Analysis of the Energy & Environmental Economics of Maine’s Biomass Industry

Prepared for the

State of Maine GOVERNOR’S ENERGY OFFICE

October 2017

Prepared By:

Innovative Natural Meister Consultants Group Resource Solutions LLC

63 Federal Street, Suite 5 1 Center Plaza, Suite 320 Portland, ME 04101 Boston, MA 02108 207-233-9910 (617) 934-4847

www.inrsllc.com http://www.mc-group.com/

TABLE OF CONTENTS

Executive Summary………………………………………………………………………………………………………………………………………..4

SECTION 1 Introduction ...... 7 SECTION 2 State of the Maine Biomass INdustry ...... 8 2.1.1 Biomass Facilities in Maine ...... 8 2.1.2 Biomass as a Part of Maine’s Forest Industry ...... 11 2.1.3 Employment in Maine’s Biomass Industry ...... 20 2.1.4 Economics of Biomass Power...... 21 2.1.5 Revenue and Expenses ...... 30 SECTION 3 Policy Drivers and Barriers ...... 35 3.1 Barriers ...... 35 3.1.1 Barrier: Low and fluctuating energy prices ...... 36 3.1.2 Barrier: Uncertain greenhouse gas (GHG) emission impacts ...... 38 3.1.3 Barrier: Uncertain policy environment ...... 40 3.1.4 Barrier: Tightening air emission and efficiency requirements ...... 42 3.2 Drivers ...... 43 3.2.1 Origins of Maine’s Biomass Plants...... 43 3.2.2 State Level Renewable Portfolio Standards ...... 43 3.2.3 Combined Heat and Power ...... 49 3.2.4 Emerging Markets ...... 51

Appendicies

Appendix A…………………………………………………………………………………………………………………………………………………..52 Appendix B…………………………………………………………………………………………………………………………………………………..53 Appendix C…………………………………………………………………………………………………………………………………………………..56 Appendix D…………………………………………………………………………………………………………………………………………………..57

About the Authors……………………………………………………………………………………………………………………………………….64

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TABLE OF FIGURES

Figure 1. New England Historic and Futures Wholesale Electricity Pricing, 2010 – 2022, $ per MWH ...... 4 Figure 2. Economics of Biomass Power Generation in Maine, 2017 (generic) ...... 5 Figure 3. Operating Biomass Electricity Plants in Maine ...... 8 Figure 4. Operating and Closed Major Markets for Biomass ...... 9 Figure 5. Maine Timber Harvest by Product, 2010 – 2016 (green tons) ...... 11 Figure 6. Products and Relative Value from Harvested Trees ...... 12 Figure 7. Volume and Stumpage Value of Harvested Timber, Maine, 2014 ...... 13 Figure 8. Biomass as a Percentage of Total Maine Timber Harvest, 2010 – 2016 ...... 13 Figure 9. Biomass sorted on a landing for chipping...... 14 Figure 10. Biomass being chipped on a landing ...... 14 Figure 11. Pulpwood Use at Maine Mills (estimated), 2011 – 2016, green tons ...... 15 Figure 12. Lost Maine Markets for Low-Grade Wood since 2014 (green tons, estimated) ...... 16 Figure 13. Wood Flow from a Timber Harvest ...... 16 Figure 14. Location of Major Sawmills in Maine ...... 18 Figure 15. Maine Sawmill Consumption (MBF) and Mill Residual Use at Maine Pulp Mills (tons), 2010-2016 ..... 19 Figure 16. Products from Biomass Electricity ...... 21 Figure 17. New England Historic and Futures Wholesale Electricity Pricing, 2010 – 2022, $ per MWH ...... 22 Figure 18. New England Wholesale Electricity Pricing – Trailing 12 Month Average, 2014 – 2018, $ per MWH . 23 Figure 19. Reported Prices for Connecticut Class 1 RECs, 2015 – 2017...... 24 Figure 20. Components of Biomass Operations & Maintenance Costs ...... 27 Figure 21. Average Biomass Fuel Cost ($ per Green Ton, Delivered), Northern New England, 2008-2016 ...... 29 Figure 22. Economics of Biomass Power Generation in Maine, 2017 (generic) ...... 30 Figure 23. Economics of ReEnergy Facilities, Maine PUC Contract, $ per MWH, modelled ...... 33 Figure 24. Economics of Stored Solar Facilities, Maine PUC Contract, $ per MWH, modelled ...... 34 Figure 25: Monthly average natural gas spot prices in Maine, 2008-2016 ...... 37 Figure 26. Maine Biomass Facilities Qualified for Maine Class 1 RECs ...... 44 Figure 27. Survey respondent affiliations with the Maine forest industry ...... 52

TABLE OF TABLES

Table 1. Fuel Cost per Ton and per MWh, estimated at 1.7 green tons per MWh ...... 5 Table 2. Operating and Closed Major Maine Markets for Biomass ...... 10 Table 3. Major Maine Sawmills and Estimated Lumber Production (million board feet) ...... 17 Table 4. Employment Associated with Maine Biomass (estimated) ...... 20 Table 5. Maine Biomass Facilities Qualifications in New England RPS Programs ...... 25 Table 6. Modelled Capacity Payments, ISO-New England ...... 26 Table 7. Fuel Cost per Ton and per MWh, estimated at 1.7 green tons per MWh ...... 28 Table 8. Maine Biomass Procurement Contracts ...... 31 Table 9. Capital Investment Requirements in Maine PUC Contracts ...... 32 Table 10. Renewable Portfolio Standard Requirements by State ...... 48

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ANALYSIS OF THE ENERGY & ENVIRONMENTAL ECONOMICS OF MAINE’S BIOMASS INDUSTRY

EXECUTIVE SUMMARY

The biomass electricity market can provide a range of energy security, economic development, job creation, and forest management benefits to the State of Maine. This report discusses the role of biomass in Maine’s forest industry, including its significant employment benefits. It evaluates the current economics of biomass power generation and discusses barrier and drivers to industry growth.

Biomass electricity facilities sell into the regional electricity grid, and compete with generation from a wide range of generation sources – including natural gas, nuclear, coal and other renewables. Based upon recent historic and projected future wholesale electricity prices in New England, the price of power does not cover the cost of generation at stand-alone biomass electricity facilities, and frequently does not cover the cost of fuel.

Figure 1. New England Historic and Futures Wholesale Electricity Pricing, 2010 – 2022, $ per MWH

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One of the significant benefits of biomass energy is the ongoing economic activity it provides the local economy. Fuel generally is procured from the area proximate to a facility, and those fuel dollars support logging, forest landowners, and the rural economy. They can also provide a market for sawmill residuals, allowing mills to continue or increase operations. Compared to other renewable energy sources, this is a unique benefit. However, this also means that biomass facilities need to continually incur the expense of fuel purchases. The price of biomass fuel can fluctuate based upon supply, demand, electricity pricing, weather and other factors. The table below shows the estimated price of fuel per megawatt hour of generation at a range of delivered prices (per green ton).

Table 1. Fuel Cost per Ton and per MWh, estimated at 1.7 green tons per MWh

$ / ton $ 18.00 $ 20.00 $ 22.00 $ 24.00 $ 26.00 $ 28.00 $ 30.00 $ / MWh $ 30.60 $ 34.00 $ 37.40 $ 40.80 $ 44.20 $ 47.60 $ 51.00

In addition to payment for electricity, biomass facilities are also eligible to participate in regional markets for Renewable Energy Certificates, and may be eligible to receive capacity payments from the regional grid operator. Each of these revenue sources is part of a dynamic market, but based upon recent and near- term projected markets, these revenue sources combine to provide roughly $64 per megawatt hour (MWh) of generation.

Expenses associated with operating a biomass facility include not only fuel purchases, but the operations and maintenance (O&M) of the facility. These costs include labor, maintenance, taxes, suppliers, debt service and other costs associated with operating facility. Combined, these cost expenses are an estimated $70 per MWh.

Figure 2. Economics of Biomass Power Generation in Maine, 2017 (generic)

80 70 60 50 40 30 20 10 0 Income Expenses Electricity RECs (CT) Capacity Fuel O&M

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Based upon these assumptions, the revenue at biomass electricity facilities does not cover the cost of operations at stand-alone facilities in Maine. There is no reason to expect the economic situation of these facilities to change soon.

As discussed above and at length in the report, biomass energy provides a number of benefits, including significant support to the state’s forest industry. Given the economics of these facilities, policy makers have alternatives to evaluate going forward:

1. In evaluating options, policy makers should address a number of questions, including:

a. Is it in the state’s interest to support biomass electricity, and if so at what level? b. Does funding come from the taxpayers, ratepayers, or some other source? c. What level of market is desired, and are there preferred geographic components to the market? d. Is the desire to have these facilities continue as for-profit ventures, or is there a role for a non-profit or quasi-public entity to own and operate the facilities? e. Given the importance of these markets to some sectors of the forest products industry, what is the appropriate support role by the industry, and how is that best accomplished? f. Are there other ways to assure a market for sawmill residuals and whole-tree chips that is less expensive or more sustainable than support for stand-alone biomass?

2. After considering these issues, policy makers have options available to them, including:

a. Do nothing, letting the existing subsidies expire and the market play out. It is likely that this “no action” alternative will result in most, if not all, of the state’s six stand-alone biomass facilities closing. b. Provide some level of external support (subsidy) to support the market for biomass. Ways to accomplish this may include: i. Selling the facilities to third parties which may be structured to improve facility economics; ii. Siting large-scale users of heat and steam adjacent to the facilities, providing a new revenue stream that would improve facility economics; iii. Renewing the existing subsidy structure, or something similar, to support continued facility operations.

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SECTION 1 INTRODUCTION

 Provide overall project context – i.e. scope and goals of report  Describe biomass energy benefits and energy priorities (see table below)  Describe sections covered in this report

The biomass energy market can provide a range of energy security, economic development, job creation, and greenhouse gas (GHG) emission reduction benefits to the State of Maine. This report discusses the role of biomass in Maine’s forest industry, including its significant employment benefits. It evaluates the current economics of biomass power generation, discusses barrier and drivers to industry growth, and discusses incentive and support programs in other states.

Energy Issues in Maine Description  Biomass energy is derived from locally-produced fuels that can be used for both electricity and thermal energy production.  Broader usage of locally-sourced biomass energy will reduce dependence on Energy security imported fossil fuels (gas and oil), reducing the exposure of Mainers to energy price volatility, reducing the State’s vulnerability to disruptions in energy infrastructure, and offering greater consumer choice.  Biomass is an important part of the forestry industry, providing an outlet for low-grade wood, sawmill residuals, and other wood waste products.  Ensuring a market for biomass is important to preserving the long-term Economic development sustainability of Maine’s forests.  Growing the local biomass industry will help keep more energy dollars in- state.  Sustainable growth in the biomass industry will support local jobs throughout Job creation the logging and sawmill supply chain, particularly in the rural parts of the state.  Maine has set GHG emissions reduction targets through 38 M.R.S.A. § 578 (with a medium-term goal of reducing emissions by 10% below 1990 levels by 2020) and is a member of the Regional Greenhouse Gas Initiative.  The Maine legislature also established targets to reduce state oil consumption Climate and energy goals by 30% and 50% below 2007 levels by 2030 and 2050 respectively.  While there is ongoing debate as to the GHG emissions impacts of biomass, biomass energy can be a valuable, locally-sourced contributor to achieving Maine’s GHG targets and displacing dependence on oil.

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SECTION 2 STATE OF THE MAINE BIOMASS INDUSTRY

 Current economic state and outlook of ME biomass industry  Interconnection of economic markets for biomass and forest products and energy policy of Maine

2.1.1 BIOMASS FACILITIES IN MAINE

Maine has six operating stand-alone biomass power plants, as well as biomass markets at a number of pulp mills. In addition to these major markets, Maine has several facilities that utilize wood for thermal energy. The figure below shows the location of the six operating stand-alone wood-fired power plants.

Figure 3. Operating Biomass Electricity Plants in Maine

Ownership Town Capacity (MW) ReEnergy Holdings Ashland 39 ReEnergy Holdings Fort Fairfield 37 ReEnergy Holdings Livermore Falls 39 ReEnergy Holdings Stratton 48 Stored Solar Jonesboro 25 Stored Solar West Enfield 25

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In the last decade, Maine has lost a number of major biomass markets, both at stand-alone electric generation facilities, and at forest industries (primarily pulp mills). The figure below shows the locations of major markets for biomass, both operating and closed.

Figure 4. Operating and Closed Major Markets for Biomass

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Table 2. Operating and Closed Major Maine Markets for Biomass Facility Town Co‐Location Status Athens Energy Athens Pellet Mill Operating Expera ‐ Old Town Old Town Pulp mill Closed Georges River Energy Searsmont Lumber mill Under construction Great Northern Paper East Millinocket Pulp & paper mill Closed Greenville Steam Greenville Stand‐alone Closed Lincoln Paper & Tissue Lincoln Paper mill Closed ReEnergy ‐ Ashland Ashland Stand‐alone Operating ReEnergy ‐ Fort Fairfield Fort Fairfield Stand‐alone Operating ReEnergy ‐ Livermore Falls Livermore Falls Stand‐alone Operating ReEnergy – Stratton Stratton Some steam and electricity Operating to proximate sawmill SAPPI ‐ Somerset Skowhegan Pulp & paper mill Operating SAPPI ‐ Westbrook Westbrook Paper mill Operating Sherman Station Staceyville Stand‐alone Closed Stored Solar ‐ Jonesboro Jonesboro Stand‐alone Operating Stored Solar ‐ West Enfield West Enfield Stand‐alone Operating Verso ‐ Androscoggin Jay Pulp & paper mill Operating Verso ‐ Bucksport Bucksport Pulp & paper mill Closed Woodland Pulp Baileyville Pulp & paper mill Operating Worcester Energy DeBlois Stand‐alone Closed

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2.1.2 BIOMASS AS A PART OF MAINE’S FOREST INDUSTRY Maine’s forest products industry is critical to the state’s economy, and is particularly important in rural parts of the state. According to research from the University of Maine, in 2016 the entire forest products industry contributed $8.5 billion to Maine’s economy, and provided 14,562 full- and part-time jobs1. Including direct and indirect employment, rough 1 in every 24 jobs in Maine is tied to the industry.

In 2016, Maine’s statewide timber harvest totaled roughly 11.6 million tons2. This is down from 13.9 million green tons in 2015, primarily due to the loss of markets for pulpwood and biomass.

Figure 5. Maine Timber Harvest by Product3, 2010 – 2016 (green tons)

16,000,000

14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

‐ 2010 2011 2012 2013 2014 2015 2016 SW Sawlog HW Sawlog SW Pulpwood HW Pulpwood Biomass

As shown above, biomass is part of an integrated timber harvesting economy, where a range of products are removed. As shown below, single trees can produce a range of products, depending upon species, diameter, quality, local markets and other factors.

1 James Anderson III and Mindy Crandall. “Economic contribution of Maine’s forest products industry 2014 and 2016 (estimated).” Maine’s Forest Economy. June 30, 2016. http://maineforest.org/wp-content/uploads/2016/09/Maines- Forest-Economy-10-12-2016.pdf 2 Data from: Maine Forest Service. 2016 Wood Processor Report. April 28, 2017. Conversion to tons by Innovative Natural Resource Solutions LLC. 3 Data from Maine Forest Service, Wood Processor Reports, 2010 – 2016.

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Figure 6. Products and Relative Value from Harvested Trees

The range of products that are harvested have different values to the landowner. In general, sawlogs (used to make lumber or plywood) are the most valuable, pulpwood is of lower value, and biomass is the least valuable produce during a timber harvest. Using data from the Maine Forest Service4, sawlogs accounted for 26% of the volume harvested in 2014, and represented 64% of the value to the landowner. Pulpwood was the largest product by volume, representing 51% of the volume and 31% of the value to the landowner. Biomass represented 23% of the statewide timber harvest, but only 5% of the value.

4 Data from: Maine Forest Service. 2014 Wood Processor Report. November 6, 2015 and Maine Forest Service. 2014 Stumpage Prices by Maine County / Unit. November 6, 2016. Analysis by Innovative Natural Resource Solutions LLC.

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Figure 7. Volume and Stumpage Value of Harvested Timber, Maine, 2014

80% 64% 60% 51% 40% 31% 23% 26% 20% 5% 0% Biomass Pulpwood Sawlogs Volume Value

While biomass is a lower value product – both to the landowner and delivered to the end-user, it represents a significant portion of the state’s timber harvest. From 2010 through 2016, biomass accounted for between 19% and 25% of all forest products harvest in Maine. At a fifth to a quarter of the volume harvested from Maine timberland between 2010 and 20165, biomass has been an important part of the state’s forest economy and infrastructure.

Figure 8. Biomass as a Percentage of Total Maine Timber Harvest, 2010 – 2016

30%

25%

20%

15%

10%

5%

0% 2010 2011 2012 2013 2014 2015 2016

5 Data from Maine Forest Service, Wood Processor Reports, 2010 – 2016. Conversion to tons by Innovative Natural Resource Solutions LLC.

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Figure 9. Biomass sorted on a landing for chipping

Figure 10. Biomass being chipped on a landing

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2.1.2.1 Loss of Maine Markets for Low-Grade Wood Since (and during) the last harvest and value data available from the Maine Forest Service (2015), there have been significant losses of markets for low-grade wood – biomass and pulpwood.

Since the beginning of 2014, pulp mills in East Millinocket, Bucksport, Lincoln, Old Town and Madison have closed. Pulpwood consumption at the mill in Jay has dropped significantly. Total pulpwood use at Maine pulp mills - estimated at 10.4 million green tons in 2012 and 9.5 million green tons in 2014 – dropped to roughly 7.3 million green tons in 20166. During this same time period, direct employment at Maine pulp and paper mills dropped from 5,723 in 2011 7

Figure 11. Pulpwood Use at Maine Mills (estimated), 2011 – 2016, green tons 11,000,000 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 2011 2012 2013 2014 2015 2016

In addition to the loss of pulp markets, many of these mills represented significant markets for biomass. The mills in East Millinocket, Bucksport, Old Town and Lincoln were all purchasers of biomass, using a combined estimated 700,000 green tons of fuel annually. Additionally, mills with access to natural gas are now consuming less biomass fuel, resulting in further losses of about 500,000 green tons annually – though this market could return if natural gas prices increased to a level that made biomass a more financially attractive fuel.

Between closed pulp mills, decreased consumption at pulp mills, closed biomass boilers at pulp mills and biomass markets lost to natural gas, Maine has lost markets for an estimated 3.8 million green tons of low- grade wood (biomass and pulpwood) since the beginning of 2014. This is roughly 28% of the total Maine timber harvest in 2014, or almost 350 truckloads of wood every day of the year.

6 Data from an INRS internal database, developed and updated annually through communications with consumers, suppliers and other market participants. 7 Innovative Natural Resource Solutions LLC. Employment in Maine’s Forest Industry. May 2016. Data from the Maine Department of Labor, Center for Workforce Research and Information, 2016

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Figure 12. Lost Maine Markets for Low-Grade Wood since 2014 (green tons, estimated)

500,000 Hardwood Pulpwood

1,000,000 Softwood Pulpwood 710,000 Biomass (closed facility)

1,630,000 Biomass (displaced by natural gas)

As Maine has lost markets for low-grade roundwood (pulpwood), biomass markets have become increasingly important outlets – particularly for softwood. In some areas of the state, there are limited to no economically viable markets for low grade softwood – spruce, fir, pine and hemlock. In these areas, land managers can elect to either defer harvesting (and thus also not harvest higher value sawlogs – threatening the supply to the state’s and region’s sawmills), or utilize any local biomass markets to utilize low-grade softwood.

Figure 13. Wood Flow from a Timber Harvest

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2.1.2.2 Sawmill Residues Additionally, for decades sawmills have relied upon pulp mills and to a lesser extent biomass markets as an outlet for their residues. When a sawmill turns a log (a cylinder) into a board (rectangle), a variety of residues are produced – clean chips, bark and sawdust. While each mill is unique, roughly two tons of residue are produced for each thousand board feet of lumber produced – one ton of chips, and another tons of sawdust and bark8. Traditionally, much of the residue was sold to regional pulp mills; this has become a significantly more limited market since 2014, particularly for softwood mills. Maine’s largest lumber mills have a combined production of roughly 844 million board feet9. Thus, these mills produce about 844,000 green tons of clean mill chips, and a similar volume of bark and sawdust each year. What was once an advantage for Maine mills – access to a number of markets for residuals – has become a significant challenge.

Table 3. Major Maine Sawmills and Estimated Lumber Production (million board feet)

Mill Town White Pine Spruce / Fir Hardwood

Hammond Lumber Company Belgrade  Hancock Lumber Company, Inc. Pittsfield  Hancock Lumber Company, Inc. Casco  Hancock Lumber Company, Inc. Bethel  Irving Forest Products Dixfield  Irving Forest Products Ashland  Kennebec Lumber Company Solon  Limington Lumber Company East Baldwin  Lovell Lumber Company Lovell  Lumbra Hardwoods, Inc. Milo  Maibec Lumber, Inc. Mesardis  Maine Woods Company Portage Lake  NC Hunt, Inc. Jefferson  Pallet One of Maine Livermore Falls  Pleasant River Lumber Co. Hancock  Pleasant River Lumber Co. Sanford  Pleasant River Lumber Co. Jackman  Pleasant River Lumber Co. Dover‐Foxcroft  Robbins Lumber, Inc. Searsmont  Sebasticook Lumber Company St. Albans  Stratton Lumber, Inc. Stratton 

Total 259 509 76

8 IHB. “Northeastern US sawmills evaluate installation of pellet mills to mitigate impact of pulp, paper and biomass mill closures”. February 24, 2017. http://www.ihb.de/wood/news/Northeastern_US_pellet_mills_50996.html 9 Data from Maine sawmills with a production estimated at >5 MMBF. All production estimates are based upon published sources, but are assumed to be inexact.

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Figure 14. Location of Major Sawmills in Maine10

10 List developed in part from information in: Maine Woodland Owners. 2017 Directory of Maine’s Stationary and Portable Sawmills. 2017. http://swoam.org/Portals/0/Articles/Documents/Online_MWO_Portable_Sawmills.pdf.

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The following chart shows sawlog consumption at Maine sawmills (in thousand board feet, or MBF) and use of sawmill residuals in Maine pulp mills from 2010 - 2016. While Maine sawmill wood use has climbed during this period, the use of mill residuals at Maine pulp mills has decreased from a peak of 645,000 green tons in 2013 to only 113,333 green tons in 201611, in large part due to the closure or reduced production at pulp mills.

Figure 15. Maine Sawmill Consumption (MBF) and Mill Residual Use at Maine Pulp Mills (tons), 2010-2016

MBF tons 750,000 700,000 600,000 700,000 500,000 650,000 400,000

600,000 300,000 200,000 550,000 100,000 500,000 ‐ 2010 2011 2012 2013 2014 2015 2016 Sawmill Sawlog Consumption (MBF) Sawmill Residue Use at Pulp Mills (tons)

A number of Maine sawmills report that they are struggling to move their residues, though every mill is currently able to find some outlet. However – for some mills material that was once sold to pulp mills is now being sold for biomass at a fraction of the previous price – fiber for paper has higher value-added potential than fuel for energy uses. This lost value impacts sawmill profitability and competitiveness.

Maine sawmills interviewed indicated that while they are currently able to move their residue, they are deeply concerned that any further market loss – pulp mill or biomass – might put them in a position where they cannot sell some or all of their residues. If this were the case, mills would need to curtail operations, putting at risk nearly 1,900 jobs at sawmills in rural Maine12, as well as the entire supply chain – loggers, truckers, landowners, foresters and others – that depend upon these markets. Biomass power plants, and biomass boilers at forest industries, have become an important outlet of last resort for these sawmills. The estimated 844,000 tons of clean chips is roughly enough to supply a 63 MW stand-alone power plant operating at a 90% capacity factor.

11 Data from Maine Forest Service, Wood Processor Reports, 2010 – 2016. 12 Maine Department of Labor, Center for Workforce Research and Information, 2016.

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2.1.3 EMPLOYMENT IN MAINE’S BIOMASS INDUSTRY Biomass electricity is the only renewable that requires a steady supply of purchased fuel in order to operate. This is both a feature and a detriment. Biomass electricity generation can have significant employment impacts, particularly in rural areas where jobs are scarce. However, the cost associated with constant purchases of fuel, as well as the relatively small size of biomass electricity generation units, contributes to the relatively high cost of electricity from these facilities.

At the state’s six stand-alone biomass power plants, there are 148 employees13. These include engineers to run the facilities, wood yard operators, wood procurement and support staff. There are additional people involved in plant operations at pulp and paper mills, but estimating this number is difficult, given that many facilities regularly fuel switch or co-fire biomass with other fuels.

However, the real jobs impact of biomass power plants is in the woods and in the fuel supply. In 2015, there were an estimated 4,417 individuals employed (or self-employed) in logging and forestry in Maine14. That same year, slightly over 3 million tons of biomass fuel was harvested in Maine, representing 21% of the state’s timber harvest. Assuming that it requires equivalent effort to harvest and process a ton of wood15, regardless of product type, this suggests that biomass fuel supply is responsible for 990 logging and forestry jobs in Maine.

Biomass also needs to be placed in a truck, transported to a facility and unloaded. The 3.1 million tons of biomass harvested in 2015 represent 103,390 truckloads of biomass (assuming 30 tons to the load). In a 45 week operating year (allowing for breaks due to mud season in both spring and fall), that is 2,297 loads per week, or 459 loads per day. Assuming two trips from the woods per truck (to allow for loading, travel in both directions, and unloading), this suggests that 230 forest products truckers are employed transporting biomass from the woods to a biomass energy facility.

In direct jobs at the biomass plants and associated fuel supply, an estimated 1,368 Maine jobs are created by the existing biomass markets.

Table 4. Employment Associated with Maine Biomass (estimated) Position Employees Biomass Energy Plants 148 Logging and Forestry 990 Trucking 230 Total 1,368

13 The Benefits and Challenges of Biomass Energy in Maine. February 2016. 14 Data from the Maine Department of Labor, Center for Workforce Research and Information, 2016 and self-employed logging and forestry was estimated using the U.S. Census Non-Employer Statistics. 15 This assumption may be conservative, given the extra step of chipping required of biomass.

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2.1.4 ECONOMICS OF BIOMASS POWER Electricity generated from biomass and sold onto the grid has unique economics, discussed here. When biomass electricity is produced, two distinct products are made. First, electricity is produced, and sold onto the grid at wholesale prices. This electricity is priced either at a previously arranged contract price, or at the spot price. Under either scenario, biomass electricity competes directly with other generation sources, including natural gas, which sets the price of electricity about 70% of the time in New England16.

Biomass plants can also produce “Renewable Energy Certificates”, or RECs, which are the legal right to claim any non-electricity attributes (location, fuel type, renewable status, vintage, RPS qualification, etc.) associated with the generation. RECs are used by electricity providers and utilities in a number of New England states17 to show compliance with those state’s Renewable Portfolio Standards (RPS). These RPS standards require electricity providers to purchase a certain (and often growing) percentage of their electricity from qualified renewable energy producers. Each state sets standards for qualification and percentages individually.

Figure 16. Products from Biomass Electricity

Markets for both of these products – electricity and RECs – are constantly in flux based upon supply and demand. Electricity in the region is priced through a system administered by ISO-New England, and prices can change in five minute increments. While it is easy to become distracted by the constant movement of this market, the area to focus on is the monthly average pricing, or even annualized pricing.

16 ISO-New England. 2016 Regional Electricity Outlook. January 2016. 17 Maine, New Hampshire, Massachusetts, Connecticut and Rhode Island all have Renewable Portfolio Standards.

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2.1.4.1 Revenue - Electricity ISO-New England reports monthly average wholesale electricity prices18, and there is an exchange where electricity can be purchased and sold for future months – both on-peak and off peak19. Futures prices are not a guarantee that the real-time price will be at a certain level in the future, but allow both buyers and sellers the ability to lock in future pricing at an agreed to price. For monthly futures prices, on-peak and off-peak electricity were blended, assuming 48% of hours in a month are on-peak, the remainder off- peak.

Figure 17. New England Historic and Futures Wholesale Electricity Pricing, 2010 – 2022, $ per MWH

$160 $140 $120 $100 $80 $60 $40 $20 $0 19 12 19 20 21 21 22 22 18 18 12 13 14 14 15 15 16 17 17 11 10 10 11 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jan Jan Jun Oct Oct Apr Apr Feb Sep Feb Sep Dec Dec Aug Aug Nov Nov Mar Mar May May Actual Futures

In New England, wholesale electricity clearly has seasonal peaks, with the highest historic and futures prices during the winter months. For biomass electricity producers, it helps to look at wholesale prices over the course of an entire year, recognizing that most plants are engineered to operate year-round, with minimal downtime. On a trailing 12-month basis, wholesale electricity prices in New England peaked at $70 per MWH in April of 2014, are currently at $27 per MWH, and the futures market suggests that this will rise and stabilize around $45 per MWH. The monthly mean price for 2017 – using both historic and futures prices – is currently $32 per MWH.

18 ISO New England, Price Reports - Monthly LMP Indices, accessed October 17, 2017. https://www.iso- ne.com/isoexpress/web/reports/pricing/-/tree/monthly-lmp-indices 19 CME Group. ISO New England Mass Hub Day-Ahead Peak Calendar-Month 2.5 MW Futures Quotes. Accessed March 16, 2016, 12:00 PM. http://www.cmegroup.com/trading/energy/electricity/iso-new-england-internal-hub- peak-location-marginal-pricing-lmp-swap-futures_quotes_globex.html and ISO New England Mass Hub Day-Ahead Off-Peak Calendar-Month 5 MW Futures Quotes. http://www.cmegroup.com/trading/energy/electricity/nepool- internal-hub-5-mw-off-peak-calendar-month-day-ahead-swap-futures.html

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Figure 18. New England Wholesale Electricity Pricing – Trailing 12 Month Average20, 2014 – 2018, $ per MWH

$80.00

$70.00

$60.00

$50.00

$40.00

$30.00

$20.00

$10.00

$‐

2.1.4.2 Revenue - Renewable Energy Certificates (RECs) As discussed above, in addition to electricity, biomass plants sell Renewable Energy Certificates as a key part of their revenue stream. For each megawatt hour (MWH) of electricity produced, one REC is generated. RECs are priced differently in each market (each state, or tier of a state’s RPS), but the Connecticut Class 1 tier is the most indicative for biomass plants operating in Maine – four of the six operating stand-alone biomass plants in the state participate in this market, and the Rhode Island and to a lesser extent Maine markets often follow Connecticut pricing. The pricing on Connecticut Tier 1 RECs dropped by more than half from $47 in 2015 to $21 in 2016. Indicative prices for 2017 for CT Class 1 RECs is $2421. It is critical to note that REC pricing is an opaque market, with limited information available in real time, and prices can move up or down based upon real or perceived changes in supply or demand.

20 Includes futures prices 21 New Hampshire Public Utilities Commission. Testimony (and verification through order) in DE 16-850 - ELECTRIC RENEWABLE PORTFOLIO STANDARDS. Adjustment to Renewable Class Requirements. Order Maintaining Class III RPS Requirements for 2017 and Modifying Class 1 Useful Thermal RPS Requirements for 2016. Order Number 25,978. January 17, 2017.

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Figure 19. Reported Prices for Connecticut Class 1 RECs, 2015 – 2017.

Maine biomass plants are able to sell their RECs into markets where:

- A biomass generation unit is able to deliver electricity (thus any “behind-the-meter” generation would be deliverable only to Maine, while electricity sold onto a regional grid could be physically delivered to other states); and - Where the facility has applied for and received a qualification from that state’s regulatory body that administers their Renewable Portfolio Standard. Each state sets unique requirements for participation in their RPS, which for biomass can include fuel type, harvesting standards, emissions and efficiency.

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The table below shows Maine biomass facilities that have received qualification in the high tier RPS programs in Maine and other New England states22.

Table 5. Maine Biomass Facilities Qualifications in New England RPS Programs

Facility Town Capacity Status State (MW) Maine CT MA NH RI Athens Energy Athens 7.1 Operating   Pending  Greenville Steam Greenville 19 Closed    Irving Forest Products Dixfield 0.7 Operating   Jackson Laboratories Bar Harbor 0.6 Operating   Old Town Pulp Mill Old Town 14.5 Closed   Old Town Pulp Mill Old Town 2 Closed   Plesant River Lumber Jackman 0.5 Operating   ReEnergy ‐ Ashland Ashland 39 Operating    ReEnergy ‐ Fort Fairfield Fort Fairfield 36 Operating    ReEnergy ‐ Livermore Falls Livermore Falls 34 Operating   ReEnergy ‐ Stratton Stratton 46 Operating   Rumford Paper Company Rumford 37 Operating   SAPPI ‐ Somerset Skowhegan 31 Operating   SAPPI Westbrook Westbrook 50 Operating   Stored Solar ‐ Jonesboro Jonesboro 27.5 Operating   Until 2016  Stored Solar ‐ WE West Enfield 27.5 Operating   Until 2016  Verso ‐ Androscoggin Jay 15 Operating   Verso ‐ Androscoggin Jay 18 Operating   Verso Bucksport Bucksport 10 Closed    Woodland Pulp Baileyville ? Operating 

22 Maine: http://www.maine.gov/mpuc/electricity/rps-class-I-list.shtml, Connecticut: http://www.ct.gov/pura/lib/pura/rps/rps.xls Massachusetts: http://www.mass.gov/eea/docs/doer/rps-aps/eligible-class-i-renewable-units.xlsx New Hampshire: http://www.puc.state.nh.us/sustainable%20energy/renewable_portfolio_standard_program.htm Rhode Island: http://www.ripuc.org/utilityinfo/RES-Application-Status(4-5-17).pdf

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Revenue – Capacity Payments In addition to revenue from sale of electricity and Renewable Energy Certificates, biomass plants (like many other electricity generation units) may also be eligible for capacity payments. In essence, payments function similar to a call option – a generation unit is paid to be available for times of peak electricity demand. This is meant to assure that the electricity grid can handle those times of the year when demand is strongest.

It should be noted that capacity markets, and how generators get paid for capacity, are complicated. This explanation is meant to serve as a summary only, for purposes of understanding how biomass facilities benefit from capacity markets.

In the Northern Maine ISA (where ReEnergy – Ashland and ReEnergy – Fort Fairfield are located), there are no system-based capacity payments to electricity generators. Load-serving entities (those that sell power to the customers) have capacity obligations, and may enter into bi-lateral contracts with electricity generators to assure adequate capacity. However, those arrangements are not public or transparent, and some generation units in this region do not receive payments for capacity. For this reason, the capacity payment in this region is modelled at $0 per MWH, but it may be higher.

In ISO-New England, there is a formal Forward Capacity Market, which uses an auction to establish the price for capacity. All generation resources in ISO-New England that can be dispatched (called upon to generate) are eligible for this funding, assuming that they are available during times of peak load. Payments are made to the generator on a dollar per kilowatt month basis, the table below shows how that converts to revenue on a dollar per megawatt hour basis (assuming operations during 90% of a 30 day month). For grid-connected facilities in ISO-New England, we have assumed capacity payments of $7.85 per MWh in 2017 and $12.79 per MWh in 201823.

Table 6. Modelled Capacity Payments, ISO-New England

Capacity Year Capacity Payment Capacity Payment $/MWH (operating 90%) $/kw month $/mw month (operating 648 hours/month) 2015‐2016 $ 3.34 $ 3,340 $ 5.15 2016‐2017 $ 3.15 $ 3,150 $ 4.86 2017‐2018 $ 7.03 $ 7,025 $ 10.84 2018‐2019 $ 9.55 $ 9,550 $ 14.74 2019‐2020 $ 7.03 $ 7,030 $ 10.85 2020‐2021 $ 5.30 $ 5,300 $ 8.18

23 The capacity payment year begins in July. These figures are established by averaging the modelled capacity payments for the two overlapping years (for 2017, averaging 2016-2017 and 2017-2018).

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2.1.4.3 Expenses – Operations and Maintenance On the expense side, biomass plant operators have operations and maintenance (O&M) costs, as well as fuel purchases. Operations and maintenance encompasses a range of costs, including labor, supplies and services, debt service, property taxes, maintenance, and stations utilities. In 2002, a report on New Hampshire biomass facilities24 estimated that these costs were $22 per MWH of generation (2.2¢ per kwh). Assuming annual inflation of 2%, a fair estimate of biomass plant operations and maintenance costs in 2017 is $28 per MWH. This has been confirmed as a “reasonable” estimate by those managing the biomass plants.

Principal & Interest 13% Production Labor 27%

Supplies and Services 15%

Property Taxes Utilities 9% 12%

Non‐Production Labor Maintenance 13% 11% Figure 20. Components of Biomass Operations & Maintenance Costs

24 Draper/Lennon, Inc. and Innovative Natural Resource Solutions LLC. “Identifying and Implementing Alternatives to Sustain the Wood-Fired Electricity Generating Industry in New Hampshire.” Prepared for the NH Department of Resources and Economic Development. January 2002.

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2.1.4.4 Expenses – Biomass Fuel Fuel costs are the largest expense for biomass power plants. Of course, it is this fuel cost that represents payments to the entire supply chain – compensation for the growing, harvesting, processing and transport of biomass fuel. While each biomass plant is slightly unique, a good rule of thumb is that it takes 1.7 green tons of biomass fuel to produce a MWH of electricity25 26. Each plant is unique, and there can be modest variations based upon time of year, moisture content of the fuel, plant size and technology. However, 1.7 green tons per MWh is a reasonable assumption for the biomass plants in Maine.

Table 7. Fuel Cost per Ton and per MWh, estimated at 1.7 green tons per MWh

$ / ton $ 18.00 $ 20.00 $ 22.00 $ 24.00 $ 26.00 $ 28.00 $ 30.00 $ / MWh $ 30.60 $ 34.00 $ 37.40 $ 40.80 $ 44.20 $ 47.60 $ 51.00

Biomass fuel prices vary, based upon input costs, supply and demand. A large number of factors influence the pricing and availability of biomass fuel, and changes in any of these factors can have an impact on biomass fuel prices.

• Diesel costs are one of the largest single inputs to forest-derived wood. Every step of the process – felling, skidding, chipping and transport – uses diesel to power machinery. As diesel costs have risen, chip prices have risen as well. As a general rule, it takes slightly over 2 gallons of diesel to make and transport 1 green ton of wood chips (see discussion below).

• The wholesale price of electricity, set largely by natural gas plants, significantly impacts the ability of existing and new wood-fired power plants to operate profitably, and often impacts what a plant can or will pay for wood fuel.

• The strength of other forest products markets factors into the availability of wood fuel supply for biomass plants. When there is significant harvesting of roundwood (sawlogs and pulpwood), there are more opportunities to capture biomass as part of a harvest. Similarly, if markets are weak and overall harvesting declines, biomass markets suffer.

• Specific and localized weather events, such as an extended mud season or a dry summer, can have a meaningful short-term impact on the price and availability of biomass fuel.

25 Clean Power Development. “Biomass Fuel Availability: Berlin, NH”. Filed with the New Hampshire Public Utilities Commission. May 2008. 26 See also “Amended and Restated Power Purchase Agreement, Public Service of New Hampshire and Berlin Station”, Approved in Docket DE-10-195 of the New Hampshire Public Utilities Commission. Section 6.1.2(a)(2) implies that facility, a 70 MW biomass unit, would burn 1.6 tons of fuel per MWh.

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INRS tracks average biomass prices in New England on a quarterly basis. Average biomass fuel prices since 2008 in Northern New England (including but not exclusive to Maine) range from a high of $38 to below $25 per green ton (delivered). There are certainly facilities paying above or below these prices during a given time period, but these prices are a fair representation of the general pricing and trend for biomass fuel.

In the figure below, the cost of diesel and the cost of wood are separated simply to show the level of impact diesel can have on biomass fuel prices. The “wood” component represents all costs not directly associated with diesel, including stumpage, logging operations and equipment costs, a truck and driver, and any margin for the logger.

$40.00

$35.00

$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

$‐ 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13 13 13 14 14 14 14 15 15 15 15 16 16 16 16

3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Wood Diesel

Figure 21. Average Biomass Fuel Cost ($ per Green Ton, Delivered), Northern New England, 2008-2016

2.1.4.5 Diesel as a Component of Biomass Production Costs As noted above, diesel fuel is a significant cost input to the price of biomass. Diesel is used in both in- wood operations (felling and skidding), operations at the log landing (handling and chipping), and transport to the facility.

Using actual fuel consumption from a number of logging companies, the authors have developed a formula for estimating the fuel used and diesel cost component of biomass fuel, based upon distance to market, payload size, and fuel cost. As a rule of thumb, slightly over two gallons of diesel fuel are used in the production of a single green ton of biomass. However, this varies considerably by the type and age of equipment, operator decisions, harvest prescription, skidding distance, distance to market, and other variables.

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2.1.5 REVENUE AND EXPENSES Given the discussion above about the revenue (electricity and RECs) and expenses associated with operating a biomass power plant in Maine, we have estimated the economics on a per MWh basis. As discussed previously, the following assumptions are used to develop this revenue and expense estimate:

• Electricity at current futures price for the next year ($32) • RECs at recent broker quote (for Connecticut $24) • Capacity Payments at $7.85 • Biomass fuel at $25 per ton, 1.7 green tons per MWH • O&M at $28 per MWh

Figure 22. Economics of Biomass Power Generation in Maine, 2017 (generic)

80 70 60 50 40 30 20 10 0 Income Expenses Electricity RECs (CT) Capacity Fuel O&M

Using these assumptions, a plant can expect to generate $64 per MWh and incur expenses of $71 per MWh. Obviously, this is not a profitable business, and cannot be conducted on a sustainable basis. In order to operate during such conditions a facility could seek to decrease production during off-peak hours, when electricity prices are low. While this is possible to some extent, it increases wear on a facility, can lead to decreased fuel efficiency and increased long-term maintenance costs. A facility could also seek to lower fuel costs, though there are limits to what supplies will accept before ceasing deliveries. A facility might also seek to supplant some in-woods fuel with wood from construction and demolition activities. A facility could also seek to decrease its operations and maintenance budget, likely through deferring maintenance, but this is cannot occur for prolonged periods without significant consequences.

Long-term, the path for these facilities to achieve sustainable profitability needs to focus on added revenue streams, either by selling power directly to proximate users at above-wholesale rates (but below retail), selling heat and steam to proximate customers, or finding appropriate co-products.

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2.1.5.1 Maine Support for Biomass Plants Recognizing the economic challenges that the biomass industry faces, and desiring to provide a brief time period of operations to secure new pathways to profitability, the State of Maine passed a program to provide up to $13.4 million in above-market funding over two years to four biomass plants. This program, overseen by the Public Utilities Commission, identifies four specific facilities, sets caps on the MW purchases, requires measureable economic impact through jobs and wood fuel purchases, and requires the operators to make capital investments in the facilities.

The details of these agreements, which vary by company, are below. The facilities owned by ReEnergy Holdings receive a flat payment of $46.50 per MWh for electricity, regardless of whether the spot price is below or above this level. The Stored Solar facilities sell into the wholesale market, and receive an added $13.40 per MWh.

Table 8. Maine Biomass Procurement Contracts

Stored Solar has received approval from the Maine Public Utilities Commission to receive their support payments at the end of the year, upon demonstration of meeting their contractual obligations. For modelling purposes, we have assumed that they receive all expected payments.

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As noted, as a condition of economic support from the State of Maine, each firm is required to make certain capital investments in their facilities. These investments are intended to position the facilities for long-term sustainability, and were agreed to by the biomass plant owners. The table below shows capital investments required by each firm in each year, and an estimate of what this means per megawatt hour.

Table 9. Capital Investment Requirements in Maine PUC Contracts27

Using the assumptions above, we have estimated the revenue and expenses associated for the ReEnergy Holding facilities (Ashland and Fort Fairfield) and Stored Solar facilities (Jonesboro and West Enfield) in each of the two years of the Maine PUC contracts. It is important to note that these estimates are based upon publicly available information and standard industry assumptions.

Importantly, all capital investment has been assigned to the year it is deployed. If this investment was amortized over the lifetime of the investment, it would be a lower value.

The following discussion and figures do not represent actual expenses and revenue for the facilities, as that information is not publicly available. It is possible that revenues or expenses are higher or lower than estimated for any of the projects discussed; the estimates represent a best effort at understanding the economics of four Maine biomass facilities currently receiving public support.

27 MWH / Year for ReEnergy Holdings estimated assuming 40 MW at an 80% capacity factor; MWH for Stored Solar estimated in Maine Public Utilities Commission, Order Approving Biomass Procurement Contracts, Docket No. 2016- 00084, January 25, 2017 (public version).

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2.1.5.2 ReEnergy Holdings The ReEnergy Holdings facilities in Ashland and Fort Fairfield were modelled using the following assumptions per MWh:

• Electricity at PUC contracted price ($46.50) • RECs at current broker quote ($24) • No capacity payments (NMISA electricity grid) • Biomass fuel at $25, 1.7 green tons per MWH • O&M at $28 per MWh • Capital expenditures of $4.81 in year 1, $2.22 in year 2

Using these assumptions, it appears that expenses exceed revenues on a per MWh basis for these facilities in both year 1 and year 2. Importantly for these facilities, the expenses do not include any charges associated with wheeling electricity from the NMISA electricity grid into ISO-New England, necessary for the electricity to qualify for RECs in other New England states.

Figure 23. Economics of ReEnergy Facilities, Maine PUC Contract, $ per MWH, modelled

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2.1.5.3 Stored Solar The Stored Solar facilities in Jonesboro and West Enfield were modelled using the following assumptions per MWh:

• Electricity at current futures price of $32 for 2017 and $39 for 2018 • PUC Adder of $13.40 • RECs at recent broker quote (Rhode Island at $24) • No capacity payments • Biomass fuel at $25, 1.7 green tons per MWH • O&M at $28 per MWh • Capital expenditure of $10 in year 1, $0 per year 2

Using these assumptions, it appears that expenses exceed revenues on a per MWh basis for these facilities in year 1, and that revenues are modestly in excess of expenses in year 2. Importantly, the operations and maintenance expenses for these facilities may be underestimated, as fluidized beds are known to have higher energy and maintenance needs than stoker facilities. It is also possible that these facilities receive capacity payments.

Figure 24. Economics of Stored Solar Facilities, Maine PUC Contract, $ per MWH, modelled

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SECTION 3 POLICY DRIVERS AND BARRIERS

3.1 BARRIERS

Maine’s biomass energy market is impacted by several economic, policy, and infrastructure barriers, which have been well-documented in the literature.28 These barriers constrain market growth. Supporting the long-term sustainability of the biomass energy industry would require development of policies, programs or other market initiatives to overcome these barriers. Absent non-market intervention, it is unlikely that biomass electricity facilities will continue to operate. The following section describes key barriers in greater detail, exploring the factors that impact market growth across the major biomass energy applications (e.g. biomass electric, CHP, and heating).

Barrier Description & Impact on Biomass Energy Sectors  Energy prices have dropped significantly over the past few years: wholesale electric costs have declined in recent years, as have natural gas and oil prices (combined with expanding gas infrastructure).  The decline of wholesale electricity prices has made Low and fluctuating energy prices biomass electricity less cost-competitive and increasingly reliant on REC revenue to break even.  Similarly, declining gas prices and the global collapse in oil prices have also made biomass thermal and CHP applications less cost-competitive.  Widespread disagreement exists among policymakers, industry, and other stakeholders regarding the GHG emissions impacts of biomass energy.  This uncertainty has led to the rollback of incentive eligibility and addition of new requirements and Uncertain greenhouse gas (GHG) emission constraints for existing and future biomass energy impacts installations.  Additionally, some private sector entities have expressed concerns about this uncertainty with respect to using biomass energy as a means to achieve renewable energy goals.

28 Maine Legislature. 127th Legislature, Second Session. (2016, December). Commission to Study the Economic, Environmental and Energy Benefits of the Maine Biomass Industry. Available online at: https://legislature.maine.gov/uploads/originals/biomass-study-report.pdf; Kingsley, E. (2016, November). Tough Time to Try to Sell Biomass Fuel: Plummeting Energy Prices Make Biomass Electricity Even Less Competitive. The Northern Logger and Timber Processor Magazine. Available online at: http://www.inrsllc.com/Northeast%20Biomass%20- %20Northern%20Logger%20Nov%202016%20Kingsley.pdf; Ahlers, C. (2016, April). Wood Burning, Biomass, Air Pollution, and Climate Change. Environmental Law, 46(1). Available online at http://elawreview.org/articles/volume-46/wood- burning-biomass-air-pollution-and-climate-change/;

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 Incentive programs and policies for biomass energy systems are in flux across the New England region.  Recent and upcoming changes in REC eligibility for biomass electricity markets are reducing revenue for Uncertain policy environment biomass electricity operators.  However, greater interest and investment in renewable thermal technologies (e.g. thermal REC eligibility for biomass in MA) may lead to additional incentive-driven opportunities for biomass energy.  High transportation costs for low energy density High transportation/ collection costs biomass fuels places geographic limits on where biomass energy is economical.  Biomass combustion can emit greater air pollutants (i.e. PM, VOC, CO) than fossil fuels technologies.  State and federal policymakers have differing goals with regards to limiting air pollutants that vary from region to Tightening air emission and efficiency region. requirements  Regardless, concerns about air emissions have led to the tightening of emissions regulations, with the EPA recently passing regulations on PM emissions from biomass thermal systems and some states imposing even greater restrictions for incentive eligibility.

3.1.1 BARRIER: LOW AND FLUCTUATING ENERGY PRICES Biomass competes directly with fossil fuels (e.g. natural gas, oil, etc.) for electricity, thermal, and CHP applications. Electricity and fossil fuel prices have declined in recent years, making biomass energy systems less cost-competitive, which in turn has discouraged additional investment in new biomass power, thermal, and co-generation resources.

Electricity sales are the primary source of revenue for biomass electric generators, followed by the sale of Renewable Energy Certificates (RECs). In New England, wholesale electricity is bought and sold in two ways: either via (1) contracts between individual buyers and sellers or (2) spot markets that establish prices for electricity products and services through competitive bids.

On average, wholesale electricity prices in Maine have declined in recent years, with a compound annual growth rate (CAGR) from 2011-2016 of -7% (-23% CAGR since 2014). Prices have primarily hovered between $20 and $50 per MWh since 2011, though there have occasionally been short lived prices peaks as high as $160/MWh during periods of winter supply constraints.

These wholesale price declines have been attributed to an influx of natural gas derived electricity supported by the lower cost of natural gas. For example, the share of natural gas in New England electricity generation has grown from just 15% in 2000 to 49% in 2015.29 Growth of natural gas generation capacity is largely the

29 ISO-NE 2016 Regional Electricity Outlook. https://www.iso-ne.com/static-assets/documents/2016/03/2016_reo.pdf

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result of declines in natural gas prices relative to alternatives (see Figure 2). In addition, policymakers’ push to phase out of coal power plants – which have high GHG emission profiles – has contributed to the region’s transition to natural gas.

Figure 25: Monthly average natural gas spot prices in Maine, 2008-201630

Natural Gas Spot Prices in Maine

25 Avg. Monthly Price

12 Month Moving 20 Average ($/Mcf)

15 Prices

10 Spot

Gas 5 Nat.

0

Such sustained low wholesale energy prices have made it difficult for biomass electric facilities to remain profitable. In order to compete directly at current prices for electricity and biomass fuel, biomass electric generators would need combined wholesale electricity and REC prices of approximately $70/MWh.31 With wholesale energy prices at approximately $35/MWh today, which leaves a $35/MWh gap, which would have to be filled by Maine’s REC market.

In addition, in recent years, many biomass electric contracts have expired, requiring generators to either renegotiate terms or turn to the wholesale market to sell electricity. Given low wholesale electricity prices, biomass generators are less able to sell power profitably on the spot market or negotiate favorable terms for contracts.

As it relates to thermal markets, Maine homes and businesses primarily utilize heating oil for thermal energy applications.32 In addition to the aforementioned decline in natural gas prices, heating oil has declined significantly in recent years: the average residential price per gallon of heating oil declined by 35% from

30 Data sourced from U.S. EIA Maine spot prices: https://www.eia.gov/dnav/ng/hist/n3050me3m.htm 31 Projection depends on assumption of ~1.7 green tons of fuel per MWh, biomass fuel priced at $35/ton, and standard operating costs for staff time, maintenance, debt service, emissions control, etc. averaged to roughly $30/MWh produced. Numbers and methodology sourced from INRS Biomass 101 presentation delivered to the Maine Forest Forum in April 2016. 32 Cite EIA Maine Energy Profile

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$3.59/gallon in 2013 to $2.34/gallon in 2015.33 Accordingly, the economics for residential and commercial biomass heating sector (both biomass thermal and CHP) has also gotten much more challenging in recent years.

Fossil fuel energy prices are projected to have only modest increases in the coming years.

o For example, U.S. EIA estimates that the price of natural gas will rise from the current price of $2.51/Mcf to $3.73/Mcf in 2018, as a result of greater projected demand.34 This price shift may marginally reduce the use of natural gas for electricity generation by approx. 2% at the national scale.35 The regional ramifications of these price changes for New England are unclear; however, it is worth noting that 60% of all new proposed power plant construction is slated to use natural gas as the primary fuel source.36 o In short, policymakers around New England—and in Maine—have largely encouraged the expansion of natural gas to reduce winter supply constraints (and mitigate corresponding spikes in winter wholesale electricity prices).37 Such natural gas policies will likely dampen demand for local biomass energy development.

Accordingly, if Maine policymakers seek to stabilize the biomass energy market, it will be important for policymakers to explore economic drivers of the broader energy (electricity and heating) market. In addition to reconciling energy policies and priorities as they relate to development of biomass energy and natural gas, Maine policymakers may also consider the potential of expanding the REC market in Maine, exploring opportunities to encourage investment in CHP and colocation, etc.

3.1.2 BARRIER: UNCERTAIN GREENHOUSE GAS (GHG) EMISSION IMPACTS Significant disagreement exists regarding the life-cycle greenhouse gas (GHG) impacts resulting from biomass energy production. There are a variety of ways to account for GHG impacts, and depending on the method employed, the carbon intensity of biomass energy production varies widely: as such some policymakers have treated biomass as carbon neutral while other stakeholders have criticized such approaches, arguing that biomass electricity emissions exceed those of other fossil fuels and timelines to resequester these emissions (and eliminate the “carbon debt”) exceed those necessary to meaningfully reduce emissions.38 This is particularly the case for stand-alone biomass electricity generation, which is less

33 Maine Governor’s Energy Office home heating fuel data. 34 http://www.eia.gov/todayinenergy/detail.php?id=29632 35 https://www.eia.gov/todayinenergy/detail.php?id=27072 36 https://www.iso-ne.com/about/regional-electricity-outlook/grid-in-transition-opportunities-and-challenges/natural- gas-infrastructure-constraints 37 Governor’s Energy Office, State of Maine. (2015, February). Maine Comprehensive Energy Plan Update. 38 Regional Greenhouse Gas Initiative. (2007). Overview of RGGI CO2 Budget Trading Program. Retrieved from http://www.rggi.org/docs/program_summary_10_07.pdf. Manomet Center for Conservation Sciences. (2010). Massachusetts Biomass Sustainability and Carbon Policy Study: Report to the Commonwealth of Massachusetts

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efficient than CHP or thermal, and therefore releases carbon at a faster rate (per MMBtu of energy generated) relative to CHP or biomass thermal, requiring additional time to reduce the associated carbon debt and achieve carbon neutrality.39

From an investor’s perspective, the uncertainty surrounding carbon emissions from biomass installations introduces additional development risks, which in turn increases the cost of capital to finance biomass projects. Investment risk for renewable energy projects has been well-documented in the literature.40 In the case of biomass projects, uncertainty surrounding GHG emissions introduces a high level of social acceptance risk and policy risk.

Social acceptance risk affects potential investors and large scale adopters, such as corporations and institutions. It refers to the potential public relations backlash such entities might face if, after investing heavily in biomass electric as part of a corporate social responsibility campaign to reduce their carbon footprint, consensus shifts towards biomass electric being carbon intensive, rather than carbon neutral. With ongoing disagreement around biomass GHG accounting, this risk might lead some corporate procurement officers to recommend investment in wind or solar for their low-carbon energy needs, rather than biomass electric.

Power market or regulatory risk includes risk arising from uncertainties in the energy market, including sub-optimal regulations to address market limitations and promote renewable energy markets. For biomass electric, this risk has been born out in New England in recent years, as RPS carve-outs and class eligibility for standalone biomass electric have reduced and become more stringent in their requirements. This in turn has strained the economics of biomass facilities, which relied on the regional sale of RECs as an important source of revenue, and has therefore put renewed political pressure on Maine’s policymakers to develop solutions for the industry.

These risks form an important barrier to both the success of existing biomass facilities, and the potential for new investment in the industry. Corporates looking to reduce their carbon footprint are actively working to address this uncertainty in order to minimize risk 0f investing in biomass.

Notably, the EPA’s Science Advisory Board (SAB) was expected to weigh in on reviewing an accounting framework for carbon dioxide emissions associated with biogenic sources that had been in development from the EPA Panel on Biogenic Carbon Emissions since 2011 to consider whether thresholds for greenhouse gas emissions regulation had been met. In April, 2016, the SAB concluded review of the revised

Department of Energy Resources. Prepared for the Massachusetts Department of Energy Resources. Natural Capital Initiative Report NCI-2010-03. Brunswick, Maine. 39 A typical biomass electric plant has an efficiency of approximately 25%. By comparison, biomass CHP and thermal can operate at efficiencies of 75-80%. (BERC, 2009 – Biomass Energy Resource Center. (2009). Biomass Energy: Efficiency, Scale, and Sustainability). 40 Waissbein, O., Glemarec, Y., Bayraktar, H., and Schmidt, T. (2013). Derisking Renewable Energy Investment. New York, NY: United Nations Development Programme; International Renewable Energy Agency. (2016). Unlocking Renewable Energy Investment: The Role of Risk Mitigation and Structured Finance. IRENA, Abu Dhabi; Noothout, P., Jager, D., Tesniere, L., et al. (2016). The impact of risks in renewable energy investments and the role of smart policies. Prepared for DiaCore and the Intelligent Energy Europe Programme of the European Union. Brussels, Belgium: European Commission.

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framework that asserted that emissions from biomass electric generation have no short term effects on climate change.41 The SAB ultimately rejected that report iteration, and requested changes to the timeframe discussed for biomass carbon release and sequestration, to better reflect the latest scientific understanding. EPA panel’s “Framework for Assessing Biogenic CO2 Emissions from Stationary Sources,” has now been under revision and review since 2011.42 Given recent changes in the EPA leadership at the federal level, it is unclear whether the SAB will ultimately provide any meaningful guidance on the topic. This only compounds the market uncertainty as it relates to carbon accounting for biomass facilities.

Until this uncertainty is resolved, the simplest course of action for Maine’s policymakers could be to focus on combined heat and power (CHP) or thermal biomass applications, which have greater consensus regarding the carbon emission benefits.

3.1.3 BARRIER: UNCERTAIN POLICY ENVIRONMENT A changing policy environment in the New England ISO (NE-ISO) over the past five years has negatively impacted Maine’s biomass market. Until 2012, all five states in the NE-ISO had Renewable Portfolio Standards (RPS) for which standalone biomass electric facilities were eligible to receive Class I Renewable Energy Credits (RECs).43

Massachusetts deviated from this trend in 2012 after a report published by the Manomet Center for Conservation Sciences challenged the carbon footprint of biomass energy, using a debt-and-dividend approach.44 Thereafter, Massachusetts restricted its Class I REC eligibility to biomass facilities that meet a heightened standard of 50% and 60% overall efficiency (to achieve ½ and 1 REC respectively), which has limited the eligibility of standalone biomass electric facilities in favor of higher-efficiency biomass CHP plants.45,46

Similarly, Connecticut plans to phase out REC qualification of biomass electric facilities after a 2013 study noted that most of the state’s biomass RECs were being sourced from “older, out-of-state, and not-very- clean biomass” facilities.47 In response, Connecticut’s Department of Energy and Environmental Protection announced a phase-out of biomass energy as part of the Class 1 portion of their Renewable Portfolio Standard, noting “Connecticut will gradually phase down Renewable Energy Credit (REC) values for Class I

41 https://www.nrdc.org/experts/sami-yassa/full-scientific-advisory-board-rejects-flawed-biomass-proposal 42 Biogenic Carbon Dioxide Emissions from Stationary Sources - Assessment Framework https://yosemite.epa.gov/sab/sabproduct.nsf/0/3235DAC747C16FE985257DA90053F252?OpenDocument; Environmental Protection Agency, Science Advisory Board Meetings. https://yosemite.epa.gov/sab/sabproduct.nsf/MeetingCal/BD5980491F4F4FBB85257FEF0048CBC4?OpenDocument 43 Department of Energy, 2016, Green Power Markets, Accessed January 2016, http://apps3.eere.energy.gov/greenpower/markets/certificates.shtml?page=5. 44 Manomet Center for Conservation Science, 2010, Biomass Sustainability and Carbon Policy Study, 182 p. 45 Massachusetts Department of Energy Resources, 225 CMR 14.00: Renewable Energy Portfolio Standard – Class I. 46 Hofer, C., Tinley, C., and Kierstead, M., 2014, Environment: Changing Role of Biomass Power in New England's REC Markets, Natural Gas and Electricity, Vol. 30, No. 7, p. 14-18, DOI: 10.1002/gas.21741. 47 The Connecticut Department of Energy and Environmental Protection, 2013, Restructuring Connecticut’s Renewable Portfolio Standard, 56 p.

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biomass and landfill methane gas beginning in 2018.”48 In July 2017, the state announced plans to begin phasing out biomass power in its Renewable Portfolio Standard beginning in 2019. Full participation will be limited to 20 years from date of approval for participation for “new” facilities (built from 2004 onward) and 15 years for “existing” facilities (built before 2004)49. After that period, half of the generation from a facility will be eligible for participation in the Connecticut RPS, the remainder can be sold into other markets, if qualified50.

Notably, New Hampshire and Massachusetts have recently taken steps to integrate CHP plants and/or useful thermal energy into their respective portfolio standards: New Hampshire created a carve out for renewable thermal energy into the Class I RPS requirement (which includes biomass thermal and biomass CHP); Massachusetts maintains a separate portfolio standard (Alternative Portfolio Standard) for CHP and other alternative fossil-fuel-based technologies, through which a renewable thermal obligation will be integrated.

With only two remaining states in ISO-NE that have not taken steps to reduce purchases of biomass RECs, future changes in REC policies in these states (e.g. requirements on fuel, efficiency, and emissions) could exacerbate revenue losses for biomass electric generators in the regional REC market. Given the uncertainty of regional policies that the biomass industry has historically relied on for stability, future external support to stabilize the biomass industry should reduce reliance on regional policies. Other options to stabilize and strengthen Maine’s biomass industry include creating in-state policies and programs to increase demand for biomass energy (e.g. expanding the Maine electric RPS), and encouraging diversification of and investments in markets for biomass energy (e.g. integrating thermal energy and CHP into the Maine RPS, providing investment funds for CHP plants and co-location).

48 The Connecticut Department of Energy and Environmental Protection, 2015, 2014 Integrated Resource Plan for Connecticut. 49 Maine facility qualifications appear to be as follows: Ashland 6/15/2005, Livermore Falls 8/10/2005 and 11/28/2007, Stratton 6/30/05 and Fort Fairfield 10/4/2013. http://www.ct.gov/pura/cwp/view.asp?a=3354&q=415186 50 Connecticut Department of Energy and Environmental Protection. 2017 COMPREHENSIVE ENERGY STRATEGY – Draft. July 26th, 2017. 206 pages.

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3.1.4 BARRIER: TIGHTENING AIR EMISSION AND EFFICIENCY REQUIREMENTS  Biomass combustion can emit greater air pollutants (i.e. PM, VOC, CO) than some fossil fuels.  Over the past several years, the EPA has released a number of final rules on Ambient Air Quality Standards that have reemphasized previous scientific findings that many of the air pollutants emitted in relatively high quantities from biomass electricity plants.51 Such findings could lead to further rulemaking that could add additional burdens to operating biomass electricity plants.  State and federal policymakers have differing goals with regards to limiting air pollutants that vary from region to region.  Concerns about air emissions have led to the tightening of emissions regulations, with the EPA recently passing regulations on PM emissions from biomass thermal systems and some states imposing even greater restrictions for incentive eligibility. For example, in order to qualify for Class 1 RECs in the Connecticut market, a number of Maine biomass plants have invested in additional technology to control NOx emissions.  Stringent efficiency requirements have been implemented by Massachusetts for RPS eligibility, effectively eliminating stand-alone biomass from participation in that state’s RPS.

51 PM: https://www.gpo.gov/fdsys/pkg/FR-2013-01-15/pdf/2012-30946.pdf; Ozone: https://www.gpo.gov/fdsys/pkg/FR-

2015-10-26/pdf/2015-26594.pdf; NO2: https://www3.epa.gov/ttn/naaqs/standards/nox/fr/20100209.pdf

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3.2 DRIVERS

Maine’s biomass energy market is impacted by regional economic, environmental and policy actions. In addition to the overall electricity and energy market dynamics discussed above, biomass electricity has generally benefitted from policies designed to support renewable electricity generation in New England52. These policies have generally been state-driven, but not always from Maine.

3.2.1 ORIGINS OF MAINE’S BIOMASS PLANTS. Maine’s biomass energy plants, particularly the stand-alone plants designed solely to produce electricity for the regional grid, were constructed and commissioned and commissioned in the 1980’s, when public policy at the state and federal level encouraged construction of new renewable energy generation. Under state and federal law, utilities were mandated to provide long-term contracts for electricity from these facilities at rates that, in retrospect, turned out to be significantly above-market. This resulted, largely, from future projections of alternative fuel source costs that proved to be grossly inaccurate. These contracts for above-market power expired many years ago, and none of the current biomass plants are under the same ownership that developed the projects and benefitted from these contracts.

3.2.2 STATE LEVEL RENEWABLE PORTFOLIO STANDARDS As discussed previously, facilities that produce qualifying biomass power can sell the “renewable” portion of renewable power, or the non-electricity attributes associated with the power. These renewable attributes are referred to as Renewable Energy Certificates, or RECs. For each Megawatt Hour (MWh) of electricity generated, one REC is generated.

Five states in New England – Massachusetts, Connecticut, Rhode Island, New Hampshire and Maine – have Renewable Portfolio Standards that have the potential to allow Maine-based biomass generation to qualify for REC sales. Any RPS is essentially a mandate that any seller of electricity operating in that state must derive a certain portion of that electricity from renewable sources. Each state defines what qualifies as ‘renewable: for purposes of their RPS, so that generation that qualifies in one state does not necessarily qualify in other states. Generation based in Maine can sell into markets where the electricity is “deliverable”. In practice, that means that for power placed on the grid, facilities in ISO-New England can sell RECs in any New England state, and facilities in Northern Maine’s NMISA service area need to contractually move their power into ISO-New England to access RECs from states other than Maine.

The following briefly describes each state’s RPS, as it applies to Maine biomass facilities.

52 Parts of the section on Drivers has been adapted and updated from: Innovative Natural Resource Solutions LLC, Maine Future Forest Economy Project - Current Conditions and Factors Influencing the Future of Maine’s Forest Products Industry. Prepared for the Department of Conservation – Maine Forest Service and the Maine Technology Institute. March 2005.

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3.2.2.1 Maine Maine has a two-tiered Renewable Portfolio Standard. In 1997 the legislature passed a law requiring that 30% of Maine’s electricity come from renewable sources. This was immediately met with existing resources, including significant in-state hydro-electric generation. Following that, the legislature instituted a Class 1 REC tier, which required 10% of electricity in 2017 to be sourced from renewable generation that started (or had significant capital re-investment) since September 2005. The Class 1 RPS does not grow beyond 2017.

In 2014, the last year a full report from the Maine PUC is available, 18 biomass facilities met over 92% of the state’s RPS requirement. Of the facilities qualified to participate in the Maine Class 1 RPS, 16 are Maine biomass units, many at forest industries53 54. In 2014, the average transaction price for a Maine Class 1 REC was $8.55. In 2015, he average transaction price for a Maine Class 1 REC was $13.1655.

Figure 26. Maine Biomass Facilities Qualified for Maine Class 1 RECs

53 Maine Public Utilities Commission. RPS Class I Renewable Resources Applications. 54 Woodland Pulp, shown on the map, has not yet received qualification, and has an application pending in Docket 2017-00013. 55 Maine Public Utiliteis Commission. March 31, 2017.

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3.2.2.2 Connecticut The Connecticut RPS requires that 15.5% of electricity come from qualifying Class 1 renewable sources in 2017, and 20.0% by 2020. A large range of generation sources qualify, including some biomass.

For purposes of its Class 1 RPS, Connecticut defines an eligible biomass facility as:

“A biomass facility that uses sustainable biomass fuel, as defined in Conn. Gen. Stat. §16-1(a)(39), cultivated and harvested in a sustainable manner. “Sustainable biomass fuel” does not mean construction and demolition waste, finished biomass products from sawmills, paper mills or stud mills, organic refuse fuel derived separately from municipal solid waste, or biomass from old growth timber stands, except where:

(A) such biomass is used in a biomass gasification plant that received funding prior to May 1, 2006, from the Clean Energy Fund established pursuant to section 16-245n, or

(B) the energy derived from such biomass is subject to a long-term power purchase contract pursuant to subdivision (2) of subsection (j) of section 16-244c entered into prior to May 1, 2006) and meets certain emissions requirements.”56

Additionally, facilities must meet an emissions threshold for NOx:

“Has an average emission rate of equal to or less than .075 pounds of nitrogen oxides per million BTU of heat input for the previous calendar quarter.”57

This threshold has proven difficult to meet for many facilities, and has required investment in new pollution control technology.

Connecticut plans to phase out biomass electric facilities after a 2013 study noted that most of the state’s biomass RECs were being sourced from “older, out-of-state, and not-very-clean biomass” facilities.

In July 2017, the state announced plans to begin phasing out biomass power in its Renewable Portfolio Standard beginning in 2019. Full participation will be limited to 20 years from date of approval for participation for “new” facilities (built from 2004 onward) and 15 years for “existing” facilities (built before 2004) . After that period, half of the generation from a facility will be eligible for participation in the Connecticut RPS, the remainder can be sold into other markets, if qualified .

Maine biomass facilities that qualify in the Connecticut Class 1 REC market are located in Livermore Falls, Stratton, Ashland and Fort Fairfield.

56 Connecticut Department of Energy & Environmental Protection. Renewable Portfolio Standard. 57 State of Connecticut, Public Utilities Regulatory Authority. “Application for a Class I or Class II Renewable Energy Source Certification”

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3.2.2.3 Rhode Island

The Rhode Island RPS requires that 11.5% of electricity come from qualifying renewable sources in 2017, and 16.0% by 2020. A large range of generation sources qualify, including some biomass.

For purposes of its RPS, Rhode Island defines an eligible biomass facility as:

“Biomass facilities using eligible biomass fuels and maintaining compliance with current air permits (eligible biomass fuels may be co-fired with fossil fuels, provided that only the renewable-energy portion of production from multi-fuel facilities will be considered eligible)”58

For purposes of the RPS, “eligible biomass fuels” is defined as:

“The phrase “Eligible Biomass Fuel” (per RES Regulations Section 3.7) means fuel sources including brush, stumps, lumber ends and trimmings, wood pallets, bark, wood chips, shavings, slash, yard trimmings, site clearing waste, wood packaging, and other clean wood that is not mixed with other unsorted solid wastes5 ; agricultural waste, food and vegetative material; energy crops; landfill methane6 or biogas7 , provided that such gas is collected and conveyed directly to the Generation Unit without use of facilities used as common carriers of natural gas; or neat biodiesel and other neat liquid fuels that are derived from such fuel sources.”59

Maine biomass facilities that qualify in the Rhode Island Class 1 REC market are located in Jonesboro and West Enfield, as well as a new combined heat and power facility located at a wood pellet mill in Athens. The now idled biomass plant at the pulp and paper mill in Bucksport was also qualified in Rhode Island.

58 Database of State Incentives for Renewable Energy. Rhode Island Renewable Energy Standard – Program Summary. 59 Rhode Island Application for Certificate of Eligibility RENEWABLE ENERGY RESOURCES ELIGIBILITY FORM, Appendix F, Eligible Biomass Fuel Source Plan (Required of all Applicants Proposing to Use An Eligible Biomass Fuel).

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3.2.2.4 Massachusetts

Massachusetts has a Renewable Portfolio Standard that allows participation by biomass facilities, subject to extremely strict standards on technology, fuel eligibility and unit efficiency. The details of these standards are complex and beyond the scope of this work, except for how they impact Maine facilities.

Through 2012, Massachusetts encouraged participation in its RPS by biomass electricity facilities that used “low-emission, advanced biomass conversion technologies using eligible biomass fuels”.60 In Maine, facilities in Jonesboro and West Enfield qualified for this, because the fluidized bed technology at these facilities was deemed “advanced”.

In 2010, Massachusetts commissioned the Manomet Center for Conservation Sciences to address biomass sustainability and carbon policy61. Their work, which has been accepted by policy makers in Massachusetts and challenged in other states, suggested that for harvests in Massachusetts, the carbon profile of biomass would cause a near-term “debt”, followed over the course of decades by a “dividend” in carbon uptake. The specific debt-dividend calculation depends upon a number of variables, including fuel type and conversion efficiency.

After the publication of this report, Massachusetts adopted new rules that changed the fuel eligibility and efficiency of biomass units qualifying for that state’s RPS. The fuel rules, which went into effect in 2012, required calculations and certifications based upon soil types and roundwood harvest levels for each harvest providing eligible biomass fuel. The efficiency requirements, which came into force in 2016, require a facility to be 50% efficient in order to receive a half-REC, and 60% efficient to receive a full REC. As stand- alone biomass plants operate at efficiencies at about half of these levels, the Jonesboro and West Enfield facilities were no longer able to qualify.

It may be possible for existing stand-alone facilities to attract heat users, but achieving these levels of efficiency would be extremely difficult, requiring a year-round, around the clock consumer of vast quantities of heat. More likely participation in the Massachusetts RPS by Maine biomass facilities will come from new combined heat and power facilities, sized to fit the heat load. Such facilities may be in the forest industry, for example at a wood pellet mill or a paper mill. The new combined heat and power biomass facility at a pellet mill in Athens has applied for participation in the Massachusetts RPS but has not yet been approved62.

60 225 CRM 14.05 (1)(a)6: Eligible Criteria for New Renewable Generation Units – Renewable Portfolio Standard. 61 Manomet Center for Conservation Science, 2010, Biomass Sustainability and Carbon Policy Study, 182 p. 62 Personal Communication, Michael Judge, Director, Renewable and Alternative Energy Development. Massachusetts Department of Energy Resources. April 26, 2016.

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3.2.2.5 New Hampshire

New Hampshire has an RPS with two tiers that allow biomass power to qualify. Class1 allows biomass projects that began operations after January 2006 to qualify. No Maine projects currently operating meet that definition, but new combined heat and power projects currently under development at Maine forest industries may.

New Hampshire also has a Class 3 REC tier, with eligibility defined as:

“Class III sources include generation facilities that began operation on or before January 1, 2006 and produce electricity from eligible biomass technologies having a gross nameplate capacity of 25 megawatts or less or methane gas facilities.”63

There are six operating wood-fired power plants in New Hampshire that meet this criteria. There are no Maine facilities of the size and vintage to qualify. The RPS requires 8% of the state’s electricity load to be met with RECs from facilities qualified in this tier, but allows the Public Utilities Commission to adjust this downward if significant volumes of RECs will not be available because they have been sold into other markets64. In practice, this tier works as a backstop on REC prices for 6 of New Hampshire’s biomass plants, in the event they are unable to secure sufficient REC prices in other markets.

3.2.2.6 RPS Requirements by States with Biomass Qualification

As discussed above, several states in New England allow biomass to participate in their Renewable Portfolio Standard, and Maine biomass plants currently sell RECs to markets in Maine, Connecticut and Rhode Island. The table below shows the total amount of electricity that must be RPS qualified, by state, for the REC tiers of interest.

Table 10. Renewable Portfolio Standard Requirements by State

Connecticut Rhode Island New Hampshire New Hampshire Maine Class 1 Class 1 Class 3 Class 1 2017 15.5% 11.5% 7.8% 8% 10% 2018 17.0% 13.0% 8.7% 8% 10% 2019 19.5% 14.5% 9.6% 8% 10% 2020 20.0% 16.0% 10.5% 8% 10%

63 New Hampshire Public Utilities Commission. Electric Renewable Portfolio Standard. 64 New Hampshire Public Utilities Commission. Electric Renewable Portfolio Standard. See, for example, Order No. 25,844 dated December 2, 2015 under Docket No. 15-477, which changed the 2016 Class 3 obligation from 8.0% to 0.5%.

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3.2.3 COMBINED HEAT AND POWER Combined heat and power (CHP) refers to units that produce both electricity, either for sale or internal use, and heat that is put to a useful purpose. Maine forest industries, particularly but not exclusively paper mills, have long utilized CHP to produce electricity and process heat for manufacturing. Depending upon the heat load and its nature (seasonality, time of day, etc.), biomass CHP can be extremely efficient, as high as 75% efficiency.65

Stand-alone biomass facilities were constructed without heat hosts in mind. However, there have been multiple efforts in Maine and New England to co-locate large heat users (as well as heat and electricity users) adjacent to existing wood-fired power plants. Having a large consumer of heat (either steam or hot water) would provide an additional revenue source for a biomass plant at almost no incremental cost, and would provide additional revenue to a facility, helping its economic position. These efforts have focused on aquaculture, greenhouses, breweries and distilleries, wood pellet manufacturing, and buildings hosting large numbers of internet servers. To date, none of these efforts have been successful, in Maine or elsewhere in New England.

There are a number of possible explanations for this, including:

- Developers of new heat-using facilities want to be assured of the longevity of the company providing them with steam or hot water, a critical input to their process. The age of the existing stand-alone biomass facilities, combined with the history of challenging economics for these facilities (as well as periods of shut-down for some facilities), may concern firms looking to make a long-term investment.

- Biomass plants may have lacked motivation to pursue new opportunities. When the plants began operations, they had long-term power purchase agreements that assured profitability. More recently, the combination of electricity prices and REC payments have generally been sufficient to support operations. Absent a compelling need to pursue new revenue streams, some plants may not have made locating new heat users a priority.

- Electricity policy may be a deterrent to co-location in some instances. Many large steam users are also significant electricity users, and could benefit from a direct sale of power from the biomass plant. However, the rules around selling power to unaffiliated firms, particularly those on separate properties, can be complicated and generally discourage such bilateral sales. Additionally, any power that was sold without accessing the electricity grid - potentially benefitting both the seller and the buyer – would not be eligible for RECs in any state other than Maine (because that electricity was not “deliverable” to another state), potentially limiting REC revenue from the biomass plant.

65 Manomet Center for Conservation Science, 2010, Biomass Sustainability and Carbon Policy Study, 182 p.

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- Facilities accessing electricity directly from a biomass plant would need to plan for power supply when the biomass plant is not operational. Such plans could include not operating when power is unavailable, purchasing an interconnection and backup service from the local utility, or installing some type of backup generation. The economics of these (or other) options will vary on a case- by-case basis, but in some cases may diminish any potential savings for a facility.

Maine does have two biomass combined heat and power projects under development at forest industries. After receiving power purchase agreements through the Community-Based Renewable Energy Pilot Program, biomass combined heat and power projects are now in development at forest industries in Athens (Maine Woods Pellets) and Searsmont (Robbins Lumber). Both of these facilities received long-term contracts, at above-market rates.

- The project located at Maine Woods Pellets, Athens Energy, is 7.1 MW, with a 20-year power purchase agreement at $0.099 per KWh ($99 per MWh). The facility will be able to generate and sell RECs, and is expected to utilize the heat for drying of wood as part of the pellet manufacturing process.66

- The project located at Robbins Lumber, Georges River Energy, is 7.5 MW, with a 20-year power purchase agreement at $0.099 per KWh ($99 per MWh). The facility will be able to generate and sell RECs, and is expected to utilize the heat for drying of wood in kilns, as well as space heating.67

These long-term power-purchase agreements help the firms get financing for their energy projects, and help the economics and long-term viability of these particular forest industries. However, as discussed earlier, $99 per MWh is certainly above-market today, and above expected market costs. These costs will be shouldered by Maine ratepayers.68

66 MAINE PUBLIC UTILITIES COMMISSION. Request for Proposals for Community-Based Renewable Energy Projects. ORDER APPROVING LONGTERM CONTRACTS. Docket No. 2013-00207. August 27, 2013. 67 MAINE PUBLIC UTILITIES COMMISSION. Request for Proposals for Community-Based Renewable Energy Projects. ORDER APPROVING LONGTERM CONTRACTS, PART II. Docket No. 2015-00299. January 29, 2016. 68 Of note, the Community-Based Renewable Energy Projects approved about twenty projects, most of which are small-scale wind, solar or hydroelectric generation, and do not provide the ongoing economic benefit to the community through continuous fuel purchases that biomass does.

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3.2.4 EMERGING MARKETS While the significant focus of this work is on on-state markets for large volumes of biomass, it is important to note that there are proposed markets – either for new bio-products or for export of biomass chips to offshore markets.

For bio-products, Maine has a history of seeking to develop new uses of wood. While there have been efforts to produce biofuels and bio-products in Maine since at least World War 2, recent efforts include private-sector efforts at the pulp mill in Old Town and work by the University of Maine on their Forest Bio- products Research Institute69. These efforts have not yet produced commercial success, but in the long- term may provide significant new markets for biomass or other low-grade wood.

Researchers have consistently demonstrated that any product that can be made from oil can also be made from wood – by breaking the cells down into their components and reconfiguring them into new products. Many of these technologies have not advanced much beyond the lab and pilot scale, and very few are proven over any meaningful period of time at the commercial scale. Additionally, many projects that can be pursed from a technical perspective may still face economic challenges.

The stage of development of these technologies is both an opportunity and a challenge for Maine. Because we have the wood, and the infrastructure to harvest it, the state is well positioned to be leaders in emerging fields. However, the lack of commercial success suggests that there will be many projects proposed, not all of which are financially viable. Even for those projects that do go forward, there will be failures – as there are with all developing technologies. Maine should proceed, but do so cautiously and incrementally, when becoming involved in such projects.

In addition to biofuels, there are at least two efforts underway to ship large volumes of low-grade wood including biomass, to markets overseas. Separate developers are working on projects at Eastport and Searsport, with shipments expected as early as mid-2017 in one case. It is important to note that these projects have shipped no wood at this point, and are not yet proven markets. Additionally, given the limited capital investment needed for export markets, as well as the likelihood that offshore buyers have multiple supply sources, it is hard to view export of chips as long-term, secure markets. While they may provide meaningful markets in the short-term, and serve as important outlets for low-grade wood, it is not certain that such markets are reliable over a long period of time.

Finally, efforts are underway to develop more efficient biomass electric systems. At least one firm claims to have engineered a system that achieves nearly double the conversion efficiency of existing stand-alone biomass units. This firm does not yet have a working prototype, and commercialization of the system is at best several years in the future.

69 http://forestbioproducts.umaine.edu/

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Appendix A – Stakeholder Outreach

Stakeholder engagement included interviews with key market experts and industry leaders, including loggers, landowners, biomass plant operators, and large biomass energy consumers. It additionally included a detailed survey – sent to over 250 market and industry stakeholders (35% response rate) – which sought input to better characterize barriers, opportunities, and potential policy and program options. A complete discussion of the stakeholder interviews and survey follows.

Note: Question was posed as “select all that apply”; number of responses will exceed total number of survey respondents

45 41 40

35 31 30

25 22 20 15 15 11 12 9 10 7 Respondents indicating affiliation indicating Respondents 5

0 Logger Landowner Forest industry Forester Biomass power Mill operator Biomass Other or CHP fuel/equipment operator manufacturer or distributor

Figure 27. Survey respondent affiliations with the Maine forest industry

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Appendix B - Stakeholder Interviews

In order to get stakeholder perspectives as the work on this report began and progressed, the team reached out to and conducted directed interviews with a number of stakeholders in the biomass industry, representing a range of positions and perspectives. The purpose of these interviews was to assure that we understood a range of perspectives on biomass, and to help direct or focus further research. Individuals who participated in scheduled interviews include:

• Dana Doran, Professional Logging Contractors of Maine • Ryan McAvoy, SAPPI • Christopher (Kip) Nichols, Seven Islands Lands Company • Brian Sourers, Treeline, Inc. • Patrick Strauch, Maine Forest Products Council • Doug Denico & Don Mansius, Maine Forest Service • John Cashwell, BBC Lands • Gus Libby, Colby College • Tom Doak, Maine Woodland Owners • James and Alden Robbins, Robbins Lumber • Rosaire Pelletier, Forest Industry Advisor to Governor LePage • Bob Cleaves, Biomass Power Association • Tom Doak, ReEnergy Holdings • Kimberly and Fahim Samaha, Stored Solar

Additionally, the authors attended and participated in a number of Maine and New England forest industry meetings, and invited participants there to discuss biomass energy issues with us (one-on-one). These meetings included:

‐ Maine Forest Products Council, Manufacturing Committee ‐ Maine Pellet Fuels Association ‐ Forest Resources Association, Northeast Region Forest Forums ‐ Northeast Region, Council on Forest Engineering ‐ New England Lumbermen’s Association

In total, the authors had direct conversations with about 40 individuals who are stakeholders in Maine’s biomass energy industry. A complete list of questions used in the interview process can be found in Appendix B. Answers were transcribed, but individuals were told that their statements would be presented only in aggregate, and in ways that did not connect a statement to an individual. This was done to achieve the greatest level of candor from those being interviewed.

In addition to these direct interviews, a large number of stakeholders were invited to share their thoughts and perspectives via an online survey. Results of that survey can be found in Appendix C.

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The following contains excerpts of answers to selected interview questions, shared to provide a sample of the thoughts and perspectives among stakeholders in Maine’s forest industry. This is not a complete listing of all answers provided, but all information received during interviews was considered and used to inform the authors.

Describe your firm’s use of biomass / reliance on biomass markets?

‐ Many loggers have invested heavily in harvesting systems for whole tree utilization. This was market-driven, and allows for improved silviculture. These investments are large – chippers start at $500,00 ‐ For many Maine loggers, 25-30% of their business is tied to chipped biomass. ‐ On the land management side, it is moderately important. Allows for thinnings, entry into second growth, etc. Particularly important given loss of markets for spruce / fir pulpwood. ‐ On the manufacturing (sawmill) side, VERY important. We need to move our residuals - critical to our operations. In today's market we are losing money, and that is dragging us down, but we are operating. Alternative disposal methods (teepee burners, landfill) are environmentally inferior to biomass, and in many cases not permitted. ‐ Landowners - market is a valuable silvicultural tool, but in reality are more interested in keeping sawmills viable, and making certain they can move their residues. ‐ Sawmills - we need to define the magnitude of the problem, the need to move residues. Some have on-site boilers. Others seeking to control their own energy / residues destiny, such as Robbins Lumber with new CHP system. ‐ Pulp & paper mills - self-contained, often have the ability to fuel switch (and do, based upon price and other factors). Need to deal with residues, but generally have self-generation options. ‐ Loggers - they need the market, and can only make this work if the distance is short. Not a big money maker, but a big volume piece. o In the big picture, it matters. Allows contractors to value-add on the margins. o allows utilization of waste o best utilization of iron and people, particularly now that there are long hauls to many paper mills - can also get in a short haul to a local biomass market, and get full use of crew and truck (reference to DOT trucking Hours of Service rules) ‐ Small margin, but key for cash flow. ‐ In all, helps keep the infrastructure healthy. ‐ Smaller timberland owners certainly access the market, but not wildly important to them as an economic issue. ‐ For landowners, from a $ perspective, a tops and branches is a "nice to have", not a "must have" ‐ As biomass is becoming the de facto market for softwood pulpwood (white pine, hemlock, spruce- fir) it is becoming more important to allow for thinnings / appropriate forest management.

Should / why should the State of Maine care about supporting biomass markets.

• Jobs, jobs, jobs. At the mills and in the woods / trucking.

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• If we lose the biomass market, very possible that some sawmills will shut down. • Importantly, these jobs are in rural parts of Maine, where job options are limited. • Provides reduced energy volatility for local economies operating in a global economy. • A market for biomass is really key to managing forests, and has become more important as we have lost pulp mills. • There is a huge cost to Maine for not managing forests, but one of the issues is the bill doesn't come due for years or decades [in lost value of logs]. • Having markets for biomass allows us to improve forestry by leaps and bounds. • We need realistic objectives - this isn't something to subsidize forever and at any volume. • We need to differentiate between mill residuals and in-woods biomass, and figure out what is most important to address. • We should never has spent so much time on wind energy issues, and instead focused on getting renewable energy out of the forests and creating jobs. • Maine should care, but needs to be strategic - there is a danger of subsiding a low-value market at the expense of pursuing other opportunities. • We have to take care of ourselves for all types of energy - electric, thermal, etc. Maine should think of itself as an energy island.

“Is there anything else you want to tell me?”

• If we prop up the biomass markets, we are propping up those contractors set up to service the biomass markets - and these tend to be the larger contractors. • We then place some smaller contractors - very important to smaller landowners - at a competitive disadvantage. Oftentimes, the large equipment just isn't right for smaller lots, particularly around homes and people. • We need a diversity of equipment and contractors to serve a diverse market that includes small landowners. • The only way Maine biomass survives is to have strong energy markets, and those are in conflict with our efforts to deal with electricity prices. Finally, we can't save the logging community with biomass. We need a more comprehensive conversation than that. • This is a big deal at sawmills - if they can't produce, we all have issues. DEP regulates how much residue can be held on site (thinks is 3 acres, unconfirmed > comes out of storage of huge sawdust piles in the late 80s). Biomass was an emergency relief valve for these mills, now MUCH more important with loss of so much pulp market, particularly for softwood. • Biomass is a very small piece of the economics of the entire forest industry. We need to find and encourage markets that are higher value. • We have to find ways to encourage markets for low-grade wood. Maine needs to think of these markets as tools to encourage better forest management, and use to encourage log quality (years out). • The opportunities are not in keeping what we have, except as a bridge to something. We need new technologies that can stand on their own.

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Appendix C – Stakeholder Survey Questions

Questions for Maine Stakeholder Interviews (round 1) v2 Name: Company: Date: By:

1. What does your firm or organization do? What’s your role at the organization? 2. Describe your firm’s use of biomass / reliance on biomass markets? Do you distinguish between sources of biomass? Kinds of biomass (pellets, chips, other)? Or biomass applications (heat, power, both)? a. As much numerical as possible 3. How do electricity prices impact your business / operations? 4. How would changes in biomass markets impact your operations? a. Increase in available markets b. Decrease in available markets 5. What major market barriers and drivers that currently impact the market for biomass in Maine? Which barriers or drivers are most significant to the health of market today? a. Consider national/state/local policies, supply chain, energy prices, international markets (or other macro‐economic influences), local permitting and regulations, general marketing and awareness, financing and access to capital, etc. 6. Do you see future threats – or opportunities – to the long‐term sustainability/growth of biomass markets in Maine? What is the potential for biomass market development in Maine? 7. Are you aware of policies – In Maine or elsewhere – that you believe do or could benefit Maine’s biomass markets? 8. Should / why should the State of Maine care about supporting biomass markets. 9. Do you have ideas on ways that biomass markets can be stabilized and supported in Maine? a. Ideas for private sector action b. Ideas for state action c. Ideas for regional / federal action 10. Is there anything else you want to tell me?

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Appendix D – Stakeholder Survey Results

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About the Authors Innovative Natural Resource Solutions LLC Founded in 1994, Innovative Natural Resource Solutions LLC (INRS) is a full-service consulting firm specializing in the forest industry, natural resource conservation, and renewable energy. The firm has extensive experience in evaluating and developing markets for low- grade wood, including biomass. With offices in Maine and New Hampshire, the firm has worked with a range of parties – private and public – to evaluate opportunities for biomass markets, and to develop and finance these markets. INRS has been directly involved in the evaluation, purchase, sale, financing or development of biomass markets (electric and thermal) totaling more than 6 million green tons per year, and is well versed in the policies and economics that support and hinder these markets. INRS has been involved in the development of new biomass electric facilities in New Hampshire, Virginia, New York and Indiana. The firm has worked on the evaluation of proposed or existing biomass energy projects in every New England state, as well as states throughout the country.

Meister Consultants Group, Inc.

Meister Consultants Group, Inc. (MCG) is an international consulting firm specializing in renewable energy policy, program development, economic and market analysis, and stakeholder engagement and facilitation. MCG works with clients across the globe, including multilateral finance institutions; federal, state and local governments; non- profit organizations and philanthropic foundations; and private sector and industry leaders. Over the past decade, MCG has supported state and local governments develop strategies, policies, and programs to accelerate the deployment of clean energy technologies (including biomass heating and electric).

The analysis and information in this report is based upon our best professional judgement and on sources of information we believe to be reliable. However, no representation or warrantee is made by Innovative Natural Resource Solutions LLC or Meister Consultants Group, Inc. as to the accuracy or completeness of any of the information contained herein. Nothing in this report is, or should be relied upon as, a promise or representation as to the future.

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