Cap and trade basics for Combined Heat and Power
By Richard Laszlo, QUEST
The government of Ontario has decided to move ahead with introducing a carbon price in Ontario by creating a cap and trade market. This policy requires firms responsible for emitting greenhouse gases directly, or those that distribute carbon-based fuels, to hold allowances covering their emissions. In order to address the issue of carbon leakage, whereby Ontario firms could flee to jurisdictions without a carbon price, the government will be providing a limited number of free allowances to qualifying facilities next year. The number of free allowances will gradually be reduced over time so that the policy eases in, rather than shocking the economy.
The implementation of this cap and trade market and the introduction of a price on carbon will be felt throughout the economy, with wide-ranging implications for municipalities, industry and consumers. This article explains some of the implications of the cap and trade system on combined heat and power (CHP), also called cogeneration. QUEST, a non-profit organization leading the development of Smart Energy Communities in Canada, has embraced CHP as one of several technologies that when properly deployed, can improve energy efficiency, enhance reliability and resilience, cut costs, and reduce greenhouse gas emissions, all desired outcomes of our evolving thinking on Smart Energy Communities.
Who gets free allowances
As specified in the final cap and trade regulation, the emissions from natural gas use associated with both the thermal and electric output of CHP operation are eligible for free allowances, provided that the electricity generated is used for “behind the meter” load displacement, and that emissions from all sources at a facility, including but not limited to CHP operation, meet the required thresholds for participation. Participation in the cap and trade market is mandatory for facilities over 25,000 tonnes a year and voluntary for facilities emitting over 10,000 tonnes a year. Facilities calculate how many free allowances they are eligible for using one of several methodologies set out in Ministry of Environment and Climate Change guidance material, with emissions associated with CHP operation falling into the category of “general stationary combustion”. Ultimately, free allowances are awarded at the discretion of the Minister, and facilities need to submit an application along with a 3rd party verified greenhouse gas report for review and approval.
The members of the Ontario CHP Consortium fully endorse this policy that treats CHP units in a similar fashion to other equipment, such as boilers and furnaces, commonly used by industrial, commercial and institutional facilities. Many other organizations, including APPrO, the Ontario Energy Association and the Electricity Distributors’ Association to name a few, supported treating CHP in this manner and making all the emissions associated with their operation eligible for free allowances. The resulting policy complements the government’s objectives with respect to CHP and conservation and demand management programs and shows how well the Ministry of Environment and Climate Change can work with the Ministry of Energy and the Independent Electricity System Operator to align policies and programs.
Expected impact on CHP
In terms of implications on facilities with CHP, the emissions profile is what matters. Here’s a breakdown by some specific cases:
For facilities with 25,000 tonnes or more of emissions in 2015, participation in the cap and trade program is mandatory and emissions associated with CHP are eligible for free allowances. By now, these facilities should already have applied for free allowances to the Ministry of Environment and Climate Change for the 2017 year, based on a 2015 emissions baseline.
For facilities with 10,000 tonnes or more of emissions in 2015, but less than 25,000 tonnes, participation in the cap and trade system is voluntary. The same rules apply and emissions associated with CHP operation are eligible for free allowances. For those facilities that did not opt-in to the market and applied for free allowances for 2017, the option to apply next year for free allowances in 2018 is available, which would be based on a 2016 baseline. Once a facility opts-in it is committed for the remainder of the first compliance period 2017 to 2020.
Facilities below 10,000 tonnes do not participate in the cap and trade market and instead will be subject to a carbon levy on their natural gas bills. Free allowances are not available to such companies. Many advocates of CHP have rightly pointed out that the 10,000 tonne per year threshold disadvantages smaller facilities. During consultations the suggestion was put forward that smaller CHP facilities should also be eligible for free allowances, and that the government should effectively remove or lower the 10,000 tonne threshold. This was taken under consideration for discussion when program rules are put forward for the next compliance period post-2020.
An interesting case is for facilities under 10,000 tonnes in 2015 but where CHP added later would increase emissions above the 10,000 tonne mark, making them eligible for free allowances and thereby reducing carbon costs via free allowances. For example, a facility that had emissions of 8,500 tonnes in 2015 and installed a CHP unit on January 1, 2016 would see their 2016 emissions increase to say 11,000 tonnes, which would make them eligible to apply for free allowances in 2018 using 2016 emissions as a baseline.
For facilities already participating in the cap and trade market (mandatory or voluntary), the addition of CHP sometime after 2015 will result in additional carbon costs associated with the incremental natural gas use beyond their 2015 baseline. This becomes another line item on the business case for moving ahead with CHP, and must be taken into consideration along with a variety of other factors. This last point is paramount – carbon costs must be put in perspective with peak demand, relative exposure to the hourly energy price vs. global adjustment, conservation incentives, resilience benefits and the longer term outlook for natural gas and electricity prices.
Several key documents are available for those looking to brief themselves:
Ontario’s Climate Change Action Plan: http://www.applications.ene.gov.on.ca/ccap/products/CCAP_ENGLISH.pdf
Ontario’s Cap and Trade Regulation: https://www.ontario.ca/laws/regulation/r16144
Methodology for the distribution of free allowances.
Note from the author:
As part of its general endorsement and support of CHP as one of several technologies that when properly deployed, can advance Smart Energy Communities, QUEST has taken on the secretariat role to the Ontario CHP Consortium, a diverse group of customers, gas, electric and thermal utilities, and technology and service providers committed to advancing CHP in Ontario. It has been my pleasure to serve in the capacity of Chair of the CHP Consortium for the last two years. Part of this role has been to work with the Consortium members and other subject matter experts at organizations such as APPrO, to develop supportive policy recommendations. As a result, we have been closely involved in the cap and trade consultations since they began in earnest last year.
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