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Michigan Innovations: Permitting Incentives, an Innovative Approach to Encourage the Use of Alternative Energy Technology (AET)

Michigan Department of Environmental Quality
Executive Divisio
Ms. Wendy Fitzner
525 West Allegan
P.O. Box 30457
Lansing, MI 48909-7957
Phone: 517-373-8798
Fax: 517-241-0858

Is project being implemented in cooperation with or funded by another federal program?
Currently, no additional federal funds have been committed to this project.

What types, if any, regulatory flexibility are needed?
The research project will include, among other analyses, an assessment and determination of what types of air quality permitting flexibility would need to be provided through the state or federal regulatory structure. Regulatory flexibility could involve providing additional permit exemptions for certain AET, establishing a general permitting system, or providing greater options for establishing and using Michigan's NOx emission budget.

Director Affirmation
Michigan has recently introduced a major initiative to encourage the adoption of AET. On April 18, 2002, Michigan Governor John Engler unveiled NextEnergy - a comprehensive economic development plan to make Michigan a world leader in the research, development, commercialization, and manufacture of alternative energy technologies. The intent is to make Michigan the friendliest state in the nation for the alternative energy industry. Alternative energy technology will dramatically improve Michigan's and America's energy efficiency and self reliance, and reduce greenhouse gas and smog emissions. This project will provide critical information to this initiative by researching and identifying permitting barriers and developing innovative permitting approaches to accomplish new, cleaner alternative energy technology to Michigan. Through this affirmation, I support the proposal set forth in this grant request.

Russell J. Harding

Summary Budget Information: [REDACTED BY US EPA]

Program Narrative

The Country is on the cusp of a technology revolution in the energy sector. In the not too distant future, a new network of distributed energy generation (DG) will be at the heart of Michigan's industrial operations. AET, such as fuel cells, holds great economic potential and promises to bring clean and efficient energy to our factories and businesses. As AET begins to take the place of conventional internal combustion systems, it ultimately will result in measurable improvement to Michigan's and America's energy self reliance and the reduction of greenhouse gas and smog emissions.

To proactively meet and encourage the demand for DG and AET, Governor Engler has committed to develop and seek tax incentives for a NextEnergy research center and industrial cluster, as well as the establishment of a NextEnergy Authority.www.nextenergy.org exit EPA

Cognizant of the importance of considering regulatory requirements in conjunction with NextEnergy, a Directors Task Force on Alternative Energy and a permitting subgroup have also been established, and consist of representatives from the Michigan Department of Environmental Quality (MDEQ), Michigan Consumer and Industry Services (CIS), Michigan Public Service Commission (MPSC), Michigan Department of Transportation (MDOT) and Michigan Economic Development Corporation (MEDC). This project will provide recommendations to the task force on environmental permitting requirements and innovative approaches to meet them. It will identify, assess, and recommend air quality permitting incentives that would facilitate or reduce regulatory barriers to the adoption and use of AET systems, leading to a reduction in greenhouse and smog producing pollutants in Michigan.

The project would contract for a study that would include the following elements:

1) Research and assess the differences in:

a. Emissions (NOx, CO2, SOx, CO, etc), and efficiencies from the application of stationary AET systems, such as fuel cells, micro turbines, and combined cycle turbines compared to conventional stationary electric generating devices.

b. Performance efficiencies due to the choices of fuels and ancillary sub-equipment.

2) Assessment of the existing regulatory structure to determine what permitting requirements currently apply and what opportunities in the existing system can be marketed or promoted as incentives to encourage the adoption of AET at stationary sources.

3) Recommendations for permitting approaches, including possible rule modifications that would facilitate and encourage the transition to AET. Potential modifications could be to:

a. Provide guidelines for a general permit for AET;

b. Provide additional permitting procedural incentives, such as expedited review, plant-wide applicability limits, etc., to sources that replace existing systems with AET; or

c. Identify a structure that would provide complimentary changes to the emission trading system or use of Michigan's NOx budget to encourage the use of AET.

MDEQ staff will manage this project, which will be accomplished by contract, and provide assistance in the interpretation and implementation of the permitting and state implementation planning (SIP) systems in the state. The end result of this project would be measurable, increased activity in the energy sector, seeking opportunities to use AET as replacements to conventional internal combustion systems. It would also encourage creative applications of AET, such as its use in control technologies. Efficient permitting approaches, along with increased use of offsets or emission reduction credits, will allow earlier and more wide-spread implementation of AET, driving air emissions and enhancing the state's ability to sustain its Air Ambient Quality Standards (NAAQS) attainment status.

Program Criteria

1) Target Priority Environmental Area

Alternative energy, such as fuel cell technology, is receiving increased attention, due in part to its potential to drastically reduce greenhouse gases--CO2 and NOx, and minimize the creation of smog inducing compounds such as NOx, as it replaces conventional combustion devices. (It is estimated that electricity generation accounts for nearly a quarter of all NOx and two-thirds of all SOx emissions nationally.) By offering incentives for AET through the state's permitting system, it is postulated that the demand for AET will increase, and air quality improvements will be achieved at a quicker rate than through the normal regulatory structure. The use of AET would also offer additional opportunities to address NOx reduction requirements, as budgets continue to be ratcheted down.

The technology also has the potential for creative applications, beyond the production of electricity and power. For example, the MPSC has recently funded a $1.3 million study to apply fuel cells as an alternative to abatement equipment for a paint line. It is proposed that the equipment would use the volatile organic compounds (VOCs) from the line as fuel, resulting in destruction of the emissions, while creating residual pollution-free energy that would power their operation. The result would be fewer emissions from the paint line, from the control device itself, and from their power plant. Permitting innovation of AET could revolutionize the use of traditional abatement systems. The synergistic potential of AET would have a profound effect on reducing the state's (and country's) global warming and smog contribution.

2) Use of Incentives as a Tool - Can be New or Expansion of an Incentive to Specified Permitting Program(s)

A. How is the proposed tool unique?

The proposed structure is unique because it will consider regulatory issues simultaneously, as a technology is introduced, rather than trying to fit the system to the technology after the fact. Our current regulatory system is not designed to account for new technologies, and this can be counterproductive in encouraging innovative approaches to reduce air pollution. Additionally, the project study would allow the state to proactively address these issues in a comprehensive and cooperative manner, in conjunction with the NextEnergy effort. By identifying permit innovation opportunities through the NextEnergy initiative, it will receive the support of the state's economic, environmental, and utility experts, which would enhance its chance for success.

B. How does the Program Build on Lessons Learned from Previous Innovation Projects?

Innovation projects that are most successful are those that try to build in a rational, protective, environmental regulatory system. By conducting the study in conjunction with the state's NextEnergy program, replication of the innovating permitting process would have the highest level of support and an internal conduit for diffusion of its findings to others. The project will work under the direction of the Task Force on Alternative Energy by providing updates and briefings and a report containing recommendations. The task force includes participants from the state's economic, environmental, and industrial services agencies and, thus, will assure early support and backing from multiple state interests. The report will provide a series of recommendations that will be directly deployable by the MDEQ, and contain the background support material necessary to obtain any recommended regulatory allowances. Since the project will also be conducted in conjunction with the state's NextEnergy initiative, an infrastructure will be in place to measure success achieved.

C. How will the State Develop and Apply the Tool to Demonstrate Success?

The state will implement the recommendations through the consensus building efforts of the Task Force on Alternative Energy. Recommendations will have the support of the state's economic, environmental, industrial, and academic leaders, who make up the task force. Success would be determined by the ability of the recommendations to be adopted into the existing regulatory system and an assessment of those taking advantage of the permitting incentives. Ultimately, monitored improvements in the state's air quality and the ability of the state to remain in attainment of the NAAQS would attest to the success of a regulatory system to encourage the utilization of AET.

3) Technology Transfer -- Could the tool be replicated by others?

This study has an excellent opportunity for being transferable to other states or nationally. The documentation of AET technologies and emissions reduction potential, and the assessment of permitting options and incentives, are timely as states throughout the country will be assessing their regulatory structures to identify barriers to a technology that could significantly affect our nation's air quality. The program recommendations could be encouraged through the National Governors' Associations, Environmental Council of the States (ECOs), and other relevant channels, and potentially serve as a national pilot.

A. Potential for Widespread Application or use of Tool (next generation).

Consideration of AET, such as fuel cell technology, with its widespread applications, is expected to grow exponentially as the technology is further researched, tested, and commercialized. Understanding the permitting issues and potential incentives would have wide-scale application as AET becomes a significant source of energy. The potential for new applications of AET, such as its use as abatement equipment to convert VOCs from waste to feedstock, would have an even greater affect on permitting of sources of pollution. The capture and control efficiencies, as well as the cost and effectiveness of such a system, could redefine best available control technology.

B. Use to Promote Organizational System or Cultural Change as a "Way of Doing Business."

The study would be unique in that it would work in conjunction and with the support of the NextEnergy initiative and the Task Force on Alternative Energy, which consists of leaders from the MDEQ, MEDC, MDOT, MPSC, and CIS, as well as those from the energy industry and academia. This structure furthers the proactive element of the project by addressing a new and upcoming technology and by generating multi-sector and media support in its early stages. The data and recommendations for enhancements to the permitting/regulatory system would be consistent with the direction and vision of all these agencies. This system could serve as a new method of addressing other new technologies that are on the cusp of infusion.

4) Guaranteeing Measures and Accountability

A. What is the plan for measuring and evaluating how well the project meets its goals and objectives?

The task force will directly oversee the study establishing clear project goals and contract deliverables. The primary goal is to develop an air permitting system that is compatible with the adoption of AET, based on its emission reduction potential. This will result in measurable reductions in smog and greenhouse gases. Developing a more flexible permitting process will accommodate innovative applications in AET, such as the proposal to reduce VOCs by using these as a fuel cell feedstock. Progress on the project will be assured by the commitment of top management representing the state departments participating in the task force. The study contract will have milestone dates and required deliverables, including frequent meetings with MDEQ staff to ensure that qualitative and quantitative standards are met. It is anticipated that this will be an 18-month project beginning in January 2003. The contract for the study will be developed in the first quarter and awarded early in the second quarter (April 2003). The research project will be accomplished over a 12-month period
(April 2003-March 2004), followed by a discussion and consensus of final recommendations by July 2004. The results of the project will be communicated through news media, the internet, at professional and trade association conferences, and within state government.

B. What are the Measures of Success for the Short -term?

The initial measures of success are the completion of a timely, successful study that quantifies emissions savings and makes feasible recommendations on permitting changes to accommodate the adoption of AET. This will occur 18 months after the grant is awarded. Once the recommendations are issued, it will take 6-8 months to go through the process of making changes in the rules necessary to provide permit flexibility or to make other regulatory and procedural adjustments for air permits. Within three years of receipt of the grant, initial applications of AET technology will be permitted for operation.

C. What are the Measures of Success for the Long-term?

In the long-term, the success would be measured by the number of operations actually taking advantage of the permitting incentives or new options available for AET, the increased use of offsets or emission reduction credits, the reduction in greenhouse gases from Michigan's inventory, and ultimately, monitored improvements to the state's ability to sustain its attainment status of the NAAQS. Proposed Level of Funding Requested


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