CHP: The State of the Market

U.S. EPA Combined Heat and Power Partnership 2009 Partners Meeting & NYSERDA CHP Roundtable
Bruce Hedman ICF International October 1, 2009

Acknowledgements
Based on work supported by:
EPAs Combined Heat and Power Partnership DOEs Industrial Technology Program

CHP Market Status

Where have we been?
Where are we now? Where are we going???

CHP Is a Significant Resource for the US

CHP Growth 1970 to Present
100 Cumulative Capacity Additions (GW)

80

82% Manufacturing 5% Other Industrial 13% Commercial/Institutional

60

40

20

0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

9% U.S. Generating Capacity (MW) 12% Generation (MWh)

Over 32 GW of New Capacity Has Been Installed Since 1995

Capacity Additions, 1995 to Present
100 Cumulative Capacity Additions (GW) 90 80 70 60 50 40 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: CHP Installation Database ORNL/DOE

But Growth Has Slowed Since 2005, and Some Existing Capacity Has Been Retired
Net Capacity Growth, 1995 to Present
100 Cumulative Capacity Additions (GW) 90 80 70 60 50 40 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: CHP Installation Database ORNL/DOE

New CHP Capacity Additions Have Been Below 1 GW/Year Since 2006
Annual Capacity Additions, 2000 to Present
7 Annual Capacity Additions (GW) 6 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: CHP Installation Database ORNL/DOE

But the Number of New CHP System Additions Has Remained Steady
Annual System Additions, 2000 to 20091
300 Annual Capacity Additions (GW)

200

100

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: CHP Installation Database ORNL/DOE

Non-Traditional Users Are Growing

6% Other Industrials 42% Manufacturing 7% Other Industrials 27% Manufacturing

52% Commercial/ Institutional

66% Commercial/ Institutional

Up to 1999: 2,585 sites

Source: CHP Installation Database ORNL/DOE

2000-2009: 1,374 sites

But Industrials Drive Capacity Additions

7% Other Industrials 11% Commercial/ Institutional 15% Commercial/ Institutional 3% Other Industrials

82% Manufacturing

82% Manufacturing

Up to 1999: 63.0 GW
Source: CHP Installation Database ORNL/DOE

2000-2009: 24.8 GW

Industrial States Installed the Most Capacity

805 MW 1,361 MW New York Oregon 1,372 MW California 1,969 MW Alabama 755 MW Indiana 7,910 MW Remaining States

3,085 MW Louisiana 7,498 MW Texas

CHP Capacity Additions: 2000 - 2009

Source: CHP Installation Database ORNL/DOE

But Other States Have Active Markets

512 Sites Remaining States 217 Sites New York 83 Sites Connecticut 64 Sites Massachusetts 60 Sites New Jersey 47 Sites Illinois 54 Sites Texas

337 Sites California

CHP System Additions: 2000 - 2009

Source: CHP Installation Database ORNL/DOE

Heavy Steam Users Dominate Industrial Applications

1,062 MW Food Processing 1.466 MW Fabrication 7,693 MW Chemicals 898 MW Other Mfg 700 MW Other Industrial

1,957 MW Paper

7,285 MW Refining

CHP Capacity Additions: 2000 - 2009

Source: CHP Installation Database ORNL/DOE

Universities and District Energy Represent Two Thirds of the Commercial/Institutional Capacity
477 MW Other 101 MW WWT 125 MW Hospitals 601 MW Utilities 1,333 MW District Energy

1,060 MW Universities

CHP Capacity Additions: 2000 - 2009

Source: CHP Installation Database ORNL/DOE

Market Development 2000 - 2009

Early capacity additions driven by large merchant plants with industrial steam hosts Growing deployment in commercial and institutional applications Development stalled by high natural gas prices and growing economic uncertainties Significant retired and idled capacity

CHP Market Status

Where have we been?

Where are we now?

Where are we going???

Policymakers Appear to be Getting the Message about CHP

CHP is a critical energy efficiency resource CHP can quickly and cost-effectively reduce CO2 emissions CHP can enhance economic competitiveness

What If CHP Represented 20% of US Generating Capacity in 2030?

$234 billion private sector investment Nearly 1 million new jobs Reduces fuel use and CO2 emissions

Source: ORNL

20% CHP Could Reduce Projected Increases in CO2 Emissions by More than 60%

Source: ORNL

Energy Independence and Security Act of 2007

Title IV, Section D, contained provisions designed to improve energy efficiency by promoting CHP, waste energy recovery and district energy. Called for EPA to establish a Waste Energy Recovery Registry to identify the quantity and quality of recovery potential Authorized funding of regional Clean Energy Application Centers (not appropriated) Authorized a Waste Energy Recovery Incentive Program (not appropriated)
Production incentive of $10/MWh during first three years of operation

Energy Improvement and Extension Act of 2008

Provided a 10% investment tax credit (ITC) for the first 15 MW of CHP property
Systems <50 MW Produce at least 20% useful thermal and 20% electricity Be 60% efficient Be placed in service before January 1, 2017

CHP qualifies for 5 year depreciation under Modified Accelerated Cost Recovery System (MACRS)

American Recovery and Reinvestment Act of 2009

Provides refundability to investment and production tax credits through a grant program within the Department of Treasury Allows bonus depreciation for CHP:
50% of depreciation value can be taken in the first year Remainder over the following four years

Allows CHP tax credits even if projects are financed with local development bonds Allows biomass projects to claim a 30% investment tax credit Provides some $100 billion of additional government-backed loan guarantees for clean energy projects Potential funding for shovel ready projects
$156 million of cost-share grants for CHP, waste energy recovery, district energy, and industrial-efficiency projects (DOE ITP FOA44)

CHP Eligible for Similar Benefits as other Clean Energy Technologies

2007 Energy Property 45 PTC 45 ITC Refundable ITC 45 PTC 2009 48 ITC Refundable ITC

CHP Biomass open loop Wind

$20/MWh for 10 yrs $20/MWh for 10 yrs $20/MWh for 10 yrs

$20/MWh for 10 yrs $20/MWh for 10 yrs $20/MWh for 10 yrs

1st

10% of 15 MW 30%

10%

30%

30%

30%

Solar

30%

30%

30%

Geothermal

10%

10%

10%

If a technology is eligible for both PTC and ITC, then one of the two types of tax credit must be selected

Proposed Tax Enhancements

Increased ITC of 30% for highly efficient CHP Increase ITC eligibility from 15 to 25 MW for projects of unlimited size Remove prohibitions against cofiring in biomass PTC

State Initiatives
Thirteen states include CHP or waste energy recovery in portfolio standards
Nevada, Oregon, South Dakota, North Dakota ( B.C. and Saskatchewan) - waste heat recovery projects equivalent to other renewable electric generation resources

Specific incentives for CHP

New York Connecticut New Jersey Massachusetts California Texas Midwest Governors Association

New York
CHP technology demonstration and fleet program Energy Efficient Power Systems Existing Facilities Program pay for performance Multi-family Facilities Program pay for performance RPS
Anaerobic Digesters under customer-sited tier Fuel cells

Connecticut
An Act Concerning Energy Independence, June 2005 Customer CHP and DG Incentives
$450/kW, additional $50/kW in congestion area Utilities receive $200/kW (down to $50 in 2011) Low interest financing Natural gas distribution cost rebate No back-up power for new systems

More than 80 applications representing 300 MW between 2006 and 2008

New Jersey
Clean Energy Program supports increased energy efficiency and installation of clean energy technologies
Calls for 1,500 MW of CHP as part of state energy plan Provides $450/kW incentive (first $70 million offering recently closed)

Utility-based Energy Efficiency Incentive programs

PSE&G announced $190 million program $450/kW rebates for CHP in hospitals 50% of design costs

Massachusetts
MA Alternative Energy Portfolio Standard CHP is eligible technology
250 MW by 2020 $20/MWh equivalent CHP credit includes electricity and thermal Metered power output and useful thermal reported quarterly with independent verification

Gas and Electric Rebates for CHP

Green Communities Act directs utilities to purchase all cost-effective efficiency and makes CHP eligible

MicroCHP eligible for Renewable Trust

California
CARB set a target of 4,000 MW of new CHP by 2020 in response to AB 32 AB1613 calls for feed in tariffs for excess power from CHP systems < 20MW CPUC considering must-take contracts for excess power from large CHP (>20 MW) Bill to reinstate Self Generation Incentive Program for fossil-fueled CHP on Governors desk
$600/kW for first 1 MW, systems up to 5 MW

Waste heat recovery projects not regulated as GHG sources

Texas
Active Texas CHP Initiative State emergency preparedness bills include CHP provisions
State and local government buildings that must operate before, during and after major events and >500 kW Mandated to evaluate CHP before construction and major renovation Consider implementing if payback is less than 20 years

Midwest
Midwest Governors Association to announce carbon reduction plan Doubling amount of CHP by 2030
Increase current 10.4 GW to 21 GW Increase CHPs share of generating capacity from 4.3% to 7.1%

City of Chicago considering its own target

Increasing current 117 MW to 317 by 2019

New CHP Capacity Additions Have Been Below 1 GW/Year Since 2006
Annual Capacity Additions, 2000 to Present
7 Annual Capacity Additions (GW) 6 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: CHP Installation Database ORNL/DOE

Over 1,800 MW of New CHP Capacity Is Currently in Construction or Engineering

Annual Capacity Additions, 2000 to 2010/2011
7 Annual Capacity Additions (GW) 6 5 4 3 2 1 0
20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 /1 1

Source: CHP Installation Database ORNL/DOE

Market Development - Current Conditions

Most activity in states with favorable regulatory treatment and/or specific incentives Natural gas CHP in areas with supportable spark spread (Northeast, Texas, California) Biomass and opportunity fuels in Southeast, Midwest and Mountain Hot applications: universities, hospitals, waste water treatment, food processing Growing interest in waste heat to power applications Increasing interest in carbon reduction and in power reliability benefits of CHP

CHP Market Status

Where have we been? Where are we now? Where are we going???

We Seem to be at Inflection Points

Credit and financing Natural gas prices Technical innovation Carbon policy Other

Natural Gas Prices

Henry Hub Prices of $13.00/MMBtu in July 2008 and $3.50/MMBtu in September 2009
$13.00 in October 2006 and $5.00 in October 2006

Prices depressed by economic downturn Long term impact of shale resources

New large resource base that will place a ceiling on gas prices, or Just enough to offset production declines in conventional resources

Recent Natural Gas Production (Bcf per year)

Supply Area
Northern Rocky Mountain Basins Midcontinent Shales Other U.S. and Canada Total U.S. and Canada 2005 2006 2007 2008

2,284

2,461

2,700

3,081

652

813

1,265

2,142

22,071

22,433

22,510

21,695

25,007

25,707

26,475

26,918

Price, $/MMBtu

10

NYMEX Natural Gas Futures - 9/30/09

The Market Is Expecting Higher Prices For Now

No v09 Ja n10 M ar -1 0 M ay -1 0 Ju l-1 0 Se p10 No v10 Ja n11 M ar -1 1 M ay -1 1 Ju l-1 1 Se p11 No v11

Technical Innovation
Higher efficiency engines and turbines entering the market Fuel cells and microturbines both demonstrating robust performance and evolving toward larger systems More interest in packaged systems and modularity MicroCHP entering North American market

MicroCHP
High efficiency, thermallybased CHP below 10 kW Over 100,000 systems in Japan; 20,000 in Europe 200 engine-driven systems installed in the U.S.
ECRInternationalfreewatt Installation Medway,MA

Pilot programs in New York and Massachusetts Potential technology for EPA Climate Choice program
MarathonEcopower Installation NewYork,NY

Carbon Policy
How to treat CHP under cap and trade? Will there be national renewable and energy efficiency resource standards?

Discussion

Traditional Power Generation Wastes Energy

Electricity Generation is the Largest Source of CO2 Emissions

50%

% of US CO2 Emissions

40%

30%

20%

CO2 Emissions by the U.S. Electric Power Sector

10%

0%
1950 Source: 1960 1970 1980 1990 2000

RED calculations based on data from Emissions of Greenhouse Gases in the United States 2007; State Energy Data Report; and Annual Energy Review.

US Electricity Generation Remains Inefficient

100%

Inefficient generation

Wastes energy Inflates costs Increases pollution

50%

U.S. Delivered Electric Efficiency

0% 1900 1920 1940 1960 1980 2000

Source: U.S. Energy Information Agency

RED | the new green

- 47 -

www.recycled-energy.com

The Potential for Additional CHP Is Nationwide

Source: ORNL

The Future Is Smaller, Thermally-Based CHP

Thermally-sized systems providing heat and power primarily for on-site use Almost one-half of the potential is in commercial / institutional applications Much the potential is in systems below 20 MW in size Much of the potential is in applications with limited experience with CHP
Industrial food processing, fabrication and assembly Commercial lodging, office buildings, multifamily Institutional hospitals, schools, government facilities

The Natural Gas Balance

Lower-48 Dry Gas Production Vs. Dry Gas Capacity (BCFD)
58 56 54 52

Gas Price at Henry Hub (Nominal$ per MMBtu)

$16 $14 $12 $10
Price Spike Winter 2000-01 Rising Prices Winter 2002-03

50

$8
48 46 44 42 40
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Hurricane Ivan

Hurricane Gustav & Ike

$6 $4

Relative Price Stability

Hurricane Katrina & Rita

$2 $0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source for Historic Data: Platts Gas Daily

The recent downturn in the economy has led to a relatively looser balance between natural gas supply and demand.

Henry Hub Natural Gas Prices ($ per MMBtu)

$14 $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Jul-05 O ct-05 Jul-06 O ct-06 Jul-07 O ct-07 Jul-08 O ct-08 Jul-09 O ct-09 Jul-10 O ct-10 Jul-11 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 O ct-11
Historical Henry Hub Prices from Platts Gas Daily

Average Prices, 2010-2011 Oil Prices ($/Bbl): Light Crude Futures 72.92 ICF WTI 79.55 Gas Prices ($/MMBtu): Natural Gas Futures 6.53 ICF Henry Hub 6.10

ICFs Projected Henry Hub Prices

Futures Gas Price, Sept. 29, 2009