BOARD MEETING DATE: April 5, 2002
AGENDA NO. 24

First Annual Program Review for Rule 2020 – RECLAIM Reserve

SYNOPSIS: 

Rule 2020 – RECLAIM Reserve, requires an annual report to the Board on several implementation aspects of the rule. The report includes specifics on projects under the Pilot Credit Generation Rules that provide emission reductions for the RECLAIM AQIP and Mitigation Fee Program. It also includes an evaluation of the Rule 2020 participation fee and information on credits received and used for the RECLAIM AQIP, Mitigation Fee Program, and the State Emission Reduction Credit Bank. This report, in conjunction with the Status Report on Mobile Source Credit Generation Rules and Chapter 3 of the Annual RECLAIM Audit Report for 2000 Compliance Year presented to the Board on March 1, 2002, fully satisfies the requirements of Rule 2020.

COMMITTEES: 

Stationary Source and Mobile Source, March 22, 2002, Reviewed

RECOMMENDED ACTION:

Receive and file.

Barry R. Wallerstein, D.Env.
Executive Officer

Executive Summary

Rule 2020 – RECLAIM Reserve, was adopted as part of the RECLAIM program changes in May 2001 to address California energy issues and the rapid rise in NOx RECLAIM Trading Credit (RTCs) prices. The rule, along with five credit generation rules, set up new credit programs to assist certain RECLAIM facilities in complying with their annual allocations. Rule 2020 requires an annual progress report to the Board on these programs. This report, along with the Status Report on Mobile Source Credit Generation Rules and Chapter 3 of the Annual RECLAIM Audit Report for 2000 Compliance Year presented to the Board on March 1, 2002, fulfills that requirement.

The RECLAIM Air Quality Investment Program (AQIP) was designed to help new¹ and small emitting RECLAIM facilities comply with their allocations. Mobile or area source credits generated under the pilot credit generation rules will be converted to RTCs for use by these facilities. The Mitigation Fee Program was designed to help power producers offset their excess NOx emissions due to the California energy crisis. Since May 2001, two marine vessel repowering projects have been undertaken to generate emission reductions for the RECLAIM AQIP and Mitigation Fee Program. The initial projects are nearing completion. Emission reductions will be generated over several years with the first reductions expected to be available as early as spring 2002. Emission reductions under both programs can be purchased for $7.50 per pound while the cost-effectiveness for both projects is below that cost. Therefore, no change in the RECLAIM Reserve participation fee is recommended at this time.

¹ A new facility is defined as any facility which has received all District Permits to Construct on or after October 15, 1993 (Rule 2000(c)(51)).

The State Emission Reduction Credit Bank was established by two of Governor Davis’ Executive Orders in early 2001 to provide offsets for new or expanded natural gas peaking capacity at power plants. These emission reductions were obtainable until September 30, 2001. Three facilities used this program. Two were RECLAIM facilities and one was non-RECLAIM. A total of 55 pounds per day of PM10 and 1,081 pound per day of NOx emission reductions were obtained from the state bank.

Background

Rule 2020 was adopted in May 2001 as part of the amendments to the RECLAIM program undertaken to address the rapid rise in NOx RTCs and California energy issues. It set up the procedures and fees for generators and users of NOx emission reductions for the RECLAIM AQIP, the Mitigation Fee Program, and natural gas turbine power plant peaking sources. Five pilot credit generation rules were also adopted at that time to generate NOx emission reductions for the RECLAIM Reserve. They include Rules 1612.1 – Mobile Source Credit Generation Pilot Program, 1631 – Pilot Credit Generation Program for Marine Vessels, 1632 – Pilot Credit Generation Program for Hotelling Operations, 1633 – Pilot Credit Generation Program for Truck/Trailer Refrigeration Units, and 2507 – Pilot Credit Generation Program for Agricultural Pumps which have been approved by EPA for inclusion in the State Implementation Plan. A sixth rule, Rule 1634 – Pilot Credit Generation Program for Truck Stops, adopted in 2001, has not yet been approved by EPA. Rule 2020 requires an annual report to the Board including:

• The amount of NOx emission reductions that have been generated over the past 12 months, that have been obtained, and that remain in the Reserve;
• The number and types of facilities, including location, that have participated in the RECLAIM AQIP and Mitigation Fee Program;
• A description of the types of emission reduction control strategy projects that have been or are being implemented under the Pilot Credit Generation rules;
• The location of the emission reduction control strategy projects;
• An evaluation of the participation fee; and
• For the State Emission Reduction Credit Bank:
  - The amount of credits converted to RTCs;
  - The amount of credits used at non-RECLAIM facilities; and
  - The number of gas turbines, including location, capacity, date of
     operation, and projected and actual emissions, if available.

The March 21, 2002 Status Report on Mobile Source Credit Generation Rules and Chapter 3 of the Annual RECLAIM Audit Report for 2000 Compliance Year partially fulfilled these requirements. All information from the two reports has been included and updated in this report.

NOx Emission Reductions

During the past 12 months two projects have been funded to generate credits under Rule 1631 – Mobile Source Credit Generation Pilot Program for Marine Vessels, but no emission reductions have yet been obtained for the RECLAIM Reserve. These credits will be generated over time based on fuel usage and the first of the credits will be available as early as spring 2002. Therefore, the current balance in the Reserve is zero.

Facilities Participating in RECLAIM AQIP and the Mitigation Fee Program

RECLAIM AQIP is designed to convert mobile source or area source emission reductions from approved projects to RTCs. The RTCs can then be purchased by qualified facilities to offset emissions in excess of their annual allocations. Facilities allowed to use RECLAIM AQIP include new or low emitters (i.e., 6 tons per year or less of NOx) that meet certain criteria. RECLAIM AQIP requires pre-funding and emission reductions are not yet available for the program. Therefore, at this time, there are no participants. Some emission reductions from current projects will be available as early as spring 2002.

In contrast to the RECLAIM AQIP, the Mitigation Fee Program does not require pre-funding. Power producing facilities pay $7.50 per pound for emission reductions to offset excess emissions. Since May 2001, five facilities have participated in the Mitigation Fee Program. The total amount collected under the Rule 2020 Mitigation Fee Program is approximately $14.7 million. Additional money has been collected under the Mitigation Fee Program established by Governor Davis’ Executive Order No. D-24-01 dated January 17, 2001. Table I summarizes the facilities that paid into the mitigation fee during 2001.

Table I
Rule 2020 Mitigation Fee Program Participants in 2001
 

Past and Current Emission Reduction Control Strategies

Two emission reduction control strategies have been funded under Rule 1631. Both projects are repowering marine vessels. One consists of repowering three vessels for the RECLAIM AQIP, with total projected emission reductions of 640 tons. The second project’s emission reductions will be included in the Mitigation Fee Program and consists of repowering 33 vessels with projected total emission reductions of 610 tons. These emission reductions have been revised since the March 2002 Status Report on Mobile Source Credit Generation Rules due to additional information from source testing of the engines and moving one of the vessels from the Mitigation Fee Project to the RECLAIM AQIP project. The emission reductions are generated over time and calculated based on the fuel usage for the boats. Most of the repowering projects have been completed and the first emission reductions may be available as early as spring 2002 through June 30, 2005. All marine vessels for the projects are located at the Ports of Long Beach and Los Angeles. Additional projects will be funded in the near future to use the additional money collected under the Mitigation Fee Program.

To date, no projects have been funded under the other pilot rules.

Evaluation of the Participation Fee

The current participation fee for the RECLAIM Reserve is $7.50 per pound of emission reductions. The projects undertaken so far are below $7.50 per pound. However, projects in the future are likely to be more expensive. Therefore, it is recommended that the participation fee not be changed at this time.

State Emission Reduction Credit Bank

The State Emission Reduction Credit Bank was designated for use for new or increased gas turbine peaking units. Emission reductions available from the state bank were available for use for three years. They were obtainable until September 30, 2001 and are valid until November 1, 2003. The entire inventory of State Emission Reduction Credits applied to permitting in the AQMD was 55 pounds per day of PM₁₀ and 1,081 pounds per day of NOx emission reductions. Of those, 761 pounds per day of NOx credits were used at RECLAIM facilities, both located in Colton. One non-RECLAIM used the balance of 55 pounds per day of PM₁₀ and 319 pounds per day of NOx.

Actual emissions are not yet available for these projects. The projected emissions in the table represent the maximum potential to emit for the projects. Peaking units operate only when required by the state electricity grid. In recent months, the demand for electricity from the peaking units has been far less than it was during the energy crisis in the summer of 2000, so actual emissions are expected to be significantly less than the potential to emit. Table II summarizes the distribution of the credits to the gas peaking turbine projects under this program in 2001.

Table II
State Emission Reduction Credit Bank Activity in 2001
  

Notes: Use of State Emission Reductions requires a 1.2 to 1.0 offset ratio. The Palm Springs facility used a combination of purchased ERCs, Priority Reserve credits, and State bank credits to offset their PM10 emissions. They used 319 lb/day available from the State bank to offset their NOx emissions and were required only to offset emissions for the partial year they operated in 2001.

Recommendations

Receive and file this report in conjunction with the March 2002 Status Report on Mobile Source Credit Generation Rules and Annual RECLAIM Audit Report for 2000 Compliance Year. No change in the RECLAIM Reserve participation fee is recommended at this time. Subsequent annual program reviews for Rule 2020 should be incorporated as part of the Annual RECLAIM Audit.

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