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Policies & Regulations

The energy market in the U.S. is in a state of transition. For the most part gas markets have restructured, breaking the gas suppliers into unregulated companies and leaving the distribution ("pipe") companies regulated. A similar restructuring is happening in the electric industry today, with each state in various stages and each adopting various regulations and policies towards electric deregulation. Many States have adopted some policy or regulation that breaks the electrical industry into two parts, essentially the same as in the gas industry, a supplier side (electric generation companies) and a distributor side (transmission and distribution companies, also known as "wire" companies). For the current status of restructuring in your State visit the Energy Information Administration (EIA), Status of Electricity Restructuring page.

Many of the policies and regulations are being driven by the overall movement of the nation towards connecting distributed generation (DG) systems to the grid. Distributed generation helps bring the source of electricity closer to the point of use thereby reducing grid congestion, especially in local areas where demand is high and the transmission and/or distribution systems are at or near capacity. Distributed generation can also reduce some of the line losses associated with transmitting electricity from remote central generating stations to urban areas.

The issues also apply to CHP and are similar to those that apply to DG. However, CHP has some additional aspects that need to be taken into consideration. Since CHP not only generates electricity, providing the same benefits to the grid as distributed generation, it further reduces electrical demand by displacing electrical load through the use of thermal technologies to provide cooling and heating that otherwise would have been provided by electric cooling and heating equipment. In this respect, CHP should be given credit for not only the energy it saves by eliminating line losses, but it should also be given credit for the electricity it displaces through recovery of the heat produced by the generation equipment. However current regulations and policies do not allow emissions credits to be taken for the either the electricity and/or line losses directly replaced by onsite self generation, nor for electricity displaced by the thermal cooling and/or heating equipment.

Many smaller electric generators, who generate electricity only for their own use, are positioning themselves to connect to the grid and that leads to many issues, including technical, pricing, policy, and regulatory. The major issues include the following:

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Access and Interconnection Policies and Requirements

Many States have no standard, policies and requirements for Access and Interconnection. In those States it is left up to each individual electric utility to define the procedures that affect DG installations. Each utility has an approved rate structure and its own guidelines that must be followed when installing DG/CHP within that electric utility's service territory. This results in a "hodge-podge" of rules, standards, and fees makes it difficult for manufacturers, engineering and installation companies, energy service companies, and other that want to install DG or CHP at several sites within a State to discern what the requirements and subsequent cost will be. The financial aspects for the same DG/CHP installation in one service territory will likely be very different than in another. Many States have begun working towards identifying appropriate interconnection standards for connecting to utility distribution systems; some such as Texas and Michigan have completed guidelines. Some States are working on developing their own interconnection standards, often soliciting developmental guidance from utilities within their State, others are proposing to follow the requirements set forth in the developing IEEE 1547, Standard for Distributed Resources Interconnected with Electric Power Systems.

Also, utilities generally require an interconnection study to be completed. In addition to the cost of the study, this process also often adds time to the projects duration, sometimes months while the utility completes and reviews the study. Generally these studies are required to be done by the utility itself and the fees vary widely depending on the type of equipment being installed, the location of the connection on the grid, and the utility. These studies can be very costly and often cost prohibitive to smaller installations. Some utilities have simplified study processes for grid interconnections if the DG source is below 30 to 40 kilowatts.

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Utility Rate Structures

Many utilities have rate structures that serve as a disincentive to installing DG and CHP. These rate structures carry high standby demand charges, often based on worst-case scenarios depicting the need to maintain capacity to supply DG installation during the highest peak demand. The also carry penalties associated with electric usage during unplanned outages of the customers generation equipment. The variation in utility rate structures makes the financial viability of a CHP installation very sensitive to the utility area it is in, as well as how the operating performance of generation portion of the system performs.

Another circumstance that impacts the financial viability of CHP is the potential for re-negotiated discounted rates to those customers who intend to self-generate. Many States allow for the utility to re-negotiate rates when the potential loss of a customer would result in an uneconomic bypass of the utility's system. This can occur when the customer has decided to investigate or move forward with a DG or CHP installation. A customer may have already paid a consulting firm to review the rate structure and likely savings and/or paid an engineering firm to develop a specification for the CHP installation. The project can have a reasonable payback and good economics, yet because the host electric utility does not want to lose the electric load, they offer a lower rate. This can effectively stop the installation.

The reason many States allow for an electric utility to re-negotiate rates is the perception is that if a large use customer leaves the utility, the ratepayers will end up paying more because of deficiencies in the utilities revenue requirements. While this argument has some place in a totally regulated electric utility environment, it does not have significance in a deregulated environment because the market determines the price and all customers are allowed to "shop around." Even in a regulated environment, the threat of a rate increase to a "captive" customer has minor significance since the current and predicted growth of electricity to 2010 exceeds the predicted growth in DG over the same time period. Therefore, even if all of the DG that was predicted to be installed were installed, the utilities would still see a growth in load and income.

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Exit Fees

In many States exit fees are determined by the utility on a case-by-case basis and can vary significantly and be relatively substantial. For smaller projects, exit fees can be a disincentive to installing CHP.

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Tax Treatment of Distributed Generation and Thermal Recovery Equipment

According to current tax law, CHP components fall into several tax categories with depreciation periods based on its use and capacity. Systems that have generation capacity greater than 500 kW have a cost recovery period of 15 years if the electricity is used onsite verses 15 to 20 years if the electricity is sold. In contrast, a similar engine used in an airplane would have only a 5 to 7 year tax life. The federal government is considering ways to standardize depreciation tax life for CHP related equipment so that it better reflects the 7-10 year operating life of the equipment.

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Siting Requirements and Emission Credits

Sitting for smaller CHP installation is not as restrictive as for those over 1 MW. Those over 1 MW must obtain a sitting permit from the EPA. In areas designated as non-attainment this may require additional environmental controls be installed on the equipment or operational hours may be restricted. EPA requirements may also come into effect when changes are made to sites that have central boilers that fall under the regulations of the EPA. Implementing CHP at those sites may result in changes to a central boiler system, changes to the boiler system may require filling changes with the EPA, this in turn may result in the emissions from the generation equipment being taken into consideration along with any boiler emissions.

The US Environmental Protection Agency (USEPA) has recently launched an initiative, Combined Heat and Power Partnership Program, to help foster the installation of CHP. They recognize that CHP offers an efficient clean alternative to central power generation. They acknowledge the offset of pollution by the use of clean energy fuels like natural gas, and new generation technologies, like microturbines and fuel cells. They also acknowledge that CHP saves energy and therefore pollution by reducing transmission losses and displacing electricity by using recovered heat from the generation process to operate cooling and heating equipment, and for industrial production processes.

In recognizing the benefits of CHP, the US EPA is working to issue new Guidelines regarding the treatment of CHP and to also begin developing changes to their regulations to help foster the deployment of CHP technologies.

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Energy Efficiency Incentives

Numerous State Governments, and many major metropolitan areas have launched energy efficiency benefits program. In general, these programs promote the use of energy efficient technologies and offer some incentives such as low interest loans or tax-benefits to those installing systems at some defined level of efficiency.

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