While there is much that we don’t know about the future of energy, one thing is certain; carbon reduction will remain a top goal of northeast states, especially when led by Democratic administrations. And a Clean Heat Standard (CHS) is the one regulatory approach that is gaining momentum. CHS’s are complex and will impact the heating oil industry from the wholesaler down through the supply chain.
What is a Clean Heat Standard and Will There be One in My State?
In its simplest definition, a Clean Heat Standard is a compliance program with the specific goal of reducing the consumption of fossil fuels in the thermal sector. It is a market-based regulatory standard that would require fossil fuel wholesalers to sell less carbon-intensive fuel each and every year. It would be built to meet the state’s building emissions sublimits through the electrification of buildings. There are two states that are likely to implement a Clean Heat Standard in the not-too-distant future.
In Vermont, the Climate Action Plan led to the consideration of a Clean Heat Standard in order to meet the state’s goal of achieving a 40% reduction in greenhouse gas emissions from 1990 by 2030 and 80% by 2050. The CHS bill was passed by Vermont’s legislature in the spring of 2022, but was voted by Vermont’s governor the following month. Governor Scott cited grave concerns about the costs to renters, homeowners, building owners, and Vermont businesses. An attempt to override the governor’s veto failed by a single vote, and it is expected to be reintroduced next year.
The Massachusetts Clean Energy & Climate Plan for 2050 has proposed a “Cap on emissions from heating by having MassDEP implement regulations by the end of 2024 that consider emissions caps, standards and potentially a Clean Heat Standard” and to “Implement a Clean Heat Standard (CHS) as a regulatory approach to meet buildings emissions sublimits through electrification and energy efficiency.” The Commission on Clean Heat, which was established by Executive Order by Massachusetts Governor Charlie Baker, and is set to recommend emissions-reduction policy at the end of this year, will almost certainly be recommending a Clean Heat Standard for the Bay State.
If Vermont and Massachusetts both adopt a CHS, we can very reasonably expect to see similar programs enacted in Connecticut, New York and elsewhere across the Northeast.
How a CHS Will Work
The design of the CHS is expected to be similar in both Vermont and Massachusetts, and the greater the similarity of these two programs, the greater the likelihood that a CHS in your state will follow this blueprint as well. Here’s how we expect it to work.
The regulated entities will be the wholesalers of natural gas, propane, and fuel oil. It’s possible that the electric utilities will be regulated as well. If heating fuel is purchased out of state, the obligated party will be the entity that is the first point of sale within the state. These regulated entities will have a compliance obligation that aligns with the goals set by the state. In Massachusetts, that will mean the regulated entities will have an obligation of achieving 29% emissions reduction below 1990 levels in 2025, 49% emissions reduction below 1990 levels in 2030, 75% emissions reduction below 1990 levels in 2040, and 85% emissions reduction below 1990 levels in 2050. These increases in obligation will be linear in the years between benchmarks.
The CHS will be a market-based program where entities can buy and sell Clean Heat Credits. In order to meet their compliance obligation, regulated entities need to retire credits in one of four ways:
Each Clean Heat Credit in the market will have an underlying value of one metric ton of CO2 reduced by the clean heat measure.
There has been significant discussion about the clean heat measures that will be considered eligible to qualify for Clean Heat Credits. In the vetoed Vermont bill, the eligible measures included:
• Installation of air- and ground-source heat pumps
• Energy efficiency improvements
• Solar thermal
• Delivery of biodiesel, renewable diesel, renewable natural gas, clean hydrogen, and wood pellets.
It will be critical for the future of our industry that biodiesel and renewable diesel be considered eligible clean heat measures within future CHS programs.
Who Will Generate and Own Clean Heat Credits?
This has been a measure of debate in both states. In Vermont, the end user would retain possession of the credit for all installed clean heat measures in their home and the retailer would retain possession of the credit for all delivered clean heat fuels to the end user. Therefore, it can be expected that in Vermont and Massachusetts that the wholesaler (or first point of sale within the state) will face a compliance obligation and that retailers selling biodiesel blends to their customers will generate Clean Heat Credits that can be sold in the open market.
This type of market-based compliance program provides ample opportunities for both retailers and wholesalers to generate a competitive advantage against other heating fuels and against other competitors within the industry. Wholesalers selling biodiesel blends will face a lower compliance obligation within a Clean Heat Standard than wholesalers that do not. Retailers that deliver biodiesel blends, install air-source heat pumps, and provide weatherization will generate credits in a Clean Heat Standard that can be monetized and increase their profits. Propane retailers that sell renewable propane will also generate credits and increase their profits.
Impact on the Heating Fuels Industry
It’s understandable for retailers and wholesalers to be concerned about the impact a Clean Heat Standard will have on their business and the industry at large. It’s likely that the compliance obligation placed on wholesalers (or on the first point of sale within the state) will increase the price of fuel to retailers and ultimately to consumers. But the companies that are blending or making renewable fuels available for purchase to their customer base will have a new method of increasing their margins and holding down the price of renewable energy to the end-user by generating credits within the CHS.
Whether you view a Clean Heat Standard as an interesting pathway to accelerate our industry’s transition to renewable energy or yet another serious threat for the delivered fuels industry to deal with, the reality is these types of programs are coming and most of us will have to deal with them in our states at some point in the future. And companies that are preparing to be successful in an environment with a Clean Heat Standard will be head and shoulders above their competition when a CHS finally comes to your state. ICM
About the author: Joe Uglietto is President of Diversified Energy Specialists (DES), a renewable energy consulting and environmental markets trading company that has represented retail heating oil companies as an aggregation within the Massachusetts APS Program. Joe regularly consults on energy projects for the Clean Fuels Alliance America, National Oilheat Research Alliance, and many state and regional energy associations. Joe’s recent work has focused on the flaws of thermal electrification policy and the design of Clean Heat Standards.
(978) 245-8730, Joe@DiversifiedEnergySpecialists.com, DiversifiedEnergySpecialists.com