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Overview
Example
Initial Steps
Three Stages
OVERVIEW
Twenty-two U.S. states and the district of Columbia will soon
face stringent federal requirements to reduce the overall
nitrogen oxide (NOx) emissions that result from electricity
generation, industrial and commercial processes, and vehicle
emissions. Each state will have to modify those processes
so the state can live within its NOx budget (caps on total
NOx emissions). These emission requirements are enforced by
the U.S. EPA, which has established NOx budgets that each
state must meet by September 2007. The EPA has created a NOx
Budget Trading Program whereby states can meet their emission
reduction targets through a combination of actual emission
reductions and/or purchase of emission reduction credits from
other states in the trading program that have reduced their
emissions below their state NOx budget level. Each state will
be required to produce a State Implementation Plan (SIP) in
order to demonstrate how the state will modify these activities
in order to live within its allocated budget for NOx. According
to EPA estimates, states will be required to reduce NOx emissions
from electrical generating units (EGUs) by 64% on average.
Electricity generation accounts for an average of 65% of the
NOx emissions subject to reductions as calculated by EPA.
This is a major environmental challenge facing each state.
Many states are engaged in a major review of energy policy,
and as part of these reviews are looking for ways to increase
investments in energy efficiency investments and renewable
energy generation. The integration of energy efficiency and
renewable energy development into the environmental plan for
reducing NOx emissions can be critical for both efforts. Efficiency
and renewable projects can make compliance with NOx budgets
easier and more cost effective, while qualifying these energy
programs as part of the plan for meeting NOx budgets can provide
emission credits and revenues that can support the development
of the programs. Increasing energy efficiency and replacing
fossil generation with non-polluting renewable energy can
reduce the NOx emissions related to electricity generation.
These resources can also reduce the cost for the state of
complying with the federal requirements. They can reduce NOx
emissions at a lower cost than technical retrofits or modifications
to generation technology. However, in order to develop these
resources it is critical that the value of the potential NOx
emission reduction, the NOx credit, be given to the energy
efficiency and renewable energy projects. An allocation of
NOx emission credits must be set-aside as part of a state’s
SIP in order for these programs to receive these credits.
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EXAMPLE
Here is how this would work using EPA estimates for NOx savings
and the value of NOx emission credits. During the qualifying
season, every kWh saved or produced using renewable resources
rather than fossil fuels will save an estimated .0015 pounds
of NOx emissions, every 1.3 million kWh will therefore save
or remove 1 ton of NOx emissions. Estimates of the value of
an avoided ton of NOx emissions are between $1,700 and $4,100,
or between 1.28 mills and 3.08 mills per kWh. Powering the
South, a recently completed analysis of the potential for
energy efficiency and renewable generation in the Southeast,
found that a program funded at between 0.2 mills and 0.4 mills
would be sufficient to leverage substantial efficiency investments.
Of course, the calculation from Powering the South applied
to every kWh sold and the NOx credits will be given only to
the kWh’s saved or avoided as a result of the program. Nevertheless,
qualifying efficiency programs for inclusion in state SIP
programs, and thereby qualifying them for credits for avoided
NOx emissions, can produce a significant portion of the total
revenue required to leverage the efficiency investments. These
estimates are of course preliminary and they have to be adjusted
to reflect the seasonality of the NOx credits and the size
of the efficiency and renewable energy set-aside, but they
clearly show that the qualification of these investments for
inclusion in state plans could be a critical factor in funding
the support and development effort needed to undertake the
programs. The following is an outline intended to provide
guidance to states that wish to pursue the qualification of
energy efficiency and renewables as part of their State Implementation
Plan for complying with NOx emissions. Development of each
plan includes establishment of a Nitrogen Oxide set-aside
for energy efficiency and renewable energy generation, establishment
of the administrative structure, and program verification
protocols that will allow energy efficiency and renewable
energy to be used as part of the state’s SIP.
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INITIAL
STEPS
The following set-aside program elements in a state’s initial
SIP submittal must be developed: Identification of a state’s
intent to include an EE/RE set-aside; The size of a state’s
EE/RE set-aside; Statement of whether early credit for actions
taken prior to 2003 will be rewarded; and An allocated NOx
budget for each state that accommodates the EE/RE set-aside.
After the initial SIP submittal, the state must develop a
plan outlining how its EE/RE set-aside will be run. This plan
should address (1) which state office(s) will administer the
allowances from an EE/RE set-aside, (2) what information is
needed from program participants to apply for set-aside allowances,
and how will it be collected, (3) what protocols the state
will use to measure and verify EE/RE projects, (4) how NOx
emissions associated with the energy saved/displaced will
be determined, and (5) when and how the state will inform
EPA about the EE/RE set-aside allowance claims.
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THREE STAGES
Once a state has decided to include an EE/RE set-aside in
their SIP, the plan development must address the following
three stages of program development and implementation: The
state must develop elements necessary to establish a set-aside
in its initial SIP submission. The state must develop essential
design elements for administering the program and quantifying
and allocating allowances under its EE/RE set-aside. The state
must develop procedures for measuring and verifying the energy
savings and emissions reductions from EE/RE projects in its
NOx Budget Trading Program set-aside.
A. Establishing
a Set-Aside
The state must address the following key questions: What
types of projects are eligible for awards, and who would
receive allowances? How can pool size be used to help a
state focus allowance awards on new projects? How should
the pool be sized to award credit for actions implemented
before 2003? How does pool size depend on the number of
control periods the award will be given for (length of award)?
How can the state adjust its set-aside pools to handle over
and under subscription? The state must evaluate EPA’s recommendations
for establishing a set-aside in the context of its electricity
sector. EPA’s recommendations are that (1) the set-aside
be 5-15% of the total NOx budget, (2) eligible projects
meet seven project criteria (defined in a guidance document),
not more than one applicant for each project should receive
allowances, and that allowances should be awarded to end
user, (3) the EE/RE credit offset pool be large enough to
reward new projects as well as "business-as-usual" projects,
(4) the program give credit for early actions, (5) the award
length be three years, and (6) that over-subscription be
handled on a first come, first served basis, while under-subscription
be handled via pro-rata reallocation of EE/RE credits. To
facilitate inclusion of an EE/RE set-aside in the state’s
NOx Budget Trading Program, each state must (1) outline
the criteria and design elements of the set-aside program,
(2) recommend adjustments to the EGU core source budget
allocations to accommodate the allowances that are being
set aside; and (3) develop and submit a proposal to include
an EE/RE set-aside and the number of allowances that will
be in it as part of the SIP submission.
B. Designing
the Administrative and Quantitative Elements
The state must address the following elements: When the
allowance awards will be made (timing of awards); How and
when to apply for awards, and what is needed in the application;
How to measure and verify results in terms of energy saved
or displaced; How to translate project results (energy saved
or displaced) into emissions; and How to direct set-aside
allowance awards toward new projects which result in additional
energy savings or displacements beyond business as usual
energy efficiency or renewable gains (providing real reductions).
Each state must evaluate EPA’s recommendations for designing
the administrative and quantitative elements a set-aside
program in the context of its electricity sector. EPA’s
recommendations are that (1) applications be submitted and
evaluated using a "two-step" process, (2) energy savings
and displacements be translated into emissions reductions
using an emissions factor of 0.015 lbs NOx/kWh, (3) uncertainty
in business-as-usual estimates be addressed using a compensation
factor of 0.75, (4) the award process be based on a seasonal
lag, (5) all processes be coordinated to ensure proper timing
of the application, award, and verification process, and
(6) that documentation, tracking and reporting procedures
lead to establishment of appropriate NOx Allowance Tracking
System (NATS) accounts and periodic and on-going documentation.
C. Measuring
and Verifying Electricity Savings
Each state must address how to verify that the resultant
electricity savings from energy efficiency and renewable
energy projects are real, and accurately measured. Each
state must examine the characteristics of energy efficiency
and renewable energy projects that may cause uncertainty
in measuring electricity savings, and provide an overview
of the mechanisms available to limit and/or account for
this uncertainty. In addition, each state must assess the
specific protocols available for varied types of energy
efficiency and renewable energy projects, and discuss how
they will handle the uncertainty associated with available
methods of measurement and verification. As part of this
effort, each state must evaluate EPA’s upcoming recommendations
for measuring and verifying electricity savings in a set-aside
program in the context of its electricity sector as soon
as they are released. The EPA recommendations are forthcoming
in a guidance document titled, Creating an Energy Efficiency
and Renewable Energy Set-Aside in the NOx Budget Trading
Program: Measuring and Verifying Electricity Savings.
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