer significant fuel, cost, and emissions savings compared to conventional separate heat and power systems. They can also be configured to deliver high-quality, reliable energy, including during utility grid outages, thereby improving the resilience of critical facilities during extreme weather events and other emergencies. However, CHP systems are capital-intensive investments and face market and regulatory barriers that have historically limited their deployment. As a result, the federal government and several state and local governments have implemented policies and incentives designed to overcome barriers and deploy CHP more effectively. CHP policies and incentives can be designed to lower upfront capital costs, streamline the regulatory process of installing CHP systems, and make it easier for CHP users to realize the benefits from the resiliency and flexibility these systems provide.
Additionally, with greenhouse gas emission reductions becoming a priority, states and local governments are introducing incentives and regulations that recognize CHP's emission reduction benefit. The emphasis on emission reductions has seen many states expand a range of programs, from energy efficiency incentive programs to renewable energy programs such as renewable portfolio standards. Several policies and regulations have been implemented at the state and local levels to incentivize the development of zero-carbon CHP systems that use low-carbon fuels, such as biogas, renewable natural gas, and hydrogen.
Energy Regulation and Policy
Federal and state energy regulations and policies can be used to address market barriers and support CHP deployment through federal and state laws, executive orders, and Federal Energy Regulatory Commission (FERC) orders. These energy regulations and policies can require utility companies to evaluate the resilience and energy efficiency benefits of CHP, encourage utility investment in CHP systems, and set federal/state targets for CHP development. Regulatory policies can also allow federal agencies to partner with states to identify and reduce market barriers for CHP development.
Federal and state environmental regulations require monitoring and meeting emission levels of certain pollutants from energy generation systems. Environmental regulations that affect CHP include output-based regulations that determine emission levels based on CHP's outputs—both electrical and thermal. Examples of output-based regulations include the U.S. EPA's New Source Performance Standards for certain CHP prime mover technologies (like stationary combustion turbines, electric utility steam generating units, and internal combustion engines) and the National Emission Standards for Hazardous Air Pollutants (for stationary reciprocating engines and for major sources under the Clean Air Act). Some states in the Regional Greenhouse Gas Initiative allow high-efficiency CHP systems to count toward greenhouse gas reduction goals. States can also adopt special environmental permitting procedures for CHP systems, such as Massachusetts' Industry Performance Standards for CHP. These regulations can support CHP deployment by allowing federal agencies to partner with states to identify and reduce market barriers for CHP development. More information on environmental regulations can be found here.
Interconnection standards are FERC or state regulations that govern utility policies for interconnection of distributed generation to the grid. Transparent, standardized technical standards, procedures, and agreements can reduce uncertainty and streamline the approval process for connecting distributed generation, such as CHP, to the electric grid. Interconnection standards serve a critical function, as they ensure the safety and reliability of the electric grid. Uniform and transparent application timelines and procedures, appropriate cost-based application fees, and simplified contracts could encourage more deployment of distributed generation, including CHP.
Net-metering policies regulate how utilities compensate customers for excess electricity generated by customer-sited distributed generation, such as CHP, and are commonly implemented by state public utility commissions. Customers that sell excess electricity to a utility may receive a credit on their account throughout the billing cycle. Key criteria commonly addressed by net-metering policies include system capacity limits, eligible systems and customer types, and treatment of excess generation. Net-metering policies can provide utility bill savings and improve the financial return on investments in CHP systems.
Portfolio standards are regulations implemented by states that require utilities to obtain a certain amount of the electricity they sell from specified sources and/or achieve specified reductions in electricity consumption. The main types of portfolio standards are renewable portfolio standards (RPS), clean energy standards (CES), energy efficiency resource standards (EERS), and alternative energy portfolio standards (AEPS). Portfolio standards help create demand for CHP systems by enabling utilities to capture a CHP system's environmental and efficiency benefits. The eligibility of CHP in these portfolio standards can depend on the type and size of the CHP systems, their efficiency, or the fuel they use. Examples of portfolio standards that include CHP are the Massachusetts Alternative Portfolio Standard and the Virginia Energy Efficiency Resource Standard.
Public Benefits Fund
Public benefits funds are pools of resources typically created by levying a charge on customers' electricity bills. States use these funds to support renewable energy and energy efficiency projects, such as CHP. Most public benefit fund charges are assessed in increments of mills (tenths of a cent) per kWh. Public benefits funds can also be used to support low-income assistance programs, as well as assisting homeowners with weatherization projects.
State Climate Change Plan
A state climate change plan (or climate action plan) lays out a strategy, including specific policy recommendations, that state or local governments will use to address climate change and reduce greenhouse gas emissions. In general, climate change plans include targets for greenhouse gas reductions and outline actions that state and local governments can take to meet those targets. These emission reduction targets can be sector-specific or economy-wide. Climate change plans can specifically include policies, regulations, or financial incentives to support CHP.
State Energy Plan
A state energy plan outlines a set of agreed-upon goals and objectives related to the state's future energy needs. This process involves gathering stakeholder feedback to assess future energy requirements, evaluate existing energy policies, and identify potential challenges and opportunities. State energy plans can specifically highlight the role CHP can play in achieving the agreed-upon goals and objectives, as well as other criteria laid out in the plans.
Federal and state bond programs support CHP deployment by establishing an avenue to borrow capital at fixed and often low interest rates. Federal and state bonds have lower interest rates than commercial bonds because of their longer terms. They are typically tax-exempt and are low risk because they are backed by a government entity. By providing CHP developers with low-risk financing, bonds help address the financial barriers associated with CHP installations.
C-PACE (Commercial Property Assessed Clean Energy)
C-PACE programs allow building owners to receive financing for eligible energy-saving measures, including CHP, repaid as a property tax assessment. C-PACE provides access to low-interest, long-term loans that property owners can take advantage of to finance the costs of energy improvement projects at commercial buildings without a large upfront cash payment. The debt for the energy improvement project is tied to the property, not the individual, meaning the repayment obligation may transfer along with the ownership of the property. C-PACE programs are approved by state governments and are usually run by local governments.
Electric Utility Rate
Electric utilities can offer special rates or other programs to customers with onsite distributed generation, including CHP. This can result in savings throughout the life of the project. Measures can include a reduction or exemption from standby rates and/or exit fees, supportive demand charge tariffs, the option to buy excess power, and guidelines for dispute resolution processes. Special rates can be part of a commercial and industrial portfolio or constitute a standalone program. Additionally, electric utilities can provide technical assistance or feasibility studies for customers looking to install CHP programs. An example of a favorable rate for CHP is the Value of Distributed Energy Resources (VDER) rate in New York, which provides compensation through bill credits to distributed generation projects that provide electricity to the grid.
Feed-in tariffs provide per-kWh payments to CHP or other distributed generation for electricity exported to the grid. They help finance CHP systems by offering long-term contracts to producers of energy-efficient or renewable electricity. These long-term contracts reduce hurdles to financing energy-efficient and renewable energy technologies by guaranteeing that owners of these systems will receive a set price from their utilities for the electricity they generate and provide to the grid.
Gas Utility Rate
Natural gas utilities can offer specialty rates to customers using natural gas for distributed generation, including CHP. These rate structures can provide discounts for the gas that is provided to the site to fuel a CHP system, resulting in savings throughout the life of the project. Gas utilities' specialty rates (like special electric utility rates) can be part of a commercial and industrial portfolio or constitute a standalone program; gas utilities can also provide technical assistance or feasibility studies for customers looking to install CHP programs. As an example, Southwest Gas provides specialized rate schedules for onsite electric generators, including CHP systems.
States or utilities can offer grants and rebates to support the development of CHP projects by reducing the upfront costs of CHP systems and equipment. These programs award money directly to project developers or end-users who are installing CHP systems. They vary by focus (e.g., resilience or emissions reductions), amount of overall funding available, eligible project size, and other specifics.
Federal or state loan programs can help support the development of CHP systems by providing financing to cover the costs of CHP equipment. Government-backed loans tend to have low interest rates and long payback periods, which reduces the financial burden of developing CHP systems. A CHP system's eligibility for a loan can depend on the recipient, the project size, the minimum efficiency, and other project specifics.
Production incentives are payments made by a state or utility on a per-kWh basis to operators of CHP or other distributed generation systems. They provide a steady, certain revenue stream for CHP operators to help them pay off their investment in the system. These per-kWh payments tend to last for 12 to 18 months after the beginning of system operation. While production incentives do provide CHP operators with a revenue stream, they do not address the high upfront costs associated with CHP installation.
Federal and state tax credits or favorable tax treatment can be used to support CHP development and deployment. These financial incentives can offer CHP developers a tax credit, which can be used to reduce the upfront capital costs of a CHP system or can exempt CHP systems from certain types of taxes, such as property tax or sales tax. Eligibility for tax credits or tax exemptions does vary by state and can be influenced by system size, type of fuel used, and other project specifics.
Please contact us with questions or for more information on CHP policies and incentives.