6. Treatment of CHP in a Cap-and-Trade System
This section addresses three issues related to the treatment of CHP in a GHG cap-and-trade system. First, we consider whether CHP should be included in the cap-and-trade system and, if so, what thresholds or exemptions should apply. Second, we discuss what sector or sectors should be used to regulate CHP GHG emissions. Third, we consider the appropriate emission allowance allocation method for CHP, taking into consideration our other recommendations to ARB. Consideration of CHP installations as an emissions reduction measure is addressed in Section 4.1.3 above.
Our recommendations focus on GHG emissions associated with electricity generated by CHP facilities. We encourage ARB to consider treatment of the GHG emissions related to thermal output from CHP facilities in a manner that is consistent with its treatment of thermal output from other sources in the industrial and commercial sectors.
6.1. Background
CHP is a technological process that generates both electricity and useful thermal output from a single fuel source. Because of this co-generation, the potential exists for fuel efficiency gains relative to processes that provide electricity and useful heat separately. This efficiency potential can reduce total fuel use and therefore decrease GHG emissions.
Several technologies are used in CHP facilities, including gas turbines, microturbines, spark ignition reciprocating engines, steam turbines, compression ignition reciprocating engines, and fuel cells. These technologies can either combust fuel or, in the case of fuel cells, catalyze fuel. CHP systems can be divided into two basic classifications: topping-cycle and bottoming-cycle. In a topping-cycle CHP system, the primary purpose is to generate electricity on-site, with waste heat from that generation then captured for use in a secondary on-site process. A bottoming-cycle CHP application captures waste heat from an industrial or commercial thermal process and uses it to generate electricity. Electricity produced from a bottoming-cycle CHP unit has no or relatively small amounts of GHG emissions associated with it, depending on whether there is any supplemental firing.
In California, there are presently about 940 CHP units. Over 600 of these are units of less than 1 MW capacity, which fall below ARB's current reporting threshold. While these small units account for nearly two-thirds of the number of CHP units, they constitute just over 1% of all CHP capacity. Table 6-1 provides further information regarding CHP units in California.
Table 6-1
Summary Statistics of CHP Plants in California
Size |
Total Capacity |
% of |
Number of Plants |
% of Plants |
Less than |
102 |
1.1% |
604 |
64% |
Greater than |
9,126 |
98.9% |
336 |
36% |
Total |
9,228 |
- |
940 |
- |
According to the current California Greenhouse Gas Inventory,47 electricity production at existing CHP facilities emitted between 15 and 24 MMT CO2e each year between 1990 and 2004. GHG emissions associated with useful thermal output were between 7 and 13 MMT CO2e each year. Total CHP facility GHG emissions ranged between 25 and 33 MMT CO2e, approximately 6-7% of California's total GHG emissions during the period. CHP total and disaggregated GHG emissions are represented graphically in Figure 6-1.
Figure 6-1
GHG Emissions from CHP in California
(Source: California Greenhouse Gas Inventory, November 2007)
Regardless of technology type or classification, most CHP produces three separate outputs: thermal output consumed on-site, electricity consumed on-site, and electricity delivered to the grid. Thus, GHG emissions from a CHP facility may be associated with more than one sector for GHG regulatory purposes. The on-site thermal output generally would be produced by a boiler if not for the CHP installation, and would be associated with the commercial or industrial sector, as appropriate. The electricity delivered to the grid would be associated with the electricity sector (as previously defined), while the proper sector for the electricity used on-site has not previously been determined.
6.2. Regulatory Treatment of CHP Emissions
In this section, we address whether all, some, or no portion of the three CHP components (electricity delivered to the grid, electricity consumed on-site, and thermal output consumed on-site) should be included in the cap-and-trade system, if ARB determines that cap-and-trade should be implemented.
Most parties support inclusion of all GHG emissions from CHP in the cap-and-trade system. EPUC/CAC argue that including CHP GHG emissions in a cap-and-trade system may create a disincentive for CHP because on-site emissions of a CHP facility are larger than they would be if the needed thermal output was obtained through other means and no electricity was produced on-site.
Electricity delivered to the grid is indistinguishable from electricity delivered from non-CHP sources. In the absence of a CHP installation, the electricity used on-site would be purchased from the grid. To provide comparable and equitable treatment for both CHP-generated electricity and electricity generated from non-CHP sources, we recommend to ARB that the emissions associated with all electricity consumed in California that is generated by CHP facilities in excess of a minimum size threshold (see Section 6.2.2 below), whether it is used on-site or delivered to the grid, be included in the cap-and-trade system. Whether inclusion of CHP in a cap-and-trade system would produce a disincentive is in large part a function of the allowance allocation method. This issue is discussed in more detail in Section 6.4 below. The allocation method we recommend in Section 6.4 for emissions associated with the electricity produced by CHP facilities would not create a disincentive for the installation of CHP.
The proposed decision did not include recommendations regarding CHP systems for which all electricity is used exclusively on-site with no deliveries to the grid. In comments on the proposed decision, EPUC/CAC recommend that all CHP facilities that meet the minimum size threshold be provided comparable GHG regulatory treatment regardless of whether they deliver electricity to the grid or solely serve on-site load. We agree with EPUC/CAC that there is no policy basis for differential GHG regulatory treatment of CHP facilities on the basis of whether they deliver electricity to the grid and, further, that differential treatment on this basis could have unintended and harmful competitive impacts. As a result, our recommendations to ARB regarding the GHG regulatory treatment of CHP facilities apply to all CHP facilities that meet the minimum size threshold, regardless of whether they deliver electricity to the California grid or solely serve on-site load.
EPUC/CAC also ask for clarification regarding our meaning in discussing electricity that is generated by CHP facilities for "on-site" consumption or use. We use this term to mean use for those purposes that are specified in Public Utilities Code Section 218(b)(1) and (2).
EPUC/CAC raise an additional concern in their comments on the proposed decision that warrants discussion. They describe that whether a CHP facility is importing electricity from or exporting electricity to the grid typically is determined at a single "net" meter at the facility's site boundary, with electricity produced and load served on-site being netted before reaching the meter at the point of interconnection. They describe other arrangements, however, in which generation and load may be interconnected to the grid through separate meters, and assert that, for purposes of determining GHG emissions, the result of these two configurations is the same. We agree with EPUC/CAC that GHG regulatory treatment of CHP facilities should be comparable regardless of the metering configuration used.
Another question arises concerning the treatment of electricity that may be delivered to the grid in California from out-of-state CHP. Under Section 38505(m), "Statewide greenhouse gas emissions" means "the total annual emissions of greenhouse gases in the state, including all emissions of greenhouse gases from the generation of electricity delivered to and consumed in California . . . whether the electricity is generated in state or imported." Under AB 32, ARB will track all GHG emissions resulting from the generation of electricity delivered to and consumed in California, whether the electricity is generated in California or imported. However, for CHP units located outside California, the thermal output and the electricity consumed on-site or at other locations outside California is not subject to AB 32. The scope of any cap-and-trade program under AB 32 can be no broader than what is encompassed within AB 32. Accordingly, for a CHP unit located outside California, we recommend that only the electricity delivered to the California grid and consumed in California be included in the California cap-and-trade program.
In this section, we address what, if any, size threshold should be established below which CHP facilities should not be included in the cap-and-trade system. Parties agree that very small CHP facilities should not be included in the cap-and-trade system, but do not agree regarding the size threshold. Some parties support a threshold based on the type of use made of the process heat. Other parties argue that, under the deliverer framework, non-CHP deliverers do not have distinctions based on size other than some minimum. Most of the parties agree that either 1 MW or some other de minimis threshold would be appropriate.
Since one of our goals is to create equitable GHG policy among all electricity market participants, we recommend that ARB adopt the same minimum size thresholds for CHP electricity generation as for all other deliverers included in the electricity sector for purposes of GHG regulation.48 The size threshold would not distinguish between electricity used on-site and electricity delivered to the grid.
Some parties advocate that more efficient CHP facilities should be exempt from the cap-and-trade system. Most parties agree that efficient CHP should be used and encouraged. However, no other deliverer is subject to an efficiency threshold. Therefore, we do not recommend that any efficiency threshold be used to determine whether a CHP facility is subject to the cap-and-trade program, if one is implemented. Efficiency criteria may be useful, however, in determining if a CHP facility qualifies as an emissions reduction measure (see Section 4.1.3.2 above).
ARB may want to treat GHG emissions associated with thermal output from a CHP facility in a manner that is parallel to its treatment of other sources in the industrial and commercial sectors. In such an approach, the total emissions that determine if a CHP facility is subject to reporting or compliance obligations in the industrial or commercial sector, as appropriate, could include emissions associated with useful thermal output but would exclude emissions associated with electricity generation.
6.3. Attribution of GHG Emissions to Appropriate Sectors
Several parties advocate the creation of a separate sector for CHP for GHG regulatory purposes. Some of these parties argue that it would be arbitrary to divide GHG emissions between sectors and that doing so would make it difficult to design appropriate regulatory mechanisms. Other parties argue that a separate CHP sector is not needed as long as all of the outputs that CHP produces (electricity and thermal output) are included in the cap-and-trade system. These parties assert that if all emissions associated with both outputs are included in the cap-and-trade system, "where" the emissions are assigned is not important. Some parties believe that a benefit of a separate CHP sector would be that it would ensure that all CHP emissions are included in the cap-and-trade framework. As other parties note, no other technological process is currently defined as a separate sector.
Consistent with our recommendations in D.08-03-018 regarding the treatment of other electricity delivered to the grid and to ensure equitable treatment of CHP-generated electricity, we recommend that (subject to a minimum size threshold discussed above) CHP electricity that is delivered to the grid and consumed in California be included in the electricity sector for GHG regulatory purposes. The deliverer, that is, the entity that delivers the CHP electricity to the grid, would be responsible for the associated emissions. In order to also provide equitable treatment for CHP electricity used on-site, we recommend that CHP electricity that is used on-site also be included in the electricity sector, even though it is not delivered to the grid. While there is no "deliverer" for CHP electricity used on-site, it would be reasonable to treat the CHP operator as comparable to a deliverer for purposes of GHG regulation of CHP electricity used on-site, e.g., the CHP operator would be responsible for surrendering allowances for CHP electricity used on-site.
It is possible that in some instances the deliverer of CHP electricity to the grid is not the operator of the unit, in which case two entities would be responsible for surrendering allowances for different portions of the CHP unit's emissions associated with its electricity generation, i.e., the deliverer for the CHP electricity delivered to the grid, and the CHP operator for CHP electricity used on-site. We do not know if there are any cases where this will actually occur.
If ARB wants to attribute the GHG emissions from thermal output in a manner that is parallel to our recommended treatment of emissions associated with GHG-generated electricity, we expect that ARB would attribute those emissions to the industrial or commercial sector as appropriate.
6.4. Allocation of Allowances for CHP Facilities
EPUC/CAC recommend that allowances should be distributed for free to topping-cycle CHP facilities using a double benchmark mechanism. A double benchmark would set reference emissions rates for each of the two outputs associated with CHP, useful thermal output and electricity. The reference emissions rates would be in the form of metric tons of emissions per unit of energy output. In essence, the double benchmark would allocate allowances based on what the emissions would have been if the thermal output and the electricity were efficiently generated separately. EPUC/CAC present the basic concept of a double benchmark and offer various different modifications to their proposal should we conclude that modifications are needed to coordinate their proposal with our recommended allowance distribution methodology for deliverers and retail providers. These options include use of a reference emissions rate based on average fossil generation or a CCGT, establishing the reference emissions rate based on a specific vintage of generation technology, and the allocation of allowances for avoided transmission losses. EPUC/CAC also describe modifications to their proposal that would apply if some allowances were distributed through an auction to CHP facilities. EPUC/CAC argue that any extra allocation that would occur due to the reference emissions rate being larger than the actual emissions rates of CHP facilities would compensate CHP facilities for the potential disincentives resulting from the increased on-site emissions due to CHP electricity production.
EPUC/CAC submit that there is no need to utilize a double-benchmark approach for bottoming-cycle CHP because the production process is fundamentally different than in a topping-cycle CHP facility. EPUC/CAC and Indicated Cement state that, in many bottoming-cycle CHP facilities, the level of GHG emissions is not changed by the presence of CHP and, further, that where supplemental firing is used to generate electricity, the incremental GHG emissions are much less than from a standard gas-fired generator. As a result, EPUC/CAC's position is that, when there is no supplemental firing in a bottoming-cycle unit, there is no need to allocate allowances for the electricity generated. When there is supplemental firing with a resulting compliance obligation, EPUC/CAC recommend that allowances be distributed for the electricity production based on an average or marginal emissions rate for fossil resources or for natural gas-fired generation. EPUC/CAC do not recommend use of a benchmark mechanism for the distribution of allowances for a bottoming-cycle CHP's thermal output.
Several parties generally support EPUC/CAC's double-benchmark proposal. These parties have differing opinions about the appropriate reference emissions rate. DRA prefers using an auction to distribute allowances, but states that special consideration such as a double benchmark may be required for CHP units if free allowances are allocated to other generators.
As discussed above, we consider in today's decision how, for CHP facilities that meet a minimum size requirement and are included in the cap-and-trade program, emission allowances should be distributed for the electricity generated by the CHP facility, not for the thermal output. As a result, in the remainder of this decision, we refer to EPUC/CAC's proposal as the "EPUC/CAC benchmark proposal," which recognizes that ARB may consider allowance allocations for the thermal output.
PG&E proposes that allowances should be distributed to CHP facilities in the same manner that they are distributed to other deliverers. PG&E argues that the inherent fuel savings of CHP would create an economic incentive to install CHP, and that any unintended negative consequences created by distributing allowances to CHP facilities on the same basis as all other deliverers would not be substantial enough to deter installation of CHP facilities. PG&E recommends that the method for distributing emission allowances for thermal output from CHP be consistent with the method ARB adopts for other sources of thermal output in the industrial sector. SDG&E/SoCalGas generally support PG&E's recommendation.
CCC contends that treating CHP facilities the same as other deliverers for allocation purposes could result in CHP facilities being economically disadvantaged if their role as a self-provider is not also accounted for. In its opinion, CHP facilities act essentially as their own retail provider. CCC argues that distribution of auction revenues to retail providers in proportion to the loads they serve without a comparable distribution of auction revenues to CHP facilities would treat CHP inequitably, and that this inequitable treatment would reduce the economic incentives for installing CHP facilities.
Our recommendation that, for CHP facilities that meet a minimum size requirement, emissions associated with all electricity generated by the CHP facility and consumed in California be included in the cap-and-trade program and included in the electricity sector for GHG regulatory purposes allows separate consideration of the appropriate allowance distribution methodologies for thermal output and electricity generated by CHP. The separate consideration of allowance distribution methodologies for the two CHP outputs does not preclude adoption of any of the distribution options proposed by parties. As an example, if we were to recommend that allowance distribution for CHP electricity be based on a CCGT benchmark and ARB were to utilize an allocation method for thermal output that distributes emissions allowances based on a benchmark, the resulting distribution of emission allowances to CHP could be comparable to EPUC/CAC's double benchmark proposal.
In the development of the record, parties were asked about regulatory and legal barriers to the development of CHP, particularly in the context of whether CHP should be treated as an emissions reduction measure. Several parties suggest that allocation policies be used to compensate for what they perceive as regulatory barriers to CHP. In Section 5.4.3 above, we address a similar issue regarding whether extra allowances should allocated to renewables and to energy efficiency.
As discussed in Section 4.1.3, we commit to investigate market and regulatory barriers for CHP with the goal of maximizing the State's reliance on cost-effective CHP as an emissions reduction measure. Consistent with our discussion in Section 5.4.3, we do not determine at this time that it would be appropriate to use favorable distribution of GHG allowances to provide an extra incentive for CHP technologies. This issue may warrant revisiting as part of our further examination of CHP barriers, as discussed in Section 4.1.3.
The EPUC/CAC benchmark proposal would provide on-going allocations of free allowances to CHP based on reference emissions rates that would attribute more emissions to CHP facilities than they would actually create. Some parties argue that the resulting extra allowances would be warranted because CHP facilities would experience increased on-site compliance obligations while contributing to an overall decrease in emissions statewide. However, we are not convinced that such favorable treatment and extra incentives for CHP through inflated allowance allocations are warranted. As a result, we do not recommend the EPUC/CAC benchmark proposal at this time.
One of the parties' concerns, articulated by CCC in particular, is that allocation policies would treat CHP inequitably if they do not recognize that CHP facilities act as their own self-provider of electricity used on-site. We agree that allowances should be made available to CHP facilities in an equitable manner that recognizes that CHP functions in ways that are comparable to a deliverer for all of its electricity, and comparable to a retail provider for the portion of its electricity used on-site.
To ensure equitable treatment for all market participants, we recommend that the allowance distribution policies that we recommend in Section 5 apply to CHP-generated electricity. We recommend that, for CHP facilities that meet a minimum size requirement, all CHP-generated electricity that is consumed in California, whether delivered to the grid or used on-site, receive allowances on the same basis as other deliverers, and that CHP-generated electricity used on-site receive allowances on the same basis that they are distributed to retail providers. These recommendations apply to both topping-cycle and bottoming-cycle CHP installations.
For purposes of GHG regulation, acknowledging the dual roles that CHP plays as both a deliverer for all of its electricity and a retail provider for on-site usage would treat CHP facilities on the same basis as other deliverers and retail providers. We recommend that CHP receive the same benefits of free allowance distributions and have the same obligations, including a requirement to purchase any additional allowances or offsets needed to meet GHG compliance obligations.
As described in Section 6.3 above, there may be situations in which the deliverer of CHP electricity to the grid is not the operator of the unit. Recognizing this, we recommend that, to the extent that allowances are distributed administratively to deliverers, the deliverers for CHP electricity delivered to the grid and consumed in California, and the CHP operators for CHP electricity used on-site, receive allowances on the same basis as deliverers of electricity from other sources.
All CHP electricity consumed in California should be included in determining free distributions to individual deliverers. In Section 5.4, we recommend that distribution of free allowances to individual deliverers be based on a fuel-differentiated output-based approach, with distributions limited to deliverers of electricity from emitting resources. Free distributions to deliverers would be phased out by 2016. We recommend that these same policies apply to CHP in its role as an electricity deliverer. For topping-cycle CHP, we recommend that the same fuel-based weighting factors be used that are used for other delivered electricity. Because no emissions would be attributed to bottoming-cycle CHP that does not use supplemental firing, it would not receive free allowances as a deliverer. We believe that additional work will be needed regarding the specific weighting factors that should be used when there is supplemental firing in bottoming-cycle CHP, in order to account for the resulting emissions.
We recommend similarly that ARB treat CHP operators comparable to retail providers for the portion of CHP-generated electricity that is used on-site. All CHP electricity consumed on-site should be included in determining the amount of free distributions to individual providers. Our recommendation in Section 5.4 that allowance distributions to retail providers be based initially on historical emissions of their electricity portfolios, transitioning to a sales basis by 2020, should apply equally to CHP-generated electricity used on-site. Equity goals dictate that CHP operators receive allowances on the same basis as retail providers and similarly be required to sell through a centralized auction the allowances they receive as a result of their role comparable to a retail provider for the portion of CHP-generated electricity used on-site.
Our recommendation in Section 5.5 that auction proceeds should be used for purposes consistent with AB 32 also applies to CHP facilities. Operators of emitting CHP facilities could use auction proceeds to offset their compliance obligations under the cap-and-trade program, a use that would be consistent with AB 32. ARB may choose to require CHP facilities to report on their use of auction revenues.
47 Inventory data available at http://www.arb.ca.gov/cc/inventory/data/data.htm, November 2007.
48 ARB's current reporting regulations require reporting by all electricity generating facilities that both have a capacity greater than or equal to 1 MW and emit 2,500 metric tons of CO2 per year or more..
