Industry News

From District Energy Magazine, Fourth Quarter, 2012

Back when I was a kid playing hockey in 1969-70, Bobby Orr revolution­ized the game as a point-scoring defenseman when he led the National Hockey League in scoring with 120 points. At the time, the 100-point threshold was a very rare achievement and a singular mark of excellence. By the time I was graduating from college in 1981, the standard of excellence was reset when Wayne Gretzky broke the 200-point barri­er for the first time and finished with 212 total points in one season. When asked how he managed to completely redefine the game and nearly double the scoring efficiency in the NHL, Gretzky humbly replied, "I guess it's because I skate to where the puck is going to be..."

Here in the U.S., we are entering a new era of decentralized energy and the puck is moving to smaller, cleaner and more energy-efficient generating assets. Much like the shift from mainframe com­puters to desktops and laptops, large, remote central coal and nuclear power plants are giving way to smaller-scale, more nimble and cleaner local energy assets. Large coal plants in the U.S., with an average fleet efficiency of 32 percent and built in an era when goalies played without masks, are being retired due to a combination of compliance costs, com­petition from cheaper, cleaner natural gas, and poor heat rates (fuel efficiency). Especially in merchant power markets, coal plants that throw away two-thirds of their input fuel as waste heat cannot compete with combined cycle or, better yet, CHP facilities that can operate at efficiencies of 80 percent or higher. Nukes, impaired by post-Fukushima public safety concerns, also carry huge construction risks and uncertain fuel cycle costs, and are signifi­cantly challenged in attracting private capi­tal without ridiculous levels of federal loan guarantees. During the first half of 2012, 165 new electric power generators total­ing 8,100 MW of capacity were added. Of those, 105 were under 25 MW, and most were renewable plants using solar, wind or landfill gas. The game is changing.

On August 30, President Obama issued an executive order entitled "Accel­erating Investment in Industrial Energy Efficiency," which calls for deployment of 40 GW of new combined heat and power by 2020. This is an ambitious objective, essentially growing U.S. CHP capacity by 50 percent over the 82 GW currently operating. To get there, it will require that our industry fully engage in the effort to identify and promote policy pathways and work through solu­tions to the regulatory hurdles. We will have to skate harder, forecheck more and dig in the corners for more scoring opportunities. We will need to germinate project opportunities across many sec­tors and leverage support from multiple layers of government. Most important, we will need to energize the investment of private capital in new systems. DOE and EPA deserve credit as the primary catalysts for this executive order, but it is up to us to create the private-public partnerships that will be essential to fully accelerate industry growth.

Already, some inside the Beltway have dismissed this directive as a tooth­less tiger because it lacks the fangs of a clear budget allocation or a companion funding mechanism. I would remind those folks that district energy/CHP has historically not relied on government lar­gesse. We are accustomed to competing for market share with efficiency and reli­ability as our fundamental arguments and have faced policy headwinds while port­folio standards and production tax credits shifted capital support to renewables. Our lack of dependence on subsidies—call it self-reliance if you will—is a solid footing from which to compete. We know how to lace up our own skates.

Of course, there is work to be done for better policy and regulatory alignment to remove complications and reinforce the value proposition of energy efficiency, particularly recovered thermal energy. Part of the process is to better understand the motivations and commitments of market participants (i.e. utilities, industry, institutions, government, etc.) so that our advocacy efforts are directed at tangible, realistic growth in highest-value markets. Over the past decade, institutions have been major adopters of CHP, due largely to favorable thermal energy profiles, clear environmental missions, and a tolerance for longer investment horizons than the two-year payback threshold often stran­gling action by U.S. industry. While there are still hundreds of viable CHP opportuni­ties in our colleges, universities, healthcare and military bases, the competition for capital and constraints on bonding capac­ity will require that we develop more inno­vative financing strategies to really unlock CHP across the U.S. Likewise, scores of urban district energy systems with substan­tial thermal loads are ideal candidates to adopt CHP if the rules and incentives for cleaner, local power generation and distri­bution can be modernized.

To really accomplish CHP penetra­tion, we will need capital investment instruments such as envisioned in the Master Limited Partnership Parity Act (S.3275) cosponsored by Senators Coons (D-DE) and Moran (R-KS). A master limited partnership (MLP) is a business structure that combines the tax advantages of a partnership with the liquidity of being able to buy or sell ownership interests like a stock. MLPs are often traded on the stock market and have been very effec­tive in aggregating huge sums of capital for endeavors such as oil and gas drilling. MLPs are analogous to real estate invest­ment trusts (REITs), in which individuals can purchase and sell shares in assets that own large portfolios of commercial real estate. In particular, if the manufacturing sector is to deploy CHP, projects with paybacks greater than five years or single-digit rates of return will not compete well for internal capital, and the traditional ESCO model seems misaligned with capital-intensive endeavors like CHP.

Though only 200 words long, the Master Limited Partnerships Parity Act would dramatically level the playing field for clean energy, attracting pools of pri­vate capital and allowing formation of clean energy MLPs. Presently, for reasons unknown to this author, only investors in energy portfolios for oil, natural gas, coal extraction and pipeline projects qualify. Clean energy industries have been excluded by statute from MLPs, which offer access to lower-cost capital with greater liquidity. It seems altogether reasonable and fair to change this provision so that private inves­tors in clean energy can skate on the same rink with the same rules and risks as their fossil counterparts. I'm encouraged by the bipartisan sponsorship of S.3275, and IDEA will likely be asking our members to help recruit additional Senate sponsors. It's time we had sharper skates and played with curved sticks too.

I have often said that utilities have embraced wind and solar not because they chose to, but because they were "told to" by legislative edict with clear policy drivers like state renewable port­folio standards. In my view, traditional utilities have historically assessed wind and solar farms as marginal, incremental assets and not as fully disruptive competi­tion to baseload electricity revenue. CHP, on the other hand, could represent a true shift in control to the customer and potentially a migration from grid-derived power. Therefore, I would urge caution and clarity of mission when inviting util­ity "participation" in CHP deployment. Our path forward should not be co-opted by veiled promises of investment in CHP as "rate-base assets" when historical utility behavior toward CHP has often involved buying out potential cogenera­tion projects through creative special rate concessions or intentional obfuscation on standby charges and interconnec­tion requirements. In fact, utilities have much to gain from deployment of CHP in grid-congested areas and as cleaner balancing capacity to intermittent wind resources. We should avoid simplistic gas-fired "peaking plants" with high heat rates and low priority in the bid market and will want to structure incentives for using thermal energy more efficiently. Regulators need to offer some carrots to encourage utility participation but should not abandon the stick when protectionist tendencies surface.

Mayors, planners and economic development officials are competing to attract the next wave of high-value real estate development.

Another aspect of the executive order is the ability to compel government agencies to collaborate on more favorable policies to unleash private investment in CHP. To add 40 GW in seven years, we will need to fire on all cylinders and engage across many sectors, particularly those sectors reliant on thermal energy, such as large refineries and process indus­tries with significant thermal loads in places like the Houston Ship Channel in Texas (one reason for hosting CHP 2012 in Houston). Another important segment is the MUSH market (municipalities, universi­ties, schools & hospitals), where invest­ments in district energy/CHP have yielded higher energy security along with cost sav­ings and a smaller environmental footprint. If Gretzky were a CHP developer today, he would be skating toward the largest ther­mal loads. The electric goals will follow.

Cities and towns are getting into the local energy game, not just in the U.S. but across Canada, U.K., Germany, South Korea, Australia and Scandinavia. Mayors, planners and economic develop­ment officials are competing to attract the next wave of high-value real estate development. Large cities are "energy mapping" to inform better growth options and seeking guidance on how to integrate new district energy/CHP infra­structure. With denser, transit-oriented development anchoring more sustainable communities, this alternative to suburban sprawl is attracting both aging boomers and emerging millennials. More frequent storm-related outages are driving interest in microgrids and local generation. Since nearly 40 percent of end-use energy is for heating and cooling buildings, optimizing thermal energy use is critical for success. This is where the real estate development game is moving and the IDEA guide "Community Energy: Planning, Develop­ment and Delivery" is a helpful map to that future.

Despite record spending by the fossil fuel lobby to retain status quo, the game is clearly shifting to more efficient, distributed and cleaner energy sources. So while the goal may be more electricity from CHP, let's not overlook the assist and the key points provided by thermal energy.