United states Environmental Protection Agency Radiation (6204J) EPA430-R-94-001 February 1994 Energy Efficiency and Renewable Energy Opportunities from Title IV of the Clean Air Act ------- ,— wrt. , V. • u • .. This handbook was prepared jointly by the US Environmental Protection Agency and ICF Incorporated under contract # 68- D3-0005. Contributing authors from EPA were Lloyd Wright, Jennifer Selber, and Joe Kruger. Important inputs to this handbook were also provided by Steven Brick, Steven Kihm, Jerry Mendi, and David Schoengold of MSB Energy Associ- ates; Michael Marvin of the American Wind Energy Associa- tion; Rick Morgan of EPA; Manuel Patino of EUA Cogenex Corporation; and Lynn Sutcliffe of Sycom Enterprises. ------- ENERGY EFFICIENCY AND RENEWABLE ENERGY: Opportunities from Title IV of the Clean Air Act ACID RAIN DIVISION US ENVIRONMENTAL PROTECTION AGENCY FEBRUARY 1994 ------- Table of Contents List of Tables and Figures . ii Executive Sumrnaiy iii Introduction 1 Part 1: The Acid Raid Program 5 A. Overview of the Acid Rain Program 6 B. The Allowance Trading Market 7 C. Environmental Benefits 8 Part 11: The Incentives: Clean Air Act Opportunities 13 A. Avoided Emissions 14 B. Conservation and Renewable Energy Reserve 17 C. Reduced Utilization 23 Part III: Efficiency and Renewable Energy in SO 2 Compliance Strategies 29 A. SO 2 Emissions and Resource Type 30 B. Avoided Emissions 33 C. Conservation and Renewable Energy Reserve 41 D. Reduced Utilization 43 Part IV: Efficiency and Renewable Energy Cost-Effectiveness 47 A. Avoided Costs 48 B. Demand-Side Efficiency Programs 51 C. Supply-Side Efficiency Programs 54 D. Renewable Energy Projects 56 E. Bidding 58 F. System Dispatch 59 Part V: Beyond SO 2 : Other Pollutants 65 A. Applying the Concepts to Other Pollutants 67 B. Externalities 68 C. Using Efficiency and Renewable Energy to Reduce Regulatory Risk .. 71 Conclusion 75 Endnotes 79 Appendix A: Production-Simulation Modelling 81 Appendix B: Conservation and Renewable Energy Reserve Application Form... . 85 ------- TABLE OF CONTENTS List of Tables and Figures Table I-i Projected Allowance Prices 9 Table 111-1 Emissions Impacts of DSM Programs 37 Table 111-2 Reserve Allowances of Utility B 42 Table 111-3 Reserve Allowances of Utility D 43 Table IV- 1 Avoided Costs for Utility A 50 Table IV-2 Avoided Costs for Utilities A, B, and C 51 Table IV-3 Effect of Avoided SO 2 Emission Costs on DSM Cost-Effectiveness . . . 53 Table IV-4 Effect of Avoided SO 2 Emission Costs on IPP Profitability 59 Table IV-5 Effect of Renewable Energy Resource on Dispatch Order 66 Table V-i Environmental Externality Values 71 Table V-2 Effect of Externalities on Avoided Costs 72 Figure II- 1 Reserve Application Procedures 19 Figure JV-i Avoided Costs and Program Participation 55 ------- Executive Summary The 1990 Clean Air Act Amend- ments provide a significant opportunity for energy efficiency and renewable energy to play a cost-effective role in an electric utility’s resource mix. Through an innovative system of tradeable emis- sion allowances, Title l v of the Act calls for a 10 million ton reduction in nation- al SO 2 emissions. To encourage pollu- tion prevention, Title 1V includes three incentives to promote the use of efficien- cy and renewable energy. The Incentives The three incentives to encourage efficiency and renewable energy are: 1. Avoided emissions; 2. Conservation and Renewable Energy Reserve; arid 3. The Reduced Utilization provision. Avoided emissions is perhaps the most lucrative of the three incentives; each ton of SO 2 avoided through effi- ciency and/or renewable energy saves one emission allowance. Thus, the avoided emissions incentive allows a utility to save emission allowances at the utility’s own rate of emissions. Furthermore, the avoided emissions incentive is quite simple to implement; no reporting, applications or verification are required. The Conservation and Renewable Energy Reserve is a special bonus pool of 300,000 allowances set aside to re- ward new initiatives in demand-side efficiency and renewable energy. For every 500 MWh of energy saved through demand-side efficiency or generated through renewable energy, a utility earns one allowance from the Reserve. A utility is eligible for Reserve allowanc- es from January 1, 1992 until the utility enters the Acid Rain Program. Reduced utilization of an affected unit is one compliance option. During Phase I, though, a utility may not re- duce generation below its baseline merely by shifting generation to non- affected units, unless such shifts are offset by efficiency or renewable energy. Thus, efficiency and renewable energy resources can help avoid the loss of emission allowances and the imposition of other penalties. In general, the value of these incentives will be the number of allow- ances generated or saved multiplied by the market price of an SO 2 emission allowance. SO 2 Compliance Strategies Efficiency and renewable energy can be cost-effective components to an integrated compliance strategy. Effi- ciency and renewable energy can play a significant role by: U Complementing or offsetting the use of other compliance strategies such as fuel-switching; U Delaying the use of expensive alternative strategies such as scrubbing; ------- iv EXECUTIVE SUMMARY L i Helping to avoid penalties asso- ciated with noncompliance; and Li Increasing revenues through the sale of extra allowances. The usefulness of the three incentives on SO 2 compliance depends upon each utility’s own circumstances. Utilities that currently emit high levels of SO 2 can benefit significantly from the incen- tives. However, even utilities already in compliance can benefit from the reve- nues generated by extra allowances. Resource Cost- Effectiveness Because emission allowances place an economic value on SO 2 emis- sions, a utility’s avoided costs will change as a result of Title IV. In turn, increases in avoided costs due to avoid- ed SO 2 costs will increase: Li The number of efficiency mea- sures and renewable energy op- tions that are cost-effective; Li The penetration of efficiency pro- grams and the size of renewable energy projects; and Li The project economics for energy- service companies and indepen- dent power producers. Thus, program design and screening procedures for demand-side efficiency programs, supply-side efficiency pro- grams, and renewable energy projects should incorporate avoided SO 2 costs. Likewise, bidding and dispatch process- es should include these costs. Beyond SO 2 Efficiency and renewable energy not only help utilities avoid SO 2 emis- sions but other pollutants as well, in- cluding NOx, C0 2 , toxics, and particulates. The methodologies for incorporating SO 2 costs into compliance planning and resource cost-effectiveness can apply to other pollutants as trading markets emerge. In some regions, where ground-level ozone is a problem, trading systems for NOx are being devel- oped. Even when a pollutant is not presently regulated, it may be cost-effec- tive to consider the pollutant when for- mulating SO 2 strategies. The addition of expensive control technologies for each pollutant can be considerably more costly than addressing all pollutants simultaneously through efficiency and renewable energy. Thus, efficiency and renewable energy resources can help a utility minimize the risk of future envi- ronmental regulations. Integrated Resource Planning The market-based benefits of the Clean Air Act incentives are ideal inputs for integrated resource planning. By incorporating these benefits into the planning process the true economic competitiveness of energy efficiency and renewable energy is more fully realized. ------- Introduction The Clean Air Act Amendments of 1990 have given energy efficiency and renewable energy resources an added quantifiable value. The purpose of this handbook is to assist in quant fyirtg the incentives from Title IV of the Clean Air Act. - Photo courtesij of U.S. House of Representatives ------- 21 I NTRODUCTION Energy efficiency and renewable energy are valued resources in meeting future energy demands. The Clean Air Act Amendments of 1990 increased the attractiveness of these resources through an innovative system of trade- able emission allowances. This hand- book quantifies the added value energy efficiency and renewable energy bring to an electric utility based upon the incen- tives in Title 1V of the Clean Air Act. Clean Air Act Goals and Incentives When the United States Congress embarked upon the Clean Air Act Amendments, several goals were para- mount. The primary goals for Title 1V, the Acid Rain Program, are: Achieve significant environmental benefits by reducing emissions of sulfur dioxide and nitrogen oxide; Reduce these emissions at the lowest cost to society: and Encourage pollution prevention through efficiency and renewable energy. The resulting legislation called for a 10 million ton emission reduction in sulfur dioxide and a 2 million ton reduc- tion in nitrogen oxides.’ To promote pollution prevention the program in- cludes three incentives for energy effi- ciency and renewable energy. These three incentives are: 1. Allowance savings from avoided emissions; 2. Bonus allowances from the Con- servation and Renewable Energy Reserve: and 3. Generation shifts away from high emitting plants by use of the Re- duced Utilization provision. Handbook Contents and Structure This handbook will describe how each of the three incentives work and the potential impact on environmental compliance strategies and resource cost-effectiveness. The varying implica- tions for demand-side management, supply-side efficiency improvements. and renewable energy technologies are addressed. The essentials of quantifying Clean Air Act benefits are presented through examples and step-by-step work sheets. The examples are based upon real data from utilities with differ- ing Clean Air Act compliance needs. The data requirements and calculation methodologies are illustrated through these examples. The handbook is organized into five parts. Part I provides an overview of Title 1V and tradeable emission allow- ances. Part II describes each of the three incentives for energy efficiency and renewable energy in detail. Part III explains the impact of the incentives on SO 2 compliance strategies. Part IV explains the impact of the incentives on other applications affecting energy effi- ciency and renewable energy, including program design and screening, bidding, and dispatch. Part V applies these methodologies to pollutants other than SO 2 . ------- INTRODUCTION 3 Handbook Goals This handbook will assist in tin- derstanding the relationship between the Clean Air Act and the cost-effective- ness of energy efficiency and renewable energy. A number of groups will find this information pertinent, including: Utility regulators; Utility environmental compliance planners; Utility resource planners: Energy efficiency manufacturers and service providers; Renewable energy manufacturers and developers: Consultants; Environmental organizations; and Through the market-based allow- ance trading system of the Clean Air Act, reductions in SO 2 emissions have a real value to electric utilities. Allowance trading provides the incentive for utili- ties to pursue energy efficiency and renewable energy technologies, and to minimize costs by doing so. The extent to which the Clean Air Act incentives affect the financial out- look of energy efficiency arid renewable energy will depend upon each utility’s own circumstances. However, all utili- ties should seriously consider these opportunities. The real, quantifiable value of the Clean Air Act incentives can be key to maximizing a utility’s overall cost-effectiveness in serving its custom- ers and protecting the environment. Consumer advocacy groups. ------- Part I The Acid Rain Program Using market-based mechanisms to achieve environmental goals is becoming increasingly common. The market trading of SO 2 emission allowances, as provided by the Clean Air Act, serves to benefit energy efficiency and renewable energy. ------- 6 1 OVERvIEW OF THE ACID RAIN PROGRAM A. Overview of the Acid Rain Program Through Title I V of the Clean Air Act Amendments, Congress established the Acid Rain Program. The program seeks to significantly reduce emissions of SO 2 and NOR, the primary causes of acid rain. To achieve this goal at the lowest cost to society, the program employs an innovative market-based approach for controlling emissions. In addition, the program encourages pollution prevention through efficiency and renewable energy. Title IV sets as its primary goal the reduction of armual SO 2 emissions by 10 million tons below the 1980 level. These reductions will be achieved over two phases. Phase I begins in 1995 and affects 110 mostly coal-burning electric utility plants located in 21 eastern and midwestern states. Phase II, which be- girls in the year 2000, tightens the Phase I limits and expands the scope of the program to include most electric utility plants over 25 MW. The Acid Rain Program creates a new tradeable commodity, the SO 2 emission allowance. Each allowance represents an authorization to emit one ton of SO 2 (i.e., a unit that emits 5,000 tons of SO 2 must hold at least 5,000 allowances that are usable that year). Each affected source is allocated a spe- cific number of allowances for Phase I arid Phase II based on past emissions rates and utilization. 2 Once allocated, allowances may be bought, sold, traded, or banked for use in future years. At the end of each compliance year, a utility must retire one allowance for each ton of SO 2 emitted in the preceding year. Hold- ing an insufficient amount of allowances can result in a $2,000 per ton fee for non-compliance. The tradeable allowance system will help utilities achieve SO 2 reductions at the lowest possible cost by allowing the utilities to choose the most cost-effective compliance strategy. Compliance strat- egies can include purchasing allowances from other utilities, switching to lower- sulfur fuels, installing scrubbers, and/or implementing efficiency and renewable energy resources. The utility decides which compliance strategies best meets its needs. Energy efficiency measures and renewable energy generation can be an important part of a compliance plan for several reasons. Efficiency and renew- able energy resources not only create allowances for the utility through the Conservation and Renewable Energy Reserve, but they also avoid emissions for which the utility would otherwise need to surrender allowances. The following table defines some terms commonly used to evaluate the role of efficiency and renewable energy in meeting Title IV requirements. This part discusses the following topics: A. Overview of EPA’s Acid Rain Program B. The Allowance Trading Market C. Environmental Benefits ------- PART I: THE ACID RAIN PROGRAM 17 B. The Allowance Trading Market I. Overview A key factor in evaluating the im- pact of the Clean Air Act incentives will be the market price of an emission al- lowance. The allowance price will deter- mine the degree to which efficiency and renewable energy resources add value to the utility. The allowance price is of impor- tance to utilities in a variety of compli- ance situations. For utilities that are still in the process of formulating com- pliance strategies, allowance price as- sumptions are critical to determining the relative cost-effectiveness of each compliance option. The cost-effective- ness of efficiency and renewable energy versus the other options will vary de- pending upon the market price. For utilities already holding excess allow- ances due to other compliance actions, the allowance price will indicate the additional revenue that may be gained from efficiency and renewable energy. For utilities considering purchasing allowances as a compliance strategy, the market price will directly determine compliance costs. 2. Market Estimates Each year EPA holds an auction and direct sale of a small portion of allowances (2.8 percent) reserved from the total allowance allocation. The auc- tions are intended to help signal price SO 2 Allowance Terminology Earned Allowance: Allowance gained by utility through the Conservation and Renewable Energy Reserve. Saved Allowance: Allowance that utility is not required to surrender to EPA, due to avoiding the emission of one ton of SO 2 at an affected unit. Avoided emissions and Reduced Utilization result in saved allowances. Allowance Balance: Cumulative balance of allowances in a utility’s allowance account, which can be thought of as a savings account. Positive annual balances will be added (deposited) to the account; negative annual balances will be subtracted (withdrawn). Also called allowance reserve margin. Banked Allowances: Unsurrendered and unsold allowances held by a utility in excess of compliance requirements. ------- THE ALLOWANCE TRADI information to the market early in the program and to provide a public source of allowances for new utilities that are not allocated allowances. Utilities, envi- ronmental groups, allowance brokers can participate in the EPA auctions. The initial auctions are being adminis- tered by the Chicago Board of Trade. The 1993 EPA auction yielded the first recorded values for the allowances. Prices for allowances for use beginning in 1995 ranged from $131 to $450 with an average of $156 per allowance. Pric- es for allowances for use beginning in 2000 ranged from $122 to $310 with an average of $136 per allowance. However, these initial results may not represent actual market values. First, EPA did not set a minimum price on the allowances. Thus, the resulting price did not necessarily represent the value at which allowance holders are willing to sell. Second, allowance trad- ing is a relatively new instrument; mar- ket activity and expertise in this area will continue to evolve. Third, the auc- tion sales were paid in 1993 dollars while the allowances are for use starting in 1995 and 2000. Thus, the auction results represent the net present value of some higher future allowance price. Price signals are entering the market through other means as well. Several private trades have taken place, although the details of these trades are not always made public by the partici- pants. Several brokerage firms and trading exchanges are offering such services as on-line trades, SO 2 futures trading, and private auctions. Specialty consulting firms are also offering price information services. As actual compli- NG MARKET ance dates near, a more certain allow- ance market should develop. A recent report issued by the Electric Power Research Institute (EPRI) indicates that allowance prices could rise from $250 per allowance in 1995 to $480 per allowance in 2007. These values are in 1992 dollars. EPRI’s pro- jections are based upon research of likely utility compliance actions. Table I-i summarizes EPRI’s findings for the expected allowance price as well as the estimated price floor and ceiling. 3. Handbook Assumptions Unless otherwise stated, the ex- amples presented in this Handbook are based upon a conservative allowance price of $200 per allowance or the $250 EPRI estimate for 1995 allowances. While these examples often demonstrate the substantial financial benefits of efficiency and renewable energy, these benefits will be even greater at a higher allowance price. The cost-effectiveness of efficiency and renewable energy re- sources will increase as the cost of emit- ting SO 2 increases. C. Environmental Benefits 1. The Effects of Acid Rain Acid rain and the emissions that cause it damage waters and forests, endanger animal species, accelerate the decay of buildings and monuments, and impair public health. Acid rain has been the primary cause of the acidifica- tion of 1,350 streams in the Mid-Allan- tic highlands, 90% of the streams in the New Jersey Pine Barrens, and a large number of lakes in the Adirondacks. The Canadian government estimates ------- PART I: THE ACID RAIN PROGRAM 9 1995 2000 2003 2007 Estimated Floor 190 250 250 200 Expected Price 250 340 400 480 Estimated Ceiling 320 430 510 650 that 14,000 lakes in eastern Canada are acidic. In many sensitive lakes and streams acidification has completely eradicated fish species, leaving these water bodies barren of life. If acidic deposition levels were to remain con- stant over the next 50 years, the acidifi- cation rate of lakes in the Adirondacks is expected to rise by 50 percent or more. Acid rain also degrades forests, particularly high-elevation spruce trees that populate the Appalachian Moun- tains, by increasing the spruce’s vulner- ability to winter injury. This deteriora- tion of forests affects important natural areas such as the Shenandoah and Great Smoky Mountain National Parks. Furthermore, long- term contamination of the sensitive soils is likely to have already occurred. Acid rain moves through soils, stripping away vital plant nutrients through chemical reactions, and thus poses a threat to future forest growth. Sulfur dioxide emissions in the atmosphere are responsible for over 50% of the visibility reduction in the eastern part of the United States. The resulting haze from sulfur dioxide emis- sions has impaired enjoyment of many national parks across the country, in- cluding such parks as the Grand Can- yon and Shenandoah. Acid rain also corrodes metals, stone, and paint re- sulting in the deterioration of precious cultural materials, such as statues and monuments. Dry deposition of acidic compounds can also dirty buildings and other structures. The maintenance and repair costs associated with acid rain are extremely high. Given the large number of buildings affected by acidic deposition, even a small impact on maintenance costs translates into a very large savings to society. Finally, recent studies have point- ed to increased health risks from partic- ulate matter, which includes sulfates and other pollutants emitted during the combustion of fossil fuels. A recent study by Harvard University’s School of Table I-i Projected Allowance Pricesa a Source. EPRI In 1992 dollars/ton paid in the year indicated. The expected price is a market clearing price that assumes the continued operation of most fossil fuel units. ------- 10 ENVIRONMENTAL BENEFITS Public Health linked these emissions to higher mortality rates. Preliminary results of another Harvard University study of 24 North American cities showed a strong statistical association between decreased lung function in children and long-term exposures to ambient acidic aerosols. EPA is in the process of evaluating the need for tight- er regulations on emissions of particu- late matter. Based on concerns about the \rariolis effects of acid rain on humans. animals and the environment, Congress mandated aggressive SO 2 reductions under the Clean Air Act Amendments. The Acid Rain Program promises to confer great benefits on human health and the environment. The 10 million- ton reduction in SO 2 emissions should significantly decrease acidification of water bodies and forest soils and allow many of these systems time to recover. Visibility is expected to increase by 30% or more in the eastern United States, and the lifespans of buildings and mon- uments should improve. Finally, the SO 2 reductions will make the air health- ier to breathe. 2. Environmental Benefits from the Clean Air Act Incentives Energy efficiency and renewable energy can play a crucial role in SO 2 emissions reductions. Pollution preven- tion through efficiency and renewable energy helps combat not only acid rain, but other environmental harms as well, including global warming and urban smog. In addition to SO 2 , efficiency and renewable energy resoi irces help prevent emissions of CO 2 , NOR, toxics, and particulates. These resources also avoid the production of ash and scrubber sludge. The environmental benefits from just one of the Title l v incentives, the Conservation and Renewable Energy Reserve, are substantial. The 300,000 allowances in the Reserve represent a conversion of 150 billion kWh to effi- ciency or renewable energy. The follow- ing graphic illustrates the net pollution displaced by the implementation of the Reserve. Photo courtesy of U.S. flepL of Intenor Implementation of the Reserve displaces: 885 Million lbs of SO, 825 Million lbs of NO, 225 Billion lbs of CO 2 Based upon national average emissions rates for each pollutant ------- PART I: THE ACID RAIN PROGRAM 11 The CO 2 reductions from the Re- serve are equivalent to taking 21 million cars off the road each year or the plant- ing of 43.5 million acres of trees. These reductions are based upon national averages for each pollutant’s emissions rate. 4 The actual amount of emissions offset will depend upon each utility’s marginal rate of emissions. The emissions offset in the illus- tration above is only a small portion of the total emissions avoided by the Title TV incentives. The environmental bene- fits of efficiency and renewable energy persist as long as these resources func- tion. Through the use of efficiency and renewable energy resources, electric utilities are able to demonstrate concern for the environment and project a posi- tive image to the community at large. ------- Part II The Incentives: Clean Air Act Opportunities The number of allowances that can be gained from avoided emissions, the Reserve, and Reduced Utilization will vary with each utility’s unique circumstances. However, each utility should calculate the value the Clean Air Act incentives add to efficiency and renewable energy resources. Photo courtesy of Ed Linton ------- 14 AVOIDED EMISSIONS A. Avoided Emissions 1. Overview Each time a utility emits a ton of SO 2 , the utility has expended an emis- sion allowance. Given the market value of each emission allowance, the utility has thus also expended a financial re- source. Simply avoiding the emission of SO 2 through efficiency and renewable energy is perhaps the most lucrative of the Title IV incentives. Each ton of SO 2 avoided through the use of energy efficiency and renew- able energy means one less allowance must be surrendered to comply with Title IV. Both demand-side and supply- side efficiency programs will create val- ue for the utility through avoided emis- sions. Any energy generation type that reduces SO 2 emissions will likewise support avoided emissions. The avoided transmission and distribution losses associated with an efficiency and/or renewable energy program will also benefit the utility. The result is an allowance that can be used for current compliance. “banked” for future use, or sold. The utility saves these allowances at the average emission rate of the utility’s units affected by Title IV. For utilities currently emitting high rates of SO 2 , avoided emissions can thus be particu- larly valuable. This part describes the three Clean Air Act incen- tives to encourage energy efficiency and renew- able energy; data needs are identified and work sheets are provided to help the analyst determine each incentive s added value. The three incen- tives from Title IV of the Clean Air Act are: A. Avoided Emissions B. Conservation and Renewable Energy Reserve C. Reduced Utilization Each ton of SO 2 avoided... Offset / Generation “/l\” Increases revenues ------- PART II: THE INCENTIVES 15 2. Eligibility Avoided emissions are relevant during both Phase I and Phase II. To save allowances, the avoided emissions must occur at units affected by Title lv. During Phase II, virtually all fossil-fu- eled units are affected. Thus, avoided emissions may be particularly beneficial after Phase II begins on January 1, 2000. 3. Verification/Application Procedures Avoiding emissions through effi- ciency and renewable energy is the sim- plest of the incentives to implement. The utility achieves the benefits of avoided emissions automatically. No forms or applications need to be submit- ted to EPA or any other governmental entity. No verification is required to prove the efficiency or renewable energy resource is in place. The lack of paper- work further enhances the cost-effec- tiveness of this incentive. The indirect and overhead costs normally associated with regulatory requirements are avoid- ed. The benefits from avoided emis- sions reach far beyond Clean Air Act compliance. For utilities that are al- ready in compliance, the extra allowanc- es can be sold to further lower overall costs. Thus, avoided emissions are an easy way to not only save a substantial number allowances but to minimize utility costs as well. 4. Evaluating the Impact of Avoided Emissions To understand the potential im- pact of avoided emissions the utility should model its system with and with- out the efficiency and renewable energy programs in place. “Production-simula- tion’ t models are useful for this purpose. Production-simulation models simulate system operation to determine energy production costs, dispatch order, gener- ation and total emissions. Different system specifications are modeled and compared to yield estimates of avoided emissions. Examples of commercially avail- able production-simulation models in- clude ENPRO© and PROMOD©. Appen- dix A includes information on the neces- sary input data and procedures for using a production-simulation model. The following work sheet leads the analyst through the steps needed to assess the value of avoiding SO 2 emis- sions through efficiency and renewable energy. Complete the following steps for each year the utility has units affected by Title IV. Phase I units are affected from January 1, 1995 forward. Phase II units, which include most fossil-fired units, are affected from January 1, 2000 forward. ------- STEP 1: JAVOIDED EMISSIONS Work Sheet No. 1 Evaluating the Impact of Avoided Emissions STEP 2: Identify planned or potential efficiency and renew- able energy programs and quantify program ef- fects on peak demand (MW) and energy (MWh). Tons STEP 3: Run production-simulation model with and without the efficiency and/or renewable energy programs in place. Determine the level of SO 2 emissions for each scenario. 2a. Estimated tons of SO 2 without efficien- cy/renewable program(s) 2b. Estimated tons of SO 2 with efficien- cy/renewable program(s) The model will also allow determination of produc- tion costs, total and unit-by-unit generation levels (MWh). and peak demand (MW). These data are useful to ensure that the outputs are reasonable and to assist the analyst in understanding model runs. STEP 4: Determine the avoided emissions due to the effi- ciency and renewable energy programs. Subtract the result in 2b from the result in 2a. This difference in tons represents the allowances saved by avoid- ed emissions. Multiply the number of allowances saved in step 3 by the market value for emission allowances. This result is the value added by the avoided emissions incentive. Allowances k Tons Tons ------- PART II: THE INCENTIVES 17 B. Conservation and Renewable Energy Reserve 1. Overview The Reserve is a special bonus pooi of 300,000 allowances that Con- gress set aside to award utilities under- taking new initiatives in efficiency and renewable energy. For every 500 MWh of energy saved through demand-side efficiency or generated through renew- able energy, a utility earns one allow- ance from the Reserve. Reserve allow- ances may be used for current compli- ance, banked for future use, or sold. A utility can apply for Reserve allowances for efficiency measures and renewable energy generation brought into operation on or after January 1, 1992. Energy efficiency measures may be installed under a program that exist- ed before January 1, 1992 as long as the measures themselves were installed after this date. Efficiency programs are restricted to demand-side programs only; supply-side efficiency measures cannot be claimed for Reserve credit. Renewable energy programs qualifying for the Reserve include biomass, geo- thermal. solar, and wind energy re- sources. Transmission and distribution losses avoided by the programs may also be credited with Reserve allowanc- es. The Reserve is an incentive for utilities to set up efficiency measures and renewable generation years before compliance deadlines. Phase I utilities may earn Reserve allowances from Jan- uary 1, 1992 until these utilities enter the Acid Rain Program on January 1, 1995. Phase II utilities may earn Re- serve allowances from January 1, 1992 until these utilities enter the Acid Rain Program on January 1, 2000. Thus, the Reserve encourages utilities to get a head start on meeting the Acid Rain Program’s emissions standards. 2. Eligibility Requirements To qualify for the Reserve the applicant must meet the following re- quirements (also see 40 CFR 73.81 and 73.82): / Applicant must sell electricity (utility or independent power producer). / Applicant or applicant’s holding company must own or operate. in whole or in part, a Phase I or Phase H unit. / Applicant must be subject to a least cost plan or planning pro- cess that is approved or accepted by the applicant’s ratemaking entity. The least cost plan or planning process must meet the following requirements: (1) public participation; (2) evaluation of a full range of resource options: (3) treatment of supply-side and demand-side resources on a con- sistent and integrated basis; (4) accounting for system operation and risk factors; and (5) imple- mentation of least-cost resources. / Investor-owned utilities applying for credit from efficiency pro- grams must be subject to a rate making process that provides for net income neutrality. This means the utility’s rate making ------- _! J CONSERVATION AND entity adjusts the utility’s electric rate for lost sales due to the effi- ciency program. Applications for net income neutrality must be certified by the Department of Energy. 3. Verification To receive the Reserve allowances, the applicant must be able to verii r to EPA that the efficiency savings or re- newable energy generation did occur. Renewable energy generation is verified simply by submitting plant records of net energy generation. For demand-side efficiency pro- grams, utilities follow one of two verifi- cation paths. If a utility is state-rate regulated and the rate making entity uses a performance-based rate adjust- ment, then the utility submits verifica- tion to the state for approval. Otherwise the utility must submit verification to EPA and is encouraged to use EPA’s Conservation Venfication Protocols 5 as a guide to good and accurate verification. Instructions and forms for these Proto- cols are found in the User’s Guide to the Conservation Venfication Protocols. 6 4. Application Procedures Figure Il-i outlines the Reserve application procedures. To apply for Reserve allowances, the applicant must submit a “Conservation/Renewable Energy Reserve” form to EPA. This application is a simple two page form. A copy of this form is included in Appen- dix B, along with the relevant instruc- tions. If the applicant is applying for allowances based upon an efficiency RENEWABLE ENERGY RESERVE program and is an investor-owned utili- ty, the utility must also be certified for “net-income neutrality” by the Depart- ment of Energy. 7 5. Evaluating the Impact of the Reserve Estimating the impact of the Re- serve allowances is a simple process. The rate at which the allowances are earned is fixed at one allowance for every 500 MWh of qualified efficiency savings or renewable energy generation. The primary data needs to estimate the Reserve’s impact are: J The amount of savings from qual- ified demand-side efficiency mea- sures and the amount of genera- tion from qualified renewable energy programs; and The market value for an SO 2 emission allowance. In addition to determining the value of planned efficiency and renew- able energy programs, the analyst should also examine the impact of ex- panded efforts. The added value given by the Reserve may mean a more ag- gressive program is the most cost-effec- tive. The Reserve allowances may also change the timing of such programs. The following work sheet leads the analyst through the steps necessary to assess the value of the Reserve allow- ances. Complete the following steps for each year the utility is eligible for the Reserve. Phase I utilities are eligible from January 1, 1992 until January 1, 1995. Phase II utilities are eligible from January 1, 1992 until January 1, 2000. ------- PART II: THE INCENTIVES Figure 11-1 Reserve Application Procedures 1. Utility Complete verification documenta- tion Apply for net income neutrality with DOE (only if investor-owned) Complete Reserve application II 2. Ratemaking Entity Reviews/certifies Reserve application D Certifies verification documentation (only if you are state rate-regulated with performance-based rate adjust- ments) U 3. EPA Certifies verification documentation (only if ratemaking entity does not) Li Approves/disapproves Reserve application See 40 CFR 73.82(c) ------- 20 CONSERVATION AND RENEWABLE ENERGY RESERVE UTILITY PROFILE City of Austin, Texas The City of Austin is one of a growing number of municipalities where the generation and conservation of Electrical Energy are managed by separate departments within municipal government. The Electric Utility Department provides Generation and billing services, while the Environmental and Conservation Services Department (ECSD) provides Conservation and Energy Services to the citizens of Austin. The Environmental and Conservation Services Department provides 14 individual programs to commercial and residential customers, and has provided the Electric Utility Department with more than 200 MW of generation capacity deferred since 1982. This represents a reduction of 11% in system capacity requirements. ESCD’s programs are designed primarily to promote maximum efficiency in Austin’s energy and environmental resources. Current programs include: residential loan and rebate programs, the “Energy Star” and “Green Builder new home rating programs, commercial and municipal energy programs, multi-family programs, a home weatherization program for low- income, elderly and disabled customers, and an air conditioning rebate program. ECSD is considering refrigerator disposal, residential lighting, and commercial duct repair programs. The current Demand-Side Management Program forecast for the City of Austin estimates a savings of 270 MW and 1267 GWh during the ned Iwenty years (capacity savings include a system reserve margin of 20%). As a result of current programs, the City is forecasting substantial emission reductions. ECSD has developed a sophisticated model based on the EPA’s ISCLT model which predicts the dispersion, fall, absorption, and decomposition rates of several pollutants. Analyses with this model indicate that at the current level of commitment to DSM. the City will reduce the emission of CO 2 by 27,000 tons, SO 2 by 20 tons, Nox by 54 tons, CO by 13 tons, and Total Suspended Parficulates by 2 tons (all values are yearly incremental savings). Environmental benefits computed by the model are monetized at the local, long-range and global levels, with savings of at least 520.5M for each 510M invested in conservation. ECSD also counts economic impacts due to DSM in its cost-effectiveness criteria. As a result, a projected investment (by the City) of $1 OM per year will generate a net economic benefit of $3. 7M per year and the creation of 137 jobs. The Electric Utility Department has made a signiticant investment in renewable energy resources, particularly solar voltaic systems. One such project is the 300 KW (alternating current) generating facility at the Decker Power Plant. Analysis of the first year’s operation determined that reliability exceeded 99%, a yearly capacity factor of 22%, but a summer on- peak capacity factor of 55%. The yearly cost savings attributed to fuel were $7800, which ------- r ici II: IH INC N1IVES I 1 translates to SO.02 per kWh. The plant, dedicated on December 5. 1988 has been operating at or near design con- ditions since that date. Based on the sustainable DSM pro- grams which were implemented in 1992, the City of Austin received 18 SO 2 emis- sion allowances from the Conservation and Renewable Energy Reserve. Austin was the first municipal utility to receive Reserve allowances from the EPA. Austin Photovottaic System ------- STEP 1: STEP 2: 22 CONSERVATION AND RENEWABLE ENERGY RESERVE Work Sheet No. 2 Evaluating the Impact of the Reserve Determine if the applicant qualifies for Reserve allowances. Note the eligibility requirements listed above (or see 40 CFR 73.81 and 73.82), If the applicant and its programs qualify. proceed to step 2. STEP 3: Determine the total amount of system-wide savings (MWh) from qualified demand-side efficiency programs and the total generation (MWh) from qualified renewable energy generation. Add these two values together. Note That the demand-side efficiency measures and renew- able energy generation must have become operational on or after January 1, 1992 to qualify, and must be verified. MWh STEP 4: Divide the result in step 2 by 500 MWh/allowance. This result is the number of allowances to be received from the Reserve. Multiply the number of Reserve allowances earned in step 3 by the market value for emission allowances. This result is the value added by demand-side efficiency measures and renewable energy generation from the Reserve. Repeat steps 1 - 4 for each year the applicant is eligible for the Reserve. Allowances $ ------- C. Reduced Utilization 8 PART II: THE INCENTIVES 23 1. Overview The Reduced Utilization provision prevents anticipated Phase I emission reductions from being eroded if genera- tion is shifted away from a Phase I plant to unaffected SO 2 emitting facilities. Such load shifting would result in in- creased emissions at Phase II plants or unregulated sources. The Reduced Utilization provision requires utilities either to specify the unit or units which will provide the compensating generation (and make them affected Phase I units) or to sur- render allowances for shifting genera- tion below its Phase I units’ 1985-87 baseline. The allowances are surren- dered at the average emission rate of the system’s Phase II units. 9 However, the provision also al- lows energy effIciency and renewable energy to offset these shifts and thus avoid the loss of allowances. To avoid surrendering allowances, the utility may: 1. Shift to a sulfur-free genera- tor; 10 2. Offset with demand-side efficiency measures; or 3. Offset with supply-side efficiency measures. Efficiency and renewable energy resources permit utilities to reduce the usage of Phase I plants without the requirement to designate a compensat- ing unit or to give up additional allow- nee.s - A further advantage of using effi- ciency or renewable energy in Reduced Utilization is the flexibility of where the measure or generation occurs. Offset- ting energy efficiency measures may come from anywhere within the utility system. Offsetting renewable energy generation may even be purchased from outside of the utility system. Thus, a Phase I unit may be credited with the savings or generation from a source far from the unit itself. 2. Eligibility Requirements The Reduced Utilization provision is applicable only to electric utilities with Phase I-affected units. Unlike the Conservation and Renewable Energy Re- serve, utilities may use both demand- side measures and supply-side (i.e., power generation, transmission. or dis- tribution) efficiency measures. Utilities Reduced Utilization provision prevents utilities from shifting generation bdow the system’s Phase I baseline. Generation Shift - - - t i n 1 __ Phase I Unit Non-Phase I Units Unless load shifts are offset by efficiency or renewable energy. ------- 241 REDUCED UTILIZATION may receive credit for efficiency mea- sures installed as early as January 1, 1988, as long as the utility verifies that the savings persist during the period of 1995- 1999. 3. Verification Annual verification of energy sav- ings or renewable energy generation is required to receive credit under the Reduced Utilization provision. The renewable energy generation may be verified with plant records of net energy generation. Demand-side and supply- side energy efficiency measures may be verified by following appropriate verifica- tion procedures. These verification procedures may be those prescribed by the utility’s ratemaking entity or the procedures outlined in EPA’s Conserva- tion Verification Protocols. 1 4. Application Procedures A Reduced Utilization plan must be filed with EPA by November 1 of the year in which reduced utilization oc- curs. An initial estimate of energy con- servation savings must be filed in the annual compliance certification report by March 1 of the following year. The unit’s designated representative must submit the verification results as part of a confirmation report by July 1 of each year. Thus, the first possible verifica- tions would take place in the first six months of 1996 for energy savings that occur in 1995, following submittal of a Reduced Utilization plan by November 1995. The EPA Administrator may grant, however, for good cause shown, an extension of the time to file the con- firmation report. Unlike the Reserve program, a utility using the Reduced Utilization provision does not have to meet the least-cost planning or net income neu- trality requirements. Since the utility is saving its own allowances, the utility is not limited to the amount of efficiency savings or renewable energy generation for which it may receive credit. 5. Evaluating the Impact of Reduced Utilization The following work sheet leads the analyst through the steps necessary to assess the value of efficiency and renewable energy from the Reduced Utilization provision. This work sheet provides only an estimate; the actual value is determined retrospectively by the procedures in 40 CFR 72.91 and 72.92. The primary data needs to eval- uate the impact of the Reduced Utiliza- tion provision are: J Average baseline heat input (rnmBtu) from 1985-87 for all Phase I units. J Heat rates (fuel input/generation output in Btu/kWh) for all Phase I units. System average SO 2 emission rate of all Phase II units. J Average SO 2 emission rate of all off-system purchases. MWh savings from qualified ener- gy efficiency or MWh generation from renewable energy sources in each year of Phase I. Measures must have been installed on or after January 1, 1988. J Market price of allowances. ------- PART II: THE INCENTIVES Work Sheet No. 3 Evaluating the Impact of Reduced Utilization Potential Number of Allowances Surrendered STEP 1: STEP 2: Determine if the utility system’s aggregated Phase I units are expected to operate below their 1985-87 baseline, and, if so, how far below (mmBtu) 12 If the Phase I units are not expected to operate below baseline, Reduced Utilization does not apply. If the Phase I units are expected to operate below baseline in any year, continue to step 2. mmBtu STEP 3: Determine the utility’s average emission rate for electricity not generated at Phase I units (lbs of S0 2 /mmBtu). For the portion of non-Phase I generation from within the utility’s system. determine the average emission rate for the system’s Phase Il units. For the portion of non-Phase I generation from outside of the utility’s system, find the average emission rate for the utility’s NERO region (listed in 40 CFR Part 72.92). Calculate the weighted-average emission rate from these two values. lbs/mmBtu Determine the potential number of allowances to be surrendered due to reduced utilization by multiplying the result from step 1 by the result from step 2. Divide result by 2000 to convert pounds of SO 2 to tons. The tons of SO 2 represent the number of allowances the utility would surrender without energy efficiency and/or sulfur-free generation. Allowances Potential Number of Allowances Saved by Energy Efficiency and Sulfur-Free Generation STEP 4: Determine the total amount of system-wide savings (kWh) cy and the total system-wide generation (kWh) from sulfur-free sources. Add these two values together. Note that the energy efficiency measure(s) must have become operational after December 31, 1987 to qualify, and must be verified. from energy efficien- kWh (continued on next page) ------- STEP 5: 26 REDUCED UTILIZATION Work Sheet No. 3 (cont’d) Evaluating the Impact of Reduced Utilization STEP 6: STEP 7: Determine the weighted-average heat rate (Btu/kWh) for the Phase I unit(s) that have been operated below the 1985-87 baseline. 13 The weighting is based upon the percentage each unit is below the baseline. Converl the total kWhs in step 4 to an equivalent heat value (Btu) by multiplying the result from step 4 by the result from step 5. Divide the result by 1 6 to convert Btu to mmBtu. Determine the potential number of allowances saved by energy efficiency and sulfur-free generation by multiply- ing the result from step 6 by the result from step 2. Divide result by 2000 to convert pounds of SO 2 to tons. The tons of SO 2 represent the potential number of allowances saved. Value Added by Energy Efficiency and Sulfur-Free Generation STEP 8: STEP 9: Apply the allowances saved in step 7 toward offsethng the allowances surrendered in step 3. Apply these allow- ances until all the surrendered allowances in step 3 are offset or the available allowances in step 7 are used up. Multiply the number of allowances offset in step 8 by the market value for emission allowances. This result is the value added by energy efficiency and sulfur-free genera- tion from the Reduced Utilization provision. Repeat steps 1 - 9 for each year 1995 through 1999. Btu/kWh mmBtu Allowances Allowances $ ------- PART II: THE INCENTIVES Basics of the Clean Air Act Incentives for Energy Efficiency and Renewable Energy Avoided Reserve Reduced Emissions Allowances Utilization Who May Apply? Anyone Can Owner/Operator of Owner/Operator Benefit; Any Affected of Phase I No Application Utility or IPP Affected Units Utilities Must Have a No Yes No Least-Cost Plan and Net Income Neutrality? What Type of Demand-and Demand-Side Demand-and Measures? Supply-Side Efficiency; Supply-Side Efficiency; Renewable Energy Efficiency; Renewable Energy Renewable Energy At What Rate are Utility’s Own Rate 500 MWh = 1 Average emission Allowances of Emissions Allowance rate of the system’s Earned/Saved? Phase II units How Many Allowances No limit 300,000 Total No Limit Are Available? When Are Utilities Eligible? Phase I From 1995 on From 1992 until 1995 From 1992 until 2000 Phase II From 2000 on From 1992 until 2000 Not eligible ------- Timeline for the Incentives January 1, 1995 January 1, 1992 (Phase I Begins) January 1, 2000 (Phase II Begins) Conservation and Re- newable Energy Reserve begins Avoided emissions incentive begins for Phase I utilities 1 Avoided emissions available to all affected utilities Reserve no longer available to Phase I utilities Reduced utilization provision begins L Reserve no longer available to Phase Il utilities E J Reduced utilization provision ends m C C) rn C -4 I- -4 0 z 1992 I 1993 [ 1994 I 19951 1996 I 11997 I [ 1998 I I 1999 I 2000 I •• ------- Part III Efficiency and Renewable Energy in SO 2 Compliance Strategies To meet SO 2 emission requirements of Title 1V electric utilities may choose from a range of compliance options. Efficiency arid renewable energy can be a cost-effective component to an integrated compliance strategy. Photo courtesy of Kramer Junction Company ------- 30 SO 2 EMISSIONS AND RESOURCE TYPE The market-based nature of Title IV of the Clean Air Act gives utilities a range of options for meeting compliance needs. Efficiency and renewable energy can play a significant role in this pro- cess by: J Complementing or offsetting the use of other compliance strategies such as fuel-switching, Delaying the use of expensive alternative strategies such as scrubbing, J Helping to avoid penalties asso- ciated with noncompliance, and Increasing revenues through the sale of extra allowances. As the examples below illustrate, the potential usefulness of the three Clean Air Act incentives varies depend- ing on each utility’s own unique circum- stances. The existing plant mix, emis- sions levels, and operating costs all affect the financial impact of the incen- tives. This chapter discusses and illus- trates the application of the three Clean Air Act incentives to encourage the use of efficiency and renewable energy. 14 A. SO 2 Emissions and Resource Type Specific efficiency and renewable energy technologies differ in terms of resource availability and the type and amount of pollutants being offset. The level of emissions that can be avoided will also differ by utility. Each existing fossil fuel plant will have different emis- sions characteristics. In the case of load management programs, the amount of emissions avoided also de- pends upon the characteristics of the plants to which generation is trans- ferred. Efficiency and renewable energy technologies generally fall into three load-type categories: base-load, inter- mediate-load, and load management. This part discusses the how the three incentives affect SO 2 compliance strategies. A. SO 2 Emissions and Resource Type B. Avoided Emissions C. Conservation and Renewable Energy Reserve D. Reduced Utilization ------- PART Ill: EFFICIENCY AND RENEWABLE ENERGY IN 31 so 2 CO M P11 A N CE STRATEGIES 1. Base-Load Generation Base-load technologies or pro- grams reduce demand during both on- and off-peak periods. rpical demand- side base-load technologies include refrigeration, water heating and exit lights. Supply-side base-load efficiency technologies include amorphous core transformers and base-load power plant efficiency improvement programs. Geo- thermal resources and biomass-flred steam generation are examples of re- newable energy technologies that can operate as base-load units. The emissions avoided due to base-load technologies are those emis- sions associated with the generation that is on the margin at any given time throughout the day when the technology is operating. The generation unit on the margin depends on the utility’s specific plant mix. During off-peak periods, the emissions that will be avoided due to the efficiency or renewable energy tech- nologies are likely to be those of the base-load plants. 2. Intermediate-Load Generation In contrast to base-load technolo- gies and programs, intermediate-load technologies and programs reduce de- mand during on-peak periods only, when energy costs are highest. While base-load programs are meant to reduce demand 24 hours per day, intermediate- load programs generally reduce demand during an 8 to 16 hour period depend- ing on the size and length of system peak. Commercial lighting programs and air conditioning and heating pro- grams are some examples of typical intermediate-load demand-side pro- grams. Wind and solar energy technolo- gies are examples of intermediate-load renewable resources. Emission reductions from inter- mediate-load units are those reductions associated with the plants on the mar- gin during intermediate and peak peri- ods. Peaking plants are high-fuel, low capital cost plants such as oil and gas- fired combined-cycle plants or combus- tion turbines. Such plants emit consid- erably less SO 2 than coal-fired plants. Thus, reduced generation at these plants will not lower SO 2 emissions as dramatically as reductions at coal-fired units. 3. Load Management Load management technologies and programs shift demand from on- peak periods with high energy costs, to off-peak periods with lower costs. Un- like base- and intermediate-load pro- grams, which focus on reducing energy use (MWh), load management programs focus on shifting demand (MW). Load management programs generally save little energy and sometimes actually increase energy use. Load management programs also can result in increased emissions (see “Contrary Effects” box). The increased emissions can occur when generation is shifted from a clean peak period unit (e.g., wind energy resource) to a higher emitting off-peak unit (e.g., a base-load coal-fired unit). ------- EMISSIONS AND RESOURCE TYPE Contrary Effects of Load Management Programs Certain types of demand-side management programs, load management and off-peak promotional programs. may actuafly result in increased emissions rather than avoided emissions. Load management programs trim peak usage and sometimes transfer that usage to off-peak periods, If the generation source being used at the oft-peak time (e.g. , a coal unit without a scrubber) emits greater emissions per unit of generation than the peaking unit, this “contrary impact” can occur. Off-peak promotional programs virtually guarantee increased emissions since the purpose of these off-peak programs is to increase the utilization of existing plants in an effort to minimize rates. Parametric modeling of Utility A. the 6.000 MW mid-and high-suffur coal-using utility. illustrates these two effects. The load management program actually results in in- creased emissions that require the surrender of additional allowances. This utility pos- sesses a large allowance reserve margin due to having scrubbed a large Phase I unit and received bonus allowances through the scrubber bonus allowance lottery. Therefore, for Utility A, the load management program represents a loss of potential revenue from the sales of extra allowances. For a utility without an allowance reserve, a load management program would require the purchase of additional allowances or the use of another compliance strategy to counteract the emissions impacts of the program. The contrary emissions impact of this utility’s hypothetical load management program dilutes the impact of the utility’s demand-side management programs as a whale. The emissions avoided by the three programs in aggregate (the refrigerator, commercial lighting, and load management program) are reduced as a result of the load manage- ment program. As expected, the off-peak promotion program resulted in increased emissions. By 2010, this program required the surrender of almost 38,000 allowances more than the no DSM” scenario. For utilities without excess allowances a promotional program could require the purchase of additional allowances or reliance on alternative compliance strategies. ------- PART III: EFFICIENCY AND RENEWABLE ENERGY IN 33 so 2 Co M P11 A N CE STRATEGIES B. Avoided Emissions Each ton of SO 2 avoided through the use of efficiency and renewable energy means one less allowance must be surrendered to comply with the Clean Air Act. The result is an allow- ance that can be used for current com- pliance, banked for future use, or sold. As described in Part I, avoided emis- sions is the simplest of the three incen- tives to implement -- no reporting, ap- plications or verification are required. The effectiveness and simplicity of avoided emissions makes this incentive a potentially major contributor to a utility’s Clean Air Act compliance strate- gy. The actual impact of an avoided emissions strategy depends upon the unique character of the utility system. Avoided emissions save the utility al- lowances at the utility’s own rate of emissions. Thus, utilities that currently emit high levels of SO 2 can benefit sig- nificantly from avoided emissions. Depending upon the utility’s Title IV compliance status, these avoided emissions may complement compliance strategies such as fuel switching, or add to the utility revenues through the sale of allowances. All utilities should calcu- late the avoided emissions benefits of efficiency and renewable energy for each utility’s own circumstances. ------- 34IAVOIDED EMISSIONS UTILITY PROFILE Northern States Power Company Northern States Power (NSP), headquartered in Minneapolis, Minn., is a national leader in utilizing efficiency and renewable energy resources. As early as 1980, NSP explored the feasibility of harnessing wind to produce electricity. Demand-side manage- ment at NSP began with appliance rebates in 1982 and has grown steadily since then. Wind Energy Commitment After extensive research and analysis, NSP last year signed a power purchase arrangement with U.S. Windpower Corporation of Oakland, Calitornia. Under terms of the arrangement, U.S. Windpower will construct, own and operate the Buffalo Ridge Windplant on a site owned by NSP near Lake Benton in southwestern Minnesota. The Buffalo Ridge site provides ideal weather and geographic conditions for operating a reliable and cost-effective wind plant. The first stage of the wind energy project will be a 25- megawatt power purchase ar- rangement. This initial commitment is scheduled to be on-line by May 1, 1994. Additionally, NSP has commit- ted to a total of 100 megawatts of wind-derived energy by 1998, and plans to use a competitive bid pro- cess to achieve the additional 75 megawatts. At an output of 25 megawatts, the Buffalo Ridge Windplant will generate enough electricity to power approximately 10,000 to 15,000 homes each year. NSP and its customvers will enjoy the benefits of avoided SO 2 emissions, and NSP could earn bonus allowances from the Conservation and Renewable Energy Reserve. Likewise, NSP esti- mates that for every kilowatt-hour of fossil fuel generation offset by wind energy, beiween 1-2 pounds of carbon dioxide will be kept out of the atmosphere. N5P Test Windplant in Holland. Minnesota (continued) ------- PART III: EFFICIENCY AND RENEWABLE ENERGY IN 35 S 02 Co M Pit A N CE S TRAT E G I ES Innovative DSM Programs NSP has set a goal to reduce ,000 MW of system coincident demand by 1995 and 1,700 MW by 2000. By the end of 1992, NSP had reduced coincident demand by 643 MW - nearly 60 percent of the 1995 goal. The number of DSM programs has in- creased dramatically, from 25 in 1989 to more than oO programs in 1994. Three programs represent the core of NSP’s DSM effort: a commercial and industrial Lighting Efficiency Program, a load control program called Saver’s SwitchSM, and an interruptible rate program called Peak- and Energy-Controlled Rates. The Lighting Efficiency Program achieved 20 MW of demand reduction in 1992, considerably aided by the Energy Financing Program, which disbursed almost $5 million in low-interest loans for energy-efficient equipment. One of NSP’s long term goals is to increase DSM efforts by improving existing programs and adding new programs aimed at conservation and load management. For example, in 1993 NSP added a preventative maintenance incentive to commercial and industrial programs for chiller, rooftop, and refrigeration efficiency. Cleaning and check- ing this equipment on a regular basis can improve energy efficiency by 10 to 20 percent. Also in 1993, NSP became the first US utility to offer a specific rebate program to business customers who convert existing chillers from chlorofluorocarbon (CFC) refrigerant to non-CFC refrigerants. Additionally, NSP is upgrading the lighting in its own facilities through participation in EPA’s Green Lights Program. ------- 36 AVOIDED EMISSIONS 1. Avoided Emissions and Demand-side Efficiency Utilities already committed to a compliance strategy based upon scrub- bing or fuel switching may be sufficient- ly placed to meet Title IV requirements. However, avoided emissions through efficiency and renewable energy can still benefit the utility. The extra allowances generated by the avoided emissions can be sold on the allowance market and thus increase utility revenues. The “no DSM” case resulted in the high- est emissions level at more than 3.5 million tons of SO 2 . Of the three indi- vidual programs, the high efficiency refrigerator program achieved the greatest emission reductions. Refrigerator pro- grains reduce generation around the clock and thus lessen the usage of higher emitting coal-fired units. The load man- agement program resulted in more einis- sions than even the “no DSM” scenario. For an explanation of this effect, see the “Contrary Effects box. Given the utility’s strategy to scrub dur- ing Phase I, implementation of the three demand-side programs will create addi- tional allowances that the utility may bank or sell. The demand-side programs will increase allowance holdings by al- most 143,000 by 2010. The allowances saved by the demand-side programs may allow the utility to consider less expen- sive compliance options for Phase II. These options might include supply- or demand-side efficiency programs, renew- able energy, and/or fuel switching. If utility A continues with plans to scrub a unit during Phase II, the utility would not need the allowances saved by the demand-side programs for compliance purposes. However, the allowances would still have value in terms of added revenue. For example, if the utility sold the nearly 143,000 additional allowances “created” by DSM at $200 each, it would generate nearly $29,000,000 in added revenue. Example: Utility with Excess Allowances Utility A is a mid-sized (6,000 MW) utility that relies heavily on medium- and high- sulfur coal. The utility’s CAAA compli- ance strategy is to scrub one plant during Phase I and one plant during Phase H. Consequently, this utility projects a large allowance reserve margin during both Phase I and Phase H. Three typical demand-side efficiency pro- grams are modeled: A refrigerator pro- gram representing a base-load program, a commercial lighting program representing an intermediate-load program, and a peak-load program representing load management. Together the programs are expected to reduce Utility A’s peak load by five percent, an impact typical of moderately aggressive demand-side effi- ciency programs. The programs are modelled parametrically to capture interactive effects. The steps to parametric analysis and production-simulation modeling are discussed further in Appendix A. The results of the modeling effort are summa- rized in Table 111-1. (antthucd) ------- PART Ill: EFFiCIENCY AND RENEWABLE ENERGY iN SO 2 COMPLIANCE STRATEGIES Table Ill-i Emissions Impacts of DSM Programs Cumulative SO 2 Emissions (tons) Emissions Savings Allowance Balance (Allowances) ‘No DSM Scenario 3,546,100 0% 1,990,700 System with Refrigerator Program 3,435,700 3% 2,101,100 System with Commercial Lighting 3,480,400 2% 2,056,500 Program System with Load Management 3,573,900 -1% 1,963,000 Program System with Refrigerator, 3,403,200 4% 2,133,700 Lighting, and Load Management Programs ------- 38 AVOIDED EMISSIONS The following example illustrates how demand-side management pro- grams can allow a utility to defer the use of other Clean Air Act compliance strategies. Example: Deferring Compliance Strategies Utility C. a large (28,000 MW) utility for which medium-sulfur coal is the primary fuel, has 28 Phase I affected units, and approximately 80 Phase LI-affected units. The company’s Phase I compliance strat- egy is to switch fuels at Phase I-affected units. This strategy will reduce emis- sions considerably below the number of allocated allowances. In Phase II, however, the utility’s annual SO 2 emissions will be greater than the annual allowance allocation. During Phase II the utility plans to use allow- ances banked during Phase I to remain in compliance. Once the allowance reserve margin is depleted, the company intends to purchase allowances to remain in compliance. Two scenarios are modeled to illustrate the effects of DSM on Utility C’s compli- ance costs. The first scenario contains no DSM, and the second scenario as- sumes that the utility implements ag- gressive demand-side programs. The DSM programs include residential, commercial, and industrial programs for new and existing facilities. These pro- grams cover a wide range of technologies, including building envelope, heating, ventilating, air conditioning equipment, lighting, motors, water heating, and load control programs. In 1993 about 80 MW of DSM will be in place. DSM progrmns are ramped up quickly, reaching a maxi- mum of nearly 4,000 MW in the year 2001. From 2001 to 2010, the last year modeled, the nearly 4,000 MW of DSM represents approximately 14 percent of the utility’s total system capacity. The DSM programs affect the utility’s emissions by varying degrees over time. For example, in 1999, the final year of Phase I, the demand-side efficiency pro- grams earn approximately 20,000 allow- ances more than the amount the utility would have earned without DSM. During Phase II, that amount increases to over 50,000 allowances in the year 2001. Cumulatively, by 2007, this utility would save over 300,000 allowances through the DSM programs. In the absence of the demand-side programs, the utility would need to purchase nearly 165,000 addi- tional allowances or change its compli- ance strategy. Conversely, with the DSM programs the utility would possess over 130,000 extra allowances. Thus. DSM could defer for almost two years the need for this utility to purchase additional al- lowances or otherwise alter compliance strategies. (continued) ------- PART III: EFFICIENCY AND RENEWABLE ENERGY IN 39 SO 2 COMPLIANCE STRATEG I ES 2. Avoided Emissions and Supply-Side Efficiency Like demand-side efficiency pro- grams, supply-side efficiency programs can also avoid SO 2 emissions. And like demand-side efficiency programs, the amount of avoided emissions will de- pend upon the characteristics of the specific program and the emission char- actenstics of the plant that is being avoided. To calculate the avoided emis- sions from a supply-side efficiency pro- gram, the system with and without the efficiency program are modeled using a production-simulation model. in some instances, such as boiler efficiency im- provements, the analyst may only need to adjust the plant heat rates assumed in the model. 3. Avoided Emissions and Renewable Energy Like energy efficiency technolo- gies, renewable energy resources vary in the emissions avoided depending upon the characteristics of both the technolo- gy and the utility system. Some renew- able energy resources, such as geother- mal and biomass generation, can be dis- patched in the same manner as tradi- tional generation technologies. These resources are likely to be operated as base-load or intermediate-load units. Although solar and wind energy technologies are by nature intermittent, the availability of these resources can often be predicted with a high degree of certainty. Moreover, technologies are under development to cost-effectively store the energy generated from inter- and distribution losses are approximately seven percent: transformer losses ac- count for approximately 25 percent of the total transmission and distribution loss- es. The total savings potential, assuming replacement of all transfonners. is ap- proximately 0.6 percent of system genera- lion. If Utility B adopts a transformer replace- ment program. with a target of replacing one-fourth of all transformers by the year 2000, the utility would realize approxi- mately 60 GWh per year in energy sav- ings. These energy savings avoid approx- Imately 165 tons of SO 2 per year. Such supply-side efficiency improvements can play an important role in a utility’s overall energy efficiency strategy and will yield benefits relative to Clean Air Act compliance. The utility also benefits from the reduced energy, transmission and distribution costs. Example: Amorphous Core Transformers Amorphous core transformers improve efficiency by decreasing core losses. Amorphous metal cores can reduce core losses by 60-70 percent compared to conventional silicon steel core transform- ers. Since core losses constitute approxi- mately 50 percent of the total losses from transformers, replacement of convention- al transformers with amorphous core transformers can reduce total transform- er losses by approxnnately one-third. Amorphous core transformers increase efficiency during all time periods and are thus considered a base-load efficiency option. Assume that Utility B institutes a pro- gram to replace conventional transform- ers with amorphous core transformers across its system. Total transmission (continued) ------- 40 AVOIDED EMISSIONS mittent resources. Solar and wind ener- gy technologies are now generally con- sidered to be intermediate-load units. Generating electricity from sulfur- free renewable energy technologies can displace equivalent generation from sulfur-emitting sources, thus avoiding SO 2 emissions. Emissions are avoided at the emission rate of the sulfur-emit- ting unit, which can be significantly higher than the rate allowances are earned under the Reserve. Consequent- ly, utilities that have implemented or are planning to implement renewable energy projects should incorporate avoided emission benefits into compli- ance planning. Utilities with high-sulfur units capable of being displaced by renewable energy generation stand to gain the most from renewable energy technolo- gies. However, as the following example shows, even utilities with low-sulfur units can find that additional renewable energy generation may lead to the least- cost compliance strategy. Utility B plans to add wind energy Ca- pacity in several years throughout Phas- es I and II. Specifically, the utility plans to add 25 MW of wind energy in 1995, 25 more MW in 1997 and a final 50 MW in 2000, for a total of 100 MW installed capacity by 2000. Utility B has one affected Phase I unit and 20 affected Phase II units. Well in advance of passage of the Clean Air Act Amendments, Utility B implemented a S0 2 -reduction strategy that included fuel-switching and scrubbing. Conse- quently, all Utility B units already have emission rates that meet Phase 11 require- ments. By reducing SO 2 prior to imple- mentation of Phases I and II of the Clean Air Act, this utility will possess a large allowance reserve margin. The implementation of these levels of wind energy would result in the utility’s saving over 3,300 allowances, i.e., avoiding over 3,300 tons of SO 2 emis- sions compared to a “no wind energy” scenario by the year 2010. The avoided emissions due to wind power generation are not concentrated in any single unit or units, but are distributed relatively evenly among Utility B’s Phase II units, which are all low-sulfur units. The 3,300 allow- ances saved due to Utility B’s wind ener- gy plans would be three percent of the cumulative allowance balance for the “no wind energy’ scenario. If retained by Utility B, these allowances would add to the existing allowance reserve margin. If the additional allowances due to the implementation of wind energy were sold at $200 per allowance, the value of the avoided emissions would be about $660,000 (or $1.2 million at $350 per allowance). Again, these results are for a relatively “clean” utility. If the utility had a higher SO 2 emission rate, the benefits would be even greater. Example: Wind Energy and Avoided Emissions Utility B, a 7,000 MW utility, provides an example of the potential effect of wind energy on avoided emissions. Wind ener- gy can be thought of as an intermediate- load technology with a typical capacity factor of approximately 0.3, depending on the specific technology used, site charac- teristics and wind profile. (cxntinued) ------- PART III: EFFICIENCY AND RENEWABLE ENERGY IN SO 2 COMPLIANCE STRATEGIES 141 C. Conservation and Renewable Energy Reserve The bonus allowances from the Conservation and Renewable Energy Reserve increase the attractiveness of demand-side efficiency and renewable energy resources as SO 2 compliance strategies. Since the Reserve allowances are earned before a utility actually en- ters the Acid Rain Program, the Reserve is an early way to earn a return on effi- ciency and renewable energy invest- ments. Once the utility enters the Acid Rain Program, the measures or genera- tion installed continue to benefit through avoided emissions and/or the Reduced Utilization provision. Thus, each of the Title IV incentives are com- plementary in supporting efficiency and renewable energy as SO 2 compliance strategies. 1. Reserve Allowances and Earning Potential The number of allowances a utili- ty will earn from the Reserve depends upon two factors: (1) the size of the utility’s efficiency and/or renewable energy program, and (2) the number of years the utility is eligible. Phase I utilities may earn Reserve allowances for demand-side measures or renewable generation during a three year period from January 1, 1992 until January 1, 1995. Phase II utilities may earn Re- serve allowances during an eight year period from January 1, 1992 until Jan- uary 1, 2000. A Phase Il-affected utility that began full-scale, aggressive conservation and/or renewable energy programs in 1992 possesses the greatest opportunity to benefit from the Reserve. However, the bonus allowances from the Reserve can affect the role of efficiency and re- newable energy for all utilities and inde- pendent power producers affected by Title IV of the Clean Air Act. In many instances the role of the Reserve allow- ances will be to allow the sale or bank- ing of excess allowances. Example: Reserve Allowances for a Phase I Utility Utility B, a 7.000 M\V utility, has one affected unit in Phase I, and is therefore only eligible to gain Reserve allowances from 1992 until 1995. Despite being eligible for Reserve allowances for oniy a three-year period, Utility B has in place a relatively aggressive package of DSM programs as part of its base plan. As- surning that Utility B achieves and veri- fies the projected energy savings, and meets net income neutrality and least- cost planning requirements. the utility will gain a signifIcant number of Reserve allowances. Table 111-2 summarizes Utility B’s poten- tiai for gaining Reserve allowances through DSM. Note that the DSM sav- ings from one year continues to add to the total of a following year. provided the measure is still in place. Based upon Utility B’s projected programs. the utility will earn a total of 2,150 allowances from the Reserve. Since Utility B is already in compliance with both Phase I and Phase II requirements. the utility does not need the Reserve allowances for Title IV compliance. At a market value of $250 per allowance, Utility B would earn $537,500 from the sale of the 2,150 bo- ntis allowances ($725,500 if market price is $350 per allowance). ------- 42 CONSERVATION AND RENEWABLE ENERGY RESERVE Year Savings (GWh) Allowances 1992 159 318 1993 349 698 1994 567 1,134 2. Reserve Allowances and Compliance Flexibility The examples illustrate the bene- fits of Reserve allowances for utilities that will have allowances in excess of SO 2 emissions from affected units in Phase I and Phase II. The excess allow- ances generated in the examples can be sold or banked for future use. The excess allowances give both Utility B and Utility D an added reserve margin for ensuring compliance with Title IV. Reserve allowances can also in- crease compliance flexibility and timing. While the benefits from the Reserve alone are not likely to completely alter SO 2 compliance strategies, the Reserve allowances can help delay more costly strategies such as scrubbing. Table 111-2 Reserve Allowances of Utility B Total 1,075 2,150 Example: Reserve Allowances for a Utility With only Phase II Units Utility D has no units affected in Phase I and is therefore eligible to gain Reserve allowances from 1992 until 2000. Utility D is allocated approximately 100,000 allowances annually in Phase II, and pians to use less than this number to comply. Therefore, any allowances gained through the Reserve can be either sold or banked. Utility D has modest plans for DSM and expects to achieve its first savings from energy efficiency programs in 1994. As Table 111-3 illustrates, Utility D’s projected programs will earn the utility 10,970 allowances through the Reserve. This result assumes that the programs are implemented as planned, savings are verified and accepted as valid by EPA, and the utility meets net income neutrali- ty and least-cost planning requirements. At a market value of $250 per allowance, Utility D would earn $2,742,500 from the sale of the 10,970 bonus allowances ($3,839,500 if market price is $350 per allowance). ------- PART IU: EFF1C ENCY AND RENEWABLE ENERGY IN SO 2 COMPLIANCE STRATEGiES Year Savings (GWh) Allowances 1992 0 0 1993 0 0 1994 114 228 1995 391 782 1996 778 1,556 1997 1,132 2,264 1998 1,413 2,826 1999 1,657 3,314 D. Reduced Utilization The Reduced Utilization provision allows utilities to reduce operation of affected units during Phase I as a means of compliance. However, to pre- vent utilities from circumventing Phase I requirements by shifting generation from affected units to non-affected units, utilities that reduce utilization below their 1985-87 baselines must identif y a compensating unit or surren- der allowances unless one of the follow- ing compensating actions are taken: 1. Shift to a suiftir-free generator; 2. Offset with demand-side efficiency measures; or 3. Offset with supply-side efficiency measures. The Reduced Utilization provision is only invoked if a unit’s generation drops below its 1985-87 baseline and is only applicable to electric utilities with units affected by Title IV during Phase I. 1. Reduced Utilization and Phase I Compliance Reduced Utilization achieved through demand-side efficiency, supply- side efficiency, or sulfur-free renewable energy is a potential strategy for meet- ing Phase I compliance requirements. The avoidance of costs associated with efficiency and renewable energy should be considered in the evaluation of the cost-effectiveness of these resources. Table 111-3 Reserve Allowances of Utility D Total 5,485 10,970 ------- 44 REDUCED UTILIZATION Example: Reduced Utilization in Phase I Compliance Utility B’s only Phase I-affected unit is currently in compliance with Clean Air Act requirements due to early switching to low-sulfur fuel. Alternatively, Utility B could have used the Reduced Utilization provisions to comply with Phase I re- quirements. If Utility B simply shifted the generation of the utility’s Phase I unit to other units (most of which would be Phase II units), the utility would have to identify a coin- pensating unit or surrender allowances. The allowances are surrendered at the average emission rate of the system’s Phase II units. However, since Utility B can attribute the reduced utilization to compensating amounts of DSM, the utili- ty would avoid bringing a Phase II unit into Phase I or surrendering these allow- ances. Utility B is planning to implement enough demand-side efficiency to offset the entire generation of the affected Phase I unit. Whereas the baseline gen- eration of Utility B’s Phase I unit is about 300 QWH, the projected savings from the utility’s demand-side efficiency programs range from 1,250 GWFI in 1995 to 2,500 GWH in 1999 for measures operational since January 1, 1988. Thus, the pro- jected energy savings are greater than baseline generation, and Utility B could theoretically reduce the generation of the Phase I unit to zero without surrendering allowances. in this case, the value of the compensat- ing DSM is equal to the baseline heat input of the Phase I unit times the aver- age SO 2 emission rate of Utility B’s Phase II units. This amount equals 915 tons of SO 2 for each year, 1995-1999. Utility B thus avoids surrendering 915 allowances each year from 1995 through 1999, the eligibility period for Reduced Utilization. In total, 4,575 allowances are saved (continued) during this period. At a market price of $250 per allowance, the utility has saved $1.14 million (at $350 per allowance, the utility saves $1.60 millionL In this case, Reduced Utilization provides the means for meeting Utility B’s Phase I requirements. The utility is planning to implement enough efficiency and renew- able energy programs to offset the pro- duction of the Phase I unit even without consideration of Clean Air Act require- ments. ------- PART III: EFFICIENCY AND RENEWABLE ENERGY IN 45 S 02 Co M P11 AN CE STRATEGIES 2. Relevant Circumstances for Reduced Utilization Reduced utilization is an attrac- tive strategy for utilities with units af- fected in Phase I that have relatively large demand-side efficiency, supply- side efficiency, and/or renewable energy programs either in place or planned. Since the savings or generation attribut- able to measures installed anytime after January 1988 are eligible, utilities with mature, long-running programs are likely to save the most allowances. Reduced Utilization is most appli- cable to older, less-efficient units with relatively high operating costs. Reduc- ing utilization of a newer, efficient base- load unit with lower production costs is less likely. The allowance benefits may not be enough to offset these low pro- duction costs. The use of Reduced Utilization also depends upon whether the utility offsets enough Phase I generation to cause the Phase I unit to drop below baseline. If the efficiency and renewable energy programs do not cause the unit’s generation to drop below the 1985-87 baseline, then Reduced Utilization does not apply. However, emissions would still be avoided and allowances saved, but “avoided emissions” would be the applicable incentive. 3. Reduced Utilization and the Reserve: Complementary A strategy incorporating both Re- duced Utilization and the Reserve can be particularly beneficial. The same de- mand-side efficiency and renewable energy measures that earned bonus allowances from the Reserve up until 1995 may save allowances for a Phase I utility under the Reduced Utilization provisions from 1995 through 1999. In fact, Reduced Utilization may yield even greater benefits than the Reserve: Li Eligibility requirements for Re- duced Utilization are less strict than for the Reserve. Unlike the Reserve, a utility using the Re- duced Utilization provision does not have to meet the least-cost planning or net income neutrality requirements. Li Unlike the Reserve, which has a limited pooi of bonus allowances to be awarded, Reduced Utiliza- tion has no limit as to how many allowances may be saved. Li While the Reserve awards bonus allowances only for demand-side efficiency and renewable energy programs, the Reduced Utilization opportunity exists for supply-side efficiency programs as well. Li The Reserve allowances are based on a set formula of 1 allowance for every 500 MWh of energy savings or renewable energy gen- eration. No set formula exists for Reduced Utilization. Reduced Utilization generates allowances based upon the average emission rate of the system’s Phase II units. Li To qualify for the Reserve, effi- ciency and renewable energy projects must have been installed on or after January 1, 1992. Measures installed on or after January 1, 1988 qualify for Re- duced Utilization. ------- 46 REDUCED UTILIZATION Example: Reserve and Reduced Utilization Allowances Allowances earned through the Reserve were compared with allowances saved via Reduced Utilization for Utility B. The util- ity is able to earn 2,150 allowances from the Reserve, based on the formula of one allowance for every 500 MWh. The utility saves 915 allowances per year from the Reduced Utilization provision. This an- nual savings of 915 allowances is based upon 300,000 MWh of efficiency savings (one allowance for every 327 MWh). The saved allowances for Utility B due to Reduced Utilization are based on a sys- tem average SO 2 emission rate for all Phase II units. Utility B’s average Phase II emission rate of 0.55 lb/mmBtu re- flects a reliance on low-sulfur coal. Utilities with higher Phase II emission rates would save a greater number of allowances per kilowatt-hour saved. For example, if the average emission rate of Utility B’s Phase II units was 2.5 lbs/mmBtu, Utility B would save 4,138 allowances. In this case, one allowance is saved for every 71 MWh of efficiency savings or renewable energy generation. ------- Part IV Efficiency and Renewable Energy Cost-Effectiveness Avoided SO 2 emission costs alter the economics of conventional utility generation. The cost-effectiveness of efficiency and renewable energy in program design and screening, bidding, and system dispatch are all improved by the Title IV incentives. Photo courU’sq of Osram Sylvania Inc. ------- 48 AVOIDED COSTS The Clean Air Act will increase the attractiveness of resources that do not emit SO 2 . The economic value of these alternate energy resources is mea- sured primarily by the costs of conven- tional supplies that are avoided. The previous section described how the Clean Air Act incentives affect SO 2 com- pliance strategies. This section exam- ines how the Clean Air Act affects utility planning and the overall cost-effective- ness of efficiency and renewable energy projects. Avoided cost values are critical to the resource selection process. The utility first develops a base-load forecast to determine the long-term need for additional energy resources. The utility then develops a base supply plan, to meet the electricity requirements of the base forecast. Such base supply plans most often employ traditional supply resources. The costs avoided by not implementing the base supply plan is compared to the cost of other resource options such as efficiency and renew- able energy. Resources costing less than the avoided cost of the base supply resources should be implemented. Part IV shows how the costs of avoided SO 2 emissions will alter overall avoided cost. The added SO 2 costs incurred by traditional resources will improve the cost-effectiveness of effi- ciency and renewable energy options. A. Avoided Costs Efficiency and renewable energy resources reduce the need for new fos- sil-fuel facilities, the amount new and existing plants operate, and the amount of pollutants emitted. For these rea- sons, efficiency and renewable energy resources may avoid many of the costs associated with a base supply plan. Efficiency and renewable energy are the preferable resource options if the costs avoided by these resources are greater than the costs of their implementation. Because emission allowances place an economic value on SO 2 emis- sions, a utility’s avoided costs will change as a result of Clean Air Act com- pliance strategies. In turn, increases in avoided costs can increase the amount of efficiency and renewable energy re- sources that are cost-effective. This part discusses the impact of the Title IV incen- fives on calculating avoided costs and the impli- cations of an increased avoided cost on utility planning, bidding, and dispatch. A. Avoided Costs B. Demand-side Management Programs C. Supply-side Efficiency Programs D. Renewable Energy Projects E. Bidding F. System Dispatch ------- PART IV: EFFICIENCY AND RENEWABLE ENERGY COST-EFFECTIVENESS I 1. Calculating Avoided Costs Avoided costs are derived from a comparison of the cost of building and operating a utility system with and without alternate energy resources. Avoided costs can be broken into com- ponents of energy and capacity. The avoided cost of SO 2 emission allowances is a cost which should be incorporated into current avoided cost of energy cal- culations. Methods of calculating avoided costs vary. A detailed discussion of avoided cost methodologies is beyond the scope of this Handbook. The follow- ing discussion and examples will focus upon the avoided costs of SO 2 emis- sions. The avoided cost of SO 2 emis- sions can be calculated by multiplying the annual difference iii SO 2 emissions by the market value of an emission allowance. A more complete calculation is actually more complicated. The ana- lyst must also account for inflationary effects as well as determine the net present value of the cost stream. 2. Avoided Cost and Resource Characteristics Avoided energy, capacity arid SO 2 costs vary for different efficiency and renewable energy options. For pro- grams offsetting base-load generation, the avoided cost per kWh may be less than for intermediate-load options. Although the base-load energy efficiency resource saves more energy, some of that energy is saved during off-peak periods when production costs are low- Load management may reduce system energy and capacity costs, but increase system SO 2 emission costs. Likewise off-peak promotion programs often result in increased energy and SO 2 emission costs (See ‘Contrary Effects’ box in Part Ill). 3. Avoided Costs and Utility Characteristics The avoided costs associated with efficiency and renewable energy resourc- es vary depending upon utility circum- stances. In reality, utilities will imple- ment bundled programs, combinations of multiple base-load, intermediate-load and load management options. Such program combinations which help to maximize the cost-effectiveness of effi- ciency and renewable energy programs alter the aggregate avoided cost value. A utility’s avoided costs of energy also vary due to generating plant char- acteristics such as fuel type. A utility using peaking units with costly fuels at the margin will have higher avoided energy costs than a utility using more coal plants. Relying less on coal plants also reduces °2 emissions at the mar- gin. Avoided costs must be calculated for each utility’s own specific circum- stances. The avoided cost of SO 2 emis- sions, as represented in the above ex- ample, is not the primary contributor to total avoided costs. Although efficiency and renewable energy resources can help to reduce emissions and aid com- pliance with the Clean Air Act, the pri- mary effect of efficiency and renewable energy resources on avoided costs ap- pears to be avoiding the construction er. ------- 50 AVOIDED COSTS Base Load, Intermediate Aggre- Wind Refrigerator Program Load, Commer- cial Lighting Load Managementa gate DSM Energy Project Off Peak Promotionb (cords/kWh) (c.nts/lWh) ($/kW) (cents/kWh) (cents/kWh) (cents/kWh) Avoided Cost 3.62 3.78 40.2 4.08 3.68 3.88 of Energy Avoided Cost .56 .93 46.2 1.05 .99 NA of Capacity AvoidedSO 2 .15 .15 -1.5 .14 .15 .16 Emission Cost 4.33 4.85 84.9 5.28 4.81 4.05 Table IV - 1 Avoided Costs for Utility A Total Avoided Costs a The avoided costs tot load management are expressed In dollars per kW of load shifted. because load management, as modeled, does not save energy, the cost value cannot be expressed as a cost per energy avoided. b The off-peak promotion numbers are not avoided costs, rather They are Incremental costs (an increase In the cost per kWh for each addItional kWh), Example: Effect of Efficiency and Renewable Energy on Avoided Costs The avoided costs of energy, capacity and SO 2 emissions were calculated for five hypo- thetical load shapes for Utility A. This para- metric analysis illustrates the avoided costs associated with a base-load energy efficien- cy resource, an intermediate-load energy efficiency resource, a peak-load control program. a renewable energy option. and an off-peak promotion program. The first three options are also combined into an aggregate demand-side management program. Table IV- 1 shows the avoided costs of ener- gy, capacity and SO 2 emissions correspond- ing to the parametric analysis.The results in Table IV- 1 are based on a conservative emission allowance value of 2OO per allow- ance. The impact of avoided SO 2 emission costs will be greater at a higher emission allowance price. As expected, the avoided cost of the base- load refrigerator program is less than the (con ti.rwed) avoided cost of the intermediate load com- mercial lighting program. Part of the sav- ings from the base-load program occurs during off-peak periods when production costs are lower. The load management program actually increased SO 2 emission costs due to increased generation during off-peak periods. The results for the base- and intermediate- load range energy efficiency resources would also represent the results for renew- able energy resources with similar effects on utility load shape. For example, a paper company installing a wood-waste boiler and cogenerator may reduce the company’s elec- tricity purchases from the utility around the clock. Thus, the wood-waste project would have the same effect on avoided costs as installing a base-load efficiency resource. Similarly, an independent power producer may install a photovoltaic system to sell energy to the utility during on-peak periods. The photovoltaic system would reduce exist- ing loads much as would installing an inter- mediate-load efficiency resource. ------- PART IV: EFFICIENCY AND RENEWABLE ENERGY COST - EFFECTIVENESS I 51 Utility A, Utility B, Utility B, Utility C, Demand-Side Demand-Side Wind Energy Demand-Side Resources Resources Resource Resources (cents/kWh) (cents/kWh) (cents/kWh) (cents/kWh) Avoided Cost of 4.08 5.00 3,02 2.39 Energy Avoided Cost of 1.05 2.25 2.27 1 .60 Capacity Avoided SO 2 .14 .04 .04 .06 Emission Cost Total Avoided 5.28 7.29 5.32 4.05 and operation of costly generating Ca- pacity. Nonetheless, SO 2 emissions pose real costs to utilities, and real benefits accrue from avoiding SO 2 emissions. These costs and benefits must be con- sidered when selecting among ener r resource options. The avoided cost of SO 2 emissions must be included in the total avoided costs when screening. analyzing and implementing resource options. The following sections, using selected examples typical of utility re- source planning and implementation, illustrates how avoided SO 2 emissions costs can affect ener r resource plans. B. Demand-Side Efficiency Programs 1. Overview Avoided SO 2 emission costs can affect demand-side efficiency programs by increasing: Table IV-2 Avoided Costs for Utilities A, B, and C Cost Example: Avoided Costs at Different Utilities The avoided costs for three different utilities are given in Table IV-2. This table illus- trates how avoided costs can vaiy with utility circumstances. The Utility A values represent the avoided costs from the three hypothetical programs, a base-load refrigerator program, an inter- mediate-load commercial lighting program, and a load management program. Avoided costs for Utility B are given for both the utility’s planned demand-side efficiency and wind energy programs. The Utility C values represent the avoided cost from the utility’s planned demand-side efficiency programs. The avoided costs of energy vary with the utility because the types and fuels of gener- ating plants are different. Utility B uses peaking units with costly fuels at the mar- gin whereas Utility C uses more coal plants. This greater use of coal plants means higher SO 2 emissions at the margin, which also explains why the avoided SO 2 emission costs are higher for Utility C. ------- 521 DEMAND-SIDE EFFICIENCY PROGRAMS L1 The number of energy efficiency measures that are cost-effective and should be implemented, The number of customers partici- pating, and LI The overall energy saved. Thus, avoided SO 2 emission costs should be an integral part of demand- side resource program design and screening. Demand-side management programs are typically developed and implemented in the following stages: 1. Potential energy efficiency mea- sures are identified and the sav- ings potentials are estimated. 2. The potential energy efficiency measures are screened to deter- mine cost-effectiveness using avoided cost values. 3. Measures that pass the economic screening are bundled into pro- grams for implementation. Avoid- ed costs are used to help set the customer incentive levels. 4. The bundled programs are screened to ensure cost-effective- ness is maintained when program administrative costs and interac- tive effects between measures are considered. The use of avoided costs in screening the bundled programs is similar in concept and method to screening indi- vidual efficiency measures. 5. Programs are implemented, moni- tored and refined as necessary. The economic screen in stage 2 compares the cost of each measure to the avoided cost of the supply resource being offset. An energy efficiency mea- sure is cost-effective when the savings (avoided costs times energy saved) is greater than the measure’s cost. 2. Impact on DSM Program Screening Avoided costs affect the scope of energy efficiency measures being con- sidered. An increase in avoided costs would have the effect of increasing the Example: Cost-Effectiveness of DSM Measures Consider a hypothetical situation of a utility evaluating three different energy efficiency measures. The benefit-cost ratio is calculated both with and without the avoided SO 2 emission costs being considered. In this example, the benefits of the DSM measures stein from the avoided emissions incentive. If the utility also took advantage of the Reserve and/or Reduced Utilization provision, the impact on the avoided costs would be even greater. Table IV-3 illustrates the impact of avoid- ed SO 2 emission costs on different DSM measures. Measure no. 1 was already cost-effective before the inclusion of the avoided emission costs and became more cost-effective with these costs. Measure no. 2 was just below the cost-effective- ness threshold without SO 2 emission costs, and then becomes cost-effective with the SO 2 emission costs. Measure no. 3 was not cost-effective be- fore or after the inclusion of the avoided SO 2 emission cost. Thus, the impact of the avoided SO 2 emission costs depends upon both the nature of the DSM mea- sure and the utility. ------- PART IV: EFFICIENCY AND RENEWABLE ENERGY COST-EFFECTIVENESS I Measure No. No.1 No. 2 No.3 number of measures that are considered cost-effective and suitable for inclusion in one or more demand-side programs. In some instances, adding the avoided cost of SO 2 emissions will result in additional measures being cost-effective. The effect of the avoided SO 2 emission cost is very spec flc to each utility. 3. Impact on Customer Participation and Savings Measures that pass the economic screening are bundled into programs designed to implement those measures. Avoided costs are used in the design of the programs to help set the customer incentive levels needed to achieve suffi- cient customer participation. The cus- tomer incentives and program adminis- trative costs will decrease some of the savings in avoided costs. The customer incentives need to be high enough to achieve savings, but when combined with program adminis- trative costs, less than the avoided cost. The added avoided SO 2 emission cost mczyjust fy a higher customer incentive, and thus can increase customer partici- pation. The mechanism for program de- livery can affect the impact of the avoid- ed SO 2 emission costs on customer incentives. Delivery mechanism options include rebates, shared savings, and the use of energy service companies. If the mechanism is utility-admin- istered rebates, small additions to the avoided cost may not greatly affect the levels of customer incentives. Program designers may choose a value signifi- cantly below the full avoided cost based on experience or judgement. Program designers also tend to pick round num- bers (e.g., a $50 rebate rather than a $48.50 or $51.50 rebate) for simplicity and marketing reasons. Table IV-3 Effect of Avoided 502 Emissions Costs on DSM Cost- Effectiveness Present Value of Avoided Energy ($) Present Value of Avoided Capacity (5) 65.00 Beneffi-Cost Ratio w/o SO 2 Costs 8 50 10.00 Present Value of Avoided SO 2 (5) 129.00 1.50 1.25 Benefft Cost Ratio wiTh SO 2 Costs 32.00 .99 2.50 .67 .50 1.30 5.00 1.02 .69 ------- DEMAND-SiDE EFFICIEN If the mechanism is shared sav- ings with the customer, the costs avoid- ed by the DSM programs are shared between the customer using the device and the utility. For example, the cus- tomer may receive 50 percent of the avoided cost for allowing the utility to install the DSM measure. Under a shared savings arrangement, even small additions to the avoided cost will be passed on to the customer. Thus, the avoided SO 2 emission costs would be incrementally added to customer incen- tive levels. If the mechanism is purchasing the savings from third-party, energy service companies (ESCOs), the utility will contract with the ESCO to improve the efficiency of customer energy use. The customer may or may not receive additional incentives based on avoided SO 2 emission costs. However, the SO 2 avoided emission costs can help extend the scope of the ESCO’s efforts to in- clude additional measures and/or par- ticipants. CY PROGRAMS C. Supply-Side Efficiency Programs 1. OveMew Supply-side efficiency refers to any efficiency improvements made on the utility’s side of the meter. Supply- side efficiency improvements can in- clude transmission and distflbution programs such as amorphous core transformer improvements, in-plant programs that improve plant heat rate, and utility in-house efficiency programs such as lighting, heating, and cooling. Amorphous core transformers re- duce standby energy and capacity loss- es, resulting in more electric power reaching the customer for the same amount of heat input to the power plants. Improving power plant heat rates means that the power plant pro- duces more electricity for a given amount of heat input to the power plant. Utility in-house programs reduce the utility’s consumptive use of electrici- ty by using more efficient end-use tech- nologies. In each of these cases, less heat input is required to deliver the same amount of electricity to the cus- tomer. Thus, both total heat input and total emissions are reduced as a result of supply-side efficiency improvements. 2. Impact of Supply-side Programs on Cost- Effectiveness Supply-side efficiency measures are considered through a similar pro- cess as that for demand-side measures. Avoided costs are used to determine the cost-effectiveness of the various Example: Participation in DSM Programs The previous example illustrated how the avoided SO 2 emission cost can increase the number of measures passing the cost-effectiveness screen. However, the avoided SO 2 emission cost also can influ- ence the optimum number of program participants. The present value of the avoided SO 2 indicates the additional resources available to increase incentives or other delivery mechanisms. Figure IV- 1 Illustrates how the avoided SO 2 emission costs can increase: 1. The number of program partici- pants, and 2. The amount of energy savings. ------- PART IV: EFFICIENCY AND RENEWABLE ENERGY COST-EFFECTIVENESS Avoided Costs Figure IV- 1 and Program Participation DSM Measure No. 1 Without SO 2 Costs 11,000 Participants 2,200 MWh saved/yr Without SO 2 Costs DSM Measure No. 2 With SO 2 Costs II H _ — 12,000 Participants 2,400 MWh saved/yr With SO 2 Costs 0 Participants 0 MWh saved/yr 5,000 Participants 250 MWh saved/yr I r ------- 56 SUPPLY-SIDE EFFICIENCY PROGRAMS supply-side efficiency measures being considered. A higher avoided cost will increase the number of supply-side measures considered to be cost-effec- tive. Supply-side efficiency measures can avoid the surrender of allowances under the avoided emissions incentive and the Reduced Utilization provision. However, these measures do not qualify for earning bonus allowances from the Reserve. Like demand-side efficiency measures and renewable energy pro- jects, supply-side efficiency measures can avoid SO 2 emissions by offsetting generation from sulfur-emitting sources. The avoided SO 2 emission costs can make supply-side measures that are already cost effective to be more so. Likewise, measures that were not previ- ously viable may now become cost-effec- tive. D. Renewable Energy Projects 1. Overview Avoided SO 2 emission costs can affect renewable energy projects by increasing: The number of renewable energy resource options that are cost- effective, L1 The size of the projects, and LI The payments for purchased power and improving the project economics for independent power producers. In an integrated resource plan- ning context, screening and selecting renewable energy resources follow much the same pattern as demand-side man- agement programs. Utilities must devel- op and implement plans to serve energy needs. Renewable energy options must be examined and compared to other resource options for overall cost-effec- tiveness. Avoided SO 2 emission costs must be included to capture the full avoided cost of the renewable energy resource. Renewable energy resources are typically developed in the following stag- es. 1. Potential renewable energy re- sources are identified and the energy production potentials are estimated. 2. The potential renewable resources are screened to determine cost- effectiveness using avoided cost values. The economic screen compares the cost of each option to the avoided cost of supply being replaced. 3. Options that pass the economic screening are implemented either by the utility or a non-utility generator. Renewable resource options may be developed by the utility or through non-utility generators who then sell the power to the utility. The utility’s avoid- ed costs are a major determinant to the buyback rate for non-utility generators. Power purchases under PURPA (Public Utility Regulatory Policies Act) are priced at the avoided costs of the pur- chasing utility. Customer-owned renew- able energy projects are also possible. Such self-generation may offset the ------- AND RENEWABLE PART IV: EFFICIENCY ENERGY CO ST - EFFECTIVENESS I customer’s own energy use or be sold back to the utility grid. 16 2. Impact on Project Size and Screening Avoided costs affect both the number of renewable energy options passing the economic screening process and the optimum size of the project. As with energy efficiency resources, the inclusion of the avoided SO 2 emission cost may change the viability of projects which were previously not cost-effective. Those projects already cost-effective will become even more so. From the utility perspective, the inclusion of avoided SO 2 emission cost may be sufficient to select a renewable energy option. With utility-owned re- sources the utility directly receives the cost and SO 2 emissions benefits. The utility may also accept renew- able energy project proposals offered by independent power producers. In this case, avoided costs can help determine the terms of the purchase agreement. The buyback rate will increase with the addition of avoided SO 2 emission costs. The increased buyback rate will improve the project viability for the independent power producer, and may induce addi- tional and/or larger project proposals. 3. Impact on Independent Power Producers Avoided SO 2 emission costs may have a significant impact on indepen- dent power producers. These non-utili- ty generators are competing to build and operate electric generating facilities at costs lower than the electric utility’s conventional generation. The utility’s buyback rate for an independent power Example: Utility Renewable Energy Project Renewable energy resources are increas- ingly becoming components of utility bulk generation. In other instances, renew- able energy resources are the most cost- effective options for specific applications. One such application is the use of modu- lar renewable energy systems for remote locations. Such systems avoid the costly construction of distribution lines over long distances. For example, a potential customer locates miles away from the nearest utility power supply. When evaluating the customer’s options for electricity, the utility calcu- lates that in addition to the utility’s nor- ma! avoided costs of 6.5 cents per kWh (including 0.1 cents per kWh for avoided SO 2 emission costs), the cost of the ser- vice extension would be 4.1 cents per kWh. The total avoided cost for that customer would be 10.6 cents per kWh, which is the same as the estimated cost of a solar photovoltaic system with storage and inverters constructed on-site and not connected to the utility network. The utility and customer both opt for the pho- tovoltaic system. producer depends on the utility’s avoid- ed costs. Photo courtesy or roe Solar Energy Industry Association ------- 581 RENEWABLE ENERGY PROJECTS The income received by the inde- pendent power producer must cover the amortization of the power generating plant and operating and maintenance expenses as well as provide a margin of profit. As illustrated below, a small increase in buyback rates can result in a large increase in the independent power producer’s profit margin. Since profit is what remains after all expenses are paid, even a small increase in buyback rates can greatly increase prof- its for a project with set expenses. The improved profitability will at- tract more independent power produc- ers to submit proposals as well as en- courage those already making proposals to increase the number and size of pro- jects. The size of proposed projects is often limited by the availability of fi- nancing and capital. Higher buyback rates will enhance profitability and will improve the ability of independent pow- er producers to raise capital needed for expanded project proposals. Thus, including avoided SO 2 emission costs can lead to increases in the size and number of renewable ener- gy projects offered by independent pow- er producers. E. Bidding 1. Overview Bidding is the mechanism by which a utility can acquire supply and demand-side resources in a competitive fashion. Avoided SO 2 emission costs may affect the bidding process and increase the number and scope of com- petitive bids for energy efficiency and renewable energy resources. The utility’s procurement process may be limited to supply-side or de- mand-side projects, or may be an open “all-source” bidding request. Often a utility will publish its avoided cost as a target for potential bidders. By knowing the utility’s avoided costs, a bidder can determine if the project is sufficiently competitive to proceed with the often costly process of developing a proposal. Generally, a utility receives sealed proposals from project developers and selects projects based on cost and other criteria. A contract between the utility and the successful bidder(s) must then be negotiated. Once terms are set, the project is implemented. 2. Impact of Avoided SO Emission Costs on Bidci ng Inclusion of avoided SO 2 emis- sions costs can affect the bidding pro- cess in at least three ways. First, avoid- ed costs may be published prior to the Example: Effect of SO 2 on Profitability Consider an independent power producer proposing a project with the expenses and power sales shown in Table IV-4. Assume that the utility buyback rate for purchased power was at the avoided cost for Utility A described in Table IV-2. The estimated revenue from the project is greater if buyback rates include the avoided SO 2 emission cost. However, because the costs of production remain unchanged, the profits increase at an even greater rate. In this example, a 3 percent increase in the avoided costs (due to avoided SO 2 ) results in a 12 percent increase in profits for the independent power producer (IPP). ------- PART IV: EFFICIENCY AND RENEWABLE ENERGY COST-EFFECTIVENESS I solicitation of bids for resource projects. Increasing the avoided cost should re- suit in a greater number of competitive bids being submitted, as more projects become competitive with the utility base plan. Second, avoided costs will also af- fect the evaluation of bids. The full value of avoiding utility supply capacity should be considered in bid evaluation. Thus, when the utility is reviewing bids, the utility should include the avoided SO 2 emission cost in the cost criteria. Other criteria may include risk and reliability factors and other environmen- tal impacts. Third, avoided costs will affect the actual negotiation of the contract for the resource. Avoided costs will be part of the overall balancing of interests be- tween economic factors, risk, reliability, and environmental factors. These costs may also be part of an indexed payment strategy, or as a re-opener clause to a fixed payment strategy. To the extent that avoided costs enter the negotia- tions, the inclusion of avoided SO 2 emission costs can result in increased payments to the bidder. F. System Dispatch 1. Overview Dispatch refers to the selection process by which generating units are chosen to serve electrical loads at a particular time. The electrical loads are not constant throughout the day; loads usually fall to a low during the late night or early morning hours, and in- crease to a maximum during the after- noon hours when customers are most active. As loads increase during the day, the utility must increase the output of generating units already on-line, or bring additional units on-line, to serve the loads. When loads decrease, the utility must reduce the level of genera- tion by taking units off-line and/or backing down the level of output from units already on-line. Table IV-4 Effect of Avoided SO 2 Emission Costs on IPP Profitability Annual Costs: Amortization of Capital: O&M Expenses: Annual Sales: $5,100,000 $3,200,000 211,000,000 kWh Buyback rate (S/kWh) Revenue (5) Without SO 2 Costs Profit (5) .0513 With SO 2 Costs 10,833,000 .0528 2,559,000 11,150,000 2,876,000 ------- _ ]SYSTEM DISPATCH Major Components of a Resource Bid Ufihity requests for proposals for energy resources con be quite detailed and complicated. Some utilities provide forms to prospective bidders as part of the request for proposals. These forms require summary information describing the project, schedules, and other attachments. Some utilities even require that the bidders complete a project evaluation work sheet in which bidders score their proposals in accordance with a set of instructions The major categories of information that could be included in a resource bid and/or bid evaluation are: Project description, including resource type. size, fuel type, dote of avail- ability. and life of the offered resource. Li Energy and capacity offered. by time of day, season, and year Price bid, including capacity and energy charges. escalation rates, cost indices, and proposed payment schedule. En ,1ronmental emission levels and of her effects calculated both for the project and net of utilfty plant emissions being offset. i Technical feos.ibilily and risk assessment, including maturity of technology, operating experience of the bidder, completeness of engineering design. progress toward securing needed licenses and permits, and proposed quality control Li Economic viability of proposer and project. including capital structure, security of financing, public acceptance of project. and years unttl project breaks even, Project persistence, Including maintenance practice, fuel secunty, and proposer experience. Li System compatibility, including dispatchobility, fuel diversity, appropriate- ness of size, and location. Li Estimate of The avoided costs of utility supply, including avoided SO 2 emission costs and perhaps avoided costs of external impacts. Li Estimate of benefit cost ratio. ------- PART IV: EFFICIENCY AND RENEWABLE ENERGY COST-EFFECTIVENESS 61 Utilities dispatch generating units according to economic dispatch to mini- mize the operating cost of the utilities’ systems. Plants with lower fuel and variable operating and maintenance costs per kWh are brought on-line and loaded to full output before units with higher operating costs. Generating units with low fuel costs, low heat rates (less heat input per kWh output), and low variable operating and maintenance costs tend to be called upon sooner. loaded more heavily, and taken off-line later than other units. Fixed costs (e.g.. the cost of building the generating unit) are sunk costs -- incurred whether the unit is called upon to operate or not -- and do not enter into the dispatch deci- sion. Until recently, SO 2 emissions were considered externalities, costs that are imposed upon others but for which a business does not pay. Thus, SO 2 emission rates were not considered in economic dispatch. However, the cre- ation of the SO 2 allowance market tin- der the Clean Air Act Amendments has added the cost of SO 2 allowances to the costs directly incurred by the utility. Analysts developing or evaluating utility plans must be careful to include the cost of SO allowances in the eco- nomic dispatch of the utility system be- ing modeled. Failure to include allow- ance costs in the dispatch model can result in higher emissions, higher com- pliance costs, and higher operating costs. 2. Impact of SO 2 Emission Allowances on Dispatch Consider a utility that needs additional allowances to meet compli- ance requirements. The utility could reduce SO 2 emissions at an existing plant by fliel switching. scrubbing, pur- chasing excess allowances at market cost, or employing efficiency and renew- able ener . In either case, the utility will face a cost in meeting allowance obligations. Conversely, the allowances the utility expends through the dispatch of the utilitys system dispatch have a value. By including the market value of an allowance in the economic dispatch algorithm, generating units would be dis- patched to minimize (he combined cost of fuel, variable operating and mainte- ncunce, and SO 2 allowances. SO 2 costs would be included in economic dispatch for each unit at the time the unit be- comes siibject to Title IV. A utility with excess allowances is not facing increased system operating costs. However, a market exists to sell allowances. This market gives the utili- tv an opportunity to reduce operating costs by selling excess SO 2 allowances. Again, including the market value of an allowance in the economic dispatch algorithm will appropriately dispatch units to minimize overall utility prodiuc- tion costs. In both examples. the costs of SO 2 allowances are real costs, or real opportunities for reducing costs. faced by utilities. The SO 2 allowance market has established a cost for the SO 2 emit- ted which is every bit as real as the fuel cost for the plant. The utility needs to acquire the allowance just as it needs to purchase fuel. The allowance concept distin- guishes SO 2 from other regulated and ------- 62 SYSTEM DISPATCH unregulated pollutants. Other regulated pollutants are regulated solely on the basis of emission rates, meaning that more tons of pollutant can be released as more plants are built. (The exception is for plants that are being built in non- attainment areas where offsets for the emissions would be required.) Unlike other regulated pollutants, and all un- regulated pollutants, the limits on total SO 2 emitted creates a market value for SO 2 . 3. Impact on Dispatchable Renewable Energy Resources The ability to dispatch energy re- sources allows the utilities to increase or decrease electrical supply to loads demanded by customers. Conventional fossil-fired utility generation is dispatchable; the utility has control of the resource’s availability. The utility has flexibility to choose which plants serve the load. The utility can use that flexibility to respond to varying condi- tions such as power plant outages, the amount of power demanded, transmis- sion network constraints, and environ- mental regulations on plant operation. Some forms of alternate resources do not give the utility the ability to dis- patch. Sometimes this condition is a function of the physical process used to produce electricity; solar and wind erier- gy systems are examples. However, the availability of these resources can often be predicted with a high degree of cer- tainty. Storage technologies are being developed to cost-effectively store the energy generated from these resources. In general, though, solar and wind ener- gy resources are not considered dispatchable. Many forms of renewable energy are dispatchable. Biomass systems in which wood, plant, or other organic material can be stockpiled until convert- ed to electricity are dispatchable. Geo- thermal systems in which steam can be withdrawn as needed are dispatchable. Hydro electric systems in which stored water is the primary energy source are also dispatchable. In such instances, the avoided SO 2 emission costs should be considered in the dispatch of these resources. Including the avoided SO 2 emission costs will act to increase the use of dispatchable renewable energy resources. Example: The Failure to Include SO 2 in Dispatch Consider the effect of failing to include SO 2 allowance costs in the dispatch algo- rithm for Utility A, the moderately-sized high-sulfur-coal-burning utility. In this hypothetical situation, the utility failed to add the market price of $200 per allow- ance for SO 2 emissions to each unit’s fuel and operating costs when dispatching. This hypothetical situation is compared to one in which the utility applied a cost of $200 per SO 2 allowance to each unit’s SO 2 emissions. SO 2 emissions are substantially higher when SO 2 emission costs are not includ- ed in the dispatch algorithm. Including SO 2 emission costs in dispatch resulted in the emission of almost 300,000 fewer tons of SO 2 over the 15 year period be- ginning in 1995. By comparing operating cost differences between the two cases, one finds that this SO 2 reduction was accomplished at an average cost of $43 per ton. ------- PART IV: EFFICIENCY AND RENEWABLE ENERGY COST - EFFECTIVENESS The following example illustrates that dispatchable renewable resources can displace conventional generation to reduce SO 2 emissions. Example: Utility-Owned Geothermal Unit Assume that a utility builds a 200 MW geo- thermal unit at a capital cost of 5.0 cents per kWh and an 80 percent capacity factor. Because there is no fuel cost, overall operat- ing and maintenance costs are an addition- al 1.0 cents per kWh. Other coal-fired units on the utility’s system have operating costs (including avoided SO 2 emission costs of 0.1 cents per kWh) ranging from 2.1 cents to 2.9 cents per kWh. Because the cost to l)uild generating units is a sunk cost, it does not enter into the dispatching deci- sions. The coal-tired units follow in the same dis- patch order as prior to the addition of the geothermal unit. The units at the bottom of the loading order (last to be dispatched) are displaced by the geothermal unit. 302 emissions from those units are avoided to the extent that unit energy output is de- creased by the new geothermal unit. Table IV-5 summarizes these results. 63 Photo courtesy of the Icelandic Tourist Bureau ------- JSYSTEM DISPATCH Table IV-5 Effect of Renewable Energy Resource on Dispatch Order Before Geothermal 1 After Geothermal 1 Dispatch Priority Variable 0&M and Fuel (Cents/kWh) 502 Emissions (Tons) Dispatch Priority Variable 0&M and Fuel (Cents/kWh) SO 2 Emissions (Tons) Geothermal 1 N.A. N.A. N.A. 1 1.0 0 Coal 1 1 2.1 3500 2 2.1 3500 CoaI2 2 2.15 4000 3 2.15 3950 Coal 3 3 2.4 2500 4 2.4 1100 Coal 4 4 2.9 1500 5 2.9 300 Total SO 2 11500 Total SO 2 8850 ------- Part V Beyond SO 2 : Other Pollutants t 1 jjtctency ancL renewabLe energy not onLy tleLp uttLtties avoid SO 2 emissions but other pollutants as well, including NOx, GO 2 , toxics, and particulates. Efficiency and renewable energy resources can provide a cost- effective strategy against the risk offuture environmental regulation. Photo courtesy of Wood fin Camp ------- 66 PART V: BEYOND $02: OTHER POLLUTANTS Sulfur dioxide is not the only pollutant of concern stemming from electric utility operation. Electric utili- ties also emit nitrogen oxides, carbon dioxide, toxics, and particulates as well as produce ash and scrubber sludge. Not all of these pollutants are applicable to tradeable emission programs; nor are all of these pollutants even currently regulated. However, the consideration of these pollutants when formulating SO 2 strategies may still be a cost-effec- tive course of action. The following table indicates the approximate share of national emissions from electric utilities: Pollutant S hare of National Emissions by Electric Utilities (‘Q 2 A( ’)O/ L 7IO CO 2 35% NOx 32% Particulates 5% The Clean Air Act includes re- strictions on most major air pollutants emitted by electric utilities. In addition to the SO 2 emission allowance system, Title IV of 1990 Clean Air Act Amend- ments also established new regulations for nitrogen oxides (NOx) emitted from utilities. Title III of the Act contains provisions for the study of utility emis- sions of airborne mercury and other toxics. Title I of the Act addresses a range of pollutants such as SO 2 , NOx, and particulates from the perspective of ambient air standards. Carbon dioxide (C0 2 ) is not a regulated pollutant. However, CO 2 is a major focus of several international efforts to reduce greenhouse gas emis- sions. The Climate Change Treaty as signed by the United States during the 1991 Earth Summit in Rio de Janeiro is one such instrument. On Earth Day 1993 President Clinton reaffirmed the United States’ commitment to meeting the Climate Change Treaty. This com- mitment includes stabilizing greenhouse gases at 1990 levels by the year 2000. To support this effort, the U.S. has developed “The Climate Change Action Plan,” a program of 50 actions designed to reduce greenhouse gas emissions across all sectors. The procedures and issues dis- cussed in this Handbook are relevant to these other pollutants in several ways. First, if emission trading systems or other economic incentive programs are This part discusses the following topics: A, Applying the Handbook’s concepts to other pollutants B. Considering the impact of externalities on avoided costs C. Using efficiency and renewable ener- gy as a pollution prevention strategy to minimize risks ------- PART V: BEYOND SO developed for other pollutants, analo- gous calculations for compliance costs and resource cost-effectiveness will apply. Second, States that develop monetary values for environmental externalities may find some of these calculations and procedures useful. Finally, to calculate the full benefits of energy efficiency and renewable energy as pollution reduction strategies, utili- ties and regulators should consider how these technologies can reduce multiple emissions. One important consideration is the use of these technologies to hedge the cost risks of possible future environ- mental regulations. A. Applying the Concepts to Other Pollutants As with SO 2 , efficiency and re- newable energy resources help avoid NOx, CO 2 and other emissions simply by reducing a utility system’s generation from fossil fuel sources. If economic incentive programs are developed for these other pollutants, the concepts introduced in this Handbook may prove useful. Reduction of ambient nitrogen oxide emissions may be the next compli- ance area in which energy efficiency and renewable energy can play a role. NOx is an important precursor of tropospher- ic ozone (urban smog) a pollutant that affects dozens of cities and towns in the United States. Under Title I of the Act, regions that exceed national ambient air quality standards (NAAQS) must take actions to reduce their emissions. These “non-attainment” regions are classified as either extreme, severe, serious, moderate, or marginal depend- ing upon the degree of the problem. 2: OTHER POLLUTANTS 67 Compliance dates range from 1993 to 2010 based on the non-attainment status. The Clean Air Act Amendments of 1990 encourage the use of market- based economic incentive programs in areas of the country that exceed nation- al ambient air quality standards (NAAQS). In several parts of the coun- try, regulators are developing these types of programs to control NOx emis- sions. Most notably, the South Coast Air Quality Management District in Southern California will launch NOx and SOx emissions trading systems in early 1994. The South Coast region is classified as an extreme non-attainment area for ozone and its NOx program will cover approximately 390 facilities. Each facility will receive an annual allocation of tradable emissions credits similar to Acid Rain allowances. The number of annual credits allocated to utilities will be reduced over time so that by 2003 there will be an overall reduction of 75 percent.’ 7 Title I NOx trading is also under consideration in Massachusetts and several other States that make up the Northeast Ozone Transport region. In addition, State and regional govern- ments are exploring the use of NOx trading to address non-attainment areas in Illinois and Houston, Texas. As noted in the case of SO 2 emis- sion trading, the associated emission costs for these programs will affect the avoided costs of fossil-fired generation. In turn, increased avoided costs for fossil-fired generation will improve the viability of efficiency and renewable energy resources in project design and screening, bidding, and dispatch. ------- 68 EXTERNALITIES B. Externalities 1. Overview A number of states have begun to consider the environmental costs of emissions through “environmental externalities.” These externality values are incorporated into the traditional benefit-cost analysis and used in inte- grated resource planning. Some states have placed a specif- ic monetary value on a given pollutant (in terms of $f ton or similar units). In other instances, states have adopted a more general “adder” to the costs of conventional fossil and/or nuclear gen- eration technologies (typically a ‘per- centage” credit or debit added to the estimated costs of a new unit). Table V-i summarizes the values given to eight common air pollutants by three jurisdictions that have attempted to quantify the emission impacts. 2. Impact on Cost- Effectiveness Like avoided SO 2 emission costs, environmental externality values im- prove the cost-effectiveness of efficiency and renewable energy resources relative to conventional fossil fuel and nuclear technologies. Externality values effec- tively increase a utility’s avoided costs for conventional energy generation tech- nologies. Consequently, more efficiency and renewable energy technologies may be cost-effectively added to the utility’s resource portfolio. Higher avoided costs caused by the incorporation of the costs of one or more emissions now considered externalities could affect the utility planning process in a variety of ways. These impacts would parallel those discussed for SO 2 ; these impacts in- clude resource screening, program de- sign, bidding, and dispatch. In addition to improved cost-effec- tiveness, externality values can also affect incentive levels and customer participation. With the higher avoided cost, the utility would be able to offer more attractive incentives to improve program penetration. 3. Impact on System Dispatch Historically, system dispatch has been conducted on a strictly economic basis; dispatch has included only costs directly incurred by the utility. As such, environmental impacts associated with power plant emissions generally have not been factored into dispatching deci- sions, unless environmental regulations constrain the availability of certain gen- erating units to produce electricity. Some analysts have argued that power plant emissions create a burden on and cost to the rest of society, and that utili- ties can reduce these societal costs by including an emission cost in their dis- patch methods. Example: Externalities Add to Avoided Costs Table V-2 illustrates the effect of includ- ing the externality values approved by the Massachusetts DPU on an example utility’s avoided costs. In this example, a total of 4.29 cents would be added to the utility’s avoided costs to account for the eight identified externalities. ------- PART V: BEYOND SO 2 : OTHER POLLUTANTS 69 Massachusetts Nevada California (Docket 89-239) (Docket 89-752) (PUC) Pollutant 1989 5/ton 1990 S/ton 1990 S/ton The environmental dispatch meth- od thus adds emission rates to the fac- tors considered in economic dispatch algorithms (fuel costs, heat rates and variable operating and maintenance costs) to determine the priority in which generating units are loaded. Environ- mental dispatch is a means of incorpo- rating external environmental costs into dispatching decisions. Using an environmental dispatch scenario, an analyst could determine a pollutant’s effect on the dispatching of generating units. In other words, the analyst could see the impact on emis- sion levels from dispatching generating units as though these pollutants had a direct cost to the utility. The direct cost for purposes of the dispatching study could be an assumed price of a pollu- tion allowance if a market existed, or it could be based on perceived environ- mental harm to society. Table V-i Environmental Externality Values Nitrogen Oxides (NO) $6,500 Sulfur Oxides (SO) Volatile Organic Compounds $6,800 $1,500 $5,300 $13,060 Total Suspended Particulates $1,560 $1 ,180 $4,000 $12,960 Carbon Monoxide (CO) $3,660 $4,180 $860 Carbon Dioxide (C0 2 ) $8,780 $920 Methane (CH 4 ) $22 NA Nftrous Oxide (N 2 0) $22 $220 $3960 $8 $220 $4,140 NA NA ------- 70 USING EFFICiENCY AND RENEWABLE ENERGY TO REDUCE REGULATORY RISK Mass DP Pollutant (1989 U Value $/ton) System Marginal Emis- sions (Ib/MWh) Cents/kWh (1991) Table V-2 Effect of Externalities on Avoided Costs N0 sox S6,500 VOC SL500 5.1 TSP $5,300 10.6 Co $4,000 1.66 0 002 0.80 $860 0.3 CH 4 0.00 $22 0 N 2 0 0.06 $220 1,620 0.00 $3,960 0 1.78 0 0.00 0.00 Example: Environmental Dispatch with NO Consider assigning costs to the NO emissions of Utility A and dispatching the system taking those costs into account. To determine the effect of NO emission costs on unit dispatch, a range of NO emission costs from $1 .000 per ton avoided to $10,000 per ton avoided was analyzed using a production-simulation model. At $1,000/ton, over the 15 year period of analysis, NO emissions de- crease by 57,500 tons at an average cost of $380 per ton due to environmental dispatch. At $10,000/ton, over the 15 year period of analysis. NO emissions decrease by 107,700 tons at an average cost of $990 per ton due to environmen- tal dispatch. In both the high- and low-cost NO sce- narios, environmental dispatch resulted in decreases in both NO and SO 2 emis- sions. However, SO 2 emission levels became more unstable and rose as NO prices became larger and began to domi- nate the dispatch. This illustrates that pollutant control strategies should be developed in an integrated manner so that gains made in the control of one are not unexpectedly lost when the focus changes to control another. Although this example is done for NON, it Is applicable for any pollutant for which an allowance market does not exist, i.e.. any unregulated pollutant or any einis- sion-rate-regulated pollutant. If another pollutant were to be used, the appropri- ate emission rate for each generating unit and the appropriate ‘allowance” value would have to be substituted in the pro- duction-simulation model. (continued) ------- PART V: BEYOND SO 2 : OTHER POLLUTANTS C. Using Efficiency and Renewable Energy to Reduce Regulatory Risk Conventional compliance options such as scrubbing and fuel switching often address pollutants in isolation. For instance, scrubbing technologies that capture SO 2 emissions may not reduce other pollutants such as NOx. Such technologies may even increase the output of other pollutants. 18 Sepa- rate control technologies may be re- quired for each pollutant. Conversely, efficiency and renew- able energy technologies will reduce or avoid virtually all pollutants. When developing compliance options, the regulatory costs should be considered on an integrated basis. A pollution prevention strategy may be particularly useful for hedging the risks of possible future environmental requirements. Efficiency and renewable energy tech- nologies may be part of a voluntary ‘no regrets” strategy against changes in existing regulations or the development of new legislation for presenfly uncon- trolled pollutants. The voluntary reduction of CO 2 and other greenhouse gases is the cor- nerstone of the recently announced U.S. Climate Change Action Plan. One com- ponent of the plan, ‘The Climate Chal- lenge,” is a program in which electric utilities are voluntarily committing to CO 2 reductions. The success of such voluntary stabilization efforts will be reviewed every two years by an action plan task force. Further, the Action Plan directs an interagency task force to explore longer term strategies to address CO 2 beyond the year 2000. Depending upon the success of the voluntary ac- tions and the strategies for longer term actions, other greenhouse gas actions are possible. Efficiency and renewable energy help utilities prepare for any contingency. ------- 72 USING EFFICIENCY AND RENEWABLE ENERGY TO REDUCE REGULATORY RISK UTILITY PROFILE New England Electric System Since its first programs were launched in 1987, New England Electric System (NEES) companies continually to establish new environmental initiatives that reflect a commit- ment to providing electric service in an environmentally sustainable way. The NEES companies have developed a broad mix of energy efficiency and renewable energy efforts, and boast one of the country’s largest demand-side management programs (DSM), relative to its size. The NEES companies have initiated efficiency programs that will save as much energy as produced by a large fossil-fuel generating unit. Residential DSM programs include appliance recycling, electric space heat conversions, energy efficient home construction, lighting retrofits and more. NEES’ commercial and industrial DSM programs promote efficient design and construction practices. In collaboration with the Conservation Law Foundation, NEES developed NEESPLAN 4, a plan that reaffirms energy efficiency and renewable energy investment as environmentally responsible initiatives and key components to minimize customer costs and reduce future environmental risks. In 1992 NEES gener- ating subsidiary New England Power Company an- nounced that it will purchase 36,000 kilowatts of elec- tricity from seven renewable energy plants. Projects include the company’s first major windpower project, as well as landfill methane, municipal solid waste, waste heat to generate electricity. The projects are estimated to reduce greenhouse gas emissions by over 500,000 tons (carbon dioxide equivalents) per year and will reduce smog precursor emissions by over 4o0 tons per year. These renewable initiatives will help NEES reach its goal of reducing net emissions of carbon dioxide and other greenhouse gases by 20% from 1990 levels by the year 2000, and stabilizing at that reduced level in the post-2000 period. NEES also works internationally to offset greenhouse gases. One pilot project involves working with a Malaysian timber harvesting firm to improve its harvesting practic- es so that more unharvested trees survive, leaving more of the forest intact. This project is expected to economically offset 300,000 to 600,000 tons of carbon dioxide. NEES Appliance Recycling Prcgrorn ------- PART V: BEYOND SO 2 : OTHER POLLUTANTS 73 NEES’ efforts take on special importance as New England faces stringent emission reduction requirements under the Clean Air Act amendments. These environmental investments will help NEES position itself to comply, not only with requirements flowing from the 1992 Earth Summit agreement to stabilize greenhouse gas emissions, but with EPA’s Clean Air Act regulations including the Acid Rain Program. Two NEES companies, Massachusetts Electric and Granite State Electric, were already awarded 103 bonus SO 2 allowances from the Conservation and Renewable Energy Reserve. The companies were rewarded for their efficiency efforts and a landfill methane renewable energy project. Based on current estimates of future DSM energy savings and renewable energy addi- tions, the NEES companies expect to be eligible for a total of 14,000 allowances from the Reserve through 1999. In addition to global and national opportunities for investment in pollution preven- tion, there are local prospects as well. For example, NEES plans to participate in the new Massachusetts Emission Reduction Credit (ERC) banking and trading program. The ground-breaking ERC program allows inventoried sources of NOx, VOCs and CO in Massachusetts to earn bankable and tradeable credits by reducing emissions before or below regulatory requirements. Potentially credit-earning activities include utility DSM and renewable energy. ------- Conclusion The market-based benefits of the Clean Air Act incentives are ideal inputs for integrated resource planning. By incorporating these benefits into the planning process the true economic competitiveness of energy efficiency and renewable energy is more fully realized. Photo courtesy of U.S. Department of Interior ------- 76 CONCLUSION This Handbook described the un- precedented opportunities offered by the Clean Air Act Amendments of 1990 for utilities to use energy efficiency and renewable energy programs in their air pollution compliance strategies. In addition to the built-in incentive of sav- ing allowances through avoided emis- sions, the Clean Air Act provides two other special incentives--the Conser- vation and Renewable Energy Reserve and Reduced Utilization. Two Ways to Consider the Benefits As discussed in this Handbook, the link between energy efficiency and renewable energy and acid rain compli- ance for electric utilities is important for two reasons. First, these technologies can be part of a least cost compliance strategy. For some utilities, efficiency and renewable energy may complement other compliance options such as fuel switching, co-firing with natural gas, or allowance trading. Ultimately, utilities should explore the synergies between all compliance options to find the least-cost portfolio. Second, the SO 2 reduction bene- fits of efficiency and renewable energy can make these energy resources more cost effective and can even turn non- cost effective programs into viable ones. The quantifiable costs of generating SO 2 feed directly into electricity planning mechanisms such as cost effectiveness tests, program design, bidding schemes, and buyback rates. Even in States where the inclusion of environmental externalities in resource planning deci- sions is controversial, the inclusion of the market-based costs of SO 2 emis- sions in resource decisions should be acceptable to State regulators. Beyond SO 2 The methodologies outlined in this handbook may be easily adapted to calculate the quantities and impacts of emissions other than SO 2 . In some areas of the country, avoided NOx emis- sions may soon provide an additional market-based incentive for energy effi- ciency and renewable energy. In addi- tion, States with externality values may use the method outlined in the Hand- book to calculate the avoided emissions of additional pollutants. Integrated Resource Planning is the Key Integrated Resource Planning (IRP) provides an ideal mechanism for utilities and state regulators to develop and evaluate acid rain compliance strat- egies. Even where the value of saved or earned allowances has only a modest effect on the cost effectiveness of renew- able energy or energy efficiency resourc- es, compliance planning should incorpo- rate many of the same qualitative vari- ables necessary for good resource plan- ning. Factors such as diversity and modularity of technology and the con- sideration of risk are as important for compliance planning as they are for resource planning. These factors, which may have a big impact onftaure costs faced by a utility and its ratepayers, often favor the use of energy efficiency and renewable energy. Finally, the extent to which utili- ties receive the emission reduction ben- efits of energy efficiency and renewable ------- energy will depend upon the policies of state regulators toward these technolo- gies. Special bonus allowances for ener- gy conservation and renewable energy are available only to utilities that have implemented least cost integrated re- source planning. In addition bonus allowances for energy efficiency pro- grams only will be awarded to utilities whose state regulators have taken mea- sures to make conservation profitable. These eligibility requirements do not apply to utilities seeking to save allow- ances through avoided emissions. How- ever, utilities in States that lack these regulatory reforms are not likely to pur- sue energy efficiency and renewable energy resources and to benefit from their emission reductions. CONCLUSION 77 ------- Endnotes 1. These reductions are relative to 1980 emission levels. The reductions will he achieved incrementally beginning in 1995 and reaching targeted levels by 2010. 2. Units affected by Phase I are allocated allowances equal to the average of the 1985-87 heat input multiplied by a 2.5 lbs S0 2 /mmBtu emissions rate. Phase II allocations are derived from this baseline times a 1.2 lb S0 2 /mmBtu. 3. Electric Power Research Institute, Integrated Analtjsis of Fuel. Technology and Emission Allowance Markets: Electric Utility Responses to the Clean Air Act Amendments of 1990, Report no. TR- 102510, August 1993. P. 1-20. 4. National average emission factors - 1990 (per kWh sold) Percent of CO 2 NOx SO 2 Fuel type Generation ( lb/kWh) ( lb/kWh) ( lb/kWh ) Coal 53% 2.4 0.0088 0.017 Fuel Oil 4% 2.0 0.0042 0.0 12 Gas 9% 1.3 0.0046 0 Other 34% 0 0 0 National Average 1.5 0. 0055 0.0099 * SO 2 emission rate for coal is an average of the 1990 value of 0.022 lb/kWh and a projected 2000 value of 0.0 12 lb/kWh. 5. US EPA, Conservation VerifIcation Protocols, Document no. EPA 430/8/B-92-002, March 1993. Also, California public Utility Commission, Protocols and Proced ures for the Verffication qf Costs. Benpfits. and Shareholder Earnings from Demand-Side Management Programs, October 29, 1992. Also, New Jersey Board of Regulatory Commissioners, Measurement Protocol for Commercial. Industrial and Residential Facilities, April 28, 1993. 6. US EPA, The User’s Guide to the Conservation Verification Protocols, Document No. EPA 430-B-93-002, April 1993. 7. Net income neutrality applications should be sent to: U.S. Department of Energy. EE- 14, 1000 Independence Ave., SW, Washington, DC 20585. 8. On November 18, 1993 EPA proposed some revisions to the Reduced Utilization requirement. These revisions are expected to be finalized in the spring of 1994. For more information see 58 FocI. Rep. 60950, November 18, 1993. 9. If the utility shifted a portion of the generation to sources outside of the utility’s system, then allowances for that portion must be surrendered at the average emission rate for the NERC region. 10. In general, sulfur-free generation includes renewable energy resources. However, in certain cases, such as some forms of geothermal and biomass production, the resource may not quali1 r as sulfur-free generation. This distinction between renewable energy generation and sulfur-free generation only applies to the Reduced Utilization provision. ------- __ ,9j ENDNOTES 11. U.S. Environmental Protection Agency, Conservation VerifIcation Protocols, EPA 430-8-B-92-002, March 1993 and The User’s Guide to the Conservation Verification Protocols, EPA 430-B--93-002, April 1993. 12. This determination is made after adjusting for any system-wide sales declines and any shifts to compensating units. 13. This weighted-average heat rate is only an approximation. The Reduced Utilization provision actually requires the kWhs from energy efficiency and sulfur-free generation to be converted by the heat rate of a specffic Phase I unit. Thus, in order to maximize the benefits of energy efficiency and sulfur-free generation, the utility would assign these resources to the Phase I unit with the greatest heat rate. 14. Also see: Alliance to Save Energy, Impacts of Demand-Side Management Programs on the Environ- ment, June 1993, Washington, DC. 15. If the utility shifted a portion of the generation to sources outside of the utility’s system, then allowances for that portion must be surrendered at the average emission rate for the NERC region. 16. Because retail rates are often higher than the avoided costs, customers who self-generate can benefit more by offsetting their own energy use. The avoided SO 2 emission cost may not be relevant if the renewable generation is only for the customer’s own use. However, customer self-generation projects will often combine self-use with the sale of excess power to the utility grid. For these combined-purpose projects, utility avoided costs may affect project viability and project size. 17. For a complete description of the RECLAIM program, see RECLAIM, Development Report and Proposed Rules, Volume I, October 1993. 18. The increased energy demand for the control technology may increase the net emissions of other gases such as CO 2 . ------- Appendix A Production-Simulation Modelling Data Needed for Typical Production-Simulation Model I Monthly load shapes I Annual peak and energy forecast / General and fuel escalation rates / Existing plant data: emissions, heat rates, capacity, fuel types, etc / Data on expected plant additions / Annual changes to system (retirements, etc.) / Seasonal capacity variations / Purchases and sales data / Scrubber data / Cost of emissions ($/lb) / Assignment of hours to time-of-use periods ------- _ . JAPPENDIX A Steps in a Parametric Analysis Parametric analysis can be a useful tool in situations in which either the utility does not have efficiency and renewable energy programs already planned, or the analyst wishes to evaluate how changes in program load shapes or energy and capacity impacts would affect the levels of emissions that are avoided. STEP U Determine type of program(s) to model. The analyst might choose to model a typical complement of efficiency or renewable energy programs that includes some base-load, intermediate-load, and peak-reduction components. The analyst could also model individual programs of special interest, e.g., off-peak promotion, to determine their emissions impacts. STEP 2: Determine the level of capacity saved or generated. For example, a moder- ately aggressive DSM scenario for the near-term time horizon might be expect- ed to decrease peak load by about ve percent. Larger and smaller decre- ments can be used. Individual technologies or programs should be assigned a proportion of the savings. STEP 3: Develop a load shape reflecting the capacity and energy savings for each demand-side and renewable energy program. The load shape of the program depends on the characteristics of the technology included. Base, intermediate, and peak-reducing or generating technologies each possess their own unique load shape. Input to production-simulation model. For each supply-side efficiency program, determine the change in heat rate expected as a result. Input changes to production-simulation model. ------- APPENDIX A 83 Publicly Available Data Sources for Production-Simulation Modeling a Energy Information Administration, U.S. Department of Energy, Form EIA- 767, Steam-Electric Plant Operation and Design Report’. Projected Fuel Consumption Plant Configuration Boiler Information Air Emission Standards and Design Parameters Plant Information Fuel Type and Consumption Generator Information Flue Gas Desulfurization Information J Office of Energy Emergency Operations. U.S. Department of Energy, Form IE-411. Capacity Purchases and Sales Existing Generation Capacity Future Generating Capacity Installations, Changes, and Removals Actual and Estimated Net Energy and Peak Demand Federal Energy Regulatory Commission, FERC Form No. 1: Annual Report of Major Electric Utilities, Licensees, and Others. Plant Statistics (e.g. heat rate, net generation) a Electric Power Research Institute, TAGTM Technical Assistance Guide: Elec- tricity Supply General Plant Performance Data General Economic Factors j Edison Electric Institute Load Data ------- Appendix B Conservation and Renewable Energy Reserve Application Form ------- Acid Rain Program &EPA Instructions for Conservation/Renewables Reserve Form (40 CFR Part 73.80, 73.81, and 73.82) The Energy Conservation and Renewable Energy Reserve Program provides a 300,000 allowance reserve for utilities employing qualified energy conservation measures or renewable energy generation. To apply for allowances from the Reserve, you must submit the Conservation/Renewables Reserve form. EPA will accept submissions each July 1 following the year for which you are claiming energy savings or generation, beginning on July 1, 1993. Forms received before July 1 will be deemed to be received on July 1. EPA will accept Conservation/Renewables Reserve forms until it has allocated all 300,000 allowances or until the year 2010, when the Reserve will be terminated. EPA will render a decision whether submissions meet the specified requirements within 120 days of receipt. If the applicant is a state rate-regulated, investor-owned utility and is undertaking conservation measures for the purpose of receiving Reserve allowances, EPA ‘s approval will be conditional upon certification of net income neutrality by the Secretary of the U.S. Department of Energy. For a complete description of the Conservation and Renewable Energy Reserve allowance program mandated by Sections 404 (f) and (g) of the Clean Air Act Amendments, see 40 CFR Part 73. Type or complete the form using black ink. If you need more space, add pages in the appropriate format or photocopy the pertinent page. When you have completed the form, indicate the page order and total number of pages 1 of 4, 2 of 4, etc.) on each page in the spaces provided at the top right hand corner of the page. STEP 1 Enter the name of the electric utility that is applying for the reserve allowances and list the state(s) in which the utility operates. STEP 2 List the name and phone number of the person(s) EPA should contact for clarification. STEP 3 To qualify for reserve allowances, the applicant, any subsidiary of the applicant, or any subsidiary of the applicant’s holding company, must own or operate, in whole or in part, an affected unit. You need to list only one affected unit. STEP 4 Applicants subject to the ratemaking jurisdiction of a State regulatory authority must use the verification methodology approved by such authority provided that the ratemaking entity uses performance-based rate adjustments (see 40 CFR 73.82(c)(1)). All other applicants must submit documentation to EPA to verify savings; these applicants may use the EPA Conservation Verification Protocol. These applicants must submit the documentation with this form. STEP 5 At “Type of measure or program,” enter a descriptive name associated with the energy conservation measure or program. If a group of measures are combined for monitoring purposes, you may enter the overall name of the program. For instance, a group of energy savings measures you undertake in office buildings may be termed “Building Retrofit.” For individual measures, use the terms given at 40 CFR part 73, Appendix A(1), if appropriate. You also may list a conservation measure not appearing in Appendix A, provided it meets the requirements of 40 CFR 73.81 (a). List these measures using an appropriate term. If you are using industrial waste gases as a conservation method, include documentation to illustrate that the use of such gases does not result in a net increase of sulfur dioxide emissions. “Savings year” refers to the year for which you are claiming saving for the particular group of installations. For instance, if in 1997 you are applying for credit based upon conservation achieved in 1995, the savings year is 1995. You may claim multiple years of savings for a measure, but should list each year separately. You must have installed measures on or after January 1, 1992, to receive credit. “Number of Installations” is the number of sites or devices installed with the conservation measure. This value represents the total number of installations in operation during the savings year. Total the energy savings from each conservation method, including those listed on additional pages, in the “Total” box on the right hand side of the form. ------- Page 2 Conservation/Renewables Reserve Form Instructions STEP 6 This step converts the megawatt hours of generation saved to the tons of sulfur dioxide emissions avoided due to conservation measures, as follows: Tons of SO 2 = Step 5 Total (MWh) x 4 (lbsIMWh ) = Step 5 Total (MWh) X .002i i n Avoided 2000 (lbs/ton) !L MWh Round to the nearest tenth of a ton. STEP 7 “Type of generation” refers to the renewable energy technology you employ. Use the terms listed at 40 CFR part 73, Appendix A, if such terms are appropriate. Eligible types of generation are: biomass (i.e., combustible energy-producing materials from biological sources, which include wood, plant residues, biological wastes, landfill gas, energy crops and eligible components of municipal solid waste), solar, geothermal and wind resources. You may list a type of renewable energy generation not appearing in Appendix A, provided it meets the requirements of 40 CFR 73.81(c). List such measures using an appropriate term. At “Plant Name,” identify the plant at which the renewable energy generation took place. Use the plant name from NADB or other appropriate name. “Generation year” refers to the year for which you are claiming renewable energy generation. For instance, if in 1997 you are applying for credit based upon generation achieved in 1995, then the generation year is 1995. You may claim multiple years of generation, but should list each year separately. You must have initiated the generation on or after January 1, 1992 to receive credit. Total the renewable energy generation from each qualified method, including those listed on additional pages, in the “Total” box provided on the right hand side of the form. For hybrid renewable energy systems, the amount of generation is the MWh that can be attributed to the qualified renewable energy measure. Include documentation showing the hybrid system’s total generation, the heat input and heat rate attributed to the non-renewable portion of the generation, and the calculations you used to determine the amount of qualified renewable energy generation. Step 8 Include copies of pertinent plant operation records that substantiate the amount of renewable energy generation claimed. Step 9 This step converts the megawatt hours of renewable energy generation to the tons of sulfur dioxide emissions avoided, as follows: Tons of SO 2 = Step 7 Total (MWh) x 4 (Ibs/MWh ) = Step 7 Total (MWh) X . 002 j Avoided 2000 (lbs/ton) MWh Round to the nearest tenth of a ton. STEP 10 This step sums the tons of sulfur dioxide emissions avoided from qualified conservation methods and renewable energy generation. One allowance will be allocated for each ton of sulfur dioxide emissions avoided due to these practices within the period of applicability (January 1, 1992, to the date on which any unit owned or operated by the applicant becomes a Phase I or Phase II unit.) Allowances will not be allocated for savings to be accrued in future years. STEP 11 You must identify the allowance tracking account(s) to which the allowances from Step 10 are to be distributed. Allowances may be distributed to one central account or to the accounts of individual units. The subsequent transfer of Reserve allowances follows the same procedures as other allowances, as specified in 40 CFR Part 73. For approved applications, allowances from the Reserve will be transferred into the applicant’s allowance tracking system account(s) beginning in 1995, provided that a sufficient number of allowances remain in the Reserve. If less than a sufficient number of allowances remain, the allowances will be proportionally distributed to the accounts. ------- Conservation/Renewables Reserve Form Instructions Page 3 STEP 12 The entity with ratemaking authority for the utility must review the application. As the Step 12 certification states, the ratemaking entity for the utility must be able to certify that the least-cost plan or least-cost planning process meets the following requirements of 40 CFR 73.82(a)(4)-(7): • Provides an opportunity for public notice and comment. • Evaluates the full range of existing and incremental resources in order to meet expected future demand at lowest system cost. • Treats demand-side resources and supply-side resources on a consistent and integrated basis. • Takes into account necessary features for system operation such as diversity, reliability, dispatchability, and other factors of risk. • Is being implemented by the applicant to the maximum extent practicable. • Is consistent with the energy conservation measures adopted and the renewable energy generated. Further, the applicant must demonstrate that the qualified energy conservation measures adopted and qualified renewable energy generated are consistent with the least-cost plan or least-cost planning process. The ratemaking entity also must be able to certify that measures not included in Appendix A of Part 73 meet the following requirements of 40 CFR 73.81 (a)(2) and (c)(2): • The measures must be consistent with an applicable least-cost planning process. • The measures must be implemented pursuant to approval by the utility regulatory authority. • A qualified conservation measure must be a cost-effective demand-side measure that increases the efficiency of the customer’s use of electricity (as measured in accordance 40 CFR 73.82(c)) without increasing the use by the customer of any fuel other than qualified renewable energy, industrial waste heat or industrial waste gases. • A qualified renewable energy measure must be derived from biomass (j . ., combustible energy- producing materials from biological sources, which include wood, plant residue, biological wastes, landfill gas, energy crops, and eligible components of municipal solid waste), solar, geothermal, or wind resources. STEP 13 The certifications arise from the regulatory requirements. Only a utility may qualify for the Reserve (40 CFR 73.82(a)(1 )). If your application indudes an energy conservation measure and the utility is investor-owned, you must provide the necessary information to enable the U.S. Secretary of Energy to certify that the State regiiatory authority has established rates and charges that ensure net income neutrality (40 CFR 73.82(a)(9)). You must submit this information to the Department of Energy directly and not through EPA. Consistent with 40 CFR 73.82(a)(3), you must certify that the utility “is paying in whole or in part for one or more qualified energy conservation measures or qualified renewable energy generation (that became operational during the period of applicability) either directly or through payment to another person that purchases the qualified energy conservation measure ci qualified renewable energy generation. Measures that are installed before January 1, 1992, or after one of the utility’s units becomes a Phase I or Phase II unit do not qualify for the Reserve bonuses (40 CFR 73.80(b)). Independent power producers that sell qualified energy generation to another utility must submit documents to indicate the energy was purchased according to the purchasing utility’s least cost planning process (40 CFR 73.82(a)(8)). Enter the name of the individual who will act as the certifying official for the Utility. ------- Page 4 Conservation/Renewables Reserve Form Instructions Submission Instructions To obtain allowances from the Conservation and Renewable Energy Reserve, you must submit this application to the following address: U.S. ENVIRONMENTAL PROTECTION AGENCY ACID RAIN DIVISION, 6204J ATTN: CONSERVATION AND RENEWABLE ENERGY RESERVE 401 M STREET, SW WASHINGTON, DC 20460 Paperwoik Bwden Estimate The burden on the public for collecting and reporting of information under this request is estimated at 78 hours. Send comments regarding this collection of information, including suggestions for reducing the burden, to: Chief, Information Policy Branch (PM-223), U.S. Environmental Protection Agency, 401 M Street, SW, Washington, D.C. 20460; and to: Paperwork Reduction Project (OMB#2060-0258), Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, D.C. 20503. Do not send your forms to these addresses; see submission instructions, above. ------- 9EPA STEP I Identify the applicant STEP 2 Enter information for the person completing this form STEP 3 Identify any affected unit owned or operated by the applicant by plant name from NADB and allowance tracking system account ID# United States Environmental Protection Agency Acid Rain Program 0MB No. 2060-0258 Expires 1-31-96 ENERGY CONSERVATION MEASURES AND VERIFICATION STEP 4 Mark the appropriate box STEP 5 Enter the requested information for each type of conservation measure employed. Total the savings and round to the nearest MWh. If more space is needed, add pages in the appropriate format STEP 6 Convert total from Step 5 to tons of sulfur dioxide emissions avoided by multiplying Step 5 total by .002 tonslMWh. Round to the nearest tenth of a ton RENEWABLE ENERGY GENERATION STEP 7 Enter the requested information for each type of renewable energy generation measure employed. Total the generation and round to the nearest MWI . If more space is needed, add pages in the appropriate format STEP 8 Mark box and attach documentation STEP 9 Convert the total from Step 7 to tons of sulfur dioxide emissions avoided by multiplying Step 7 total by .002 tons/MWh. Round to the nearest tenth of a ton Verification of conservation measures performed by L I I State U.S. EPA (Attach documentation verifying energy savings) I tons 1 Savings Number of Year Installations Generation Energy Generation Year (MWh) Conservation/Renewables Reserve For more information, see instructions and refer to 40 CFR 73.80, 73.81 and 73.82 This submission is: LII New [ I] Revised Page Page 1 of [ 11 Utility Name State(s) Name Phone Plant Name ATS Account ID# Type of Measure or Program Energy Savings (MWh) I to:1 TOTAL I I Type of Generation Plant Name LII I have attached documentation to verify the amount of renewable energy generation TOTAL EPA Form 7610-10 (1-93) ------- TOTAL RESERVE ALLOWANCES Utility Name (from Step 1) Conservation - Page 2 Page LI of LIII STEP 10 Add together the Step 6 and Step 9 entries; round result to the nearest ton and convert tons to allowances (1 ton = 1 allowance) STEP 11 Identify the allowance tracking account(s) and the number of earned reserve allowances to be allocated to each account. The total must equal the number entered at Step 10 STEP 12 Submit application to the appropriate ratemaking entity for approval CERTIFICATION BY CERTIFYING OFFICIAL FOR THE UTILITY STEP 13 Read the certifications and sign and date (see instructions) I certify that the following requirements have been met: (1) Applicant is a utility as defined in 40 CFR 72.2. (2) If the applicant is an investor-owned utility submitting an application based on an energy conservation measure, The Department of Energy has certified the fulfillment of the net income neutrality requirement, or such certification is pending. (3) Applicant has met requirements for payment of conservation measures in 40 CFR 73.82(a)(3). (4) The qualified energy conservation or renewable energy generation measures are installed and operational on or after January 1, 1992. and before the date on which any Unit owned or operated by the applicant becomes a Phase I or Phase II unit. (5) If the applicant is an independent power producer and sells qualified renewable energy generation to another utility, the generation was sold pursuant to the purchasing utility’s least cost plan. Applicant has submitted supporting documentation. I certify under penalty of law that I have personally examined, and am familiar with, the statements and information submitted in this document and all its attachments. Based on my inquiry of those individuals with primary responsibility for obtaining the information, I certify that the statements and information are to the best of my knowledge and belief true, accurate, and complete. I am aware that there are significant penalties for submitting false statements and information or omitting required statements and information, including the possibility of fine or imprisonment. allowances Allowance Tracking System Account Number Allowances CERTIFICATION BY RATEMAKING ENTITY TOTAL I certify, as the appropriate representative of the applicant’s ratemaking entity, that the applicant’s least cost plan or least cost planning process meets the requirements of 40 CFR 73.82(a)(4), (5), (6) and (7), and if the applicant is claiming savings for a conservation or renewable energy measure not listed in Appendix A of 40 CFR Part 73, the measure meets the criteria of 40 CFR 73.81(a)(2) or 40 CFR 73.81(c)(2). If the ratemaking entity performs verification (Step 4 is marked “State”), I also certify that the verification procedures meet the ratemaking entity’s requirements and the information and calculations contained in this form are correct and accurate. Name of Certifying Official Phone Name of Regulatory Body Signature Date Name of Certif ng Official Title Signature Date EPA Form 7610-10 (1-93) ------- |