Biomass Regulatory Strategy

Carbon issues will increasingly impact various segments of the real estate industry in unexpected ways. Executives need to be mindful of these issues as they unfold. The impact of carbon regulation on biomass boilers is an example.

Increasingly, CFOs and facility managers are adopting the cost-cutting strategy of exploring fuel sources other than electricity and diesel fuel to run the boilers in their facilities. In particular, facilities in rural areas are increasingly relying on biomass boilers, where woody energy sources are plentiful and relatively inexpensive.

The EPA has recently released its plans to regulate carbon emissions from biomass boilers subject to its Tailoring rule and MACT rule. The strictness of the MACT rule in particular is a relatively unexpected development that will potentially have a negative impact on firms who have taken action to proactively embrace clean energy strategies (and will, by extension, benefit firms that have not yet taken proactive action).

The following summary is intended to explain the recent history of EPA involvement in biomass regulatory issues, and discuss the likely next steps in the EPA regulatory process as it impacts firms with biomass interests.

Background

The United States Clean Air Act is a Federal law designed to control air pollution on a national level. It requires the Environmental Protection Agency (EPA) to develop and enforce regulations to protect the general public from exposure to airborne contaminants that are known to be hazardous to human health. 42 U.S.C. § 7401.

The EPA historically has not regulated emissions of carbon dioxide and other greenhouse gasses.

In 2003, twelve states and others brought suit to force the EPA to regulate greenhouse gas emissions from vehicles. Ten states, the EPA, and others opposed the petition. The Supreme Court in Massachusetts v. Environmental Protection Agency, 549 U.S. 497 (2007), determined that the EPA must reconsider its decision to not regulate greenhouse gas emissions from vehicles.

In 2009, the EPA issued a “proposed endangerment finding” and a related proposed “cause or contribute finding”. The findings determined that vehicle emissions of carbon dioxide and five other gasses threaten the public health and welfare. After extensive public comment, a final rule codifying these findings became effective in January 2010.

These findings set the stage for future regulation of greenhouse gas emissions from all sources - including vehicles, boilers, industry, etc - in accordance with the EPA’s duty under the Clean Air Act as announced by the Supreme Court.

As a result, the EPA has subsequently taken steps to regulate greenhouse gas emissions from a variety of sources, including biomass boilers.

The first step is through the Tailoring rule, which is now a final rule. The second is through three Emissions Standards for Boilers and Process Heaters and Commercial/Industrial Solid Waste Incinerators rules - one of which, the MACT rule, is directly relevant to biomass boilers. That rule was pending comment through August 23, 2010 and comments are now under consideration by the EPA.

Tailoring Rule

The EPA regulates air emissions under the Clean Air Act. According to a recent analysis in the New York times, which is reprinted verbatim in part here, under the Clean Air Act's New Source Review program, if a new facility is built or an existing plant is upgraded, and if the plant is expected to emit a certain amount of pollutants—usually 100 to 250 tons per year is the threshold—then the facility must apply for a permit from a state agency and demonstrate that it is using the "best available control technology" to restrict that pollution.

The low 100-250 ton threshold was designed for emissions like lead and sulfur dioxide, since 100 tons per year is an enormous amount of lead, and it ensures that only the very largest polluters are regulated. But 100 tons per year is a very low threshold for carbon-dioxide. If the EPA used this existing emissions baseline to regulate greenhouse gases, about six million different small boiler facilities would potentially have to apply for permits. To avoid that scenario, the EPA has enacted the Tailoring Rule.

Under the Tailoring Rule, the only entities that will be regulated under the New Source Review Program will be polluters who already have to apply for permits for other pollutants (like lead and sulfur-dioxide) and who emit more than 75,000 tons of greenhouse gases per year. That standard will apply to only about 550 big polluters in the entire country. After that, for the next two years, any new power plant expected to emit more than 100,000 tons of greenhouse gases per year will be covered.

As a result, new biomass boilers will have to comply with the Clean Air Act’s New Source Review program only if they emit more than 100,000 tons of greenhouse gasses per year, which generally only captures large, utility scale facilities.

However, the thresholds for this rule will likely be adjusted in future years in accordance with various policy goals that are yet to be developed. Most likely the threshold will gradually be adjusted downward over time, and will increasingly capture large commercial facilities.


National Boiler Maximum Achievable Control Technology (MACT) Rule

In June 2010 the EPA published three proposed rules regulating emissions of toxic air pollutants at 1) area source boilers 2) major source boilers and 3) solid waste incinerators.

The MACT rule (docket #EPA-HQ-OAR-2006-0790) concerning area source boilers is relevant to commercial facility biomass projects. It applies to boilers at facilities that emit or have the potential to emit less than 10 tons per year (TPY) of any single air toxic or less than 25 TPY of any combination of air toxics.

The Biomass Thermal Energy Council (BTEC) has prepared a report on the severe impacts this rule would have on the ability to cost-effectively install and operate small biomass boilers. The following assessment is contained in comments prepared by the BTEC and submitted to the EPA in opposition to the rule as written.

Under the proposed rule, new and existing biomass boilers at area source facilities would be required to meet new emission limits for carbon monoxide (CO) and particulate matter (PM) as indicated in the chart at the top of this post. The proposal is extremely strict.

Substantial practical problems identified by BTEC that will result from implementation of this proposed rule include:

• Potentially Unachievable and Unrealistic Standards

EPA’s proposed emissions limits rely on a data set that is not representative of real-world technologies. Biomass boilers that achieve EPA’s particulate matter (PM) standard are not the same boilers that achieve its carbon monoxide (CO) standard. Using EPA’s own data set, it is obvious that there is no biomass boiler tested that can achieve both the proposed levels for PM and CO. Requiring new biomass boilers to meet standards that no single biomass boiler has ever achieved in testing is unreasonable.

• High Compliance Costs and Economic Consequences

Under EPA’s new annual emissions testing requirement, testing expenses would add an estimated $8,000- $15,000 per boiler system. That added cost likely surpasses the biomass fuel bill for smaller systems and is a major budget consideration for larger biomass boiler systems. Also, proposed compliance technology requirements could cost more than the biomass systems themselves. Such costs negate the monetary and environmental advantages of using renewable, local biomass fuel, thus encouraging continued fossil fuel use and discouraging investment.

EPA’s emissions limits will drive up costs, reduce biomass boiler use and fuel demand, and result in potentially widespread economic losses in industries that rely upon this low cost fuel, such as the wood products manufacturing, forestry, and agriculture sectors.

BTEC recommendations for improvement to the rule include performance requirements that are more representative of real-world technologies and practical realities:

• Initial minimum performance standards of (CO) – 1,164ppm (@ 7% O2) and (PM) - 0.23 lbs/mmBtu for all boilers, with reductions thereafter based on data collected during the first two years of the Rule’s implementation;

• Initial third party boiler certification test with required annual tune-ups without ongoing costly stack testing. Once a boiler (or range of boilers) is tested, that boiler would be approved for installation until a change was made in the boiler design.

Numerous trade associations, business interests, and others have formally opposed the proposed rule as written, for many of the reasons listed above.

A final rule is expected to be adopted by December 16, 2010.

Compliance Timeline

Once the final rule is published (presumably at 40 CFR § 63.11193 of subpart JJJJJJ - National Emission Standards for Hazardous Air Pollutants for Industrial, Commercial, and Institutional Boilers Area Sources - for area source boilers) existing affected boilers must achieve compliance no later than 3 years after publication of the final rule. New affected boilers that start up on or before the publication of the final rule must achieve compliance no later than the date of publication of the final rule. New affected boilers that start up after publication of the final rule must achieve compliance upon startup.

Next Steps

The MACT rule as written will impose significant unplanned costs on biomass boilers that are installed or under development, or to be installed in the future.

A wide range of biomass industry trade groups, businesses, and politicians have submitted comments to the EPA that the proposed rule is unworkable, and that it needs to be adjusted to avoid imposing excessive and unreasonable compliance costs on biomass boiler projects.

Potential passage of this rule is important to be mindful of as projects are pre-developed and pro-forma assumptions are made.

From a strategy perspective, for any firm with an interest in biomass boilers potentially covered by the EPA’s rulemaking, an in-depth conversation with internal and external groups can and should take place now to develop a range of options for the worst, medium, and best case EPA scenarios.

Industry Trends

The Dell case study is only one of many. Across the country and around the world, companies are turning to efficiency as the highest value way to increase productivity, clean up financial statements, and drive returns.

Case Study: Dell

In the face of declining sales, dropping profits and a weak stock price, PC maker Dell is vowing to go as green as possible.

The company's strategy is simple: Consume electricity efficiently first, and consume renewably second.

The company's efforts to become energy efficient are well known. But perhaps most surprising is Dell's embrace of renewable energy.

Tod Arbogast, Dell's Sustainable Business Director, says that 35% of the electricity the company uses in the U.S. is from clean and renewable sources. Globally, Dell's use of renewably generated electricity is 20% of its total.

Considering that electricity generated by renewable sources amounts to about 2% or 3% of the total energy used in the U.S., Dell's use of renewable energy is off the charts.

Energy partnerships matter in connection with clean energy real estate strategies. And Arbogast gives credit to Austin Energy, a utility in Austin, Texas, for being progressive about its use of clean energy.

The conventional view of renewable energy is that you have to pay more for it. But Arbogast says that Dell is saving money by using wind and landfill-to-methane-generated electricity.

"We're working off a base of 12 cents a kilowatt hour electricity, and we're still saving money," he says. "We engage in long-term contracts, and for a certain period we pay a premium [to fossil-fuel-generated electricity], but it doesn't take that long for the traditional-energy cost to surpass our fixed-rate cost" and help Dell save money.

Eventually, says Arbogast, Dell aims to use electricity that is 100% generated by clean and renewable sources. The company doesn't have a timeline to reach that goal. But in the meantime, to offset the 65% of electricity it uses domestically that is generated from fossil fuels, Dell is buying green offsets, "credible, vetted, third-party-verified renewable energy credits," says Arbogast. Dell is the only one in the PC industry doing this, he added.

Clearly, Dell is positioning itself to get in front of the carbon regulations that are currently being discussed in Congress - a best practice for every company.

See: "Dell's Green Energy Strategy" by Kerry A. Dolan

True Cost Energy Pricing

If Federal legislation is passed, all sources of energy will likely be priced at their true cost.

True cost pricing is pricing that includes all direct costs, social costs, and environmental costs of a particular form of energy.

By definition, renewable energy and energy efficiency involve a near-zero true cost premium. In contrast, fossil fuels are attractive and widespread because they have a low price relative to other forms of energy (renewable energy, nuclear power, etc). However, the price that consumers pay for fossil fuels does not reflect their true cost. Numerous social costs related to environmental and health impacts associated with fossil fuels are not included in their curent prices.

If pending Federal legislation comes to pass, the true cost of carbon emissions will be factored into the cost of fossil fuels going forward, instead of ignored and shifted into the future.

Here is an example of how true cost energy pricing could work, and how it would change the cost-calculus of companies choosing between three energy procurement alternatives related to real estate and energy costs:



Sources: US Energy Information Administration; National Academy of Sciences

The textbook rational business is interested in short-term profit maximization. Accordingly, it would seem that an organization would not be in favor of higher energy prices.

However, as previously noted, the alternative of not paying for the costs of carbon emissions now is a shift in those costs to future generations - which will result in high future costs of managing environmental damage and economic problems that result.

Given a choice between these options, it is no wonder that organization after organization is publicly supporting clean energy legislation and the true cost pricing mechanisms that raise conventional energy prices a little bit now in order to avoid higher costs in the future.

Pending Federal Climate Change & Energy Legislation

First, a general primer on the relationship between Federal and state laws. Federal laws set baseline standards that must be meet nationwide. States can set standards that are higher than Federal standards, but cannot set lower standards.

Comprehensive Federal energy and climate change legislation is coming. It is not law yet, but is merely in the mid-stages of discussion. Therefore, the details of what a final comprehensive Federal law will look like is uncertain. However, views of how the law should look can be found in various proposals including the American Clean Energy and Security Act, American Clean Energy Leadership Act, and the Clean Energy Jobs and American Power Act.

Federal standards for energy consumption in buildings, transportation, and consumer products will have a wide reaching impact across the US - especially in states that currently lack up-to-date energy standards. Moreover, Federal climate change legislation will create standards where state standards are almost entirely lacking.

Regardless of the form it takes, Federal energy and climate change legislation will create energy and climate standards that must be met nationwide. Compliance with these standards will cost money. These costs will be passed on, in various forms, through every corporation, non-profit, and governmental unit to every US citizen. These costs are projected to range from hundreds of dollars per person per year to thousands of dollars per person per year, depending on a wide range of assumptions.

Critics of comprehensive energy and climate change legislation argue that the costss are unnecessary and unreasonable - especially because they would be passed on in the form of higher prices for consumer goods and services, yet consumers would not see any tangible day-to-day benefits to justify higher prices for the same basket of goods and services as before.

However, data-driven scientific analysis shows that the price of delayed action on energy and climate issues would be far more costly.

For example, a noted study on the global impacts of climate change suggests that the costs of continuing to waste energy, and continuing to rely on fossil fuels, could equal between 5% and 20% of global GDP each year. These costs are generally associated with changes in the availability of resources like water, land, food, trees, and air. In contrast, the cost of taking action now to avoid these impacts would be around 1% of global GPD. The weight of the evidence contained in the broad body of other scientific studies supports similar conclusions.

A rational organization will run an NPV analysis of the costs and benefits of compliance with Federal energy and climate laws as compared to the cost of lost business opportunies (which in the aggregate results in lower national and global GDP) in going forward without these laws. Among other things, it will also adjust for the value of having a brand that the public sees as socially responsible - a value which is difficult to quantify but that has unquestionable value.

Many companies have performed this analysis and determined that it is in their best interests to support Federal energy and climate legislation even though it will impose short term costs that pinch the bottom line.

For example, Dow Chemical Co., Entergy Corp., Nike Inc., and hundreds of other Fortune 500 companies showed their support for the legislation during a recent lobbying effort on Capitol Hill. Additionally, there is the widely publicized withdrawal of Apple, Excelon, PG&E, PNM Resources, and others - who arguably have little to gain from Federal legislation - from the US Chamber of Commerce which opposes this legislation.

How can an organization mitigate the increased costs of energy and climate legislation? It's first step must be to reevaluate the way it uses energy. What gets measured gets managed - therefore, energy benchmarking is key. Once an organization understands its energy use patterns - the electrity that powers its lights, the fuel that delivery trucks burn on their routes, the amount of unused water that goes straight down the drain - it can take action to reduce this waste.

By minimizing waste, an organization can minimize the costs it incurs in complying with impending Federal energy and climate legislation, and thereby minimize the associated costs that it has to pass on to its customers.

Energy Waste

An understanding of the wastefulness inherent in our energy habits and energy infrastructure is a critical starting point for understanding the magnitude of the opportunity presented by clean energy. This insight is crucial for the long term planning of any organization with substantial energy intensive capital assets. These organizations wil prosper only if they have the foresight to incorporate energy into their long term strategic plans.

America wastes half of the energy it generates. 50%. Sound extraordinary? It's true, and it's the "dirty" little secret of our fossil fuel consumption habits.


How can it be that losses of 50% are possible? The answer is that our energy habits and energy infrastructure are holdovers from a different time - a time when energy was very cheap, and environment was not a concern.

For example, our power plants use decades old technology, and vast amounts of heat that they generate are lost to the atmosphere instead of used to provide heat for other buildings.

Additionally, we lack energy storage capabilities. Power plants produce energy constantly regardless of demand. For example, plants continue to produce power at night, despite that there is minimal demand. We lack the ability to cost-effectively store this excess energy, so it is either never captured, or it is lost as heat.

Inadequacies in our distribution infrastructure (the substations and power lines that criss-cross the nation) and our failure to fully utilize energy at the point of use (in buildings, industrial equipment, electric motors, automobiles, etc) substantially further exacerbate the problem.

How can it be that loses of 50% are acceptable? They are acceptable only because the price of energy is low enough to not incent consumers to care much.


Prices of fossil fuels continue to be low today because of subsidies and tax breaks that petroleum producers and distributors receive. And, by the way, even though people complain about special treatment for oil companies, they fail to realize the extent of their dependence on cheap fuel. For example, every time the price of gas goes up by a dime, people are up in arms. Oil company subsidies cannot be removed because people would revolt.

In short, our country is conditioned to waste excessive energy, and feels entitled to artificially low energy prices.

Clearly, this is unsustainable. And it is all about to change.

The price of energy is about to rise dramatically, which will reward those organizations that take action now, but potentially decmiate organizations that fail to recognize the coming reality of energy 'true cost pricing'.

Next: Pending Federal climate change and energy legislation, 'true cost pricing' of energy, why energy prices are set to rise dramatically, and how organizations can position themselves today to soften the blow of price increases tomorrow.

Overview

A tidal wave of economic change is coming, in the form of a clean energy economy.

To survive, let alone to prosper, organizations must take action to position themselves for this change.

Economic expansions are characterized by dramatic increases in productivity. The industrial revolution and heavy machinery. Utilization of excess capacity in US militarty infrastructure following WWII. The Wall Street 1980s fueled by mergers and acquisitions. The internet age and access to limitless data.

The clean energy economy will be the next revolution. It will be characterized by decreases in the amount of energy that we waste - and corresponding increases in the productivity of the remaining energy that we use.

A perfect storm of social forces have converged to power this economic transformation. These forces demand one or more of the three main benefits that a clean energy economy will provide:

Economic security

Energy security

Environmental security

Going forward, each of these topics will be explored in depth, and from various interconnected perspectives.

The objective of this exploration will be to identify strategies that organizations should consider today in order to position themselves for the change that is coming -- the change that is already here.