Effect of a 30 Percent Investment Tax Credit on the Economic Market Potential for Combined Heat and Power

October 2010 Prepared for:

Prepared by: ICF International

Contact: Bruce Hedman (202) 862-2689 bhedman@icfi.com or Anne Hampson (202) 862-2982 ahampson@icfi.com

WadeUSAistheUSmemberorganizationoftheWorldAllianceforDecentralizedEnergy(WADE).WADEworkstoacceleratetheworldwidedevelopmentofhighefficiencycombinedheatandpower(CHP),onsitepoweranddecentralizedrenewableenergysystemsthatdeliversubstantialeconomicandenvironmentalbenefits.InanefforttoraisetheprofileofCHPasaclimatechangemitigationstrategyinthe1997UNFCCCclimatechangenegotiations,theInternationalCogenerationAlliancewasfounded.In2002thegroupchangeditsnametoWADEandbroadeneditsscopetoincludeallmannerofdecentralizedenergytechnologies.MoreinformationaboutWADEcanbefoundatwww.localpower.org.

TheUnitedStatesCleanHeatandPowerAssociation(USCHPA),atradeassociationbasedinWashington,DC,representscompaniesandorganizationstofostertheuseofclean,efficientlocalenergygenerationincludingcombinedheatandpower(CHP)andotherdistributedgenerationsourcesthathelpreducegreenhousegasemissions.Morethan60organizationsandtheiraffiliates(includingseveralFortune500companies),300individuals,andalliedindustrygroupsareUSCHPAmembers.MoreinformationaboutUSCHPAcanbefoundatwww.uschpa.org.

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TableofContents

1. EXECUTIVESUMMARY..............................................................................................................1

2. INTRODUCTION........................................................................................................................2

LIMITATIONSOFTHEANALYSIS.........................................................................................................................4ORGANIZATIONOFTHEREPORT:......................................................................................................................4

3. CHPTECHNICALPOTENTIAL......................................................................................................5

3.0.1 TraditionalPowerandHeatCHP..............................................................................................53.0.2 Cooling,HeatingandPowerCHP..............................................................................................5

3.1 ESTIMATINGCHPTECHNICALPOTENTIAL..............................................................................................63.1.1 CHPTargetApplications............................................................................................................63.1.2 IdentificationofTargetFacilities..............................................................................................93.1.3 EstimatingElectricandThermalLoadsandCHPSystemSizing................................................9

3.2 CHPTECHNICALPOTENTIALESTIMATES..............................................................................................10

4. CHPMARKETPENETRATIONMODEL.......................................................................................14

4.1 MAJORMARKETMODELINPUTASSUMPTIONS....................................................................................144.1.1 CHPTechnologyCostandPerformanceAssumptions............................................................144.1.2 NaturalGasandElectricityPriceAssumptions.......................................................................17

4.2 ECONOMICCOMPETITIVENESSOFCHPANDMARKETACCEPTANCE.........................................................19

5. CHPMARKETPENETRATIONRESULTS.....................................................................................20

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ListofTables

Table1 TraditionalCombinedHeatandPowerTargetApplications....................................................8

Table2 Cooling,HeatingandPowerTargetApplications.....................................................................8

Table3 IndustrialCHPTechnicalPotentialbyState............................................................................11

Table4 CommercialCHPTechnicalPotentialbyState........................................................................12

Table5 IndustrialCHPTechnicalPotentialbyApplication..................................................................13

Table6 CommercialCHPTechnicalPotentialbyApplication..............................................................13

Table7CHPTechnologyCostandPerformanceAssumptions14

Table8StateNaturalGasandElectricityPriceAssumptions..16

Table9EstimatedCHPMarketPenetration2010through2017.21

Table10EstimatedEnergyandCO2Savings..21

Table11BaseCaseNoITCMarketPenetration22

Table1210PercentITCCaseMarketPenetration23

Table1330PercentITCforHighEfficiencyCaseMarketPenetration..24

ListofFiguresFigure1 IncreasedEfficiencyofCHPResultsinCarbonEmissionsSavings............................................2

Figure2 TechnologySizeCoverage.......................................................................................................15

Figure3 AbsorptionChillerCapitalCosts..............................................................................................17

Figure4 CHPMarketAcceptanceasaFunctionofPaybackPeriod.....................................................20

ICF International 1

1. ExecutiveSummaryCombinedheatandpower(CHP),alsoknownascogeneration,isanefficientandcleanapproachtoproducingelectricityandthermalenergyatthepointofuse.Insteadofpurchasingelectricityfromadistantcentralstationpowerplantandburningfuelinanonsiteboilertoproduceheat,anindustrial,commercialorresidentialfacilitycanuseCHPtoprovidetheseenergyservicesinoneenergyefficientstep.Asaresult,CHPcanprovidesignificantenergyefficiencyandenvironmentaladvantagesovertheseparategenerationofheatandpower.A2008reportfromOakRidgeNationalLaboratoryestimatedthatfulldeploymentofCHPcouldefficientlyprovide20percentofthenationspower,savealmost6quadrillionBtusofenergyannually,eliminategreenhousegasemissions(GHG)byanamountequivalenttoremoving150millioncarsfromtheroad,andhelpgrowtheeconomy.1

WhileCHPpromisestosaveenergyandimprovetheenvironmentatthesametimeitreducesusersoperatingcosts,investmentinCHPsystemshasstalledinrecentyears.Economicuncertainty,volatileenergyprices,regulatorybarriersandlackoffinancinghavealltakentheirtollonCHPdeployment.Notingthatanumberofstatesarebeginningtotackleregulatorybarriers,thefederalgovernment,throughtheEnergyImprovementandExtensionActof2008,hasfocusedonaddressingfinancingissuesandestablishedatenpercentinvestmenttaxcreditforqualifiedCHPprojectsthrough2016.Thisexistingincentiveiscappedat50megawatts(MW)andlimitedtoaprojectsfirst15MW.

CHPusers,developersandequipmentandserviceprovidershaveurgedthestrengtheningoftheCHPtaxcreditinordertospuradditionaldevelopmentofefficientCHPandcleanwasteheattopowerprojects.Variousproposalshavebeenintroducedtoremovethe50MWcaponqualifiedsystems(BingamanSnoweS1639,ThompsonLinderH.R.4455,andInsleeH.R.4144).Otherproposals(TonkoH.R.4751)considerestablishinga30percentITCforhighlyefficientprojects.SupportersnotethatincreasingtheITCto30percentforhighlyefficientCHPtechnologieswillaccelerateenergyefficiency,reducegreenhousegasemissions,increaseoperationalreliability,andprovideeconomicsavingsthatwillenhancebusinessstrength.SincemanyCHPcomponentsaremanufacturedintheUnitedStates,enhancedtaxcreditsalsowillhelpgrowthenationsindustrialbase.

ICFInternationalanalyzedtheprojectedimpactonCHPdevelopmentofbothanexpansiontothe10percentITC(appliedtothefirst25MWofcapacityforsystemsofanysize)aswellastheintroductionofa30percentITCforhighefficiencyCHP(projectswithoverallefficienciesof70percentlowerheatingvalueorgreater).TheanalysiswaslimitedtotraditionaltoppingcycleCHPsystemsutilizingreciprocatingengines,gasturbinesormicroturbines(bottomingcycleCHPopportunities,sometimesreferredtoaswasteheatrecoveryorrecycledenergy,werenotreviewed).Theprojectedimpactsinclude:

Theexpanded10percentITCincreasesCHPdeploymentbyabout20percentoveranoITCbaseline(550additionalMWbetweennowand2017).

Theexpanded10percentITCresultsinanannualenergysavingsof118trillionBtusandanannualreductioninCO2emissionsof14millionmetrictons(MMT),equivalenttoremoving2.6millioncarsfromtheroad2.Investmentintheprojectsrepresentedbytheexpanded10percentITCresultsinover17,000highlyskilled,wellpayingjobs.3

1 OakRidgeNationalLaboratory.CombinedHeatandPower:EffectiveEnergySolutionsforaSustainableFuture.December2008.2BasedondisplacingeGRID2007nationalaveragefossilgeneration(heatrate=9,934Btu/kWhandCO2emissionsof1,841lbs/MWh;averageT&Dlossesof7percent)3Basedonfourjobscreatedforevery$1millionincapitalinvestment,OakRidgeNationalLaboratory.CombinedHeatandPower:EffectiveEnergySolutionsforaSustainableFuture.December2008.

ICF International 2

The30percentITCforhighlyefficientCHPincreasesCHPdeploymentbymorethan60percentoveranoITCbaseline(1,600additionalMWbetweennowand2017).

The30percentITCresultsinanannualenergysavingsof162trillionBtusandanannualreductioninCO2emissionsofover19millionmetrictons(MMT),equivalenttoremoving3.4millioncarsfromtheroad.Investmentintheprojectsrepresentedbythe30percentITCresultsinover23,000highlyskilled,wellpayingjobs.

CHPtechnologycanbedeployedquickly,costeffectivelyandwithfewgeographicrestrictions.StrengtheningtheexistingITCforCHPisaneartermpathtosignificantlyreducingournationsenergyuse,improvingourenvironmentandgrowingtheeconomy.

2. IntroductionCombinedheatandpower(CHP),alsoknownascogeneration,isanefficientandcleanapproachtogeneratingelectricityormechanicalpowerandusefulthermalenergyfromasinglefuelsourceatthepointofuse.Insteadofpurchasingelectricityandthenburningfuelinanonsitefurnaceorboilertoproducethermalenergy,