Legal & Regulatory Considerations for Waste Heat Development

1. Legal & Regulatory Considerations for Waste Heat Development Current landscape & future prospects Presented by John Nimmons, J.D. Waste Heat-to-Power Workshop University of California Irvine March 2, 2005 John Nimmons & Associates Mill Valley, California 415.381.7310

2. Topics • Why legal / regulatory issues matter • Characterizing waste heat & its functions • Selling waste-heat-generated power to utilities • Federal & state support for waste heat development • Conclusions • Useful next steps

3. Sensible legal & regulatory treatment can – Why legal/regulatory issues matter • expand markets for electricity from waste heat • improve economics of waste heat recovery through grants, loans, rebates, tax benefits, etc. • raise awareness & promote consideration & adoption of waste heat options • reduce transactional barriers & cost of waste heat projects • reduce regulatory barriers to waste heat conversion & use • minimize environmental impacts • support efficient & sustainable resource use

4. Characterizing waste heatFish, fowl or …? • ‘Waste’ • Federal (PURPA benefits) • ‘residual heat’ • ‘heat from exothermic reactions’ • States: some define, many don’t. Definitions differ. E.g. – • ‘energy otherwise lost’ (Nevada) • ‘energy otherwise released to the environment’ (Washington) • ‘produced but unused’ (Oregon) • ‘Conservation’ – CA Pollution Control Fin. Auth. (CPCFA), OR, MT • ‘Efficiency improvement’ – OH, OR • ‘Alternative energy’ – ILL, MT • ‘Pollution control’ – CPCFA • ‘Renewable’ – CPCFA, CO, FL, OR, VT, WA

5. Why it matters: Federal PURPA benefits • Facilities producing electricity from waste heat can qualify for PURPA benefits, including: • interconnection with serving utility • power sales to serving utility at its ‘avoided cost’ • transmission to another utility for purchase • non-discriminatory backup service from utility

6. Why it matters: Federal PURPA benefits • ‘Qualifying cogeneration facility’ • Topping cycle: operating & efficiency standards apply • 5% useful thermal output • 42.5% efficiency, if natural gas or oil input (45% if thermal output < 15%) • Bottoming cycle: 45% efficiency (if gas or oil supplemental firing; otherwise no efficiency requirement)) • ‘Qualifying small power production facility’ • ‘waste’ - including residual heat - is an eligible energy source • no operating or efficiency standards • 80 MW limit at a single site

7. Why it matters: Federal production & investment credits • ‘Production credit’ for electricity from some renewables • 1.5¢ / kWh credit for electricity sold, for 10 years • ‘Qualified energy resources’ now include (among others): • most biomass resources • ‘closed loop’ organic material planted exclusively for electricity • ‘open loop’ – livestock manure & bedding, forest residues, landscape trimmings • geothermal energy • solar energy • municipal solid waste combustion • available until 12/31/05 (but has been renewed before) • 10% investment tax credit for certain energy property • solar electric & thermal • geothermal

8. Why it matters: State & local examples • Direct financial incentives • grants, loans, rebates – e.g., CA Pollution Control Financing Authority, SGIP • tax benefits (credits, exemptions, reimbursements, etc.)– at least 7 states • Other market support mechanisms • renewable portfolio standards – 12 states mandatory, 3 voluntary • net metering –about 40 states • green pricing –~ 32 states, over 500 utilities (.5–6.0¢ /kWh premium, avg. $5.50/mo.) • public agency mandates(planning, design, life-cycle costing, etc.)– at least 3 states • regulatory exemptions –some explicit, most through cogen exemptions • RD&D, planning, &/or promotion – at least 5 states • education, training & assistance –at least 1 state • emissions & efficiency credits – work in progress • local zoning preferences– at least 1 state

9. State Portfolio Standards • Many states have adopted ‘portfolio standards’ • Purpose: to stimulate markets for clean, efficient resources • Mechanism: utilities & other electricity providers must generate or acquire an increasing annual percentage of electricity from favored resources until target is reached • Standards generally focus on renewables, but states define eligible resources differently

10. State Portfolio Standards(potential waste heat resources)

11. Nevada RPS • A qualified energy recovery process means: • a system that converts ‘otherwise lost energy’ from – • exhaust heat from engines, or manufacturing or industrial processes or • pressure reduction in water or gas pipelines (before distribution) • to electricity, without additional fossil fuel or combustion • up to 15 MW • Excludessystems that use energy (lost or otherwise)from electric generation • For RPS, not ‘renewable energy’ as such, but a distinct type of ‘renewable energy system’

12. State Net Metering Programs • Utilities normally buy power at wholesale, & sell to customers at retail • Net metering allows self-generators to offset their excess production (otherwise valued at wholesale) against their retail purchases • Essentially self-executing – minimizes transaction costs for customers & utilities • States limit eligible system size • range: 10kW – 2 MW • typical: 25 kW – 100kW • States define eligible resource types & customers

13. State Net Metering Programs:eligible resource types

14. Conclusions • Legal & regulatory treatment will strongly affect the direction & value of waste heat development • Waste heat is characterized in diverse ways, without clearly articulated policy rationale • Waste heat projects appear eligible for important financial & market incentives already in place, but largely untested so far in the waste heat context • Developing coherent, consistent & defensible regulatory policy will simplify the work of waste heat proponents, & catalyze more widespread resource development

15. Useful Next Steps • Develop a more comprehensive understanding of the existing legal & regulatory landscape • Develop a coherent policy rationale for treatment of waste heat-to-power • Develop model legislation & regulatory approach to enhance certainty for providers & customers