CHP Tax Credit Likely to Boost Microgrid Market

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The microgrid market stands to get a boost from the recent extension of a federal tax credit for combined heat and power (CHP), often a key element of microgrids.

The Bipartisan Budget Act of 2018, signed into law February 9, reinstated the 10 percent tax credit (ITC) for CHP technologies. Project developers can use the credit for projects that begin construction by the end of 2021, with a maximum project size of 50 MW, said Anne Hampson, a principal with the consulting firm ICF who leads the CHP group in the distributed energy resources practice. The credit is limited to a project’s first 15 MW.

The credit is one of several prospects giving CHP a lift. Others include low natural gas prices, electric rate increases, and a flight toward technologies that ensure energy resilience.

“There used to be an ITC and it expired. Now that they extended the time frame again and re-established it, there’s lots of excitement in the industry,” she said.

Targeting smaller scale industrial applications, the credit can be used by a company that owns and operates its own CHP system or a third-party owner that sells power back to a facility — a hospital, for example — through a power purchase agreement.

CHP can be a solid anchor for microgrids, and the credit will help microgrid owners and developers free up money to add additional renewable energy, controls, or storage that will make microgrids more attractive, she said.

“This credit on the CHP portion of a microgrid can be combined with other credits available for solar, and more incentives coming out for battery storage all the time.” she added.

Influence on utility microgrid market

The ITC may boost the utility microgrid market, in particular, according to Hampson. She noted that utilities are increasingly considering microgrid development and their role in the process.

With the credit in place, utilities have an incentive to look at smaller-scale projects; they have traditionally focused on larger-scale projects.

“We may see more utilities investing in microgrids and also providing compensation to them. In regulated states, we have seen how utilities can invest and own generation and bring microgrids to customers,” she said.

“We may see more utilities investing in microgrids…”

Utilities can use the credit and take a more active role in microgrid investment and collaboration, according to Hampson.

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A number of utilities are getting more involved in microgrids, she noted. For example, the Jacksonville Electric Authority, a community-owned electric authority in Jacksonville, Fla., put out an RFP about potentially owning and operating CHP and microgrids at customer facilities.

“A nice business model for utilities is they can own the generation and bring that type of service to their customers,” Hampson said. “A lot of utilities have mentioned that customers are more and more interested in distributed generation and how it can provide reliability. Some utilities are saying they can do it for these customers, rather than having them do it on their own. This way, utilities can respond to the needs of their customers at customer sites.”

California alone could add 500 MW of CHP

ICF did a study about the CHP market for the California Energy Commission that looked at what would happen if the ITC were re-instated, and found that 500 MW of CHP would be added over the next 10 years.

California now has about 950 MW of CHP installed.

“That’s a significant amount of added CHP. If you extrapolate that to the rest of country, the ITC can jump start the industry,” she said.

The CHP industry is very excited about the ITC and the general movement in the industry, she said.

“There’s a lot of movement we have seen recently for CHP. First off, electricity rates are increasing throughout the country and with stable cost of natural gas, there’s a more favorable situation for CHP overall. There still are a lot of areas where CHP is a good investment, but not a great investment; it’s on the border line.” The ITC can push these projects over the border line, said Hampson.

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  1. John E Turgeon says:

    Great article, however, I am confused as to how the credit would be calculated for a 4.2 MW project.

    Please respond