The following article appeared as a guest editorial in the California Onsite Generation Regulatory and Policy Update (March 20, 2004).
In view of the complexities and uncertainties that remain evident in this publication's fine coverage of distributed generation in the State, I envision massive frustration by those waiting for clear opportunities and signals to proceed with DG more broadly. I feel inclined, therefore, to remind your readers that, in addition to the successes of the renewable program here, gas-fired cogeneration is and remains a huge DG success story in California. And as we all wade through the "exit fee" morass and focus on ways of getting new DG projects off the ground and viable, we shouldn't lose sight of the concurrent need to ensure that the huge portfolio of existing cogeneration projects remains supported with contract extensions. These existing projects form the backbone of California's existing stock of distributed generation.
Gas-fired cogeneration projects under long-term contract to the state's three investor-owned utilities (PG&E, SCE and SDG&E--the "IOUs") provide 6,367 megawatts of electricity generating capacity on the grid operated by the CAISO. This amounts 12% of the total "native" generation located within the CAISO system. Since cogeneration projects tend to operate in a "baseload" fashion, they produce an even larger share--about 17%--of the IOU's annual energy (kilowatt-hour) requirements. Cogeneration is the 3rd largest source of power in the state, trailing only conventional thermal plants and hydroelectric facilities.
This widespread development of cogeneration projects in California dates from the late 1970s and early 1980s, when cogeneration provided a key solution to California's first major "energy crisis." In 1973, world oil prices skyrocketed during the Arab oil embargo. In the electric industry, high oil prices hit ratepayers hard, particularly in states like California where the utilities burned substantial amounts of oil to generate electricity. The traditional alternatives to oil--large coal and nuclear plants--seemed increasingly suspect for costs, safety and environmental reasons. Natural gas was widely perceived to be a declining resource.
The nation needed a new approach to meeting its energy needs. That new paradigm emerged in the Public Utilities Regulatory Policies Act ("PURPA"), enacted in 1978 as part of a broad national energy plan. PURPA sought to reduce the country's dependence on oil through the development of new resources for electric generation, including renewable resources (solar, wind, biomass and small hydro) and the more efficient use of gas in cogeneration projects. By the end of 1982, most of the key elements of PURPA had been implemented in California, and industrial and institutional customers with large energy requirements were considering cogeneration as a means to reduce their electricity and natural gas costs.
Most of California's cogeneration projects were developed and built between 1982 and 1990, under long-term (20-30 year) contracts to sell excess electricity to the local IOU. Unlike the utility-owned power plants, the developers of cogeneration projects (and the renewable technology projects that were also built at this time) bore all the permitting, financing and construction risks associated with the timely completion of these plants. For industrial customers, cogeneration was also a vehicle by which they could install newer, high efficiency, lower emission equipment to produce steam, with which electrical energy was an associated output.
Today, these combined heat and power (CHP) facilities are integrated into schools, hospitals, food processors, paper manufacturers and other diverse California businesses. It's important to keep in mind the benefits to consumers from these distributed cogeneration projects--benefits that remain today. Gas-fired cogeneration has contributed significantly to the State's development of a supply portfolio that is more efficient, diverse, reliable and environmentally sound. The efficient use of natural gas in CHP projects provides societal benefits from the conservation of fossil fuels and reduces the state's overall reliance on gas. CHP has provided major air quality benefits by replacing much dirtier steam boilers and by pioneering the use of new emissions control technology, such as selective catalytic reduction. Cogeneration QFs have operated reliably for years and are widely distributed. Many are located at or near load centers, and thus avoid the cost and environmental impacts of new transmission lines.
California has long been the nation's leader in recognizing the benefits from and encouraging cogeneration. Section 372 of the State Public Utilities Code (1997) states: "It is the policy of the state to encourage and support the development of cogeneration as an efficient, environmentally beneficial, competitive energy resource that will enhance the reliability of local generation supply, and promote local business growth." More recently, in November 2003, the California Energy Commission issued the final Integrated Energy Policy Report (IEPR) with a strong endorsement of the continued development of cogeneration in California. The IEPR states: "Distributed generation, including cogeneration and self-generation, has tremendous potential to help meet California's growing energy needs as an additional generation source and an essential element of customer choice" (IEPR, p. 15).
During December 2003 and January 2004 the California Public Utilities Commission issued procurement decisions that reinforced its support for cogeneration. "As a general proposition, we find that QF power provides significant benefits to the state, in the form of more efficient industrial processes, as well as electric power. In particular, we wish to encourage existing QFs to continue providing power over the longer term to the utilities. We also wish to encourage efficiency upgrades to existing facilities. Neither of these objectives will be met if we continue to offer only stopgap solutions in the form of one-year SO1 contracts. Therefore, we will require the utilities to sign SO1 contracts for five years in duration with QFs wishing to provide power at SRAC prices (R.01-10-024, p. 160)." We were encouraged by these reassertions of the recognition of cogeneration's benefits and look forward to planned future proceedings on QF contract extensions and price issues.
As noted above, today power from gas-fired cogeneration QFs serves about 17% of the IOU's load. And one of the biggest challenges facing this large block of existing cogenerators is the upcoming end of their original contract periods. By 2005, the number of QFs under contract to the IOUs will begin to drop sharply, as their original contracts expire. Due solely to the expiration of QF contracts (both gas-fired and renewable), the IOUs' committed resources will drop by roughly 3% per year from 2005 to 2012. The reality is, however, that these power plants and their host facilities are still viable, useful cogeneration units and renewing their contracts eliminates a significant portion of this post-2006 resource concern. The state needs to support and maintain its existing energy infrastructure, while it continues to seek new energy capacity. Cogeneration needs to play a key role in the state's procurement plan. It represents a highly efficient use of natural gas that directly supports California industry and jobs. California needs to retain the benefits of the clean, efficient indigenous generation that cogenerating QFs provide. Therefore, state policy should focus on providing long-term contract extensions for cogeneration QFs, in order to ensure that utility ratepayers will continue to receive the benefits of these reliable and economical generation resources.
This editorial's author, Maureen Lennon, is Executive Director of the California Cogeneration Council. She is a principal in Lennon and Associates, Inc., a consulting firm in Pasadena. From 1990 to 2000, Maureen was Vice President of Legal, Government and Environmental Affairs for U.S. Borax, Inc. She has been a member of several Boards of Directors including, California Manufacturers and Technology Association (Chair, 1998-1999), California Cogeneration Council, California Foundation on Environment and Economy and the American Industrial Health Council. Earlier in her career, she held environmental, legal and energy management positions at Southern California Gas Company, Arco, the American Petroleum Institute and the U.S. Congress.
In view of the complexities and uncertainties that remain evident in this publication's fine coverage of distributed generation in the State, I envision massive frustration by those waiting for clear opportunities and signals to proceed with DG more broadly. I feel inclined, therefore, to remind your readers that, in addition to the successes of the renewable program here, gas-fired cogeneration is and remains a huge DG success story in California. And as we all wade through the "exit fee" morass and focus on ways of getting new DG projects off the ground and viable, we shouldn't lose sight of the concurrent need to ensure that the huge portfolio of existing cogeneration projects remains supported with contract extensions. These existing projects form the backbone of California's existing stock of distributed generation.
Gas-fired cogeneration projects under long-term contract to the state's three investor-owned utilities (PG&E, SCE and SDG&E--the "IOUs") provide 6,367 megawatts of electricity generating capacity on the grid operated by the CAISO. This amounts 12% of the total "native" generation located within the CAISO system. Since cogeneration projects tend to operate in a "baseload" fashion, they produce an even larger share--about 17%--of the IOU's annual energy (kilowatt-hour) requirements. Cogeneration is the 3rd largest source of power in the state, trailing only conventional thermal plants and hydroelectric facilities.
This widespread development of cogeneration projects in California dates from the late 1970s and early 1980s, when cogeneration provided a key solution to California's first major "energy crisis." In 1973, world oil prices skyrocketed during the Arab oil embargo. In the electric industry, high oil prices hit ratepayers hard, particularly in states like California where the utilities burned substantial amounts of oil to generate electricity. The traditional alternatives to oil--large coal and nuclear plants--seemed increasingly suspect for costs, safety and environmental reasons. Natural gas was widely perceived to be a declining resource.
The nation needed a new approach to meeting its energy needs. That new paradigm emerged in the Public Utilities Regulatory Policies Act ("PURPA"), enacted in 1978 as part of a broad national energy plan. PURPA sought to reduce the country's dependence on oil through the development of new resources for electric generation, including renewable resources (solar, wind, biomass and small hydro) and the more efficient use of gas in cogeneration projects. By the end of 1982, most of the key elements of PURPA had been implemented in California, and industrial and institutional customers with large energy requirements were considering cogeneration as a means to reduce their electricity and natural gas costs.
Most of California's cogeneration projects were developed and built between 1982 and 1990, under long-term (20-30 year) contracts to sell excess electricity to the local IOU. Unlike the utility-owned power plants, the developers of cogeneration projects (and the renewable technology projects that were also built at this time) bore all the permitting, financing and construction risks associated with the timely completion of these plants. For industrial customers, cogeneration was also a vehicle by which they could install newer, high efficiency, lower emission equipment to produce steam, with which electrical energy was an associated output.
Today, these combined heat and power (CHP) facilities are integrated into schools, hospitals, food processors, paper manufacturers and other diverse California businesses. It's important to keep in mind the benefits to consumers from these distributed cogeneration projects--benefits that remain today. Gas-fired cogeneration has contributed significantly to the State's development of a supply portfolio that is more efficient, diverse, reliable and environmentally sound. The efficient use of natural gas in CHP projects provides societal benefits from the conservation of fossil fuels and reduces the state's overall reliance on gas. CHP has provided major air quality benefits by replacing much dirtier steam boilers and by pioneering the use of new emissions control technology, such as selective catalytic reduction. Cogeneration QFs have operated reliably for years and are widely distributed. Many are located at or near load centers, and thus avoid the cost and environmental impacts of new transmission lines.
California has long been the nation's leader in recognizing the benefits from and encouraging cogeneration. Section 372 of the State Public Utilities Code (1997) states: "It is the policy of the state to encourage and support the development of cogeneration as an efficient, environmentally beneficial, competitive energy resource that will enhance the reliability of local generation supply, and promote local business growth." More recently, in November 2003, the California Energy Commission issued the final Integrated Energy Policy Report (IEPR) with a strong endorsement of the continued development of cogeneration in California. The IEPR states: "Distributed generation, including cogeneration and self-generation, has tremendous potential to help meet California's growing energy needs as an additional generation source and an essential element of customer choice" (IEPR, p. 15).
During December 2003 and January 2004 the California Public Utilities Commission issued procurement decisions that reinforced its support for cogeneration. "As a general proposition, we find that QF power provides significant benefits to the state, in the form of more efficient industrial processes, as well as electric power. In particular, we wish to encourage existing QFs to continue providing power over the longer term to the utilities. We also wish to encourage efficiency upgrades to existing facilities. Neither of these objectives will be met if we continue to offer only stopgap solutions in the form of one-year SO1 contracts. Therefore, we will require the utilities to sign SO1 contracts for five years in duration with QFs wishing to provide power at SRAC prices (R.01-10-024, p. 160)." We were encouraged by these reassertions of the recognition of cogeneration's benefits and look forward to planned future proceedings on QF contract extensions and price issues.
As noted above, today power from gas-fired cogeneration QFs serves about 17% of the IOU's load. And one of the biggest challenges facing this large block of existing cogenerators is the upcoming end of their original contract periods. By 2005, the number of QFs under contract to the IOUs will begin to drop sharply, as their original contracts expire. Due solely to the expiration of QF contracts (both gas-fired and renewable), the IOUs' committed resources will drop by roughly 3% per year from 2005 to 2012. The reality is, however, that these power plants and their host facilities are still viable, useful cogeneration units and renewing their contracts eliminates a significant portion of this post-2006 resource concern. The state needs to support and maintain its existing energy infrastructure, while it continues to seek new energy capacity. Cogeneration needs to play a key role in the state's procurement plan. It represents a highly efficient use of natural gas that directly supports California industry and jobs. California needs to retain the benefits of the clean, efficient indigenous generation that cogenerating QFs provide. Therefore, state policy should focus on providing long-term contract extensions for cogeneration QFs, in order to ensure that utility ratepayers will continue to receive the benefits of these reliable and economical generation resources.
This editorial's author, Maureen Lennon, is Executive Director of the California Cogeneration Council. She is a principal in Lennon and Associates, Inc., a consulting firm in Pasadena. From 1990 to 2000, Maureen was Vice President of Legal, Government and Environmental Affairs for U.S. Borax, Inc. She has been a member of several Boards of Directors including, California Manufacturers and Technology Association (Chair, 1998-1999), California Cogeneration Council, California Foundation on Environment and Economy and the American Industrial Health Council. Earlier in her career, she held environmental, legal and energy management positions at Southern California Gas Company, Arco, the American Petroleum Institute and the U.S. Congress.
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