Copyright 2001 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
July 27, 2001, Friday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4964 words
COMMITTEE:
HOUSE ENERGY AND COMMERCE
SUBCOMMITTEE: ENERGY AND AIR QUALITY
HEADLINE: NATIONAL ENERGY POLICY
TESTIMONY-BY: MARK HALL, VICE PRESIDENT, EXTERNAL
AFFAIRS
AFFILIATION: TRIGEN ENERGY CORPORATION
BODY: Testimony of Mark Hall Vice President of
External Affairs Trigen Energy Corporation 1 Water Street White Plains, NY,
10601
Summary of Testimony
Trigen is a leading developer, owner
and operator of industrial, commercial, institutional and district energy
systems in North America. We combine the use of highly efficient energy
technologies including combined heat and power (CHP) systems with flexible
customer-centered utility solutions. Trigen employs over 800 energy
professionals and owns and operates 52 facilities in 22 states and the District
of Columbia. Trigen is the proud recipient of many prestigious awards honoring
our innovation, leadership in the energy industry and commitment to
environmental protection. These include the Energy Star Award and the Climate
Protection Award from the U.S. EPA. There are a variety of institutional and
regulatory barriers that prevent CHP from achieving its full competitive
potential. These barriers inappropriately reduce the economic viability of CHP
projects, slow their development and implementation and in some cases simply
make them impossible to complete. Among those that Trigen believes must be
addressed most urgently are:
Interconnection - Interconnection refers to
the ability of an onsite generator or a third party to physically connect to the
electricity distribution and/or transmission system and to interact with that
system. Trigen seeks a uniform nationwide interconnect policy that creates
uniform technical standards and the ability to connect to the grid at rates and
conditions that are just and reasonable. Such a policy is necessary to deploy
the vast resources of highly efficient CHP and distributed generation (DG)
assets that can immediately address the need for new generating capacity,
greater reliability, and reduced emissions.
Backup Power - The
availability of backup power has been a significant economic issue for onsite
generation projects for years. Many restructuring bills include a provision
which would prospectively repeal all elements of
PURPA
including the requirement that backup power be made available to QF facilities.
In those locations where electricity restructuring legislation has not been
passed or implemented, the repeal of the "must sell" provision of
PURPA could result in utilities significantly raising the cost
of backup power or withholding it altogether. Trigen seeks a Federal policy that
guarantees backup power to onsite power facilities at just and reasonable rates.
The absence of such a guarantee could make the economics of onsite power
projects cost-prohibitive.
New Source Review (NSR) - The Clean Air Act's
NSR program dictates the type of emission controls that are required for energy
projects around the country. The EPA is considering revisions to the NSR program
to make it more effective and more equitable than it has been over the last 15
years. The need to modernize the nation's energy infrastructure is inextricably
linked to modernizing the nation's environmental regulatory framework. Trigen
believes reform of the NSR Program should address its failure to produce
pollution reduction from old grandfathered plants and simplify the NSR process
for new more efficient plants. Trigen is working with four other companies to
develop a multi-pollutant strategy to replace NSR.
Output-based
standards - The establishment of output-based standards allows facilities to
count their fuel to end use energy efficiency toward their environmental
compliance requirements. Output-based standards encourage efficient and
inherently cleaner plants. Trigen has been an active participant in numerous
venues established to develop output-based standards. Trigen seeks establishment
of progressive regulations that replace BACT and LAER with a cap and trade
program coupled with a universal allowance allocation of pounds of pollution per
megawatt hour of electricity produced and pounds per megawatt hour of thermal
energy produced.
Tax Lives - One of the "quirks" of the tax code is that
the same basic piece of equipment may have a wide-ranging "taxable life"
depending on the use of the equipment. For instance, a jet engine on an airplane
has a tax life of 5 years. If the same engine is used for power generation it
will get a tax life of 15, 20 or as much as 38 years depending on its use.
Trigen seeks a change in the tax laws to allow lighter gauge, small-scale
combined heat and power assets to be depreciated over a shorter time period to
encourage more widespread use. We have attached a white paper addressing our
recommendations in more depth.
Tax Credits - Tax credits have been used
for generations to encourage practices that the government views as desirable.
Trigen seeks a tax credit for the investment in CHP assets. We have attached a
white paper addressing our recommendations in more depth.
Testimony
Mr. Chairman and members of the Committee, thank you for allowing me to
testify before you today on barriers to competitive generation and in particular
in support of this committees desire to address legislative proposals to remove
barriers to combined heat and power (CHP) and other forms of distributed
generation (DG). My name is Mark Hall, and I am the Vice President of External
Affairs for Trigen Energy Corporation, based in White Plains, NY. Trigen owns
and operates some of the most efficient power plants in the world. We accomplish
this by deploying CHP, DG and leveraging other modern technologies in innovative
ways.
Trigen currently owns, operates or otherwise manages fifty-one
plants located in twenty-two states, and the District of Columbia. Trigen is the
proud recipient of many prestigious awards recognizing our innovation,
leadership in the energy industry and commitment to environmental protection.
This includes two awards from U.S agencies: the Energy Star Award from the U.S.
EPA in recognition of our leadership in CHP projects and the Climate Protection
Award from the U.S. EPA for corporate leadership in reducing greenhouse gas
emissions. But more important than awards recognizing our environmental
stewardship is the fact that we would not be selected to design, build own or
operate on-site CHP projects for our customers if we were not able to provide
substantial economic and reliability benefits in addition to outstanding
environmental performance.
The nearby University of Maryland College
Park is an excellent example. Trigen and a partner were selected by the
University to build and operate a new state-of-the-art CHP facility for the
campus as well as to manage the on-site utilities while working with the campus
staff to improve overall efficiency. The project is expected to save the
University of Maryland system $6 million dollars per year while reducing
regional nitrogen-oxide emissions by 9,800 tons per year and carbon dioxide
emissions by 3.5 million tons over the 20 year life of the contract. We were the
recipient of the 1999 Project Award from the National Council for Public-Private
Partnerships because of our ability leverage technology in ways that were both
economically and environmentally beneficial to all parties.
Despite
these economic and environmental benefits, there are a variety of institutional
and regulatory barriers that prevent CHP from achieving its full competitive
potential. These barriers inappropriately reduce the economic viability of CHP
projects, slow their development and implementation and in some cases simply
make them impossible to complete. H.R. 1945 is an attempt to remove the
interconnection and backup power barriers and allow Trigen and other companies
to increase the beneficial application of CHP. Although H.R. 1945, introduced by
Rep. Jack Quinn and with an additional 13 cosponsors covers some of the issues,
there are additional factors that must be addressed to fully remove the
barriers.
Mr. Chairman, Trigen's plants and employees are at work every
day showing how efficient energy production is both good for business and good
for the environment. By removing the barriers to utilizing CHP and other highly
efficient DG, Congress can reward investors, benefit consumers, strengthen our
economy and clean up our air.
The issues you have asked this panel to
address are of critical importance to all of us. Energy sector competition is
already upon us, with the States leading the way. The Federal government must
rise to the task of addressing the barriers to competition that inherently lend
themselves to national legislation, matters that cannot be responsibly dealt
with in a piecemeal, State-by- State manner.
H.R. 1945 is the result of
many months of thoughtful work that reflects the benefit of numerous parties
working together to arrive at consensus language that addresses the need for a
uniform nationwide interconnect standard. H.R. 1945 marks a critical step in
efforts to improve the environment and electricity markets by encouraging the
deployment of CHP and other DG. I would like to point out that S. 933 is the
Senate companion bill to H.R. 1945. The only difference between the two is that
H.R. 1945 includes a provision addressing tax depreciation that does not exist
in S. 933. Trigen offers its full support of both.
In addition to
addressing why there is a critical need for uniform nationwide interconnection
standards, I would also like to highlight four other issues that must be
addressed if we want to remove the most formidable barriers to deploying CHP and
other highly efficient DG technologies. They are: Backup power as related to
PURPA repeal, clarifying tax depreciation schedules, rethinking
new source review and establishing output-based standards. First, I will address
interconnect standards and the immediate need for H.R. 1945. Interconnection
The National Energy Policy proposal recently released by the White
House, like similar proposals of the last Administration, recognizes the
economic and environmental benefits of CHP and other highly efficient DG
systems. One formidable barrier to taking advantage of those benefits is the
lack of uniform nationwide interconnection standards.
The current
process for determining the appropriate technical requirements for the
interconnection of new energy projects with the distribution or transmission
system is often unnecessarily lengthy and expensive and the specific
requirements can vary arbitrarily from state to state, utility to utility, site
to site. Incumbent utilities that may not want to face competition may attempt
to cloak anticompetitive behavior in the guise of technical disagreement over
interconnection. We recognize that it is essential for interconnections to be
safe and reliable, but interconnection standards can be both safe and reliable,
and uniform. Bringing uniformity to interconnection through a uniform nationwide
technical standard will reduce uncertainty, lower costs, and facilitate
deployment of modern CHP technology, across the country. Interconnection
language must be sufficiently broad to help all generators connect to the
distribution and/or transmission grids. H.R. 1945 provides for interconnections
at both levels. The language does not pick winners and losers, but maximizes
flexibility for determining whether the facility is connected to the
transmission grid or the distribution grid. In addition, it is important that
the language does not unnecessarily infringe upon States' rights to manage their
respective distribution grids. The benefits of uniformity require that the
standards apply to all states.
I think it is important to give you an
example of the interconnection problem. Trigen has a great deal of experience
interconnecting various sized generators with the distribution and transmission
grid. We have done it literally dozens of times. Technically, it is a pretty
straightforward task but in practice it can be a slow painful process that
raises costs and delays projects that otherwise could be delivering important
economic and environmental benefits. In 1998, Trigen approached a utility to
request interconnection for a 703 kW generator to be installed in a downtown
office building. The small system would supply the building's electric load and
air conditioning. Yet, two years later, we were still negotiating with the
utility over so-called "technical" issues. Months after receiving our initial
request for interconnection, the utility asked that Trigen design a different,
specialized interconnection. Trigen completed the new design at a significant
additional cost. The utility rejected the design. In response, Trigen offered to
use guidelines developed by Consolidated Edison in New York City, even though
the ConEd guidelines were disproportionately burdensome and expensive given the
very small size of the installation. The utility agreed, but after Trigen
complied with these requirements, the utility imposed further "technical"
restrictions on Trigen's ability to operate the facility. It took over two years
to resolve this issue. The barrier related costs of completion were over $
88,000.
One would strongly suspect that this was anti-competitive
behavior masquerading as technical disagreement which successfully prevented the
unit from operating for two years. This is but one of countless examples. In
fact, DOE published a report in May of 2000 entitled Making Connections that
memorialized this example and numerous others from across the country. H.R. 1945
will address many of the interconnection barriers highlighted in that report.
Passage of H.R. 1945 will help manufacturers of CHP and DG technology achieve a
plug and play economy of scale, lower costs and encourage investment in CHP and
DG technology.
The Shortcomings of H.R. 1045 Regarding Interconnect
Like H.R. 1945 and S. 933, H.R. 1045 recognizes the need for a uniform
interconnect standard. However, H.R. 1045 falls short of addressing the entire
scope of that need. H.R. 1045 calls only for a standard for interconnect to the
distribution grid. Failure to address transmission interconnect would result in
an enormous lost opportunity to ensure all the same benefits H.R. 1045 seeks to
achieve at the distribution level. Addressing only distribution would create
winners and losers by giving utilities the ability to game the system by
reclassifying distribution as transmission, thereby avoiding the uniform
standards requirement. Providing standards for distribution only would also
result in inefficient choices in that generators may opt for distribution
interconnection only because uniform standards are available. Stream-lining
interconnect at the transmission level will be one more encouragement to
investing in larger scale DG like on-site CHP plants whose efficiencies can
bring immediate large scale reductions in fuel consumption and emissions.
In addition, H.R. 1045 does not include a provision addressing the right
to back-up power at just and reasonable rates. Most CHP and DG assets require
back-up power as insurance to the DG/CHP customer that they will have
electricity in the event the DG/CHP asset has scheduled or unscheduled down
time. Without a guaranty of affordable back-up power many DG/CHP projects will
never get off the ground. I will address this issue in more detail below.
Finally, H.R. 1045 includes limiting language that the DG asset must be
designed to serve "retail electric customers at or near the point of
consumption". H.R. 1945 does not include any such limitation. If we want to
encourage the deployment of highly efficient CHP and DG assets we should not
place any limitation on what customers are served or where it can be located in
order to take advantage of uniformity. This provision would limit competition to
a small range of DG assets to the exclusion of many others. This is the very
problem Congress should be seeking to eliminate.
Concerns Regarding H.R.
2460, the "Comprehensive Energy Research and Technology Act"
In H.R.
2460, a bill passed by the House Science Committee last week, a provision on
interconnection standards for distribution was added during the mark up. This
language raises concerns in that it has not been studied or analyzed by most in
the distributed power and CHP community. In addition, the amendment does not
address transmission interconnection.
Backup Power and the Prospective
Repeal of
PURPA's "Must-Sell" Provision
Hand-in-glove
with the issue of interconnection standards is the availability of
reasonably-priced back-up power. Historically, back-up power was guaranteed at
just and reasonable rates to facilities that met either the Qualifying Facility
or Small Power Production Facility definitions under
PURPA.
However, as technology and markets have evolved, the need for back-up power at
rates that are just, reasonable and not unduly discriminatory is important to a
wide-range of projects that might not meet these historic definitions,
regardless of whether the project is interconnected to the transmission or
distribution grid. H.R. 1945 remains respectful of state authority by allowing
States to determine the just and reasonable rate for back-up power at the
distribution level. The Bill also ensures that until there are open markets
where a facility can competitively purchase backup power, the local utility must
provide such backup power at nondiscriminatory rates.
CHP and other DG
systems rely on the ability to purchase backup power from the grid in the event
that they temporarily fail to operate or must shut down for maintenance. Under
current
PURPA laws the local utility "must sell" backup power
to qualified stand alone CHP facilities. Many proposed restructuring bills would
repeal both the "must buy" and the "must sell" requirements of Section 210 of
PURPA. The "Right to Back-up Power" provision of H.R. 1945 is a
safety measure that will ensure back-up power at just and reasonable rates if
the "must sell" provision of
PURPA is repealed and there is no
open access to purchase of electricity in a given state. Elimination of
PURPA's "must sell" requirement without the protection of the
right to back-up power will leave new entrants and existing DG at the mercy of
the local utility, subject to discriminatory pricing or outright denial of
back-up power.
Tax depreciation schedules
The current tax code,
based on a somewhat obsolete view of the energy industry, currently does not
allow depreciation of CHP and DG technologies in ways that reflect those assets'
physical and economic lives. This inappropriate treatment can discourage
investments in CHP and DG technology. For example, the IRS allows a gas turbine
located inside a building for on-site generation use to be depreciated over a
39-year period while the same gas turbine used for transportation (e.g., on an
airplane) depreciates in one quarter of the time. The moving parts of the
turbine used for electricity and heating may be replaced as many as five times
while the owner continues to depreciate the original investment. Shortening the
time over which this equipment depreciates would remove an impediment to
investment in what is otherwise an efficient and environmentally beneficial
technology.
New and small turbines have different physical properties
and will generally operate under quite different conditions than large turbine
units employed by traditional electric utilities and, consequently, will have
different service lives. Further, the competitive marketplace will force energy
suppliers to replace or "upgrade" standing equipment before it fails, since
installation of more efficient technology offers lower costs to customers and
the opportunity to hold or capture market share for competitive energy
suppliers. We expect that energy generation equipment will come and go in the
marketplace in a manner that strongly resembles that of modern computers -
assets which outlive their economic lives long before they cease to work
properly.
Congress should direct the Internal Revenue Service (IRS) to
set a depreciation schedule of seven (7) years for industrial and utility
facilities and ten (10) years on Building CHP (BCHP) assets, which reflects the
true technical and economic life of most systems. I have attached to this
testimony recommended modifications to the Internal Revenue Code from the US
Combined Heat and Power Association (Attachment A). Trigen is a member of the
USCHPA and supports all of its recommendations.
New Source Review
The new source permitting program known as New Source Review (NSR) was
developed over 20 years ago to reduce air pollutant emissions. At the time the
focus was on reducing smokestack emissions and NSR focuses primarily on
requirements for end-of- pipe, add-on control technologies. Add-on controls
reduce emissions but add cost and reduce efficiency.
Over the last 20
years, we have learned that a much better approach to pollution control is to
avoid entirely the generation of pollution through lower emitting processes and
reduce their impact through increased efficiency. Pollution prevention (P2) and
increased efficiency reduce emissions while also reducing capital and operating
costs. They result in processes that are cleaner and cheaper with lower demand
on all natural resources. This is clearly the direction that we need to move in
order to achieve a vital economy and a healthy environment and CHP is perhaps
the best example of this opportunity.
Unfortunately, NSR does not give
any credit for efficiency and gives little or no credit for pollution
prevention. It is constantly driving projects away from these positive
approaches and back to the old sidetrack of add-on controls. It discourages the
application of existing P2 technologies and the development of new technologies.
U.S. companies have learned that they should not invest in the development of
cleaner and higher efficiency technologies because they will not be able to
permit them. This is a multidimensional loss to the U.S. economy. In contrast,
our foreign competitors have made great strides in these areas, which are
reflected in their high efficiency use of energy.
As an example, several
of our recent projects have been based on a particular small gas turbine
generator. As an electric generator only, the turbine is less than 30 percent
efficient. However, our CHP applications using that same piece of equipment are
anywhere from 80 to over 90 percent efficient. Put another way, we provide more
than three times as much energy to the customer from the system for the same
amount of emissions and energy input.
It is only common sense that our
regulatory system should recognize this energy and environmental benefit. But it
doesn't. In the eyes of NSR, there is no difference between the two systems.
Since NSR is a cost-based system, it is requiring us to duplicate capital
investment to use add-on controls where we have already provided a reduction
through efficiency. In many cases, the project "won't pencil"if we have to pay
twice, and a beneficial project is canceled.
This fundamental flaw of
NSR is only one of several ways in which the regulation has outlived its
usefulness. The program relies on a variety of highly technical standards to
determine which new or existing units will be required to apply emission
controls. Over the years, these standards have become more and more arcane and
contentious. The very high cost and uncertainty involved in the application of
NSR to both new and existing units has created a huge disincentive for operators
to maintain and improve the performance of these units. By holding out for the
maximum possible improvement at all times, the program has discouraged even the
normal improvement that should happen without regulation. By excluding the
effects of pollution prevention and efficiency, it has excluded the best
possible solutions from consideration and left us with proliferating lawsuits as
the only result.
Because CHP, by definition, produces two types of
energy output (steam & electricity) from one fuel input, its treatment under
NSR is especially difficult. The system sometimes tries to force us to combine
our facilities with those of our clients in ways that are commercially
impossible. In other cases it deprives us of credit for emission reductions that
are legally verifiable and creditable.
Output-based regulation, which
relates the emissions to the useful energy produced is another regulatory
concept that would help to address these problems. There has been growing
acceptance of this approach as a way to send the proper signals through
environmental regulation. Unfortunately, it seems to be difficult to integrate
this approach into the structure of NSR.
We have been working with the
EPA for more than three years to find appropriate ways to achieve the
universally recognized benefits of CHP within the NSR structure. I am sorry to
report that our progress to date has been limited. In large part this is due to
the fundamental structure of the program. In the end, we are forced to conclude
that, at least for the generation of heat and power, the NSR program is a
grandfathered regulation that has outlived its usefulness and needs to be
replaced with a more modern and efficient regulatory structure. We believe that
a properly designed cap and trade program that provides guaranteed emission
reductions over the entire sector would provide better environmental results and
encourage new, more efficient technology. I have attached a copy of a
multi-pollutant strategy (Attachment B) that Trigen and four other energy
companies have developed as a substitute for NSR as it applies to heat and power
generation.
Output-Based Standards
Currently, efficiency is
measured by an input-based standard that measures fuel consumption as opposed to
energy output. Under this approach, the efficiency of CHP is not recognized. By
way of example, for every one unit of fuel consumed by a CHP plant two units of
energy are produced - steam and electricity. CHP is twice to three times more
efficient than a typical central generation plant that only produces one unit of
energy for every one unit of fuel consumed because it is not capturing the heat
off the combustion process.
The establishment of output-based standards
would allow facilities to count their fuel to end use energy efficiency toward
their environmental compliance requirements. Output-based standards encourage
efficient and inherently cleaner plants. Trigen has been an active participant
in numerous venues established to develop output-based standards. Trigen seeks
establishment of progressive regulations that replace BACT and LAER with a cap
and trade program coupled with a universal allowance allocation of pounds of
pollution per megawatt hour of electricity produced and pounds per megawatt hour
of thermal energy produced.
Encouraging competitive generation through
Investment Tax Credits
Tax credits are typically offered by the Federal
government to obtain public benefits by prompting private parties to make
capital investments that they would not so readily make otherwise or to overcome
other short-term barriers to otherwise feasible activities. As such, an
investment tax credit (ITC) is a good short-term mechanism to promote CHP
systems, which offer very significant public and private economic and
environmental benefits, but can often be more difficult for the private sector
to deploy than electric-only projects because of the complexity inherent in
assembling a "thermal load" or set of heating/cooling customers.
H.R.
2511- Section 113 proposes to amend the IRC to provide a tax credit for CHP
property. While the general proposition is laudable, the language of Section 113
has two significant shortcomings and one that defeats the purpose of offering a
tax credit from the outset. The first is it limits the eligible equipment to
those with an electrical capacity of more than 50 kW. We applaud requirements
for output efficiency but see no reasonable explanation for limiting the size of
eligible equipment. Second, it fails to offer any credit for the equipment used
to deliver energy output of CHP systems. In the case of district energy systems,
the steam distribution pipes are one of the most capital intensive parts of the
overall investment. Third, and most importantly, Section 113 extends the tax
credit only to companies that use a "normalized method of accounting". This
requirement would mean that Trigen would not be eligible to use these tax
credits in fifty of our fifty-two plants. A "normalized method of accounting" is
the method of accounting used by regulated power plants, very few of which
utilize CHP and DG. This accounting limitation defeats the purpose for offering
the tax credit in the first place. The very companies who will deploy CHP and DG
assets are precluded from taking advantage of this benefit.
Congress
should direct the IRS to provide a ten (10) percent ITC for new thermal energy
distribution systems at district energy CHP facilities. I have attached to this
testimony recommended modifications to the Internal Revenue Code from the US
Combined Heat and Power Association (Attachment A). Trigen supports all of its
recommendations.
Conclusion
Given the inevitability of
competition in the electricity market, and both national and global trends that
will guide the future of energy production in this country, I believe that
emerging technologies are serving and will serve an indispensable purpose in
meeting goals of energy efficiency and environmental demands. I urge this
committee to pass H.R. 1945 and to take a proactive stance on addressing the
other concerns I have raised here today. I thank the subcommittee for the
opportunity to appear before you. Thank you, Mr. Chairman.
LOAD-DATE: July 30, 2001