January 21, 2005 | General

State Incentives for Biomass Electricity

BioCycle January 2005, Vol. 46, No. 1, p. 38
By targeting portfolio standards, public benefit funds and net metering, states improve growth rates for renewable power. Part II
Jennifer Weeks

GENERATING electricity from renewable fuels such as wind, solar power, and biomass conveys many benefits that are widely recognized, including reduced emissions, fuel diversity, and protection against energy price fluctuations. The federal government provides incentives for renewable energy development, including investment and production tax credits and accelerated depreciation. More significantly, over the past decade, many states have adopted measures to promote use of renewable electricity, and these policies have become significant drivers for the development of new renewable generating capacity.
Part I of this article (December 2004) outlined methods by which “green” electricity generated from renewable fuels is marketed nationwide, and described how biomass electricity suppliers are participating in green power markets. This segment examines state renewable electricity incentives and their impact on biomass power generators. It focuses on three policy tools that are generally agreed to be the most influential factors behind the growth of renewable electricity: portfolio standards, public benefit funds, and net metering. Biomass electricity generators stand to benefit from each of these measures, but policies vary from state to state, in terms of both overall program design and specific provisions relating to biomass. As a result, even among states that strongly support renewable electricity, some markets are more favorable to biomass generators than others.
In traditional regulated electricity markets prior to the 1990s, many utilities provided power from a range of sources, including renewable fuels. Renewable generation typically was driven by contracts with so-called Qualifying Facilities (QFs), a category of small renewable power producers and cogenerators created under the Public Utility Regulatory Policy Act (PURPA) of 1978 in an effort to reduce dependence on oil imports and promote energy efficiency. Utility companies were required to purchase electricity from QFs in their territories at their “avoided cost,” generally meaning the likely costs that the utilities would have incurred for both energy and facilities if they had had to develop their own generating capacity instead of buying power.
As many states restructured their electricity markets over the past decade to promote competition, green power advocates have urged the adoption of renewable portfolio standards (RPSs) that require electricity suppliers to provide a certain percentage of their power from renewable fuels. RPS supporters argue that without such requirements, power providers in competitive markets are likely to shift to the cheapest available fuel sources (generally fossil fuels). In addition to reducing air pollution and greenhouse gas emissions, arguments for adopting RPSs include diversifying energy supply; reducing the volatility of electricity prices, since renewable fuel costs are generally stable or nonexistent; generating jobs and tax revenues through construction of new renewable energy facilities; and stimulating new clean energy technology industries that can capture export markets.
To date, 18 states have adopted RPS requirements that set targets and timetables for renewable electricity generation. Most recently, Colorado voters approved a ballot referendum to establish an RPS in November 2004 – the only RPS submitted to a statewide vote to date – and Pennsylvania enacted a law in December that increased an existing RPS requirement. According to the nonprofit Union of Concerned Scientists, which advocates for increased use of renewable energy, state RPS requirements in effect as of November 2004 (all except the Pennsylvania upgrade) could stimulate up to 27,670 megawatts of new renewable capacity by 2017. For comparison, total U.S. generating capacity from nonhydropower renewable fuels in the mid-1990s was about 15,000 megawatts.
Beyond the basic elements – a target share of electricity from renewables, a deadline for achieving it, and a list of qualifying energy sources – there is wide variation among existing RPSs. All RPSs treat solar, wind and biomass as qualifying fuels, with restrictions on biomass (see article). Many also include sources such as landfill gas, geothermal, tidal, hydropower, and municipal solid waste. Some states separate renewable fuels into several tiers or classes and require that specific amounts of electricity must be produced from the higher-ranked class, which generally includes the cleanest qualifying fuels. In most states, RPS compliance is mandatory, but in several (Illinois, and Minnesota for most producers) the renewable electricity target is voluntary. Some RPSs allow existing renewable resources to qualify, while others require that power must be generated from new facilities placed into service after the standard is enacted. In most but not all cases, power generated out-of-state can be counted toward RPS compliance.
As outlined in Part I of this article, renewable energy credits (RECs) are an important mechanism for selling renewable electricity because they make it possible to separate the renewable attributes of the electricity from actual kilowatt-hours. About half of RPS states allow power suppliers to trade renewable energy certificates (RECs) to demonstrate compliance. In these states, power providers can buy RECs from qualifying renewable energy generators to meet RPS requirements, but do not necessarily have to buy the actual power. For example, to comply with the Massachusetts RPS, energy suppliers can buy RECs from renewable electricity generators throughout New England that are eligible under the Massachusetts RPS and deliver their energy to the New England power grid. REC trading broadens the range of options available to electricity suppliers for meeting RPS requirements.
Analysts widely agree that some RPSs are better designed and more effective than others. Ryan Wiser, a senior analyst at Lawrence Berkeley National Laboratory, points to Texas, Iowa, and Minnesota as successful models because each state’s RPS has driven significant new renewable energy additions at reasonable and stable costs, and suppliers have fully complied with the standard or appear likely to do so. Other states have done poorly for reasons including unequal coverage of electricity suppliers, imbalances between renewable energy supply and demand (requiring either too much or too little electricity from renewables), short target durations, and unduly complex designs. As Wiser sums it up, “The legislative and regulatory design details matter!”
The U.S. Department of Energy estimates that 2,335 megawatts of renewable generating capacity was contributing to state RPS requirements as of the end of 2003 (other existing renewable capacity was put in place outside of RPS requirements). Of this amount, 2,183 megawatts (93.5 percent) came from wind, with 53 megawatts (2.3 percent) from biomass projects in Iowa, Minnesota, Texas, and Wisconsin. Another 53 megawatts of capacity was derived from landfill gas facilities in Arizona, Massachusetts, Wisconsin, and Texas. In addition, a 3-megawatt biomass plant entered operation in Arizona in 2004, and Wisconsin’s RPS stimulated biomass cofiring at 79 megawatts of existing fossil-fuel plants.
Many RPSs limit the types of biomass that qualify as renewable, based on two general concerns: emissions and sustainability (Table 1). Because biomass combustion produces sulfur dioxide (SO2), nitrogen oxide (NOx), and particulate emissions, some states where air quality is a major concern allow only advanced, low-emission biomass technologies to qualify for RPS compliance. Others require that biomass fuels must be produced “sustainably.” There is no universally-accepted definition of sustainable biomass, but the term is generally understood to describe fuels that do not impair the productivity or biodiversity of ecosystems where they are produced and used – excluding, for example, wood from old-growth forests or crops grown using methods that deplete minerals from soils. Some states address the issue by listing acceptable biomass fuels and production methods.
Certain biomass technologies, such as cofiring in fossil fuel plants and cogeneration, are not specifically addressed by all RPSs, so their eligibility is unclear in some states. Landfill gas is eligible in all states except Illinois, which does not address its status. Many states exclude municipal solid waste due to concerns about emissions from combustion of inorganic contaminants such as metals, plastics, and batteries; several states that allow MSW to qualify rank it as a lower-priority fuel. Where uncertainty exists about a specific biomass fuel or technology’s eligibility under a state RPS (for example, in states that require biomass fuels to be “sustainable”), potential electricity generators generally must seek an advisory ruling and/or a formal statement of qualification from state regulators.
Under the traditional regulatory system, many electric utilities funded public benefits such as energy efficiency programs, renewable energy purchases, and assistance for low-income customers, and were allowed to treat these activities as part of their costs of providing power. To support such activities in competitive electricity markets, many states have created public benefits funds (PBFs), typically funded by small surcharges on electricity bills.
Renewable energy advocates support both PBFs and RPSs as complementary measures to ensure that clean power can earn a share in competitive electricity markets. The concept is that states will use PBFs to make investments in technologies that are in early development stages, such as research, bench-scale testing, and demonstrations. Once these products are ready for larger-scale deployment, portfolio standards will help create market pull to generate early sales, which in turn will stimulate customer feedback and learning and help drive down costs. In reality, states have used PBFs for many purposes. For example, California used PBF funds to make payments to keep existing renewable energy generators online in the wake of its electricity crisis in 2000-2001.
Currently, 15 states maintain some type of PBF, with allocations for renewable energy ranging from $1 million per year in Delaware to $135 million per year in California. A 2003 study by Navigant Consulting estimated that between 1998 and 2012 PBFs would collect nearly $4.5 billion, and observed that these funds, working in combination with RPS requirements, “have the potential to transform [renewable energy] markets into more mainstream sources of energy.” The study noted, however, that some states had raided their PBFs in recent years to offset general budget shortfalls, and that these reallocations created a start/stop dynamic resulting in the loss of some energy projects.
Biomass is eligible for investments in nearly all PBF states, with similar limits to those incorporated into some RPS requirements (Table 2). Landfill gas and MSW are less broadly supported, probably reflecting a general view that these are mature technologies and merit less research and development aid.
Three state clean energy funds have established programs specifically targeting biomass as a renewable energy source. California has provided grants to facilities that convert agricultural biomass to electricity and supported the development of biogas projects on dairy farms. Wisconsin has also supported biogas production on dairy farms, as well as projects to produce space and process heat from wood wastes. New York’s biomass investments have focused primarily on a project to raise fast-growing willow trees for cofiring with coal.
In other states where biomass is not differentially targeted, PBFs have supported an array of biomass energy initiatives, from landfill gas projects to the construction of biomass gasification power plants. Lawrence Berkeley Laboratory and the Clean Energy States Alliance, a consortium of twelve state PBFs (www.cleanenergystates.org), reported in 2004 that alliance member funds had obligated a total of $345 million to support 163 utility-scale renewable energy projects (those with capacities of at least 1 megawatt), with a total planned capacity of 2,255 megawatts. These commitments included eight biomass projects (75.7 MW), three digester gas projects (6 MW), and 28 landfill gas projects (70.9 MW). More than 80 percent of obligated funds have come in the form of real-time production incentives, which reward generation rather than construction of facilities. Some states also offer supports such as debt financing or purchases of generators’ renewable energy credits (RECs).
On a smaller scale, net metering is another important state incentive for renewable energy development. Net metering allows consumers who generate their own electricity to sell power that they produce in excess of their own on-site consumption back into the grid at retail cost through a single meter that “runs backward” when the consumer produces more than s/he uses, thus paying only for their net use. In the absence of net metering, small generators can face difficult and expensive requirements for interconnecting their generation facilities with the electricity grid, and power providers often pay low rates for purchased electricity. Net metering also can benefit power providers by reducing system load factors when small generators produce electricity during peak demand periods.
Currently, 39 states offer some form of net metering. A summary map can be found at www.eere.energy.gov/greenpower/resources/maps/images/netmetering. Some states set higher generating system size limits for commercial or farm generators than for residential sites, recognizing that these facilities have larger power needs. Energy analysts generally view higher net metering ceilings as more effective in promoting use of renewable energy because they enable mid-sized customers, such as schools and factories, to use larger generators that are more cost-effective to operate than residential installations. To address power providers’ concerns about lost revenue, many states limit total net metering statewide to either a fixed number of megawatts or a percentage of peak electricity demand.
Biomass generators are eligible for net metering in most states where it is offered. Landfill gas, MSW, and cogeneration plants also qualify in a smaller subset of states. Anaerobic digestion projects are the only type of biomass eligible for net metering in several states, including California, New York and Vermont.
The measures discussed in this article clearly are positive factors in the aggregate for biomass electricity generators, but variations from state to state raise important considerations for power producers. For example, some states with significant renewable electricity portfolio standards and large public benefits funds place narrow limits on eligible biomass technologies. Net metering helps to reduce barriers for local generation, but analysts generally agree that net metering alone is unlikely to offset the costs of installing and permitting renewable energy facilities, especially at a small scale (although net metering combined with buy-down programs to reduce those costs can be a strong incentive).
In a 2003 report, the Northeast Regional Biomass Program (which includes the New England states plus New York, New Jersey, Pennsylvania, Delaware and Maryland) offered several recommendations for enabling biomass to benefit from state renewable energy policies. While the report focused on the Northeast states, its conclusions are more broadly applicable in many areas. The report called for:
Improving existing biomass technologies, through steps such as targeting PBF funding on low-emission biomass technologies and seeking support for research and development to reduce emissions from traditional biomass technologies.
Expediting the commercialization of advanced biomass technologies such as biomass gasification and pyrolysis, and focusing PBF investments toward this goal in states that allow only advanced biomass technologies to qualify for RPSs.
Recognizing the positive attributes of biomass energy, such as reduced greenhouse gas emissions and waste management, under state and federal environmental regulations in order to fully monetize its benefits.
Increasing regional coordination through measures such as conducting regional feedstock inventories, carrying out comparative emissions analyses for various technologies, and adopting consistent definitions for key terms such as “sustainable biomass” and “low-emission” biomass.
In the view of Lawrence Berkeley Laboratory’s Ryan Wiser, biomass electricity generators can benefit from state renewable energy incentives by taking several steps. “Biomass power stakeholders should continue to participate in efforts to define ‘sustainable biomass’, and ‘low-emission biomass,'” says Wiser. “Biomass power developers may also need to retrofit their facilities, change biomass fuel sources, or make other operational changes in order to meet the eligibility requirements that are being adopted as part of these policies. And of course, biomass stakeholders will need to continue educating the environmental and energy communities of the myriad benefits that biomass power generation can provide.”
Jennifer Weeks is a Massachusetts-based writer specializing in energy and environmental issues.

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