A Discussion of Ground Source (Geothermal) Heat Pumps and Their Role in Renewable Energy and Energy Efficiency Policy

Transcription

1 A Discussion of Ground Source (Geothermal) Heat Pumps and Their Role in Renewable Energy and Energy Efficiency Policy Richard P. Mignogna, Ph.D., P.E. Staff of the Public Utilities Commission 07 April 2008 Colorado Public Utilities Commission Suite Broadway Denver, CO 80202

2 Colorado Public Utilities Commission Richard P. Mignogna, Ph.D., P.E. Professional Engineer Research and Emerging Issues Section Doug Dean Director

3 Energy and Energy Efficiency Policy 1 Introduction Ground source heat pumps (GSHP) also known as geothermal heat pumps or geoexchange systems represent a quasi-renewable approach to providing space heating and cooling and water heating for residential and commercial buildings. This white paper discusses the applications for ground source heat pumps and the role that this technology can play in renewable energy and energy efficiency policy. It is not the intent of this paper to provide a comprehensive review of the various types of heat pump systems available and the interested reader is referred to some of the references listed in the bibliography. Similarly, a detailed economic and environmental review is also beyond the scope of this paper. Rather, the goal is to provide sufficient background to facilitate a discussion of the appropriate treatment of GSHP technology in renewable and energy efficiency policy. What is a Ground Source (Geothermal) Heat Pump? Ground source heat pumps are energy transport mechanisms used for space heating and cooling. Rather than the rely on the burning of fossil fuels to provide heat, they concentrate existing heat energy from a source in this case the ground and release that heat energy in the indoor environment. When used in cooling mode, they work similar to an air conditioning unit, in that they remove heat from the warmer indoor environment. However, rather than release that heat to the outside air, they transfer it to the cooler ground. Thus, when in heating mode, the ground serves as a heat source and when in cooling mode, the ground serves as a heat sink. A GSHP, therefore, does not produce heat. Rather, it transfers thermal energy from one location to another. In addition, when the heat pump is operating, an ancillary device known as a desuperheater can be used to provide hot water, as well. 1 Although GSHP burn no fuel, they do rely on electricity to operate. The energy saved by a GSHP is therefore relative to the heat source that would otherwise be used (e.g. natural gas, electricity, propane, etc.) to heat the 1 GSHP cannot totally replace a hot water heater as they only provide heat for hot water when the GSHP is otherwise operating. Thus, they are most effective for hot water heating during the summer when the heat that would otherwise be expelled to the ground can be diverted to the hot water tank.

4 Energy and Energy Efficiency Policy 2 building. As a cooling device, they are more efficient than typical air conditioning equipment because the heat is being transferred to the earth which is cooler than the outdoor air during the summer. This difference in temperature between the source and the sink (whether in heating or cooling mode) is referred to as the lift. 2 Because the lift between the indoor space at the desired temperature and the ground is less than the lift between the indoor space and outdoors, less energy is consumed in making the exchange. Ground source heat pumps are typically classified two ways: closed loop versus open loop and then according to the type of connection made to the earth: vertical borehole, horizontal trench, and surface water. Closed loop systems are far more common than open loop because there is little concern with contaminating or otherwise disrupting groundwater resources. Horizontal systems, in which coiled heat exchanger piping, often referred to as a slinky arrangement, is laid in relatively shallow trenches, 4 to 5 feet deep, are most suitable for residential applications. Where there is insufficient land, the heat exchanger piping may be placed in vertical boreholes. Such vertical systems tend to be more appropriate for commercial and industrial systems. If there are ponds or lakes nearby, the heat exchanger piping may simply be placed at the bottom of a body of water and then run in a trench to the structure. In the U.S., GSHP systems are sized according to the tons of thermal capacity required. One ton of capacity is equivalent to 12,000 Btu per hour. Residential systems for a typical home tend to be in the range of 3 to 5 tons of capacity. 3 Are GSHP Geothermal or Solar? Many references mistakenly categorize GSHP as a form of solar energy device. This misconception apparently stems from the fact that approximately half of the sun s total insolation is absorbed and retained by the earth. However, this is not the primary source of the thermal energy used by GSHP. Subsurface temperatures are a function of the geothermal gradient which results from the heat provided by molten mantle material 2 This term provides a convenient analogy. Heat energy naturally tends to move from warmer areas to coolers areas. Thus, concentrating the thermal energy from a cooler environment (the ground, for example) and releasing it in an already warmer environment (such as your living room) requires work. 3 In other parts of the world, systems are sized in kw (1 kw = 3,412 Btu).

5 Energy and Energy Efficiency Policy 3 beneath the earth s crust. As shown in figure 1, near-surface temperature fluctuations induced by solar radiation are superimposed on a constant larger scale heat flow that is reflected by the gradient and which is not influenced by climatic changes. As shown in the figure, below only a few meters in depth, the surface influences are virtually completely attenuated. Hence, surface temperature fluctuations are more likely to impact horizontal ground loop systems than vertical configurations, and horizontal loop GSHP extract thermal energy from the ground in spite of such solar influences rather than because of them. However, it is precisely these climatic-induced, near-surface variations that are responsible for the varying performance characteristics of horizontal loop GSHP at different latitudes. Figure 1 - Subsurface temperature fluctuations in Ottawa, ON, Canada (Williams, G.P., and Gold, L.W., 1976 as reproduced in [6]). Advantages of Ground Source Heat Pumps? For more than 10 years, the Department of Energy has promoted GSHP as the most economical, efficient, and environmentally clean indoor space heating and cooling technology available. GSHP also reportedly provide quieter operation and improved humidity control. One might then reasonably ask why they are not more common? Because GSHP serve the dual role of providing both heating and cooling, they must be compared to other heating/cooling technologies in tandem. The advantages of GSHP over radiant electrical heating and air conditioning may be obvious. And, the operating cost benefits may be similarly obvious when compared to some other fossil fuel based heating systems such as propane and oil.

6 Energy and Energy Efficiency Policy 4 However, in Colorado, gas forced air (GFA) furnaces are the most prevalent heating technology employed in residential construction. With historically relatively cheap natural gas, the economic benefit of GSHP over the tandem of GFA and central air conditioning is less obvious. Escalating natural gas prices increasingly drive this decision toward GSHP technology. However, one must also consider the fact that many homes in Colorado do not have air conditioning. Hence, the tandem of GFA heating and open windows may still have an economic advantage. While GSHP technology seems to have the clear advantage in operating costs, installation is quite another matter. The installation of GFA and central air is easily incorporated into building plans for both residential and commercial construction and there are many heating, ventilation and air conditioning (HVAC) contractors qualified to install such systems. In comparison, however, the installation of GSHP systems is more complex, more expensive, and there are far fewer qualified installers. 4 Installation of the ground loop portion, depending on the design of the system, may include trenching or drilling and laying pipe up to the structure. Thus, the up front costs of GSHP systems are far higher. When these costs can be included in the initial construction costs and incorporated into the original mortgage, the consumer may still realize a net cash flow advantage due to the lower operating costs. Retrofits are more problematic and the payback period can vary widely depending on interest rates, fuel costs, additional structural and HVAC modifications needed, and the discount rate applied to the analysis. Hanova and Dowlatabadi [6] conducted an economic analysis of the economic feasibility of GSHP in several countries. Using price data obtained from the Energy Information Administration, they report: In regions where electricity prices are significantly higher than natural gas costs, the financial returns of GSHP are questionable. GSHP systems are preferable to electric and heating oil systems in all countries for which data are available. Figure 2 shows a comparison of the annual space conditioning costs for GSHP versus conventional technologies for six U.S. cities. As discussed 4 The International Ground Source Heat Pump Association lists 107 accredited installers in Colorado working for 78 firms. The Geothermal Heat Pump Consortium (aka Geoexchange) lists 20 members in Colorado.

7 Energy and Energy Efficiency Policy 5 above, note that the most relevant comparison is against GFA with central air conditioning. Figure 2 - Annual space conditioning costs for six U.S. cities, EPA 1993 [2]. The potential for lower fuel and operating costs is only one of the advantages of GSHP. Because they are more energy efficient, GSHP are also more environmentally benign. In Environmental and Energy Benefits of Geothermal Heat Pumps [1], the DOE reports: Over an average 20-year lifespan, every 100,000 units of nominally sized residential GHP s will save more than 24 trillion BTUs of electrical energy and save consumers approximately $500 million in heating and cooling costs at current prices (1998). And, over the same period, these 100,000 units reduce greenhouse gas emissions by almost 1.1 million metric tons of carbon equivalents. The environmental superiority of GSHP in general is difficult to quantify because the benefits will vary with the carbon intensity of both the fuel being replaced and the fuel used to generate the electricity to run the system. The greatest greenhouse gas benefit will occur in locales where

8 Energy and Energy Efficiency Policy 6 electric heat predominates and the electricity is generated using primarily coal. As renewables substitute for fossil fuels in heating and electricity generation, these emissions advantages diminish though the economic advantages may remain. Though it may seem obvious, we would also note that as the heating load increases, the emissions reduction potential and operating cost savings of GSHP also increase in real terms. Figure 3 provides a comparison of the annual CO 2 emissions for GSHP and five other space conditioning technologies. Although the results vary from city to city, GSHP provide the lowest CO 2 emissions in every instance. Figure 3 - Comparison of CO2 emissions for six space conditioning technologies in six U.S. cities, EPA 1993 [2]. Market Penetration In 1998, the DOE reported a penetration level of nearly 500,000 GSHP installations. And, while accurate statistics are difficult to come by, industry advocates report more than one million GSHP installations to date. Table 1 shows annual GSHP shipments in the U.S. from 1999 through The distribution of these shipments around the country is shown in table 2.

9 Energy and Energy Efficiency Policy 7 Table 1 Annual U.S. Geothermal Heat Pump Shipments, [4]. Table 2 - Distribution of Geothermal Heat Pump Shipments, 2005 (Number of Units) [4]. The forecast for future GSHP installations is also difficult to predict with certainty, partially due to the heavy reliance on the cost of more conventional systems and fuels. Market research firm The Freedonia Group predicts geothermal HVAC shipments of 52,000 units in 2006, 76,000 units in 2011, and 111,000 units in In contrast, table 3, drawn from a presentation by the Geothermal Heat Pump Consortium, presents a far more optimistic growth scenario. Such is the nature of market forecasting.

10 Energy and Energy Efficiency Policy 8 Table 3 - Geothermal heat pump forecast, Geothermal Heat Pump Consortium, The Role in Renewable Energy and Energy Efficiency Policy Thus far, we ve discussed the benefits of GSHP systems from an environmental standpoint and an operating cost standpoint. It seems apparent that the principal impediment to more widespread adoption of this technology is the first cost of the system. Furthermore, it appears that this impediment is a greater barrier in residential construction than in commercial construction and this is understandable. Nonetheless, with paybacks as short as 5 to 10 years under some circumstances, GSHP are nearly competitive with conventional space conditioning systems. Given this situation, it seems reasonable to ask whether it is appropriate for this technology to receive special consideration in the form of public subsidies and, if so, what form they should take. Numerous mechanisms exist for modifying consumer s energy production and consumption behaviors. Rebates and tax credits are two of the most common. Subsidized or guaranteed loan programs represent another. To answer the question of whether some form of public subsidy or incentive is

11 Energy and Energy Efficiency Policy 9 appropriate, it may be useful to first discuss the motivation for creating such programs. Rationale for Incentives Generally speaking, the rule of thumb that is often followed when establishing policy is to reward (encourage) desired behavior with financial incentives and tax (discourage) undesirable behavior. For example, in the present energy arena, greater use of renewable generation is encouraged while the discharge of pollutants into the environment is discouraged. Hence, the current approach is to provide rebates to encourage greater renewable energy generation and energy efficiency while the threat of a carbon tax to discourage the release of CO 2 is looms ominously. When market mechanisms by themselves are insufficient to produce the desired policy result, regulation may be employed to mandate desired outcomes and prohibit undesirable ones. The development and deployment of new technologies, such as renewable energy and energy efficiency technologies, may require government intervention to achieve the desired result in a given time frame. Recent examples include the Renewable Energy Standard, mandatory rebate programs for solar photovoltaic systems, and demand side management (DSM) programs that must be implemented by utilities. Public incentives, be they rebates, tax credits, or other mechanisms, are intended to stimulate the industry by subsidizing the development of what is an otherwise uneconomic resource. The theory is that, with experience, the costs of the subsidized system will diminish due to several factors: Economies of scale Learning curve progress Increased competition on the part of o System providers as new entrants are drawn into the industry, and o Customers for incentive payments Technological advance To the extent that any or all of these occur, the need for incentives should diminish over time. This theory provides the first of two frameworks we will use to assess whether GSHP should be incentivized using public funds.

12 Energy and Energy Efficiency Policy 10 With respect to the benefits that accrue from economies of scale and learning curve progress, it is not clear how much would be gained from incentivizing GSHP. GSHP are a relatively mature technology that has been deployed in the U.S. for more than 20 years. While there are likely to be some incremental advances, the data show it to be reasonably competitive with conventional sources of space conditioning already. The additional benefits that would result from further economies of scale and learning curve progress in manufacturing are unlikely to be of the same magnitude as those for less mature technologies such as photovoltaics. We noted earlier that one of the reasons for the higher first cost of GSHP systems is the relative dearth of qualified installers and the costs of the drilling and/or trenching that is required. To the extent that an economic stimulus increases the deployment of GSHP technology, this is the area where the greatest learning curve progress is likely to be seen. In addition, to the extent that such a stimulus brings new entrants into the industry, the increased competition among these installers possibly holds some potential for future cost reductions. As for the technological advance that could occur due to the increased deployments stimulated by incentives, we again note that this is a fairly mature technology. The principal technological advances that may be reasonably anticipated are likely to be in the form of greater operating efficiencies of the heat pumps themselves. Given that GSHP technology is already competitive with other forms of space conditioning, it is not clear that incentives would further contribute to this technological advance. In fact, to the extent that such payments relieve competitive pressures, they may be counter productive. Hence, on balance, we do not believe that the technology-based arguments favoring a public subsidy of GSHP technology are as compelling as those made for more nascent technologies such as photovoltaics. However, this does not mean that there are no other arguments that may be made in support of incentives for GSHP. Perhaps the rationale for providing public support of GSHP can be found in framework used to develop renewable portfolio standards. The rationale underlying a renewable standard is five-fold: Energy security Conservation of scarce resources Reduced environmental impacts

13 Energy and Energy Efficiency Policy 11 Economic development Technological advance Let us then explore how ground source heat pumps fit into this framework. The energy security argument posits that our reliance on certain fossil fuels puts us at the mercy of those whose interests are not well aligned with ours. Although we do import some natural gas from Canada, our imports of oil as well as a small but growing supply of liquefied natural gas (LNG) are from decidedly less friendly environs. Thus, to the extent that GSHP substitute for imported fossil fuels, they enhance our energy security position. Conservation of scarce resources is another criterion for which GSHP are well positioned. Each fossil fuel natural gas, oil, and even coal is a nonreplenishable, depletable resource. Some, such as oil, may even have higher economic uses. Every therm of gas, barrel or oil, and ton of coal that can be conserved becomes available for other uses. Hence, especially where costs are equivalent, GSHP help to conserve those resources for other uses. Earlier we discussed the environmental advantages of GSHP over all fossil fuel based space conditioning technologies. Clearly, given the often discussed concerns with greenhouse gases and other pollutants, every Btu of thermal energy moved by a heat pump prevents additional pollutants from entering the atmosphere. Given that such environmental degradation is a societal problem, society will benefit from supporting cleaner alternatives such as GSHP. The economic development argument probably does not lend itself to the support of subsidies for GSHP. At this point, we now of no particular manufacturing capability that would benefit from incentives for GSHP. However, perhaps we could take a page from other states and offer some additional incentive for installing equipment manufactured in Colorado. As for the installation of these systems, for each GSHP system installed there would be one less conventional system installed, so this impact may be considered neutral. Lastly, we earlier discussed the likelihood of technological advance being stimulated by incentives to foster the technology and found that this relatively mature technology would not be significantly impacted by such support. Overall, three of the five justifications favoring a renewable

14 Energy and Energy Efficiency Policy 12 standard also suggest that some form of public incentive for ground source heat pumps may be appropriate. Incentive Program Design The conclusion one may draw from the preceding discussion is that some form of public subsidy may be warranted for GSHP. But, deciding that a particular technology should benefit from such subsidies is only the first step. There are many details that must be considered including: What are the goals of the incentive program? Who will be the recipient of the incentive payments? Where will the funds come from? Should incentives be capacity based or performance based? What form should the incentives take (rebates, tax credits, etc.)? What is the proper level of incentive payments? When should the incentives diminish or be removed (i.e., when will the program be declared a success)? How do federal policies impact the need for and the design of state incentive programs? Who will administer the incentive program? Unfortunately, many incentive programs are developed without giving sufficient consideration to these design issues. While all of the above considerations must ultimately be addressed, in this paper we shall cover only a few of the more crucial ones. Incentive Program Goals Just as with the development of a renewable portfolio standard, the place to begin discussing incentives to foster the deployment of GSHP is with the goals for the program. The arbitrary selection of a program target is poor public policy. Considering the current concerns over greenhouse gas emissions, one approach may be to determine a target contribution toward GHG reductions and then calculate the required substitution of GSHP for conventional heating and cooling that would be required to meet it. Another approach would be to seek the maximum number of GSHP systems that may be deployed within a specified budget constraint. Here, the success of such a program would be contingent upon the most cost effective deployment of the technology. Careful consideration must be

15 Energy and Energy Efficiency Policy 13 given to the elasticity of the demand for incentive payments so that optimal use may be made of the public or ratepayer funds accumulated for this purpose. Whatever the case, good program design begins with clear and transparent goals that are objective and measurable. Another important policy question may be asked with regard to the technologies that are subsidized by the incentives. Is it better to subsidize current, readily available technologies such as ground source heat pumps or to direct those funds into promoting more advanced technologies that possess greater potential for future cost reductions and increased efficiencies? Does targeting one technology over another provide a competitive advantage to the supported technology at the expense of the other? Those responsible for assessing and spending taxpayer and ratepayer funds have a responsibility to ensure that those funds are expended in the most cost effective manner and not succumb to the lobbying efforts of the myriad special interests who would lay claim to them. Incentive Funding Mechanisms A number of different mechanisms may be employed to fund subsidies for alternative energy in general and GSHP in particular. Thus far and to the best of our knowledge, none of the alternative energy programs in Colorado are being funded by a system benefits charge (SBC). An SBC can be structured as a flat rate or as a per unit (kwh or therm) charge similar to a bill adjustment. One difference between an SBC and a bill adjustment is that the SBC, although collected by utilities, is typically used to provide funding for programs that are administered by a government agency or independent administrator. Utilities and consumers seeking incentive payments apply to the administrator for reimbursement according to the rules established for the incentive program. In addition, the SBC typically provides a pool of funds that is independent of rate impact caps, although the SBC may be designed with a maximum rate impact in mind. This, in fact, is one of the benefits of an SBC it provides a known, stable funding source with less opportunity for creative interpretation than a funding source that is subject to a rate impact cap. Furthermore, with this model there is no inherent conflict of interest between the administrator and the ratepayer/consumer as there may be with utility-administered programs. Utility bill adjustments or riders, such as the RESA, have been the method of choice for investor owned utilities subject to the RES and DSM mandates. Unlike the RESA, which provides up-front cost recovery for the

16 Energy and Energy Efficiency Policy 14 utility, bill adjustments do not necessarily need to be collected in advance of expenditures, but may be a conventional cost recovery mechanism for acquisitions that have been declared used and useful. In the latter case, there would be less concern over whether ratepayers are paying for utility acquisitions that are prudent and cost effective. On the other hand, one might consider these ratepayer advanced funds as an investment that should give ratepayers (perhaps via an agency with a fiduciary responsibility to protect ratepayer interests) a voice into how those funds are spent. If society as a whole benefits from alternative energy generation and energy efficiency measures, it may be more equitable to fund these programs via taxes or other assessments rather than ratepayer surcharges. If this were the approach, all Coloradans who benefit from the programs would share in their cost. The present system of allowing each utility to establish its own energy surcharges can result in inequities across utility jurisdictions. Clean Energy Fund: Senate Bill created a discretionary Clean Energy Fund ( , C.R.S.) to be administered by the Governor s Energy Office. This fund will receive revenues collected by the Colorado Limited Gaming Fund ( (1), C.R.S.) transferred to it at the end of each fiscal year. Per the statute, the Governor s Energy Office may expend moneys from the fund: (a) To attract renewable energy industry investment in the state; (b) To assist in technology transfer into the marketplace for newly developed energy efficiency and renewable energy technologies; (c) To provide market incentives for the purchase and distribution of energy efficient and renewable energy products; (d) To assist in the implementation of energy efficiency projects throughout the state; (e) To aid governmental agencies in energy efficiency government initiatives; (f) To facilitate widespread implementation of renewable energy technologies; and

17 Energy and Energy Efficiency Policy 15 (g) In any other manner that serves the purposes of advancing energy efficiency and renewable energy throughout the state. Ground source heat pumps clearly satisfy criteria (c), (d), and (g) and should be considered for support from this fund. According to the Fiscal Note accompanying this legislation, the Clean Energy Fund is estimated to have available $7 million for disbursement in FY07/08, an additional $8.526 million for disbursement in FY08/09, and another $ million for disbursement in FY09/10 for a 3-year total of $39.67 million. This fund is clearly a significant source of discretionary funds that could be used to incent deployment of energy efficiency devices such as GSHP in Colorado. Other options may exist for aligning the funding of renewable programs with goals for enhanced environmental quality, reductions in fossil fuel use, and economic development. One would be to utilize the state s mineral severance tax fund to provide monies for renewable energy and energy efficiency incentive programs. In this manner, the nonrenewable resource utilization that is at the core of the environmental problem would help pay for the remedy. Similarly, the implementation of a carbon tax has been the subject of much discussion lately. While there still needs to be a clearer definition of the place in the commodity stream at which a carbon tax would be levied (i.e., the point of regulation), this would make an obvious source of renewable funding that would align benefits and costs. Incentive Structures Incentives for supporting a technology such as GSHP may take several forms including rebates, investment tax credits, grants, loan guarantees, tax free bonds, and property and sales tax exemptions. The most direct is to provide rebates to buy down the first cost of the system. This is the approach that has been adopted for supporting residential photovoltaic systems under the RES. Generally, such rebates for energy production systems are capacity based. Alternatively, a pay-for-performance approach may be adopted in which the recipient receives a payment according to the production of the system. Employing this approach for GSHP systems would require separate thermal metering. Tax credits and tax exemptions offer another approach to structuring incentive programs. The state of Colorado presently does not offer any tax credits for energy efficiency devices such as GSHP or for energy efficiency

18 Energy and Energy Efficiency Policy 16 devices. 5 One of the advantages of using tax credits as an incentive mechanism is that it spreads the cost of the incentives among all citizens. In this manner, tax credits serve the same function as grant programs or incentives paid from taxpayer dollars. One argument against this approach would be that, since the energy efficiency devices reduce the load on a specific utility, the subsidy is most appropriately paid by that utility s customers. However, to the extent that emissions, environmental degradation, and energy security are broader societal concerns, the counter argument could be that all taxpayers should share in the cost. Another argument in favor of tax credits is that they provide a mechanism for administering an incentive program without the need to create a new bureaucracy. And, the amount of the credit could be increased to meet other goals such as fostering in-state manufacturing for economic development. But, here again we face the difficulty of monitoring and verifying that taxpayers are receiving full value for their investment. In Colorado, the problem is further aggravated by the Taxpayer Bill of Rights (TABOR) Amendment which limits government flexibility in allocating revenues to suit specific programmatic needs. Thus, the generous tax credits offered, for example, by the state of Oregon to its residents may be problematic in Colorado. It is not known whether tax exemptions, as opposed to tax credits, would face similar difficulties. There is some evidence to indicate that tax credit or tax rebate programs offer a more effective inducement to consumers than ex-ante programs that require an application for funding prior to installation. 6 In France, solar thermal installations more than doubled when the country shifted from an ex-ante rebate program to an ex-post system in which consumers applied for tax rebates after the system was installed. Some state and municipal jurisdictions have created low-interest or guaranteed loan programs to support renewable energy and energy efficiency efforts. Such programs facilitate these efforts by effectively lowering the capital investment required and shortening the payback period. Perhaps an opportunity for similar programs exists in Colorado. The Clean Energy Fund described earlier could potentially be one source of revenues for such a program. Alternatively, the Colorado Clean Energy Development Authority (CEDA) created in 2007 by House Bill may be the logical entity to create a source of low cost financing to support 5 It does offer sales and property tax exemptions for renewable energy generating equipment. 6 Such as the Standard Rebate Offer for PV installations.

19 Energy and Energy Efficiency Policy 17 distributed renewable generation for consumers. House Bill , which has recently passed out of the House and is headed to the Senate, would in fact provide CEDA with new authority to implement such programs. Finally, SB07-145, the Renewable Energy Incentives Act ( , C.R.S. for counties and , C.R.S. for municipalities), allows counties and cities to offer property tax and sales tax credits and rebates to residential and commercial purchasers of renewable energy fixtures (both electrical and thermal). It is unknown whether any local jurisdictions have thus far enacted such incentives. Program Administration All of the incentive types, other than for tax credits, must face the issue of who will administer the program. In Colorado and elsewhere, there is an ongoing debate concerning who should administer incentive programs for renewable energy and energy efficiency. Under the current RES rules, the utility is charged with administering the solar incentive program. Similarly, Public Service Company of Colorado was given the responsibility of managing its legislatively mandated DSM program. One of the benefits of placing program administration in the hands of the utility is that payments made to consumers are tax free. 7 However, there is arguably a conflict of interest created by allowing the utility to be the administrator responsible for managing ratepayer funds that are used to pay the utility s costs of compliance with legislative mandates. This conflict is exacerbated by the utility s ability to obtain pre-funding via rate riders for its renewable and energy efficiency expenditures. Under these conditions, there is insufficient incentive for the utility to exercise due care with ratepayer funds and invest them in the most cost effective manner. Placing a consumer funded program in the hands of the utility with no accountability is poor public policy. Colorado already has multiple organizations that are responsible for disbursing incentives designed to spur renewable energy development. 7 IRS Publication 17 states You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit. The same publication defines energy conservation measure as including installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand. Ground source heat pumps appear to meet this definition.

20 Energy and Energy Efficiency Policy 18 These incentives vary widely depending on utility service territory. Program efficiency and equitable treatment of consumers argue for all renewable energy and energy efficiency programs, to the extent possible, to be brought under one office. This would help ensure that all Colorado consumers receive equal treatment and have equal access to renewable and energy efficiency incentive programs. A consumer s access to energy incentive programs should not be a function of his or her address. Ground Source Heat Pumps and the RES Some GSHP proponents have suggested that heat pumps should be listed as an eligible technology under the RES. They suggest that the thermal energy provided by GSHP systems be converted to an equivalent kwh with renewable energy credits awarded to the system owner. It is true that a handful of states allow thermal credits to count against their renewable standard. This decision, however, should be made on a case by case basis. Although it is a simple matter to convert thermal energy, measured in Btu, to an electrical equivalent using a factor of 3,415Btu/kWh, the more fundamental issue comes back to the design of and goals for the RES. Colorado s Renewable Energy Standard is, in spite of its name, actually a Renewable Electric Standard. It is based on the retail electric sales of qualifying utilities and requires that a specified percentage of those sales come from renewable resources. Applying thermal production against the RES would effectively dilute the standard making compliance that much easier. 8 The first test of whether a technology should be credited against the RES is a determination of what energy resource is being offset by the renewable generator. If the renewable or distributed generator is generating electricity that would otherwise be generated using fossil fuels, then an argument may be made for providing credit against the RES. If it is displacing natural gas used for heating, then perhaps the credit should come from a gas standard (or possibly a demand side management program). However, this distinction is not always easily made. For instance, in Colorado GSHP displace primarily natural gas when heating. As a cooling unit in the summer, GSHP are simply a more efficient 8 Colorado s 20 percent renewable standard is already diluted more than some would like by 1) the 10-percent standard for co-ops and municipal QRUs, 2) the 1.25x multiplier for in-state generation, and 3) the ability to purchase unbundled RECs from out of state for compliance.

21 Energy and Energy Efficiency Policy 19 refrigeration device than conventional air conditioning. They do not displace conventional electricity generation, they simply use less of it. This is not to claim that ground source heat pumps are not energy efficient and worthy of incentives. We have already made the case that they provide desirable economic and environmental benefits. The only question is what form these incentives should take. Because GSHP are more of an energy efficiency device, perhaps they are better considered for incentives under DSM programs such as the one that Public Service Company of Colorado now has before the PUC. As discussed above, there are a host of funding mechanisms that may be employed for encouraging worthy thermal production technologies including tax credits, rebates, and low interest loan programs, among others. A Unique, Non-Incentive Based Approach to Fostering GSHP We have noted that the principal barrier to the adoption of GSHP systems by consumers is the higher first cost of the system. Perhaps a possible way to overcome this impediment can be found by emulating another costly technology that suffers from a lengthy payback period. The solar services model has developed as a mechanism to help ease the adoption of PV solar systems by customers lacking the capital to purchase them. Under this approach, a private entity would install and own the generating equipment, in this case, a ground source heat pump system. The customer benefits by not having to tie up his own capital in the system and by acquiring energy at a known price for the term of the agreement. 9 The thermal production of the system would be metered and the customer would pay his monthly heating or cooling bill directly to the owner of the GSHP system. This approach does have certain statutory and regulatory implications. Colorado remains what is generally considered to be a traditionally regulated utility market. This is in contrast to several states that have restructured their markets in the hope that competition would hold energy prices down. As a traditionally regulated state, each certificated utility is granted a defined service territory in which it has an obligation to serve all customers and the right to prevent others from serving those customers. This means that no other provider of utility services may serve customers within the utility s defined service territory. 9 The energy purchase price may be above or below the tariff rate charged by the local utility and is often indexed with a mild escalator to account for inflation.

22 Energy and Energy Efficiency Policy 20 With the advent of the solar services model, we now have new commercial providers of electricity selling power to customers under a Purchase Power Agreement (PPA) within the utility s service territory. With one exception, this utility model is not permitted under Colorado law. In a report concerning Distributed Generation Incentives for Colorado Consumers, the PUC Staff suggests a possible remedy to this dilemma [8] et. seq., C.R.S., the Colorado Geothermal Heat Suppliers Act, passed in 1984, allows for a relaxed regulatory schema covering suppliers of geothermal heating systems. This Act requires the Commission to issue operating permits to providers of geothermal heat when it finds that the applicant: is fit, willing, and able to provide the proposed services, and has made an adequate showing that the geothermal heat supply and distribution system appears reasonably capable of delivering the proposed services. Importantly, this permit may not be denied because the area which the applicant proposes to serve is already being served by a gas or electric utility. Thus we already have what appears to be the sole statutory exception to the right of a certificated utility to exclude others from providing a retail utility service in its territory. While this will not directly provide incentives for GSHP in Colorado, it can help mitigate the first cost barrier to deployment. The first known implementation of this approach is presently under development in Arvada, Colorado. There, the developers of the Geos mixed use community are designing a district-wide, horizontal ground source heat pump loop to heat the community. Summary Ground source heat pumps are energy efficiency devices that provide economic and environmental benefits over conventional, fossil fuel driven space heating and cooling systems. The magnitude of these benefits is largely a function of the cost and carbon intensity of the specific fuel being displaced. There are reportedly over one million GSHP units installed in the U.S. Installations in 2005 numbered 47,830 and market forecasts for future growth vary widely. In spite of lower operating costs, however, future

23 Energy and Energy Efficiency Policy 21 growth for this technology is dampened by a relatively high first cost. Hence, a debate exists over whether GSHP should receive incentives to stimulate their adoption by the market. The most compelling rationale for providing incentives to support GSHP technology center on the conservation of depletable fossil fuels that could be used for other purposes and the GSHP superior environmental characteristics. There are a multitude of mechanisms that could be employed to garner funds for GSHP incentive programs. Two of the more common ones include utility rate riders and system benefits charges. There is an equally broad set of incentive structures that could be deployed to support the technology. These include rebates, tax credits and exemptions, and subsidized loan programs, among others. At the present time, energy incentive programs are administered by many different organizations including utilities, state offices, municipalities, and special districts. Colorado consumers would benefit from having one central administration responsible for incentive programs which could then be administered uniformly across the state. Some GSHP proponents that heat pumps should be listed as an eligible technology under the RES. Although it is a simple matter to convert the thermal energy benefits of a GSHP to standard electrical measures, kwh, this would not be advisable. The most compelling reason is that the RES is actually a renewable electric standard as opposed to a broader energy standard. Allowing GSHP production to count toward RES compliance would only serve to dilute the RES. Moreover, in Colorado GSHP are not replacing primarily grid electricity. It would be far more appropriate to include GSHP as an energy efficiency technology suitable for incentives under a DSM program. One possible alternative mechanism for further supporting GSHP technology would be to allow third-party developers to own and operate GSHP systems for consumers who would pay for metered thermal energy, much as they now do for electricity. The Geothermal Heat Suppliers Act, passed in 1984, is a little known statute that gives suppliers of geothermal heat an exclusion from the certificated utility s exclusive territory rights.

24 Energy and Energy Efficiency Policy 22 Bibliography 1. Department of Energy, Office of Geothermal Technologies, 1998, Environmental and Energy Benefits of Geothermal Heat Pumps; DOE/GO , 4 p. 2. Department of Energy, Office of Energy Efficiency and Renewable Energy, 1998, Geothermal Heat Pumps; DOE/GO , 6 p. 3. Department of Energy, Office of Energy Efficiency and Renewable Energy, 2008, A Consumers Guide to Energy Efficiency and Renewable Energy: Selecting and Installing a Geothermal Heat Pump System (Heating and Cooling Efficiency of Geothermal Heat Pumps); 11 Jan Energy Information Administration, 2007, Survey of Geothermal Heat Pump Shipments, 2005; Office of Coal, Nuclear, Electric and Alternate Fuels, Energy Information Administration, DOE, July Environmental Protection Agency, 2000, Geothermal Heat Pumps; EPA State & Local Climate Change Program, January 2000, 2 p. 6. Hanova, J., and Dowlatabadi, H., 2007, Strategic GHG reduction through the use of ground source heat pump technology; Environmental Research Letters, v. 2, Oct-Dec International Energy Agency, 2007, Renewables for Heating and Cooling: Untapped Potential; International Energy Agency, Paris, Nov 2007, 205 p. 8. Mignogna, R.P., 2007, Distributed Generation Incentives for Colorado Consumers; PUC Staff Report, Docket 07M-230E, 17 Dec Rafferty, K., 2001, An Information Survival Kit for the Prospective Geothermal Heat Pump Owner; Geo-Heat Center, Oregon Institute of Technology, Feb 2001, 24 p. 10. Williams, G.P., and Gold, L.W., 1976, Ground Temperatures; Canadian Building Digest, CBD-180.