Capital Actions for Pellet Fuel

Capital Actions for Pellet Fuel

The uptick of pellet production has spurred discussion in the U.S. and abroad of the strategies needed to piece together a sustainable position for pellet fuel in both the power and thermal marketplaces. Industry leaders say U.S. producers may find an assortment of policy areas and regulatory schemes laden with positive potential for the pellet sector. Some standouts include developments abroad, such as the U.K.’s Department of Energy and Climate Change Contract for Difference (CfD) subsidy program and the Sustainable Biomass Partnership, as well as developments on U.S. producers’ soil, such as the upcoming release of the U.S. EPA’s Clean Power Plan, the development of its associated accounting framework for biogenic carbon emissions and the EPA’s new source performance standards (NSPS) for residential wood heaters. Others include the U.S. Energy Information Administration’s densified biomass fuel survey and a number of pieces of legislation circulating through Congress, namely the Biomass Thermal Utilization Act or BTU Act. Industry advocates promote these capital activities and others in an effort to make pellet fuel more mainstream.

Pellet Potential Awaits
The U.S. EPA’s final ruling for the Clean Power Plan under section 111(d) of the Clean Air Act is scheduled for release in August. The plan was first proposed in June 2014 to reduce carbon emissions by 30 percent based on 2005 levels from existing, new, modified and reconstructed power plants. The CPP will set forth a calculation of emission-rate targets and give direction for states to implement plans to meet those targets. “This is a key component of the plan because every state has different energy portfolios and energy needs,” says Cody Kamrowski, policy and governmental affairs fellow with the Biomass Thermal Energy Council.

States will need to entertain all of the options they can to comply, and using biomass for compliance has many advantages, says Mike Jostrom, director of renewable resources with Plum Creek Timber Co. Inc. “For example, the opportunity to cofire pellets with coal-fired power plants could provide them with a great, short-term opportunity to meet their obligation with low capital costs and without sacrificing reliability,” Jostrom says. “It will be important for stakeholders to work with states on how this can be done, assuring sustainability without creating barriers.”

Seth Ginther, executive director of the U.S. Industrial Pellet Association, agrees that as the CPP moves forward, there could be opportunities for some U.S. utilities to cofire pellets in existing coal infrastructure, which “would help those utilities preserve investment in their supply chains as well as preserve jobs.”

In November, EPA acting assistant administrator of the Office of Air and Radiation Janet McCabe prepared a memorandum with guidance on how to include biomass in state carbon-reduction plans proposed by the CPP and Prevention of Significant Deterioration Program. Issued the same day was a revised version of the Accounting Framework for Biogenic CO2 Emissions from Stationary Sources. This framework is the result of ongoing research by the Scientific Advisory Board, which was tasked by the EPA to determine the biogenic CO2 emission and climate-policy benefits of biomass. The framework has the potential to apply to any stationary sources combusting biomass, which could have implications for power plants, industrial facilities and the heating sector. “With their biogenic carbon framework, the EPA is trying to establish the scientific foundation that supports what they have known all along—that you don’t really need to count the carbon dioxide emitted from biomass because it is not being removed from permanent geologic storage, like a fossil fuel is,” Jostrom says. “This, of course, assumes that you are not depleting your biological carbon stocks, like forests, in the process. If the EPA gets it right and does not burden the process with too much complexity, it could provide some policy certainty that we haven’t had for a long time.”

The SAB’s final advice to the EPA has no conclusive time line, and with a series of conference calls scheduled this summer, its findings will not be surmised by the CPP’s release. According to the Biomass Power Association, this could undermine the intentions of the EPA and the administration to ensure the role of biomass in reducing carbon emissions.

Even after the final framework’s release, it’s uncertain what policy weight it will carry. EPA may undertake some rulemaking efforts to include it in Clean Air Act regulations, but Emily McGlynn, manager for business development and policy for The Earth Partners, says it seems more likely that it will simply be used as an analytical tool that informs policy. “The decision around how to calculate net greenhouse gas emissions from biomass will be a major driver of how wood pellets are valued in the United States, as policies like the Clean Power Plan and other carbon-pricing schemes come online,” McGlynn says. “Being able to demonstrate lower net emissions should become a business strategy for anyone looking to gain more dollar value per ton of pellets.”

Wood Heater Happenings
EPA’s NSPS for residential wood heaters, governed under the Clean Air Act, was finalized in February, setting the first-ever federal standards for outdoor and indoor wood-fired hydronic heaters, forced-air furnaces, pellet stoves and the previously unregulated single-burn-rate stove. “Beyond regulating the amount of particulates each model of stove or boiler can emit, it deals with a dizzying array of other issues, from what needs to be in owner’s manuals to how appliances are tested and what kind of fuel can be used in wood and pellet stoves,” says John Ackerly, president of the Alliance for Green Heat.

Jennifer Hedrick, PFI’s executive director, says that while the association agrees with the intent of the NSPS rule and shares EPA’s goals of reducing emissions, they disagree with several components of the rule as they relate to pellet-fuel requirements. Though the EPA has attested they are not creating standards for pellet fuel, the PFI believes that is exactly what is occurring when the EPA outlines minimum requirements for pellet fuel in its NSPS. “We do not believe that the EPA has authority under the Clean Air Act, which governs the NSPS Rule, to set standards for pellet fuel.”

According to Ackerly, the regulation of the fuel—not the stoves—is one of the most controversial areas of the NSPS standards. “The NSPS says that pellet stoves must be tested with a pellet that is certified by either PFI, ENplus or CANplus,” Ackerly says. “Moreover, it says that pellets must be made of pure wood and cannot contain things such as construction and demolition debris, treated wood, plywood, plastic, manure, newspaper, cardboard, etc.”

Ackerly adds that by regulating pellet fuel, the EPA could take an enforcement action against pellet producers who use some of the banned ingredients. “A number of pellet producers use demolition debris and pallets, and these producers may see their business model upended,” he says.

Hedrick believes the minimum requirements for pellet fuel EPA is setting are problematic because several of the requirements are not in line with the best practices known to the industry. She gives several examples as the basis for this statement. For instance, in their ruling, EPA set a maximum pellet length of 1.5 inches with no regard for practical limitations. “We believe no more than 1 percent of pellet fuel should exceed 1.5 inches to ensure proper performance of the appliance, while also allowing for reasonable manufacturing limitations.”

In its minimum requirements, EPA specified that trace metals may not exceed 100 milligrams (mg) per kilogram (kg), but Hedrick says EPA does not define trace metals, nor state if it means that the combined total or individual amounts of these metals may not exceed the 100-mg-per-kg requirement. EPA’s 2 percent ash content limitation creates a third area of concern for PFI. “While the cap on ash will not cause concern for most if not all of the manufacturers of pellet fuel, it discourages innovation by pellet fuel and appliance manufacturers who could otherwise develop clean-burning appliances utilizing higher-ash pellet fuel,” Hedrick says.

PFI also believes EPA incorrectly classifies fines as inorganic rather than organic, and the agency does not provide an actual definition for fines. “This is significant as the PFI and ENplus standards have different definitions for what constitutes fines—PFI uses a one-eighth-inch-square-hole screen and ENplus uses a 3.15 mm-round-hole screen,” Hedrick says. “This is ultimately about a 30 percent difference in aperture size.”

Without some sort of assurance of a resolution to these concerns and others, PFI leadership determined a more formal challenge of the rule was necessary. PFI filed a petition for review with the District of Columbia Circuit Court on May 15. Hedrick clarifies that they do not oppose EPA’s inclusion of graded-fuel programs within the NSPS rule, but decided to take action because they object to the agency creating its own pellet fuel standards (e.g. minimum requirements for pellet fuel). “The leadership of PFI has given significant consideration to this course of action and believes it is the best path toward assurance that fuel manufacturers can continue their operations without unreasonable burden from EPA,” Hedrick says. “Concurrently, we will continue to work with EPA to attempt to address issues within the rule outside of the legal process.”

Congressional Callings
The BTU Act has been one of BTEC’s policy priorities for the past five years, packaging a 30 percent residential renewable energy tax credit with a 30 percent business investment tax credit (ITC) for commercial and industrial high-efficiency, biomass-thermal technologies. “The BTU Act adds high-efficiency, biomass-thermal technologies to the list of renewable energy technologies that currently benefit from the investment tax credits under section 25D—residential—and section 48—commercial/industrial—of the tax code,” Kamrowski says. “These tax credits will establish parity with other renewable technologies that have enjoyed substantial tax credits over many years, thus reducing market distortion and, in effect, increasing the return on investment (ROI) and financial viability of biomass technology.”

Equivalent treatment in the tax code should have been added back in 2005 when the Energy Policy Act codified all other renewable energy tax credits into section 48, says Charlie Niebling, partner of Innovative Natural Resource Solutions LLC. These credits are up for reauthorization in December and expire at the end of 2016. “If they are renewed, and there is going to be tremendous pressure to renew them, this 114th Congress has to act,” Niebling says.

The tax credits have proven valuable in other renewable energy sectors in helping consumers overcome high-investment costs, Niebling says. “It is creating a strong market pull, and if you have a strong market pull for pellets, manufacturers are going to step up to the plate and invest in capacity,” he says. “That’s what’s going to drive growth.”

The BTU Act would have the strongest, direct economic effect on the biomass-heating industry, according to BTEC. There are a few other pieces of legislation at different stages of consideration in the House of Representatives and Senate worth mentioning, however, including two others that could break open the market for biomass thermal technologies and fuels using the business ITC to incentivize thermal projects. The Power Efficiency and Resiliency Act or POWER Act  would provide a 30 percent business tax credit for qualifying waste-heat-to-power (WHP) property and combined-heat-and-power (CHP) property and extend the credit through 2018. “However, the bill’s proposed cutoff of 20 percent electrical efficiency for qualifying projects is in our view too high, as many technologies, such as backpressure steam and organic Rankine cycle engines, can produce a combined—electrical plus thermal—efficiency of over 60 percent with an electrical efficiency of less than 20 percent,” Kamrowski says. “It does not make sense to disqualify these projects with a myopic overemphasis on electrical efficiency.”

The WHP bill addresses this problem and provides a 30 percent business tax credit for qualifying WHP property, Kamrowski adds. Another big bill on BTEC’s radar is Sen. Ron Wyden’s Bioenergy Act of 2015, which would provide grants and R&D funding for biomass thermal and biopower project development, fund feedstock processing and logistics research and require USDA and DOE to coordinate bioenergy activities.

Tracking Transparency
At the end of last year, the U.S. DOE announced plans to conduct regular surveys of U.S. pellet producers that  will be published by the U.S. EIA. After collecting public comments from its first proposal, the DOE issued a request in June to the Office of Management and Budget for a three-year clearance of a new data-collection survey on densified biomass fuel on Form EIA-63C, Densified Biomass Fuels Report. Data collected on Form EIA-63C would be used to estimate densified biomass fuel consumption in the U.S., along with production, sales and inventory at state, regional and national levels.

“The information that the survey is going to be asking pellet manufacturers to provide will be extremely valuable to our industry going forward to help inform investment opportunities in new capacity, and also help inform policy makers,” Niebling says. “You can’t make a good public policy, as it relates to renewable energy, unless you’ve got the data to base it on, and our industry has suffered from a lack of good, real-time information about our size, capacity, production, inventory and the value of product produced every year.”

Data gathered via the form will be published on the EIA website and in various EIA publications, including the Monthly Energy Review. The survey goal is to collect a range of data from densified biomass manufacturers, including information on pellets, bricks, briquettes, etc. Producers with 10,000 tons or more of capacity will be targeted by the effort. Producers under the 10,000-tons-per-year cap only need to submit the form once annually. Approximately 200 densified-biomass producers are expected to respond to the initial survey, with 150 respondents expected to file regular reports. “I think if the pellet industry is to mature in this country and grow to a point where it becomes a true mainstream fuel option for residential, commercial and industrial feed, we have to be willing to provide shared information.”

Niebling says the fact that the EIA has determined that the domestic pellet industry is important enough to survey and publish data on is a good sign and something he hopes the industry will embrace. Ackerly agrees with Niebling, considering the survey an important recognition for the U.S. pellet industry, meaning that it is being taken more seriously as a mainstream fuel. “This will help show how much wood pellets are contributing to the renewable energy pie and give it credit for that contribution,” Ackerly says. “The survey will keep track of what percentage of pellets are being exported, what percent are PFI certified and where the fiber came from.”

The DOE’s second comment period on the proposed information collection closed July 6.

Push From Overseas
Europe’s climate policy is affecting all facets of pellet production. Reforestation and stewardship have grown as an industry focus, evidenced by the SBP. The partnership was formed in 2013 by major European power generators that use biomass, mostly wood pellets, and who saw a need in the marketplace for harmonized sustainability criteria for solid biomass. “They recognized that this was necessary to lower costs within the supply chain and ensure security of supply,” Ginther says. “The goal of the partnership is for their certificate to be accepted in all European markets. In order for wood pellets, or any renewable energy, to become a true energy commodity the market demands the consistency and uniformity that the SBP certificate can provide.”

The SBP fully recognizes the credibility of existing forest certification schemes like the Forest Stewardship Council and the Program for Endorsement of Forest Certification, and does not wish to compete with or replicate them. “As an industry, we have been advocating for a unified set of sustainability criteria for many years, and the SBP certificate could fill that gap for us,” Ginther says. “Consistent sustainability requirements across several markets creates efficiencies within the supply chain and make wood pellets an easily traded commodity. Overall, these efficiencies mean a lower cost for the end consumer.”

Ginther believes the crux of the pellet industry is that U.S. producers aim to provide a sustainable, low-carbon product at a low cost. “With one comprehensive set of sustainability criteria to follow, rather than different regulations and reporting requirements from each individual buyer, they can deliver on this promise more efficiently.”

Ten applicants have been accepted by the SBP as certification bodies and are progressing toward achieving SBP-approved status. Before receiving this status, a certification body must demonstrate its competence to undertake an audit of a biomass producer against the SBP standards in a real-life situation. Under the SBP framework, the biomass producer, typically a pellet mill, is certified by the SBP-approved certification body.

Another European-based program with the potential to support U.S. pellet production is the U.K.’s CfD program, which provides government support to power generators for using renewable energy sources in place of coal. The program is designed to help renewables compete with the low cost of fossil fuels, and to protect consumers from bearing the burden of costs associated with newer energy technologies. According to Ginther, it is important to note that the CfD is a private contract between the government and the generator over a fixed period, which makes it a preferred method of subsidy over Europe’s Renewables Obligation. “The CfD offers more certainty to generators and often leads to lower financing costs for converting projects,” he says.

Many U.K. power generators use this subsidy scheme to help finance conversions, which helps U.S. pellet producers compete with the low cost of coal and other fossil fuels in the energy marketplace. Although the CfD program affects the U.K. market directly, all member states have similar programs to assist with the costs of bringing renewable energy technologies to the grid, Ginther says.

Whether on native or foreign soil, there are opportunities on the horizon with the potential to bolster the U.S. pellet industry. Only time can tell, but these capital activities look like promising drivers to sustainably bring pellet fuel from minority to mainstream.

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