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July 2007

Stepping into the 21st Century, Energy Options for Michigan Farms

Alternative energy has been a hot topic in 2007. Several different reports, including those from the Governor’s office, have tackled the issue of how to diversify renewable energy initiatives in Michigan. Many of the strategies outlined in the reports could impact dairy producers positively.

David I. Johnson
Dept. of Fisheries and Wildlife

Energy options for The 21st Century will not be like those of the past in Michigan, the U.S. or the World. World trends in human population, oil demand, climate change, and the gap between rich and poor are just a few major trends that will necessitate development and implementation of sustainable energy sources. Though this transformation may be difficult, it offers unsurpassed opportunities for the agricultural community. The problem for Michigan is that our political and financial situations have left us woefully behind other Midwestern states. Unless Michigan is willing to aggressively adopt new approaches, the $18 billion for fuels that we currently send to other states will become a much larger tab in the future (1).

Report Recommendations

Since the first of the year, several different reports have attempted to describe alternative directions that will provide Michigan with an electrical future that is secure and affordable. Over the last year, the 21st Century Energy Plan (CEP) requested by the Governor was completed with extensive public input and sent to the Governor the first of the year (2). On May 1, 2007, Consumers Energy Corp. released its Balanced Energy Initiative (BEI) to supply its 1.8 million customers (3). The Environment Michigan Research and Policy Center produced a report entitled “Energizing Michigan’s Economy” (EME) (1). The Next Energy Center produced a report titled “A Study of Economic Impacts from the Implementation of a Renewable Portfolio Standard and an Energy Efficiency Program in Michigan”(4). These recommendations provide some divergent perspectives on the directions that Michigan should take that are useful and are recommended reading. This article will not attempt to review all of the recommendations of these reports, but will comment on some of the recommendations.

Increased energy efficiency is recommended by all of the reports. The 21st CEP recommended that an independent third party manage a statewide public benefits fund that would raise some $68 million through a surcharge on your electricity bill (1). This money would be used for diverse activities for administration, implementation, and evaluation. The EME extends that investment to $225 million per year to reduce electricity demand and, therefore, the need for new generation capability (1). The cost of this effort would be about one-half the cost of new coal generation that would meet future environmental requirements. BEI agrees with the need for a “good” efficiency program, but calls it a very aggressive approach and advocates active participation by utilities companies (3). Projections of two efficiency computer modeling scenarios in the Next Energy Report suggests slight improvements in job availability and decreased cost per kilowatt (kW), increased disposable income and other benefits (4). This type of program along with a strong demand management effort from the utilities would be a progressive step into the 21st Century with minimal costs to Michigan consumers and industry.

The Renewable Portfolio Standard (RPS) recommendation would require 10% renewable generation by 2015. An expansion to 20% by 2025 is also a recommendation of the 21st CEP. That plan would include fulfillment of that requirement with Renewable Energy Credits (RECs) that could be purchased from out-of-state generation (2, 5). The EME pushes the RPS percentage to 25% by 2025 (1). BEI recommends expansion of their Green Generation program from its current 5% participation to 10% (3).

Twenty-one states and the District of Columbia use mandatory RPS to encourage development of renewable energy. This is usually a mandatory quantity-based standard. Over a phase-in period, utility companies will be required to draw a certain percentage of their electricity from renewable energy sources (three states have voluntary standards and others are developing RPS) (6). Typically, this means that a utility company puts out a request for proposal and then selects projects that have the best price and potential for actually coming on line. The contracts may be for 10 to 25 years depending on the program requirements providing a consistency that seems to foster investment opportunities. Wind generation and landfill methane extraction to run generators tend to be the least costly, but if the percentage is high enough and the contract period long enough more expensive projects become competitive.

There are some major criticisms of the RPS strategy. The lowest price strongly favors existing technologies at the best sites and usually that implies technologies, which have been developed overseas. Because the bidding process favors the least expensive first, the bigger investor who can take the risk to a banker and utilize the production tax credit is selected (7). The small generator and diverse or new technologies are usually disfavored. In addition, RPS penetration levels of 5 to 15% over a decade or two will have a relatively small impact on climate change. Therefore, these criticisms suggest that recommendation and adoption of a RPS requirement will not accomplish what is needed in the time required and, therefore, will not move Michigan into a competitive position.

Investing in Energy

For development of renewable energy, several things need to occur in Michigan. First, a funding mechanism must be available to assist farms, communities, and farm-related businesses with the capital intensive startup funds necessary for these projects. Secondly, a reasonable return on the electricity that is fed into the grid, on an extended contract basis, must be available to foster diverse renewable source implementation. And finally, the utilities must encourage connection of this diverse generation system with reasonable costs and connection processes to the grid.

Most potential developers balk at the initial high capital investment required for renewable energy and energy efficiency conversions. Many individuals now are aware of the varied Federal Grant opportunities or matching funds from U.S. Department of Agriculture or Natural Resources Conservation Service, which are efforts to assist with the up-front capital requirements for projects. For continued generation returns, the “wins” for renewable energy in the 2005 Energy Policy Act were a 2-year extension of 1.5 cent/kWh for wind, solar, geothermal, and closed-loop bioenergy. This is available for 10 years (3). Other renewable energy sources such as small irrigation, landfill gas, incremental hydro, and open-loop biomass have other support levels. Open-loop biomass facilities that use, for example, livestock manure may claim a credit of 0.9 cents per kwh during a 5-year period beginning on the date the facility is placed in service (9). Since planning for a renewable energy operation can take many years, these short funding time requirements can be problematic for producers when support disappears or funding sunsets spur rushed and inadequate planning.

Challenges in Michigan

Michigan currently has limited state support for development of renewable energy projects. The State Energy Office has small grants under very specific categories and the DEQ offers P2 Loans for small businesses at attractive interest rates that can be used for waste management and “a qualified agricultural energy production system”(8). Next Energy has some grant opportunities that may offer potential. Those living in the U.P. can obtain a rebate from Wisconsin Public Power Inc. if you live and obtain power from that company. The 21st CEP recommends that a generator not able to meet its RPS requirement make a payment into the energy efficiency fund, which would then be available for the support of new renewable energy projects.

Net Metering Enhancement

The 21st CEP recommends use of net metering up to 150 kW. The only fee requirement would be a monthly service charge for the use of the grid and administration of the plan. Currently, the return rate is 1.8 cents per kW, which is based on the cost of the generation from old coal generation facilities. Clearly, this price does not include the impact externalities such as mercury contamination or asthma costs. Nor does this return reflect the dramatically increasing price of new coal-base generation or with the cost of some form of carbon sequestration (a technology not operational at this time). So if we are going to encourage renewable energy in Michigan the net metering return must reflect the costs of meeting present (not historical) costs and attempt to anticipate what future costs might be. The level must be set high enough and long enough to encourage investment by Michigan agriculture.

As a part of the RPS requirement the 21st CEP is recommending that Renewable Energy Credits (RECs) be available to fulfill the percentage of renewable energy required. One credit represents 1 megawatt of energy produced from a renewable energy source. The World Wide Web now offers some very interesting data bases to monitor these types of programs, which makes them less cumbersome and therefore a more reliable mechanism to meet program goals. Under there recommendations out-of-state generation could be used if they benefited Michigan directly (3). Depending on how the legislation is written, this may provide the opportunity for an anaerobic digester owner/operator to sell the electricity generation separately from credits that might be available through the Chicago Climate Exchange for greenhouse gas emissions and for sulfur dioxide emissions. There is now a very active market for the purchase of all three of these. The legislation is important because it can require all of these components to be in one credit (called bundling) or it can be written so that they can all be sold separately (called unbundled). States utilizing RECS have used both or are unclear as to what the requirement is. This provides an opportunity for other income streams to support the operation of generation projects needed to meet other environmental requirements.
The BEI proposes an expansion of their Green Generation program. They are looking to increase the 5% participation rate to 10% (3). This approach, though laudable, functions much like an RPS in that the process would include a request for proposal. Consumers Energy Corp. would then select the generation scheme that has the least cost. So this process is open to the same criticisms mentioned earlier on the RPS effort.

Michigan Behind

The RPS is the method of choice for most states to encourage development of renewable energy. But Michigan is well behind other states, such that playing “follow the leader” will still leave us behind over the next decade. The other mechanism that has proven to foster new technology implementation but at a much higher cost is called Feed In or Advanced Renewable Tariffs. They have been particularly successful in Germany and in diverse forms throughout the European Union (10). On our continent, they are being used in California and Canada. The big difference is that a guaranteed, minimum price per kWh is paid by the utility to the power producer for some extended period of time either at a fixed or variable rate. The price paid per kW may be uniform, but at a much higher rate then what is called “old coal”. Other countries may even differentiate the price based on the technology involved and the cost to generate that technology. So, for example, wind may receive less per kWh, wood–based generation might receive slightly more and photovoltaic generation significantly more. Though more costly, Germany has proven that the result is the implementation of more diverse array of renewable generation.

Interconnection Problem

The interconnection problem continues to be a major issue for renewable energy generators connecting to the grid throughout the U.S. The 21st CEP has stimulated discussion and action on the part of the Michigan Public Service Commission (MPSC). To facilitate the process, regulated utilities must file interconnection reports every 6 months on any size project. Workshops, publications, and websites are strongly recommended as tools to minimize interconnection issues. MPSC meetings are open to the public and those with interest are encouraged to attend. If these meetings result in a higher net metering return and a forthright methodology for interconnection, Michigan will have made significant progress.

Michigan lags behind other states in the implementation of efficiency and renewable energy programming. If Michigan is to catch up with other states it must at least require the small percentage electricity bill required to support the 21st CEP benefits fund request. However, if the state is to step over our competitors, a policy approach similar to a feed-in-tariff will be necessary. The citizens and, in particular, the farm community must be forceful in communicating their wishes to their representatives. If we do not, Michigan will continue to languish, while other states forge ahead

References

1. Madsen, T., et al. 2007. Energizing Michigan’s Economy. Environment Michigan Research & Policy Center.
2. Michigan Department of Labor and Economic Growth. 2007. 21st Century Energy Plan.
3. Consumers Energy. 2007. Consumers energy unveils balanced energy initiative.
4. Polich, R.A., et al. 2007 A study of economic impacts from the implementation of a renewable portfolio standard and an energy efficiency program in Michigan. Next Energy Center.
5. Michigan Department of Labor and Economic Growth. 2007. Michigan’s 21st century electric energy plan.
6. Holt, E.A. and R.H. Wiser. 2007. The treatment of renewable energy certificates, emissions allowances, and green power programs in state renewables portfolio standards. Ernest Orlando Lawrence Berkeley National Laboratory.
7. Rickerson, W. and M. Zytaruk. 2006. The emergence of renewable energy tariff policies in North America. Presented at Annual Meeting of the American Wind Energy Association.
8. Michigan Department of Environmental Quality. Small business P2 loans.
9. Oregon Department of Energy. Biomass Energy Incentives.
10. Austrian Energy Agency. Electricity from renewables in CEE: Support mechanisms and conditions for feed-in.

 

 

 

 

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