How Massachusett’s Alternative Energy Credit Prices Will Impact Heat Pump and Biomass Operating Costs

We passed the Massachusetts “Clean Heat Bill” in July 2014. The final bill number is S. 2214. 

The bill created a production-based incentive, similar to solar PV renewable energy credits (SRECs), for renewable thermal technologies including solar thermal, air source heat pumps, ground source heat pumps, solid biomass, and biogas.

In this article, I’ll explain how Alternative Energy Credit (AEC) prices will impact the cost to deliver heat from biomass and air source and ground source heat pumps. An AEC works the same as a REC, but the “A” stands for “Alternative” rather than “Renewable.” While the bill applies to more technologies than heat pumps and biomass, I’ll focus on technologies that can be used as primary heating sources for Massachusetts properties to provide some perspective for the building and HVAC industries.

I’ll discuss the impact of a $20/MWth payment on the generating cost for air source heat pumps, ground source heat pumps, and advanced biomass boilers. The current market price for APS AECs is trading around $29/MWth, close to the ACP payment, so $20/MWth is a conservative market price for these AECs.

The article will explain that potential AEC prices will reduce ASHP operating costs by 13%, will reduce GSHP operating costs by 33%, and will reduce biomass operating costs by 30%.

For this article, I’m only going to focus on the impact of operating costs for these technologies. I won’t focus on how these operating costs savings will impact the returns of specific projects. The reason for this is that it would require too much research and I’d have to control for to many “what if” scenarios. In order to address returns on a project, I would need to include installation costs and then compare these installed and operating costs to a competing technology to determine how it would impact returns and savings.

My assumption is that by providing specific operating cost information you can then apply these to your project-specific installed costs.

If you need some technical background information on how air source heat pumps, ground source heat pumps, solar thermal or biomass work, sign up for our in-depth free course on the subject: High Performance Building and HVAC 101

Background on the Bill

S.2214 created a production-based incentive for “useful thermal energy” that provides heating and cooling in situations where fossil fuels would have otherwise been the source of energy.

Here is how the bill defines useful thermal energy:

“Useful thermal energy”, energy in the form of direct heat, steam, hot water or other thermal form that is used in production and beneficial measures for heating, cooling, humidity control, process use or other valid thermal end use energy requirements and for which fuel or electricity would otherwise be consumed.”

One of the most impressive aspects of the bill is that it had broad support from many parties including private industry, environmental groups, renewable energy groups, electric utilities, and the Patrick administration.

What made the bill work well is that the existing Alternative Portfolio Standard (APS) market was under-supplied. The existing APS was created in 2008 as part of the Green Communities Act. However, the applicable technologies in the APS have never fully developed. The result of the APS under-supply is that the utility load serving entities were paying alternative compliance payments (ACP) because the AECs didn’t exist. The total ACP payments totaled around $12MM per year.

Assumptions for the Cost to Deliver 1 MMBtu For Each Energy Source

To discuss this, we first need to make a number of assumptions about each technology source.

Air Source Heat Pumps Operating Costs

• Electricity Cost – $0.15/kWh
• Operating COP – 2. Many will say that this is low. However, for my analysis, I’m assuming that air source heat pumps are the primary and only heating system for the entire load. This makes the analysis easier on my end, but would mean a lower COP over a long period of time over a large data set of systems. If you have any specific data to the contrary, please put it in the comments.

Ground Source Heat Pumps Operating Costs

• Electricity Cost. $0.15/kWh
• Operating COP – 3.5. With this, many in the ground source industry will say that this is too low and that they see COPs in the 4s and 5s. My response to this is that I’ve never seen any real time data over a large number of years, with a large sample size, that can support this claim. Read more about real time geothermal monitoring data. An operating COP of 3.5 is much more conservative.

Biomass Boilers

• Cost per ton delivered: $225. This is based on conversations I’ve had with a few suppliers.
• BTUs per ton. We will assume that each ton of pellets can produce 16 million BTUs.
• Operating efficiency of boiler and distribution system is 80%.

Based on these assumptions, here’s the cost to deliver 1 MMBtu for these systems.

Here are the specific numbers:

• ASHP – $21. 98
• GSHP – $12.56
• Biomass – $17.57

In case you’re curious, here’s the calculation:

For each MMBtu, what percentage came from a renewable source?

• In the case of air source heat pumps, how much heat was extracted from the air?
• For ground source heat pumps, how much heat was extracted from the ground?
• For biomass, how much of the heat delivered came from biomass?

Based on our assumptions of operating efficiency for each technology, here are the answers:

• ASHP – 500,000 BTUs of 1 MMBtu will come from the air
• GSHP – 714, 285 BTUs of 1 MMBtu delivered will be extracted from the ground.
• Biomass – 900,000 of 1 MMBtu will come from biomass.

How many MWth were produced from a renewable source?

AECs are minted on a per MWth basis. Thus, we need to convert MMBtu to MWth.

The conversion to go from MMBtu to MWth is multiplying MMBTU by 0.293. In case you’re curious, the conversion factor to go the other way, from MWth to MMBtu, is multiplying MWth by 3.412.

Here’s how much each type of technology, given our assumptions, will harvest from a renewable resource per 1 MMBtu delivered to a conditioned space.

• ASHP – 0.146 MWth
• GSHP – 0.20 MWth
• Biomass –  0.26 MWth

If we assume that the AEC prices are $20 per MWth, here’s the value of that production per MMBtu delivered.

• ASHP: $2.93
• GSHP: $4.19
• Biomass: $5.27

MMBtu Cost vs. AEC Value vs. New MMBtu Cost

To make this interesting, let’s compare the existing MMBtu delivery cost, the value of AECs per MMBtu with the new law, and the new cost to deliver MMBtu after considering the AEC prices.

 Here is the information on this graph with specific numbers:

What this graph shows is that, given our assumptions about operating efficiency are correct, the AEC prices will reduce ASHP operating costs by 13%, it will reduce GSHP operating costs by 33% and it will reduce biomass operating costs by 30%.

How would this impact normal home economics? Let’s assume we have a house with a 100 MMBtu load. 

See the graph for what the numbers what would look for a 100 MMBtu load.

You’ll notice that the AEC prices, while they do decrease the per MMBtu cost by between 13% and 30% is substantial, they don’t add up to a large amount in cash.

Here is what the AEC payments would be for each system if the system delivered 100 MBtu in a heating season, given all our assumptions about AEC price, operating efficiency of equipment, and how much it ran.

• ASHP – $293
• GSHP – $418
• Biomass – $527

You’ll notice that these payments are not huge. Given that “revenue grade metering” does not come standard on any of this equipment, this could be an issue for smaller systems.

Heat Metering

The legislation clearly states the metering requirements. You can see the language from the bill at the top of the below slide.

Systems using biomass boilers or ground source heat pumps can be metered effectively. ASTM is currently working on a heat metering standard that should be completed by 2015. However, there are no known methods for providing utility-grade metering for biomass furnaces or air source heat pumps. It’s extremely difficult to measure heat transfer through air.

This is further compounded by the amounts of money that are being considered. For small residential systems, the cost of metering systems, even if a standard exists, would likely outweigh the increased revenue of those systems.

The DOER is currently in the process of creating regulations and a key aspect that they are considering is metering guidelines and how to distinguish between small and large systems.

Upfront Minting – Getting XX years of AEC Payments in Year 1

During our renewable thermal stakeholder metering, one of the things that the DOER expressed interest in is “upfront minting,” which would mean that a property owner would get the credit for many years of AEC payments upfront. The amount of payments would be based on software projections. If the systems had metering and underperformed, there would be some sort of under-performance penalty in future years. There are many “what if” scenarios for upfront minting that the DOER is still trying to figure out.

Upfront minting would have the benefit of decreasing installed costs in year one, something that property owners are extremely sensitive to. Here’s how much 5 and 10 years of AECs could be worth in our simplified example.

5 Years of AECs

• ASHP – $1,465
• GSHP – $2,090
• Biomass – $2,635

10 Years of AECs

• ASHP – $2,930
• GSHP – $4,180
• Biomass – $5,270

Another issue raised by upfront AECs is who will cover the spread. If a biomass system is getting paid for 10 years of AECs before those AECs have actually been created, where is the money coming from?

An answer doesn’t exist for this question yet, but it will be important to consider.

Heat Pumps as “Producing” Energy

One of the key aspects of the law that always brings up an interesting conversion is this line of thinking: “Heat pumps don’t produce energy; they’re energy efficiency. They just move energy.”

My response to that is twofold.

First, solar PV does not produce energy; it just moves it. However, we consider solar PV to be a production resource. It moves energy from sunlight into something that we can use in the form of AC electricity. Also, solar PV isn’t very efficient at all. It only converts about 15% of 20% of the sun’s energy into useful energy. You could argue heat pumps do the same thing, they move energy from a non-useful to a useful form. However, heat pumps are actually much more efficient than solar PV.

Second, if I had a air source heat pump that delivered 10 MMBtu to a conditioned space with an average annual COP of 2, it means 5 MMBtu came from the outside air. Aren’t the BTUs in that air renewable? Obviously they are.

Applications in the Market

Another question to think about as the regulations for this law are created and go into effect is how and where the new law will impact the existing heating market. There are two places to look at: the residential HVAC retrofit market and low energy use building market.

Residential HVAC Retrofits

Massachusetts is a retrofit market. This means that the large benefit of these incentives will be to spur investment in these technologies for existing homes. However, metering on a residential project, assuming AECs cannot be minted upfront or a simpler method can’t be created, could be cost-prohibitive.

If the DOER can figure out how to minimize metering costs and pay for AECs upfront on smaller projects, the residential market will benefit enormously.

For the commercial and industrial markets, project costs relative to metering costs will be so large that metering won’t be an issue. Also, the AEC value for larger projects will be much more substantial.

Low Energy Use Buildings

While low energy use buildings are a growing trend, they’re not a large enough segment to actually impact the market. However, within these buildings, air source heat pumps tend to be the main source of heat pump simply because the space heating loads are so low. In these instances, almost by definition, they wouldn’t create many AECs simply because they don’t need much heat.

Further Learning

Here are a few resources if you’d like to learn more about the basics of these technologies, the new Massachusetts renewable thermal law, or existing renewable thermal incentives in Massachusetts.

1. Free Course: High Performance Building and HVAC 101. This is an in-depth free course on high performance building, air source and ground source heat pumps, and biomass HVAC systems
2. Massachusetts Clean Heat Bill
3. Existing Massachusetts Renewable Heating and Cooling Incentives