BioCycle March 2011, Vol. 52, No. 3, p. 70
Federal and state programs to spur digester development primarily target electricity generation.
WHILE the benefits of anaerobic digestion are well recognized, the costs of purchasing and installing digesters remain an impediment to wide-spread use. In most of the U.S., low electricity and natural gas prices make digesters hard to justify on a purely economic basis.
Federal and state policies are trying to spur digester usage. BioCycle asked a number of experts which policies were most effective and provide examples of best practices. Many programs highlighted by our experts target electricity generation. “For nonelectricity projects there really are not a lot of available programs,” says Amanda Bilek, an energy policy specialist with the Minneapolis-based Great Plains Institute.
Program predictability is an important consideration. “How many years will it be there, at what levels and how competitive is it,” asks Norma McDonald, North America sales manager for Belgium-based Organic Waste Systems. “Competitive versus noncompetitive is a huge issue.” Competitive programs require projects to vie for funding; under noncompetitive programs, projects receive funding or incentives as long as they meet eligibility rules.
How long funding programs will be around is a big question. Budget constraints at the state and federal levels threaten to cut or eliminate programs that have proved valuable to the development of anaerobic digestion projects. “It is really looking grim,” says Mike Raker with Agricultural Energy Consultants in Plainfield, Vermont.
FEDERAL FUNDING PROGRAMS
Two federal programs frequently cited as most effective are Section 1603 grants, which can be taken in lieu of tax credits, and REAP (Rural Energy for American Program). Renewable energy projects have successfully employed investment tax credits (ITC) and production tax credits (PTC) to attract tax equity investors. Project developers often can’t take full advantage of tax credits. Instead the credits are used to raise capital from private investors and companies that apply the tax credits against their Federal tax liability.
The credit crisis and ensuing recession severely impacted the tax equity market. Many tax equity investors, faced with smaller or nonexistent tax burdens, no longer needed the credits. To offset the loss of tax equity funding and inject capital into renewable energy projects, Section 1603 of the 2009 American Recovery and Reinvestment Act (ARRA) allows project developers to receive a U.S. Treasury Department grant in lieu of tax credits. The grants, for 30 percent of eligible project investments, are available for renewable electricity projects qualifying for federal business energy tax credits (ITC) or production tax credits (PTC). “Taking the cash grant in lieu of the tax credit so you have cash flow to start your project is extremely important for developers,” explains Shonodeep Modak, market development manager for GE Energy’s Jenbacher gas engine business in Atlanta, Georgia.
The PTC applies to biomass projects producing a minimum of 150-kW of electricity. Under ARRA, PTC-eligible systems can take the grant or receive a 30 percent ITC through December 31, 2013. Projects are eligible as long as construction begins before December 31, 2011 and the facility is placed in service before the expiration of the tax credit. “The Section 1603 grants have been tremendously helpful because they are 30 percent of an uncapped number,” McDonald says. “The disadvantage is that it’s short term in nature. From everything we are hearing it is unlikely to be extended.”
When grants are received is problematic for some smaller projects. Grants are paid after the project is up and running, Raker says. “We’ve had farms awarded the grant but it’s not something the lenders are excited about banking on.”
The U.S. Department of Agricultural (USDA) offers REAP grants and loans through its Rural Development Agency (RDA). “REAP really helps pay down some of the initial capital outlay,” Bilek says. “The downside is that it is only available for agricultural projects and small rural businesses.” Grants for up to 25 percent of eligible project costs are made for the purchase and installation of renewable energy systems (RES) and energy efficiency improvements (EEI). Awards are capped at $500,000 for RES and $250,000 for EEI. Grants up to $100,000 are also provided for energy audit and renewable energy development assistance.
Grants are awarded on a competitive basis. Criteria look at project payback based on kilowatts generated per dollars requested, system efficiency and contribution of the energy generated to the betterment of the community, explains Judith Canales, RDA’s administrator of business and cooperative programs. Loan guarantees for RES and EEI are available for up to 75 percent of eligible costs and capped at $25 million. “We work with a bank and guarantee the loan,” Canales says. “The bank makes the loan to the borrower.”
The program is funded with annual appropriations. “We are in a continuing resolution, working on the premise of the availability of funds for fiscal year 2011,” Canales explains. The 2008 Farm Bill established a 5-year window for the grants, adds McDonald. “This is really helpful. You know the program is there and you know at least some amount of money is going to be allocated. However the REAP grants have not been easy to get. They are highly competitive.”
ADDITIONAL FEDERAL PROGRAMS
The USDA’s Natural Resources Conservation Service (NRCS) recently made anaerobic digestion a higher priority conservation practice. As a result, McDonald expects to see an increasing number of digester projects benefiting from conservation funds. One NRCS program, the Environmental Quality Incentives Program (EQIP), offers financial and technical help to install or implement conservation practices on agricultural land. Practices applicable to digester projects include waste storage facilities, waste transfer, composting facilities, solid/liquid waste separation and nutrient management. Raker is pursuing strategies to leverage EQIP and REAP to fund anaerobic digester projects in Vermont. Project costs are split into a manure management component, which NRCS covers through EQIP, and the collection and conversion of biogas into useable energy, which is funded through REAP.
Financing for anaerobic digester projects approved by NRCS is also available through the USDA’s Farm Service Agency’s (FSA) conservation loan program. FSA makes direct loans for up to $300,000 and guarantees loans up to $1.12 million.
The 2010 tax compromise amended bonus depreciation provisions, which allow businesses to recover investment costs through accelerated depreciation. Eligible properties placed in service after September 8, 2010 and before January 1, 2012 qualify for a 100 percent first year bonus depreciation. For 2012, the allowable deduction decreases to 50 percent. “This is a nice source of cash as well as a nice way of reducing the cost of a project,” McDonald says. The extra cash can reduce the size of the loan projects need to carry forward or provide a means of attracting additional investors. “You can allocate depreciation to investors and you do not need to allocate it in proportion to the ownership percentage,” she explains.
New Markets Tax credits were created to stimulate jobs and economic development in distressed urban and rural communities. Under the program private investors investing in eligible businesses, such as energy projects, receive federal tax credits. “There are a few projects accessing these funds,” McDonald says. “Typically it’s done for larger projects.”
“New York is doing a lot of great things for agricultural-based biogas electricity projects,” Bilek says. The State tasked the New York State Energy Research and Development Authority (NYSERDA) with procuring renewable energy resources to meet New York’s 30 percent Renewable Portfolio Standard (RPS) goal by 2015. The program is funded by ratepayers through a surcharge on electricity bills and collected by utilities.
Eligible projects are divided into two tiers. The Main Tier, targeting large generators, uses a competitive bidding program to procure renewable energy attributes to satisfy the RPS. The most recent $250 million solicitation accepted bids for renewable power produced over 10 years, explains Tom Fiesinger, NYSERDA program manager. The Customer Sited Tier, smaller projects generally 770-kW or less, is noncompetitive. “If you qualify and we have the money you are able to get the incentive,” Fiesinger says.
The program, temporarily closed, will reopen this year. NYSERDA has allocated $70 million for anaerobic digestion systems between now and 2015 with a goal to procure 24.1 MW of power. Program participants receive a capacity incentive of $500/kW up to $350,000 or 50 percent of the purchase, engineering and installation cost of the system. A production incentive of $0.10/kWh is paid for three years. “That is totally separate from the sale of the power to the utility or the savings that a farm may realize,” Fiesinger explains. Total awards can’t exceed $1 million. Eligible feedstocks include manure, agricultural residues and biomass, industrial organic wastes (e.g., food wastes) and municipal wastewater. Electricity generated from landfill biogas is not eligible.
New York State is also cited for its progressive net metering laws. “They’ve been promoting net metering and trying to remove some of the barriers around interconnection to utilities,” Modak says. Legislation recently expanded net metering to include farm digesters up to 1 MW. Customer net-excess generation (NEG) – generation over the amount used onsite – is calculated monthly and credited to the customer’s next bill at the utility’s retail rates. At the end of the year, any NEG remaining is purchased by the utility at its avoided cost.
“Wisconsin is one of the states I see having some successful programs in place,” Bilek says. “One that has been really beneficial and made them a leader in agricultural-based biogas is Focus on Energy.” Focus on Energy is Wisconsin’s public benefit fund (PBF) promoting renewable energy and energy efficiency programs. Utilities are required to create and fund programs managed by private program administrators with oversight and approval from the Wisconsin Public Service Commission.
Individual utilities also took part in an experimental Advanced Renewable Tariffs (ART) program for a short period. ARTs, also known as Feed-In Tariffs (FIT), provide long-term contracts with guaranteed fixed prices for renewable energy. Prices, in the most effective programs, are calculated to provide a reasonable rate of return on renewable energy investments. “A FIT provides a known and dependable source of revenue,” Modak explains. “This is one of the strongest incentives which creates favorable project economics and attracts investors and banks.”
Alliant Energy’s ART program offered 10 or 15 year contracts with fixed prices for electricity produced from photovoltaics, wind, anaerobic digestion, biomass and landfill gas. Ten megawatts of capacity was allocated to anaerobic digestion projects. “They subscribed to that really quickly,” says Peter Taglia, a Wisconsin-based energy and environmental consultant. He adds that the state’s incentives complement the available federal funding. “It’s part of what has made Wisconsin effective. The state has done a good job of putting together multiple incentives.”
North Carolina’s RPS, requiring utilities to supply 12.5 percent of electricity from renewable sources by 2020, has specific carve-outs for swine and poultry waste. The legislation requires 0.2 percent of energy recovered from swine waste by 2018 and 900,000 MWh of electricity derived from poultry waste by 2014.
“This policy has encouraged utilities to release RFPs seeking development of swine and poultry waste-to-energy facilities,” Modak explains. “Our understanding is that the utilities prefer anaerobic digestion, but the contracts do not distinguish between the various waste-to-energy technologies, which are all included in the program.” Recent RFPs by Duke and Progress Energy provided long-term fixed contracts with guaranteed prices to waste-to-energy facilities.
Vermont offers a FIT, the Sustainably Priced Energy Enterprise Development (SPEED) Program, with 25-year contracts at fixed rates. The program is capped at 50 MW. The levelized rate for farm-based methane is $0.141-kWh. “Our FIT tariff was calculated using existing anaerobic digestion systems on farms with 1,000 cows,” Raker explains. “We do not have large farms here and we are increasingly forced to target 500 cow dairies.” With a 500 cow dairy, 14.1 cents “does not cut it” in terms of return on investment. Unfortunately other state incentives are ending. The Clean Energy Development Fund that offered $250,000 grants has been depleted.
Funds available through the Central Vermont Public Service Corporation (CVPS) Cow Power project are also largely depleted. CVPS Cow Power allows utility customers to purchase renewable energy for $0.04-kwh above retail costs to support farm projects. Remaining funding will largely be used for technical assistance.
Funding from the state’s Agricultural agency is also drying up. “We have been told don’t count on them,” Raker says. “Our state is struggling like other states so we really are in a bit of a fix.”
Entergy Louisiana LLC, is in the midst of an RFP for up to 233 MW of renewable energy under a pilot program required by the Louisiana Public Service Commission. The RFP seeks proposals with 10 to 20 year terms for projects producing a minimum of 2 MW of power. Projects must be in operation by 2014. Power can be produced from biologically-derived methane gas, biomass energy, distributed generation based on nonfossil fuel sources, waste-to-energy and a variety of other sources.
The Tennessee Valley Authority (TVA) has a pilot, the Generation Partners Program, which pays $0.03-kWh on top of retail rates for up to 200 kW for wind, low-impact hydro and biomass projects. The program has a capacity goal of 200 MW.
The TVA’s Mid-Sized Renewable Energy Generators program is targeting sources between 200 kW and 20 MW for contracts up to 20 years. The program is capped at 100 MW. Prices range from a low of 3.793 cents to 15.966 cent, depending on month and time-of-day, and escalate at 3 percent annually starting in 2012. “TVA is being very progressive,” Modak says. “Their programs are getting closer to the optimal environment needed for project development.”
NEW POLICIES TO WATCH
In 2007, California enacted the Low Carbon Fuel Standard (LCFS) that calls for reductions of at least 10 percent in the carbon intensity of California’s transportation fuels by 2020. Bilek believes the policy could create a market for biogas offsets for compressed and liquefied natural gas produced by livestock operations. “This could be a good case study of how putting a limit on carbon pollution can spur investments in other processes,” she says.
Pennsylvania’s nutrient trading program was created to reduce discharges of nutrients, such as nitrogen and phosphorus, into the Susquehanna and Potomac River watersheds. The program, which operates similar to a cap and trade program, allows point source regulated entities to offset discharges by purchasing credits from nonregulated or nonpoint sources, Bilek explains. “This has been a way for biogas projects doing phosphorus removal to get some additional revenue.”
Diane Greer is a Contributing Editor to BioCycle.