Massachusetts made it harder in August, after two years of study, for power plants that use biomass as fuel to qualify for full renewable energy credits under the state’s renewable portfolio standard as “class I” resources.

Renewable energy credits can be sold, and are potentially an additional source of revenue.

The decision also affects biomass projects in neighboring states. Generating capacity under the control of ISO-New England, the independent entity that operates the New England grid, can qualify as class I resources. The control area of ISO-New England includes Maine, New Hampshire, Vermont, Massachusetts, Connecticut and Rhode Island. Output claimed as from a class I resource must be verified by ISO-New England or by an independent verification system or person participating in the NEPOOL GIS accounting system. NEPOOL GIS is a generation database and certificate system, operated by the New England power pool, that accounts for the fuel type, emissions, vintage and RPS eligibility of generators producing electricity that is consumed within, imported into, or exported from the ISO-New England control area.

The Massachusetts action is troubling because it was taken mid-stream in implementing the state RPS program, and it will affect projects that are already operating or under construction.

However, the most interesting question is whether this is the start of a broader national trend.

New Rules

The Massachusetts RPS requires utilities to supply at least 7% of their electricity from class I resources in 2012. The requirement increases on an annual basis until 2020 when 15% of retail electricity supplied must come from class I resources.

The new rules for biomass apply to power plants that are not yet in service, but after a transition period, they will apply to operating facilities as well.

To achieve class I status, biomass operators can only use six types of material as fuel. The six are 1) tree tops and portions of trees produced in the normal course of harvesting timber, 2) other woody vegetation that interferes with regeneration and natural growth of forests, such as invasive plant species, 3) fuel derived from forest thinning such as structurally-weak trees or trees removed to reduce the density of timber stands, 4) damaged, dying or dead trees removed due to injury from storms or pests, 5) non-forest-derived residues, such as lumber mill sawdust, non-treated pallets, prunings from park maintenance, or trees removed to convert forest land to agricultural or other permitted uses and 6) wood purposefully grown for fuel.

The rules prohibit the use of fuel derived from construction or demolition activities.

There are further limitations imposed on forest fuel coming from forests with poor soils.

The rules require that the biomass generator demonstrate to the satisfaction of the Department of Energy Resources that per unit of useful energy, the greenhouse gas emissions from the biomass generator, over a 20-year life, will be no greater than 50% of the greenhouse gas emissions of a combined-cycle gas-fired resource employing the most efficient commercially-available technology. The biomass generator must meet this requirement to avoid rejection of its application for class I status.

The regulations impose two “overall efficiency” standards that are expressly intended to raise the energy efficiency bar for energy produced from biomass.

The first standard requires that a power plant using biomass have an “overall efficiency” of at least 50%. Overall efficiency is defined as the total energy production of the facility divided by the energy content of the fuel. Total energy production is the sum of electricity produced, useful thermal energy and the energy value of any products refined on site such as biofuels. Energy produced by the power plant, but used for parasitic load, is not given full credit in the overall efficiency calculation. Further, thermal energy used to dry fuel is not included in the calculation.

To earn any RPS class I renewable energy certificates, the project must achieve an overall efficiency of at least 50%. At 50% efficiency, the project qualifies for only half the renewable energy certificate for each megawatt hour of electricity produced for which other class I resources qualify. It qualifies for full RECs if the overall efficiency is 60% or higher. The REC award is adjusted upward from 50% on a proportional basis if the overall efficiency is between 50% and 60%.

The second standard is slightly more generous for biomass resources that are “advancement of biomass conversion generation units.” These are facilities that employ new technology and can demonstrate that the new technology improves the conversion of biomass to energy.

Compliance and Enforcement

The rules impose a variety of compliance requirements on the biomass generator. For example, for each year, the tonnage of eligible fuel used by the generator must be documented in a “biomass unit annual compliance report.” The biomass operator must also prepare a report on greenhouse gas production for the year. If the fuel used is forest residue or a result of forest thinning, a biomass fuel certificate has to be prepared along with an eligible forest biomass tonnage report. The biomass fuel certificate has to be certified by the project owner.

The Massachusetts Department of Energy Resources can conduct audits and site visits as “often as the Department determines is necessary to verify compliance . . . .” On a quarterly basis, an independent third-party meter reader, appointed by the department, reports the biomass generator’s useful thermal energy, quantity of products refined on site and the other inputs to the overall efficiency calculation.

If a biomass project is out of compliance with the rules on greenhouse gas emissions, then it is placed on probation by the state. If at the end of the five-year probation period, the project has failed to show in any three-year period during its probation that it met the requirements of the rule or that over the five-year period it was in compliance on a net-basis, probationary status is rescinded, and class I status is revoked. Penalties can also result in individual years for noncompliance with the greenhouse gas emission requirements.

Implications

Today, 30% of Massachusetts renewable energy comes from biomass. While for certain biomass projects that are operating and that previously qualified there will be no changes in 2012 (and the exemption from the rules can continue until 2015 if the project is able to demonstrate compliance with the fuel supply requirements of the new rules), the rules will be applied to all currently-operating biomass projects no later than 2016.

The actual impact of the regulations on operating Massachusetts biomass projects is not yet clear. However, application of the rules to existing biomass operators is troubling when one considers the potential changes to both fuel supply and the control of greenhouse gases. With respect to newly-planned biomass projects, the rules have no doubt caused developers to pause. It appears that only combined heat and power projects can meet the new efficiency requirements. This suggests that new biomass projects will be built next to industrial facilities.

Co-location with industrial facilities raises a number of permitting, transmission, fuel transportation and siting issues. Issues also arise in determining the relationship with the thermal energy “host.” What happens, for example, if the thermal host needs to shut down for extended maintenance or if the host simply shuts down as a result of a bankruptcy? While these issues are not new (as they have been present in cogeneration for some time), they are critical development issues.

Putting aside the specific changes to the rules for qualifying for class I status, the general notion that rules that have a significant revenue effect on renewables can change mid-stream is troubling. How will lenders react to the midstream change in regulation by the state? While financial pro formas can account for retrofits, how will banks and equity investors react to the mere potential for change? In other states in which biomass is operating, or for that matter other forms of renewable or thermal generation, will lenders insist on more restrictive change-of-law provisions? Change of law has already surfaced as a risk allocation issue in states, such as California, that require certification of renewable resources by state agencies.

If the changes imposed in Massachusetts were to be imposed in other states, how would those changes affect a generator’s compliance with its power purchase agreement? PPAs often include performance requirements that require the generator to produce a certain quantity of energy over the capacity that is made available under the PPA. If the rules are changed as in Massachusetts, and the rules have operational implications as they do in Massachusetts, will the generator or the utility bear the risk?

Beginning of a Trend?

The Massachusetts rules arise from a debate concerning the overall effect of biomass generation on greenhouse gas emissions (as well as the other environmental impacts of any form of thermal generation). Massachusetts chose to resolve this debate by relying on a 2010 study prepared by the Manomet Center for Conservation Sciences, the “Biomass Sustainability and Carbon Policy Study.” Among other things, the study concluded that forest-fueled biomass will generally emit more greenhouse gases than fossil fuels per unit of energy produced. The study speaks in terms of “carbon debt” (emissions in excess of fossil fuel) and “carbon dividends” (the reductions of greenhouse gas after re-growth of the harvested forest removes the carbon debt). With respect to carbon debt and dividends, the study concluded that “under comparable forest management assumptions, dividends from biomass replacement of coal-fired electric capacity begin at approximately 20 years.” It said that “when biomass is assumed to replace natural gas electric capacity, carbon debts are still not paid off after 90 years.” It found a significantly shorter payoff period for combined heat and power applications. Ultimately, the Manomet study concluded that policy changes were necessary to avoid a negative effect on forest soils and on sustainability and growth of Massachusetts forests.

As of now, the study and the resulting regulations appear to be an isolated case. While to some extent the debate concerning the greenhouse gas emissions of biomass continues, there appears to be continued support for biomass in various state RPS rules.

California continues to support biomass generation. While the staff of the California Public Utilities Commission recently opposed a bill before the California legislature that would have authorized some subsidies for biomass fuel collection, the staff comments did not appear to be based on any inherent opposition to biomass. An executive order issued by Governor Arnold Schwartzenegger, which encourages the use of biomass in energy production, is still being implemented through the activities of a bioenergy interagency working group and an updated bioenergy action plan.

Other states are looking for ways to increase the use of biomass. For example, Oregon has been looking for ways to support the development of biomass as a fuel. The forest biomass working group, which is a multi-disciplinary, broad-based task force assisted by the Oregon Department of Energy, recently issued a draft strategy that supports increased use of biomass in a variety of applications. The strategy, “Growing Oregon’s Biomass Industry,” was released for comment at the end of July. Similar support is found in the state of Washington.

Like other renewable technologies, biomass projects are having a difficult time moving forward as a result of low natural gas prices and weak electricity demand. However, even with the Massachusetts report and resulting regulations, a number of other states are keeping biomass at least on an even keel with other renewable resources. If the debate concerning biomass has had an impact, it may be in the level of support for large central station power-only biomass power plants, which are having a more difficult time moving past development to construction and eventual operation.

Regardless of your view on greenhouse gas emissions, biomass has the benefit of having a relatively high load factor, while providing a means for disposing of wood and other organic wastes and providing employment. These factors remain particularly important in states with forests that have been struck in recent years by insect or other pathogen invasions.