President's Message 4th Quarter 2010

From District Energy Magazine, Fourth Quarter, 2010

When I was 11 years old, I took over the afternoon paper route in my neighborhood. With 80 papers to deliver after school, I had to move quickly if I was to have any daylight left to play street hockey or touch football with my friends. I soon learned that meeting customer expectations was essential to my weekly income and dutifully placed the newspapers in each prescribed location. Out of self-preservation, I also learned the tendencies of neighborhood dogs on my route and successfully befriended most, while deploying strategies to avoid the more hostile creatures altogether.

One particular dog, a large black Newfoundland named Clammy, was my nemesis. For months, he ignored any offers of truce and would snarl menacingly, barking and straining at the end of his chain, making it very difficult to deliver the paper. One day, his owner met me at the door and just as I handed him the paper, the dog snarled and pounced, clipping him behind the knees. He quickly slammed the door, rolled the newspaper up into a baton and whopped the dog between the ears a few times. The dog whimpered and skulked away. "Mr. Silva," I asked, "do you always use the newspaper to hit the dog?" "Yes, whenever he misbehaves, I let him have it," he replied. "Teaches him a lesson." It immediately dawned on me that one lesson the dog had learned was that I was the daily source delivering the weapon for his punishment. No wonder he didn't like me. This was an early insight into how policy affects behavior and underscored how important it is to know the full background of a situation in order to solve the problem.

In energy and environmental policy, there are many hidden disincentives affecting consumer behavior. For instance, the structure of commercial office leases often requires that energy savings are shared equally between landlord and occupant. On the surface, this makes sense. But underneath, if the landlord is solely responsible for the capital investment to implement energy efficient measures and has to share half of the operating savings, in effect the payback period on capital improvements has been doubled and the ROI has been cut in half. This 'agency condition,' as described by the McKinsey Institute, has given rise to energy performance contracting and other specialized approaches to counter the financial imbalance and need for capital. But in my experience, energy service contracts tend to emphasize low first cost initiatives like lighting, fans and motors, and often miss the mark at longer-term sustainable, low-carbon solutions like combined heat and power or district energy. The agency effect has generated real headwind for more prudent investments in energy efficiency. If my money reduces your expense, what's in it for me?

Another policy arena that demands more transparency is the imposition of capricious and punitive "standby charges" by electric utility companies on cogeneration facilities. It is not unreasonable for a distribution utility to receive fair compensation for infrastructure and electricity supply in the event of a generator outage. But how is it reasonable to whack a cogeneration plant over the head with a fixed monthly 'standby' charge of $7.00 - $10.00 per KW for the full rated output of the plant, even before any interruption occurs? Conversely, how is it fair that regulatory policies simply give a pat on the head to a solar or wind installation that is knowingly intermittent and virtually never dispatchable? Why does an unpredictable, low load factor source like wind get rubbed behind the ears when a reliable, dispatchable resource like CHP takes it on the chin?

 On a more fundamental policy level, why is it that one must generate electricity in order to qualify as a renewable resource in portfolio standards or production tax credits? Electricity is obviously a very high value product, but roughly 30 percent of all energy used in the U.S. is thermal energy. Space heating is a critical societal need and is directly linked to health and economic prosperity. In many northern climates, reliable heating supply is a life safety issue. Air conditioning, once considered a luxury, is now essential to ensure commercial productivity in today's airtight office buildings; it is also a mission-critical life safety service for healthcare, research and industry. There are tremendous opportunities to harvest clean, renewable, local thermal resources for heating and cooling cities, campuses and communities, but the policy needs to adapt to support investment.

One aspect of the Thermal Renewable Energy and Efficiency Act (TREEA) - a bill drafted by IDEA and originally co-sponsored by Senators Franken and Bond and Representatives McCollum, Inslee and Tonko - seeks to remedy that inequity by qualifying renewable thermal energy like deep water cooling, geothermal and biomass for production tax credits. Research indicates that state renewable portfolio standards are much less effective without production tax credits as incentive.

In matters of climate and energy policy, IDEA has also been actively educating Congress and EPA staff on the risk of unintended consequences in greenhouse gas (GHG) emissions regulations. We have explained that cogeneration - producing both useful heat and power - may actually increase on-site emissions when compared to boilers for heat and purchased electricity, and therefore the cost of surrendering emissions allowances may increase with cogeneration. But regional GHG emissions will decline and those reductions should be properly credited back to the more efficient and cleaner cogeneration source. While the likelihood of congressional action on climate change seems increasingly remote, the EPA seems fully cognizant of the policy discrepancy as evidenced by its recent amendment on the voluntary reporting for GHG emissions. Highly efficient CHP should be encouraged and not be burdened by new climate rules, but there is no certainty that common sense will prevail in this arena, and thus IDEA must be ever vigilant in representing our members.

Likewise, in Boiler MACT, IDEA has submitted comments to EPA on the complex compliance challenges for industrial boilers (http://tinyurl.com/32t79df). IDEA obviously supports clean air but we also recognize that complicated compliance thresholds are likely to ensnare many of our member facilities. In promulgating policy, the U.S. Environmental Protection Agency (EPA) must be made aware of the costs and unintended consequences of multi-pollutant emissions regulations. Further, the data resources and procedural flaws in the analysis have led to thresholds for multiple pollutants that seem to conflict with best industry practices and set nearly unachievable targets. In this instance, the policy confusion could fundamentally overwhelm our industry and cause significant expenses and delays. For instance, if biomass becomes overly regulated and marginalized as a renewable option, what option will hundreds of solid fuel boilers on college campuses pursue? If natural gas becomes the overwhelming default option due to perceived risk avoidance, the long-term consequences of resource dependence and supply imbalance could affect other aspects of the economy.

Similarly, the recent Manomet study of biomass has sent a chill across the biomass sector, but the inaccurate headlines and poor reporting have unfairly tainted the industry. (See article on page 29.) In most cases, district energy systems utilize biomass fuel in the form of wood waste, tree trimmings, pallets and construction-derived wood waste. It is rare that virgin forests are utilized as the principal fuel source, and thus it should not form the default condition for comparison of carbon absorption. How is it that 32 percent of all the energy in Sweden is derived from biomass in a sustainable and environmentally sound manner, while U.S. policy seems to obfuscate and complicate biomass combustion? How is it that across Scandinavia, policies encourage communities to invest in district heating networks to keep the energy dollars recirculating in the local economy, generating municipal revenue from operations that fund schools, parks, libraries and community infrastructure rather than spending energy dollars on fossil fuels from foreign suppliers?

Energy and environmental policies should stimulate greater fuel flexibility, enhance lower-carbon solutions and improve the domestic trade balance. Thinking about where district energy and CHP fit in the larger legislative landscape, it becomes increasingly important that we describe district energy in a more holistic context. We need to move district energy out toward the blue ocean of sustainable community objectives rather than swim in the bloody red ocean of competing for marginal share of power markets with other ESCO-based efficiency measures or heavily subsidized renewable projects.

As part of IDEA's mission to educate policy makers as well as mayors, college presidents, architects and developers, we need to provide compelling case studies that illustrate the full value stream of district energy. For instance, Thermal Energy Corporation (TECO) in Houston recently added 48 MW of cogeneration, enabling the central plant to supply mission-critical heating and cooling to 16 million square feet of highly specialized healthcare space. In analyzing its track record, TECO determined that over the past 20 years, the rates charged to its customers have increased at half the rate of inflation. TECO customers are paying less today than 20 years ago due to regular investments in more efficient central plant operations. Additionally, the value of customer real estate has been enhanced as each building has avoided direct capital costs for equipment, replacement, maintenance and service. Instead, the hospitals were able to allocate mechanical and equipment space to a higher, more desirable use and share proportionately in their combined energy asset. And recently, on a brutally hot day in August, when the ERCOT grid set a record demand of 65,000 MW with a coincident peak rate of $2,000 per MWh, TECO did not need to purchase a single kilowatt from the grid.

The McKinsey Global Institute calls CHP one of the most cost-effective near-term solutions to climate change and states that policy uncertainty - not technology - is the hindrance. The U.S. Department of Energy Clean Energy Application Centers are working to increase the share of electricity generated by CHP from 9 GW today to 20 GW by 2030. Achieving this would reduce CO2 emissions equivalent to removing 150 million cars from the road. But in order to move this ahead, we need to address the policy clutter, call out capricious and anticompetitive standby rates, and comment on complicated regulations that may otherwise put a chill on highly efficient CHP in industrial and commercial markets. We need to play a leading role in writing the policy papers affecting our future so that we don't get whacked over the head in surprise.