Written on: January 9, 2024 by Joe Uglietto
In late November, the Massachusetts Dept. of Environmental Protection (DEP) released the draft framework for the State’s Clean Heat Standard (CHS). While the draft CHS represents a significant departure from the original concept, the implications for all other Northeast and Mid-Atlantic States remain. As I noted in the November/December issue of Indoor Comfort Marketing, Governors from eight different Northeast and Mid-Atlantic States have committed to exploring the possibility of a CHS. Additionally, Vermont has passed a CHS into law and New Jersey issued an executive order in early 2023 to create a CHS. All eyes remain on Massachusetts, and it is likely that programs in other States will closely mirror the final framework implemented in the Bay State.
What You Need to Know
First and foremost, the CHS draft calls for the program to be implemented in 2026. This is a year later than the original plan. Perhaps the largest change from the initial concept to the draft framework is in the creation of two obligations instead of just one. The draft framework calls for the creation of two different markets with tradeable credits. Both markets will have the same obligated parties—heating oil and propane retailers, natural gas and electric utilities—which will complicate the compliance process for all.
The first market created under the CHS is the Emission Reduction Standard. This standard requires that all heating oil and propane retailers—as well as natural gas utilities—reduce the amount of carbon they sell each year by a set percentage. The amount of carbon reduction required each year is one million metric tons, which equates to roughly 4.5% of the estimated carbon emissions from the heating of buildings in Massachusetts. For heating oil and propane retailers to meet compliance, they must sell less fuel, generate Emission Reduction Credits, purchase Emission Reduction Credits in the open market, or pay the Alternative Compliance Payment Price, which is set at $190 per metric ton of CO2e.
There are only two ways for stakeholders to generate credits in the Emission Reduction Standard. The first is by selling biodiesel. If a heating oil retailer sells biodiesel to its customers, the retailer will generate Emission Reduction Credits that can be used to meet compliance or can be sold in the market for a profit. The second way to generate Emission Reduction Credits is by installing heat pumps. Credits for heat pumps will be given to the end user, but the installer can enter into a contract with the end user to retain possession of the Emission Reduction Credits.
The second market created under the CHS is the Full Electrification Standard. Retailers of heating oil and propane, as well as the natural gas and electric utilities, will be obligated to convert a specified number of homes each year to electric heat pumps. The overall obligation across the state will be 20,000 fully electrified homes in 2026, increasing by 20,000 per year, resulting in 100,000 in 2030 and each year after. If the obligated parties do not electrify the specified number of residences to meet their compliance requirement, they must purchase Full Electrification Credits or pay the Alternative Compliance Payment Price, which will begin at $6,000 per home and increase to $10,000 per home in 2030. Additionally, 25% of Full Electrification Credits must come from low-income households. Full Electrification Credits from low-income households will have an Alternative Compliance Payment Price of $12,000 in 2026, increasing to $20,000 in 2030.
Since this is a draft framework, the pieces are still moving. As of this writing, the DEP is taking comments and I am deeply engaged in providing input on behalf of the industry. What is certain is that there will be a whole new world in Massachusetts in just a few years. While it may be scary for some, heating oil retailers will have a pathway to success and profitability through the blending and distribution of biodiesel.
For those of you who operate in Massachusetts, I encourage you to stay up-to-date on the CHS and become engaged in the process. For those of you who operate in other New England or Mid-Atlantic States, it is critical that you view Massachusetts as the canary in the coal mine. This CHS (or something like it) will most likely be coming to your State soon.
Diversified Energy Specialists will be keeping retailers, wholesalers and industry stakeholders abreast of the various programs and their rule-making processes in the weeks and months ahead. If you’d like to join our email list to receive our updates, email me at firstname.lastname@example.org. ICM
Renewable Energy Insights is authored by Joe Uglietto, consultant with a focus on emissions reductions and renewable energy innovation.