It’s been two years since the Inflation Reduction Act (IRA) became law, unleashing record new investments in the U.S. clean energy transition. Combined heat and power scored a major win thanks to the IRA: an expanded investment tax credit that covers up to 50% of eligible project costs. But with that credit set to expire at the end of 2024, the U.S. Treasury Department is preparing to implement the IRA’s new “technology-neutral” credits, which will take effect in January 2025.
The Treasury Department’s proposed rule for these tax credits is constrictive and needs fundamental redirection. In order to qualify, it requires combustion of fuel to undergo a Lifecycle Analysis (LCA), which is narrowly focused on fuel inputs and not on achieving Congress’ goal for these credits — cutting power sector emissions by 75%. By solely focusing on fuel inputs, the proposed rule would:
- Risk eliminating any combustion and gasification resources from qualification for the tax credit, even if they achieve significant emission reductions. Green hydrogen, for example, would likely not qualify.
- Discriminate against energy efficiency by failing to account for more efficient combustion, such as CHP, and the substantial emission reductions it would achieve and which Treasury should incentivize for any combustion or gasification process and fuel.
- Is inappropriate for assessing emission reductions in the electricity sector. Treasury is using an approach to assess transportation emissions, not power sector emissions. It’s an important and ambitious goal, which is why Treasury must use every tool at its disposal to reach it — including highly-efficient CHP systems.
CHP Alliance’s Proposed Solution
In response to Treasury’s NOPR, the CHP Alliance proposed a different methodology for calculating lifecycle emissions, one that accounts for dirty grid emissions that CHP can displace. This is aligned with the Environmental Protection Agency’s guidance and the World Resource Institute’s Greenhouse Gas Protocol. Under the Alliance’s proposal, CHP systems would qualify for the tax credits if their emissions:
- are less than a new natural gas combined cycle (NGCC) powerplant, which has an emissions rate of 750 lbs. CO2 per MWh, AND
- their emissions rate is cleaner than the marginal emissions rate of the electric grid in their region.
Today, the marginal grid emissions rate in every region of the U.S. is more than two times greater than a 16 MW CHP unit that uses natural gas. As a result, CHP systems can deliver emissions reductions faster than non-combustion resources that Treasury has already deemed eligible for the tax credits, such as wind and solar. A 15 MW CHP system, for example, delivers the same carbon reductions in eight years as a 15 MW solar photovoltaic unit does in 25 years.
In other words, Treasury’s final rule needs to fully account for the dirtier electric generation that CHP facilities displace. The CHP Alliance also continues to urge the Treasury Department to allow CHP units, which use renewable and decarbonized fuels, such as biomass, renewable natural gas, green hydrogen, and renewable propane.
As the grid gets progressively cleaner, CHP projects would need to meet stricter and stricter emissions criteria to qualify for tax credits, which these clean fuels could help achieve.
The CHP Alliance proposal would increase the number of clean fuels that would qualify for the credits and would properly incentivize efficient combustion using CHP. Such an approach could avoid up to approximately 85 million tons of carbon dioxide per year, if CHP units are installed in the place of planned natural gas development. And if CHP units were to replace marginal emissions from coal generation instead of planned natural gas development, the emission reduction potential from CHP would be even higher.
In sum, adopting the CHP Alliance’s recommendations can enhance the effectiveness of the tax credits, support the deployment of clean fuel, and accelerate progress toward our climate goals.
View a fact sheet outlining our proposal and read our full comments to Treasury.