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Md. RECs: Turn That Animal Waste into Thermal Energy

Client Alert

Authors: Marc D. Machlin and Heather Kilgore Weiner

5/08/2012

This article was published in the ‘Expert Analysis’ section of Energy Law360, Environmental Law360 and Project Finance Law360 on May 7, 2012. © Copyright 2012, Portfolio Media, Inc., publisher of Law360.

On April 6, 2012, the Maryland General Assembly enacted Senate Bill 1004 designating “thermal biomass systems” as energy resources eligible to receive Tier 1 renewable energy credits (RECs) for their thermal output. As of late April, this legislation has not yet been signed into law.

Assuming that the governor signs the legislation, RECs should become available in 2013 for qualifying biomass systems that generate thermal energy by using animal manure or poultry litter as the primary feedstock. Since thermal energy output can be measured in British thermal units (BTUs) per hour, the legislation provides that these BTU measurements may be converted into kilowatt-hours (kWhs) for purposes of measuring the RECs.

This new Maryland legislation is intended to facilitate the conversion of chicken litter and other animal waste into useful thermal energy. Initially, this waste can be processed into a fuel (methane) through anaerobic digestion. This fuel then can be used for heating purposes or power production.

As explained below, there are numerous questions of interpretation that eventually will have to be addressed by the Maryland Public Service Commission (the commission) or the Maryland Department of the Environment (MDE).

To obtain RECs, owners of thermal biomass facilities must meet numerous eligibility requirements. The state agencies will at some point have to develop guidelines for determining whether these eligibility requirements have been satisfied.

Additionally, as explained below, the concept of creating RECs for thermal output could and probably should be extended to systems relying upon other renewable fuels. At a minimum, the General Assembly should in the future consider allowing other renewable energy resources, such as waste-to-energy facilities and qualifying biomass facilities, to receive RECs for their thermal output.

Production of Chicken Litter in Maryland

There are at least 15 states with substantial poultry production. Maryland is the eighth-largest producer.1 Other states located partly within the Chesapeake Bay watershed, such as Virginia and Delaware, also have substantial poultry operations.2

This chicken litter typically consists of manure mixed with bedding, feathers and discarded feed. One advocacy group has estimated that, in Maryland, chickens produce approximately 550,000 tons of chicken litter each year.3

Under a program funded by the state and the poultry industry, some of this waste material is transported to western Maryland and used as fertilizer there.4 Much of this waste, however, is stored temporarily on site and then is used as fertilizer or placed on land, usually on nearby fields.5

Unfortunately, chicken litter contains far more phosphorus than is needed by farms near chicken-producing areas.6 In fact, some of the farm land in these areas is already saturated with phosphorus.

In addition, chicken litter is applied to the land throughout the year, even when there are no crops being grown that could absorb nitrogen and phosphorus released from this material.7 Consequently, nitrogen and phosphorus find their way into streams and creeks and then into the Chesapeake Bay, contributing to algal blooms and seasonal “dead zones.”8

The New Legislation and the Issues that Will Have to be Addressed by the Commission or MDE

Maryland’s existing statute grants RECs for the electric output from facilities that convert animal waste chicken litter into electricity.9 Under existing law, if animal waste is converted into methane gas through “anaerobic decomposition,” and if this gas is burned to produce electricity, the system owner is entitled to receive Tier 1 RECs for this electric power.10

By creating new RECs for thermal energy, Senate Bill 1004 would provide an additional incentive for the processing of animal waste into energy.

As explained below, however, implementation questions are likely to arise in several areas.

Use of Animal Manure as the Primary Fuel Source

The new legislation carefully defines the term “thermal biomass system” to cover systems that use particular types of feedstock. A “thermal biomass system” means a system that uses “(I) primarily animal manure, including poultry litter, and associated bedding to generate thermal energy; and (II) food waste or qualifying biomass for the remainder of the feedstock. ...”11

The feedstock must be “primarily” animal waste, but inevitably, questions will arise as to whether it is sufficient if the animal waste component represents just over 50 percent of the feedstock. Additional questions may arise as to whether the test is applied by actual weight, by dry weight or BTU value.

Likewise, since the availability of animal waste and other qualifying biomass may fluctuate over time, questions may arise as to the operative time period. One approach may be to rely upon the system owner’s projections at the time when it is seeking to be certified by the commission as a renewable energy facility. Another logical approach would be to apply the test on a yearly basis, corresponding to the time period in which RECs are measured.

There may also be questions as to whether or how the commission will collect the feedstock data from each owner. The commission could require the filing of yearly certification forms, or it could potentially make a one-time determination based upon the developer’s stated intentions prior to construction.

Compliance with All State and Federal Statutes and Regulations

Under Senate Bill 1004, a “thermal biomass system” must be “used” in Maryland and must comply with “all applicable state and federal statutes and regulations, as determined by the appropriate regulatory authority.”12

One initial question is whether the compliance determination relates to the owner’s entire facility or whether it relates solely to the thermal biomass system itself. While it is somewhat counterintuitive, the plain language of the statute indicates that this determination should relate solely to the new biomass system.

In fact, this compliance requirement is embedded in the statutory definition of a “thermal biomass system.” Consequently, for purposes of implementing this legislation, state regulators should focus only on the regulatory compliance of the system.

There are also questions on how compliance should be evaluated. A finding of compliance could be based upon an absence of known enforcement activity, or it could be based upon rulings by courts or agencies, or it could be based upon state inspections. Since the statute does not expressly address this point, Maryland authorities will have considerable leeway in deciding how to make these determinations.

Use of Anaerobic Digestion or Use of Other Thermochemical Processes that Provide a Substantial Decrease in Nitrogen Oxide (NOx) Emissions

Senate Bill 1004 strongly encourages the use of technologies based upon anaerobic digestion. Any person that owns and operates a thermal biomass system using anaerobic digestion is eligible to receive RECs without submitting any evidence on the system’s impacts on air quality.13

The General Assembly, however, recognized that there may be other “thermochemical process[es]” that could be used to convert animal waste into a usable feedstock.14 If an owner elects to use a technology other than anaerobic digestion, it will be eligible to receive RECs only by demonstrating to the MDE that operation of the thermal biomass system:

  1. “is not significantly contributing to local or regional air quality impairments; and
  2. "will substantially decrease emissions of oxides of nitrogen beyond that achieved by a direct burn combustion unit through the use of precombustion techniques, combustion techniques or post combustion techniques.”15

The MDE will have to decide how to implement these requirements. The agency will have to specify how an owner can demonstrate that a biomass system is not impairing air quality, either locally or regionally.

Likewise, the MDE will have to decide how to determine whether operation of such a system will substantially decrease NOx emissions, as compared to “direct burn” approaches.

Additional RECs for Production of Electricity from Animal Waste

The new legislation allows owners of thermal biomass systems to obtain RECs for the thermal output from these systems. In some instances, however, project developers may elect to build combined heat and power (CHP) facilities that produce electric power and thermal energy.

Since the existing renewable portfolio standards legislation authorizes the creation of RECs for the power output from waste-to-energy facilities and from biomass facilities that burn methane derived from poultry waste, and since the new statute does not require the developer of a thermal biomass system to give up RECs associated with production of electric power, it appears that CHP projects using appropriate feedstock materials will be eligible to receive RECs for both their thermal output and their power output.

On the other hand, the statute does not specifically address whether a renewable energy resource can be certified under more than one category. To eliminate uncertainty, the commission should address this issue explicitly.

Broader Policy Issues Associated with Granting RECs for Production of Thermal Energy

The state of Maryland is not alone in granting RECs or other incentives for thermal energy systems. Other states have recognized that even traditional gas-fired CHP projects lower greenhouse gas emissions and increase energy efficiency. By capturing and using waste heat from the combustion process, CHP projects use natural gas far more efficiently than traditional generating stations.

When thermal energy systems rely in whole or in part on a renewable resource or on waste material, the benefits are likely to be enhanced. These projects produce energy using readily available domestic resources.

Simultaneously, these projects may provide a more sustainable method for the handling or disposal of a high-volume waste stream. Especially since the steam production from these CHPs lessens demand for electricity and/or natural gas, it seems reasonable for states to provide RECs not only for the electric output from these systems, but also for their thermal output.

Ideally, however, in granting new RECs for thermal energy, states should try to avoid damaging the existing REC markets. In some states, due to an influx of solar photovoltaic projects, REC prices or solar REC prices have already fallen substantially over the last two years.

Accordingly, if the costs are reasonable, states should consider creation of a separate thermal energy carve-out or an additional thermal requirement in their renewable portfolio standards. This approach would allow states to provide an economic incentive for thermal energy projects without harming the existing REC market.

Finally, the new Maryland legislation understandably is focused on chicken litter and other animal waste. While this is a reasonable starting point, the General Assembly should evaluate whether other renewable fuels should receive the same treatment. Likewise, the General Assembly should evaluate whether it would be beneficial to provide RECs or other incentives for new gas-fired CHPs that achieve a high level of thermal efficiency.

Endnotes

1 Pew Environment Group, “Big Chicken: Pollution and Industrial Poultry Production in America,” July 2011 (hereinafter the “Pew Study”) at 8.

2 Id.

3 Elizabeth Ridlington, Frontier Group and Tommy Landers, Environment Maryland Research & Policy Center, “An Unsustainable Path — Why Maryland’s Manure Pollution Rules Are Failing to Protect Chesapeake Bay,” Environment Maryland Research & Policy Center, Fall 2011; at 2 (hereinafter “Environment Maryland Report”).

4 “State Locks Up Methane With Prison Digester Project,” Vol. 53, No.2 Anaerobic Digest 19, February 2012.

5 Environment Maryland Report at 1-3. For general background on farming practices, see L. Oldham, PhD., Nutrient Management Guidelines for Agronomic Crops Grown in Mississippi (2012) at 24-25 http://msucares.com/pubs/publications/p2647.pdf.

6 Environment Maryland Report at 8-14; see also Pew Study at 13-14.

7 See generally Environment Maryland Report at 1-3, 10-11.

8 Environment Maryland Report at 5-7. The U.S. Environmental Protection Agency has previously estimated that manure alone contributes about 19 percent of the nitrogen and 26 percent of the phosphorus in the Chesapeake Bay. See Lauren Etter, “Chicken Litter: The Aerial Hunt for Poultry Manure,” The Wall Street Journal, November 3, 2009.

9 Pub. Util. § 7 701(l).

10 Id. See also Pub. Util. § 7-701(h).

11 Senate Bill 1004 (adding Pub. Util. § 7-701(H-1) (definition of thermal biomass system).

12 Id.

13 Senate Bill 1004 (adding Pub. Util. §7-704(H-1)). While there is typically a solid ash residue (or fertilizer) produced from this process, the volume of waste (or fertilizer) is greatly reduced. In addition, this residue is dry and can more easily be stored for use at appropriate times of the year.

14 Senate Bill 1004 (adding Pub. Util. §7-704(H)(2)).

15 Senate Bill 1004 (adding Pub. Util. §7-704(H)(2)(II)).

Marc D. Machlin and Heather Kilgore Weiner

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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