In competition with grid power plants
receiving generous allowances in ACES,
CHP systems could be shut down. Unless
allowances are allocated to the district
energy CHP system it will have to purchase
allowances for all gas consumed in the
facility, resulting in an additional cost equal
to 15 percent of the average 2007 wholesale power price ($57 per MWh) at the
$16 per metric ton allowance price projected by EPA for the year 2020 (fig. 5). In
contrast, the merchant coal plant will only
have a GHG allowance cost of only 5 percent of the average 2007 wholesale power
price because allowances will be allocated
for nearly all ( 83 percent) of its emissions.
Faced with this huge competitive disadvantage in the marginal cost of power
generation, some existing CHP facilities
will shut down and construction of new
CHP plants will be choked off.
EPA projects that GHG allowances
will increase from $13 metric ton
in 2015 to $70 per metric ton
in 2050.
Increases in Natural Gas Prices
Starting in 2016, natural gas LDCs
would be required to submit allowances
for gas sold to non-capped sources, and
would pass along the cost to consumers
to the extent that the costs are not covered
through free allowances. From 2016 through
2025 gas LDCs would receive an allocation
of 9 percent of total allowances, with the
amount gradually dropping to zero by 2030.
LDCs would be required to use at least
one-third of the value of these allowances
for energy-efficiency programs benefiting
their customers, with the remainder used
to reduce the costs of costs of delivered gas
as regulated by state regulatory authorities.
District energy systems buying gas from
LDCs can expect to see prices increase by
an amount equal to at least one-third of
the market price of allowances through
2025, reaching 100 percent of the allowance
price by 2030. At the price of $27 per metric
ton CO2e projected by EPA for 2030, the
GHG cost would be $1.42 per MMBtu of
fuel. Some generally, the competitive alternative to district heating is a building boiler fueled by natural gas purchased from an
LDC. In this case, the ACES would provide a
competitive advantage to district heating
systems using natural gas at an incrementally
higher efficiency than a building boiler.
Increases in Fuel Oil Prices
Starting in 2012, producers of fuel oil
and other petroleum-based or coal-based
liquid fuels would be required to submit
allowances and can be expected to pass
the costs on to consumers. Allowances are
allocated to the states for the benefit of
Figure 5. Carbon Dioxide Emission Costs of Selected Power Generation Options in 2020.
16%
Source: FVB Energy Inc. analysis based on EPA projections of allowance prices (see fig. 3).
CO2 cost in 2020
(% of 2007 average wholesale power price)
0%
2%
4%
6%
8%
10%
12%
14%
Merchant
coal-fired
power plant
Gas-fired steam
power plant
Gas-fired
combined cycle
power plant
District energy
gas-fired CHP if
directly regulated
District energy
gas-fired CHP if
indirectly
regulated
(through gas LDC)
home heating oil and propane customers
starting at 1. 88 percent in 2012, dropping
to 1. 5 percent by 2016, a level maintained
until it gradually begins dropping by 2025
to zero by 2030. Domestic oil refiners are
allocated 2 percent of allowances between
2014 and 2026.
District energy systems using fuel oil
can expect prices to rise by an amount equal
to 100 percent of the market price of
allowances. At the price of $27 per metric
ton of CO2e projected by EPA for 2030,
the GHG cost would be $1.96 and $2.11
per MMBtu of fuel for light and heavy fuel
oil, respectively.
Recommendations for
Senate Climate Change
Legislation
Several principles should guide Senate
cap-and-trade legislation relative to treatment of district energy systems.
Covered Entities
The threshold for a CHP facility to be
a covered entity should be raised from
25 MW to 90 MW (and more than one
third of power capacity) sold to the grid.
This will largely mitigate the potential for
district energy CHP systems to be a covered entity but not receive allowances to
address the competitive disadvantage that
would otherwise result.
Allowance Allocation
To the extent that district energy systems
are directly covered entities it is critical that
allowance allocations do not put lower-car-bon options at a competitive disadvantage.
; Any CHP facility that is a covered entity
should receive allowances that at the
least avoid a disincentive to recover
power generation waste heat. This is
a problem with the ACES because
some facilities would be covered entities but would not receive allowances.
; The goal of GHG reduction would be
furthered if CHP facilities receive additional allocations in recognition of the
fact that such facilities produce both
electrical and thermal energy. For example, CHP facilities would receive
allowances for electricity production
based on average grid emissions per
MWh and thermal energy production
based on emissions per MMBtu of
thermal energy based on an 80 percent efficient natural gas boiler. Such
‘double benchmarking’ would provide
