QF Revival on Regulatory Horizon

By Published On: November 14, 2010

An infusion of new and repowered combined heat and power plants in California is expected following likely approval of a settlement before the California Public Utilities Commission. A key impetus behind the proposed agreement is the California Air Resources Board’s direction to increase these cogeneration projects--which create power and useful heat--to help reduce the power sector’s climate change impacts in the state. “There’s been a paradigm shift driven by CARB’s goal to decrease greenhouse gas emissions by increasing [combined heat and power] generation,” Frank Lindh, California Public Utilities Commission general counsel, said during a Power Association of Northern California Nov. 9 meeting. The Air Board’s carbon reduction plans under AB 32, the state climate protection law--including its proposed carbon cap-and-trade program--appear to be moving the ball forward for operators and developers of decentralized power plants that are less polluting. Both the power and heat is put to use, making the plants more efficient. Traditional gas plants produce power and waste heat. “We have been looking for opportunities to build and repower,” noted Beth Vaughn, California Cogeneration Council executive director. She said the long drawn-out litigation over the price and contract terms of deals between cogeneration plants, or qualifying facilities (QFs), and utilities caused her industry to stagnate. Many QF contracts with utilities have expired or are close to expiration. The size of the facilities varies widely, from 10 MW to 100 MW, as do the various generators interests. Now, it appears those contracts are on the verge of renewal under the agreement before the CPUC. Also spurring momentum on the combined heat and power front is the state’s loading order, according to Todd Strauss, Pacific Gas & Electric’s senior director of power procurement. Topping the state energy agency’s list are energy efficiency and renewable energy. Fourth in line of preferred energy resources is distributed generation, which includes cogeneration. “There is a strong policy overlay and billions of dollars at stake,” Strauss said. The key issue is “how much combined heat and power can we take.” The settlement, if approved, is predicted to stimulate 3,000 MW to 7,000 MW or more of new cogeneration facility contracts. Much of the power is expected to come from new and modernized projects to meet state greenhouse gas reduction targets. The proposal is expected to be approved by regulators before the end of the year. It is expected to settle what’s been at issue for years in the industry, namely the price and other terms of the contracts between utilities and combined heat and power developers. The Utility Reform Network, initially a supporter of the QF deals, for example, became concerned that cogeneration facilities were being paid above market prices. Then in July 2008, the CPUC created tumult after ruling that the utilities could change the price they paid for the QF power retroactively for up to 10 years. The Air Board gave a needed push towards settling the costly dispute with its AB 32 scoping plan, which called for more cogeneration. In May 2009, a 16-month settlement process was launched. Last month, many of the stakeholders agreed to a deal that sets payment and other contract terms. Under the proposed settlement, investor-owned utilities agree to sign deals for 3,000 MW by 2015 from existing, improved, and new QF facilities via a request for proposals restricted to only combined heat and generation facilities. The bid is expected to be similar to renewable energy solicitations. Southern California Edison is to sign 1,402 MW worth of deals, Pacific Gas & Electric 1,387 MW, and San Diego Gas & Electric 160 MW. A second request for proposals is to be launched four years later, with the amount of QF power determined by the CPUC’s long-term procurement proceeding. Cogeneration facilities are covered by federal law, but under the terms of the proposed accord, the settling parties agree to back the utilities in their request to remove combined heat and power plants with capacities above 20 MW from federal oversight under the 1978 Public Utilities Regulatory Policies Act, including the must take obligation. The parties to the settlement before the CPUC include the investor-owned utilities, consumer advocates, the California Cogeneration Council, Independent Energy Producers and some other cogeneration groups. Electric service providers and community choice aggregators have not agreed to the accord.

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