By Samuel Diamond
By this time next year (or maybe sooner), Massachusetts retailers selling bio-blended heating oil could potentially be collecting financial incentives as high as 65 cents per gallon of biodiesel delivered to their customers. To get to the “why” and “how” of it, let’s backtrack a bit…
Per Mass.gov, “Massachusetts’ Renewable Energy Portfolio Standard (RPS) was one of the first programs in the nation that required a certain percentage of the state’s electricity to come from renewable energy. The Alternative Energy Portfolio Standard (APS) was established to complement the RPS Program, providing requirements and incentives for alternative electricity technologies.”
Renewable energy sources under the RPS program include solar photovoltaic, wind, small hydroelectric, qualified biomass and anaerobic gas. Notably absent are liquid biofuels like the biodiesel that’s blended with heating oil to create Bioheat® fuel.
However, because of a Massachusetts law passed in 2014, biodiesel is included in the APS program, as it applies to the following technologies: combined heat and power, air source heat pumps, groundwater heat pumps, geothermal, solar thermal, qualified woody biomass, and most notably, qualified liquid biofuels blended with heating oil.
Since 2014, the Massachusetts Department of Energy Resources (DOER) has been working on draft regulations to fully implement the APS law. Final regulations were submitted to the state’s Joint Committee on Telecommunications, Utilities and Energy on October 13, 2017, and are pending legislative approval as of press time.
According to a recent report prepared by Kevin Bedford of New England Biofuels, in order to participate in the APS program, a retailer must sell blended heating oil containing a minimum 10 percent eligible biofuel. Eligible biofuels include waste vegetable oils, waste animal fats and grease trap waste. Eligible biofuels must also meet ASTM 6751 specifications and the EPA’s RFS2 – the Renewable Fuel Standard.
Additionally, the participating retailer must track and demonstrate a “chain of custody,” showing that the eligible biofuel made its way from an eligible producer to the retailer to the customer or end user.
Under the APS, sales of eligible biofuel occurring at the retail level will help generate Alternative Energy Credits, or AECs, which are analogous to Renewable Energy Credits (RECs) in that they also represent clean-powered electrical generation and are traded in the open market for dollar amounts.
One AEC equals one megawatt of electrical generation. One megawatt has a thermal energy value of 3,412,141 BTUs. Assuming home burner efficiencies of 85% and an approximate thermal energy value of 119,500 BTUs for one gallon of eligible biofuel, a retailer must sell about 33.6 gallons to create one AEC (3,412,141 / 119,500 / .85 ≈ 33.6). AECs are currently valued between $21 and $21.50. At these prices, eligible biofuel sales could earn retailers close to 65 cents per gallon.
AECs will need to be amassed by an aggregator (such as Bedford’s company, New England Biofuels) and submitted to the DOER. Upon review, the DOER will approve the credits and enter them into participating retailers’ accounts. This happens quarterly, the process takes about three months, and there is a time lag of approximately six months before new AEC producers begin earning money from retail sales.
Nevertheless, it is an open market waiting to be tapped … pending legislative approval, of course. The final DOER regulations, which are under legislative review as of press time, state that AECs can account for 20 percent of the state’s APS obligations. This would allow for as much as 13 million gallons of eligible biofuel sales to be included in the renewable energy market.
Biofuel producers and retailers remain optimistic that the state legislature will approve the final DOER regulations relatively soon. Another source of industry optimism was the DOER’s willingness to budge on its definition of eligible biofuels. Originally, only biofuel blends of B20 or higher were considered eligible. However, Michael Ferrante, president of the Massachusetts Energy Marketers Association, was able to work with biodiesel industry stakeholders to convince the DOER to lower the minimum blend level to B10.
“The state’s been under a lot of pressure to finish up,” Ferrante says, “so personally I think it’s very likely that the program will be up and running by next heating season, and could be before then.” The MEMA president expects the state to begin reaching out to biofuel dealers and conducting training before the APS goes into effect, so that the program can run smoothly.
That said, heating oil dealers who already sell blends of B10 Bioheat® fuel can get a head start on the program, according to Bedford. “People delivering biofuel this year should start keeping track,” he says. Because the APS program was supposed to begin all the way back in January 2015, some companies that have been keeping tight records should be able to generate retroactive AECs for trading.
The laws of supply and demand will provide additional impetus for fuel dealers to get involved, according to both Bedford and Ferrante. If the amount of AECs created by eligible biofuels exceeds the available supply, then AEC prices can be expected to drop, so the sooner dealers can begin trading, the better.
Indeed, DOER regulations call for a mechanism to kick in whereby an oversupply of AECs would result in each AEC being proportionally reduced in value in order to keep supplies from outpacing mandated renewable energy obligations. Questions remain as to how this rule will affect pricing.
One certainty, however, is that the APS has the potential to revolutionize the clean-energy market. “This is cutting edge,” says Ferrante, adding that the program, if successful, could prove to be a model for states across the country. “A lot of people around the industry are interested in seeing how the program plays out. At the end of the day, it could be incredibly beneficial for the heating oil industry and the biodiesel industry in terms of growing this marketplace.
“There is a tremendous incentive to get involved,” Ferrante adds. “It’s a legitimate profit center that can also benefit consumers and the environment, as it would encourage more retailers to enter the biodiesel market and start blending their fuel.”