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Project Comparison Focuses Thinking on Effective Incentives

Four pellet heat projects provide different levels of savings and returns.
By Eric Kingsley | March 21, 2014

States are ramping up efforts to promote heating with biomass, and wood pellet mills and heating appliance manufacturers have opportunities to help shape these policies.  Heating with wood pellets has a range of benefits including using a domestic (often local) fuel source and providing consumers with a low-cost, renewable alternative to oil and propane.  These and other benefits, including jobs, have policymakers looking for ways to encourage wood pellet projects, large and small.

When designing policies to support biomass thermal projects and infrastructure, it’s important to think about what we’re trying to accomplish. Policymakers have lots of tools available. New Hampshire is on the verge of rolling out a first-in-the-nation thermal Renewable Portfolio Standard, New York’s Gov. Andrew Cuomo recently announced new programs to provide capital to demonstration projects, and other states are experimenting with support mechanisms. Each tool can be used to support wood pellet projects, but often it’s important to think first about what a policy is trying to accomplish, and then consider the best tools to achieve that goal.

The following, based on a presentation I gave at the Pellet Fuels Institute annual meeting last summer, provides a brief look at a few projects in northern New England.  Each of these projects received some level of public support, state or federal.  I would also note that each project had a different goal. These are all good projects, using public support to accomplish different things.

To make comparisons simple, I will use some basic assumptions and metrics:

• Oil is the heating fuel being displaced, which is generally true in northern New England; pellets generally compete well on a Btu basis against oil and propane, but may have challenging economics against natural gas via pipeline.

• Oil and wood pellet prices are held constant for 20 years.  This isn’t how the world works, of course, but it makes the comparison simple and helps eliminate long debates about assumed escalators.
• Annual fuel saving estimates are simply the differential between the cost of wood pellets and the cost of an equivalent amount of oil.

• The 20-year savings is simply the annual fuel savings for 20 years, less the capital cost of the project. No accounting is made for operations and maintenance costs (for either the pellet units or oil), and no accounting for inflation. 


Project Profiles

Let’s start at my house. I live in Maine, the state with the country’s greatest reliance on heating oil. In 2008, we purchased a pellet stove. The receipts are long gone, but the full price—installed with a floor guard and venting system—was about $3,400. We received a federal tax credit of $1,000 (no longer available). The pellet stove is centrally located in the part of the house where we spend time, and has become the favorite spot for dogs and kids (parents too, but only on a space-available basis).

We buy 2 tons of pellets a winter—the stove is clearly supplemental heat. Those pellets displace about 245 gallons of heating oil annually, and provide us a savings of around $390 on heating costs. Over 20 years, we can expect savings of about $4,400 dollars. 

At the other end of the spectrum is Jackson Laboratory, a research campus located on Maine’s Mount Desert Island. This facility—known globally for its cutting edge research on genetics—installed a new “powder burn” system in 2011 which uses wood pellets crushed and burned in suspension to generate heat and electricity. This facility, which uses around 12,000 tons of wood pellets annually, is the largest single wood pellet user in the country. The project cost $4.4 million, and was supported with a $1 million grant from The Efficiency Maine Trust, a quasi-governmental agency. Jackson Labs saves about $1.74 million annually on fuel costs with this new unit, and is expected to save more than $30 million in the next 20 years. 

Somewhere between these two—and an area with great promise for market expansion—are residential systems used to heat the entire home. As profiled in the last issue of Pellet Mill Magazine, the Northern Forest Center led an effort to build a cluster of wood pellet-heated homes in Berlin, N.H. This effort, dubbed the Model Neighborhood Program, resulted in 37 new units, with a total project cost of around $790,000. Each boiler received funding from the New Hampshire Public Utilities Commission through a rebate program, plus support from the Northern Forest Center.

This cluster of 37 boilers—which were meant to serve as a model for both neighbors and for other communities—results in a total of $98,000 in annual fuel savings according to information available on the project’s real-time dashboard found on the Northern Forest website at: www.northernforest.org/berlin_dashboard.html. Assuming that these fuel savings stay constant, this group of homeowners can expect to realize savings of $1.2 million over 20 years. 

One of the truly innovative features of the Model Neighborhood Program is that it is using a cluster of users to build the supply infrastructure for bulk delivery that, over the long-term, has the potential to benefit the entire community. It will be interesting to look back in five years and see if these projects—which received more than half of their money from sources other than the homeowner—have built the knowledge base and infrastructure to encourage more wood pellet heating systems in Berlin and surrounding communities.

A final project for consideration is Millinocket Regional Hospital, a small community hospital in northern Maine. With 25 beds, this is the type of hospital critical to rural communities that often struggles financially. In 2013, this hospital brought a wood pellet boiler online to provide heat to the entire facility, at a total project cost of $518,000. Maine, using money from the federal American Recovery and Reinvestment Act, paid for half of the project’s capital cost. More information on this and other Maine ARRA wood heating projects can be found at a dashboard created to track these systems, www.mfs.nmcc.edu.

The hospital expects to enjoy annual fuel savings of about $360,000, realizing savings totaling $2.9 million over 20 years. That’s money that can be used to support the hospital’s core mission, providing health care to the people of Maine’s Katahdin region.

Planning Incentives

Each of these projects benefits not only the host—my family, a genetics laboratory, a community hospital—but also the entire region. Through purchasing a renewable fuel from local forests and mills, decreased use of oil, and retained wealth in the community, wood pellet heating systems provide a range of public benefits. It is for those reasons that state and federal programs seek to increase the use of biomass thermal systems, including wood pellets. As the projects above show, wood pellets provide some real cost-saving opportunities over the life of a system. In my firm’s experience, however, the relatively high capital cost of wood heating systems, coupled with the perception of pellets being a niche or emerging fuel, can serve as deterrents to wider adoption.

State and federal subsidies, often modest compared to the size of the project, can provide an incentive for a project host to make the decision to move to pellets. When industry advocates for new or expanded programs and support, careful consideration should be given to what is trying to be accomplished, whether the tool is expected to accomplish that goal, and what level of financial support is necessary. Funds are scarce—and always should be—so designing systems that leverage funds to the greatest benefit possible will serve industry growth well.

Author: Eric Kingsley
Partner, innovative Natural
Resource Solutions LLC
Kingsley@inrsllc.com
207-772-5440

 

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