By Sandy Beauregard, Director of Sustainability Services and Catherine Nisbet, Associate Manager of Analytics
As states across the U.S. adopt ambitious climate goals, the Clean Heat Standard (CHS) has emerged as a vital policy tool aimed at reducing greenhouse gas emissions in the heating sector. A CHS sets performance standards that obligate utilities and fossil fuel suppliers to offer increasing levels of low emission heating services, resulting in a gradual decrease in emissions. Compliance is typically measured in metric tons of carbon dioxide equivalent (MTCO2e).
The CHS is often compared to a Renewable Portfolio Standard (RPS), a performance standard that requires electric load serving entities to provide an increasing amount of renewable, efficient, or low carbon electricity sources to end users each year, with the end goal of decarbonizing the electric sector. In contrast, a Clean Heat Standard targets the decarbonization of the thermal sector. As energy advisors, we often focus on future costs and opportunities. Both CHS and RPS share a common theme: consumers pay higher energy costs upfront but have the potential to receive financial incentives if they reduce carbon emissions.
Colorado has adopted a Clean Heat Standard, and several other states have considered or are in the process of implementing the policy. The Massachusetts Department of Environmental Protection (MassDEP) is expected to propose draft regulation for a Clean Heat Standard later this year and the Vermont Legislature is set to vote on clean heat regulations in January 2025.
One key element of the programs proposed in Massachusetts and Vermont is the creation of a market for the energy generated from electrified thermal technologies. If this proposed program is adopted, the thermal energy provided by the clean heating systems could be eligible for participation in this new market. The energy could be traded in the form of a clean heat credit; in Massachusetts, this is like the way Alternative Energy Credits (AECs) can be monetized through the existing market created by the Alternative Energy Portfolio Standard (APS). The APS is a performance standard that was created to complement the state’s Renewable Portfolio Standard and incentivizes combined heat and power technologies. Obligated parties use AECs, either generated by their own assets or purchased from a third party, to comply with APS requirements.
While Clean Heat Standard program rules vary, all are focused on reducing carbon emissions in the heating sector. As progress is made toward renewable electricity goals, we expect more states to shift focus toward heating fuels and Scope 1 emissions. Examining the Clean Heat Standards developed in three states can help us understand the common elements of these programs and see how they can be adapted to fit local needs.
Massachusetts
In November 2021, the Massachusetts Commission on Clean Heat was formed by Executive Order 596 to develop a framework for long term greenhouse gas emission reductions from heating fuels in line with the state’s climate goals. Subsequently, the Commission’s final report was published in November 2022 and made several key recommendations on strategies and policies to achieve deep, statewide emission reductions from heating fuels. One of the Commission’s key recommendations was the implementation of a Clean Heat Standard by the Massachusetts Department of Environmental Protection.
Additionally, the Commission recommended that MassDEP consider several important program components in developing a Clean Heat Standard. Mirroring the framework of existing Renewable and Alternative Portfolio Standards, the Commission recommended that utilities and liquid fuel suppliers be obligated parties under the standard. Their final report also emphasized that electrification should be prioritized among eligible clean heat activities. Additional clean heat activities may include weatherization and efficiency projects that enable electrification of the building sector and accelerate progress towards full decarbonization by 2050. Also, the Commission recommended that the state consider replacing the existing Alternative Energy Portfolio Standard (APS) with the CHS, noting that the CHS will be more effective than the APS as a policy to achieve emissions reductions and support electrification.
The Clean Heat Standard Draft Framework, released in fall 2023, proposed initial statewide emission reduction and electrification standards. The Draft Framework sets annual statewide emission reductions equivalent to 1 million metric tons each year from 2026 through 2050, and notes that emissions reductions would be required to be documented each year. A specific number of full electrification residential projects would also be required each year, starting at 20,000 in 2026 and increasing by 20,000 each year to reach 100,000 in 2030. To address equity, 25% of full electrification projects must serve customers eligible for low-income discount electricity rates. Also, the Draft Framework notes that the CHS would include clean heat supported by other programs like the Federal Clean Energy Investment Tax Credit (CEIC) established by the 2022 Inflation Reduction Act.
Obligated parties under this standard would be retail sellers of natural gas, heating oil, propane, and electricity. Electricity seller obligations would be in line with current building electrification programs (i.e., Mass Save) and then increase to ensure viability of the standard as fuel providers' customer base declines.
Compliance with the Clean Heat Standard is proposed to be demonstrated using Clean Heat Credits (CHCs or “checks”). Obligated parties can either generate their own CHCs by implementing clean heat projects themselves or purchase them from third-party providers such as heat pump installers. There are two types of credits under the Clean Heat Standard: full electrification credits and emission reduction credits. Full electrification credits will be generated once for each electrification project and are available for residential installations only. An electrification project will install heat pumps capable of meeting 100% of space heating needs and combustion heating equipment will need to be removed or limited to backup or emergency use only. An early action registration program aims to incentivize completion of full electrification projects before the program regulations are in place by providing these projects with one full electrification and emission reduction credits for the first year of operation.
Emission reduction credits will be generated each year on an ongoing basis. Residential and non-residential emission reduction credit generation differs. Credit generation for non-residential clean heat measures will be based on actual emission reductions, which will be calculated in accordance with Massachusetts’s Department of Energy Resources (MA DOER) or MassDEP greenhouse gas reporting regulations.
Obligated parties can make Alternative Compliance Payments (ACPs) instead of obtaining clean heat credits. The proposed ACP for full electrification credits is $6,000 in 2026, increasing by $1,000 each year up to $10,000 in 2030. The ACP will double for low-income full electrification credits. The proposed ACP for emission reduction compliance is $190/MTCO2e, but this could be revised during program reviews. The ACP revenue will be used to invest in additional clean heat, with all ACP revenue from the low-income carve-out used for low-income full electrification. Obligated parties will be able to fully meet their compliance obligations with ACPs.
A comprehensive Clean Heat Standard regulation is expected from MassDEP in fall 2024.
Vermont
In 2020, the Vermont Legislature enacted the Global Warming Solutions Act which creates legally binding emission reduction requirements of 26% below 2005 levels by 2025, 40% below 1990 levels by 2030, and 80% below 1990 levels by 2040. These requirements are aligned with the Paris Agreement’s goal of limiting global warming to below 2 ˚C. To address the thermal heating sector’s contribution to statewide emissions, the Vermont Legislature passed a clean heat standard in 2022. This bill was overridden by the governor and failed a veto override by one vote. A diverse group of energy professionals and other stakeholders worked to rewrite the bill, addressing affordability concerns for moderate- and low-income Vermonters, adding limitations on the use of renewable natural gas (RNG), and adding a requirement that the proposed rules drafted by the PUC (Public Utilities Commission) be voted on again by the Legislature before going into effect. This new bill, the Affordable Heat Act, was also vetoed by the Governor but the Legislature voted to override his veto. The Vermont PUC has drafted regulations and solicited public comments. The final draft of the regulations will be voted on by the Legislature in January 2025.
Fuel oil is the primary heating fuel in Vermont, utilized by nearly 40% of households. Natural gas service is limited to one utility serving parts of Chittenden, Franklin, and Addison counties in the northwest corner of the state. Approximately 18% of households in Vermont use natural gas as the primary heating fuel. Propane makes up a similar share of household heating. Appropriate for this context where most heating is done with delivered fuels, the proposed clean heat regulations in Vermont would cover the one regulated gas utility and all other entities importing or producing heating fuel for consumption within the State.
Like the proposed clean heat standard in Massachusetts, the Vermont regulations will establish a compliance market with tradeable clean heat credits that can be generated by any entity and sold to an obligated party. Credits will be generated from clean heat measures including weatherization, electrification, and biofuel delivered or installed to end-use customers. Each obligated party will need to retire a specific number of credits each year and can generate the credits themselves by implementing clean heat measures or purchase them from another entity.at least 16% of the credits will need to come from low-income customers and another 16% from moderate-income customers. The proposed Vermont program will also establish one or more default delivery agents, which will be statewide entities capable of providing a number of clean heat measures. Obligated parties will be able to pay a default delivery agent to generate the credits they are required to retire each year.
Colorado
Colorado enacted Senate Bill 21-254 in 2021, requiring regulated gas utilities to develop clean heat plans that would reduce greenhouse gas emissions by 4% by 2025 and 22% by 2030 relative to a 2015 baseline. The requirement applies to all gas distribution utilities that serve more than 90,000 customers in the state. The decision to limit obligated parties under the law to gas distribution utilities reflects Colorado’s thermal energy landscape where 65% of households use natural gas as the primary heating source. The second most common heating source is electricity, utilized by 26% of households, followed by propane at 5% and only 0.1% using fuel oil. Regulating gas distribution utilities covers the majority of thermal energy while reducing program administration and the burden on smaller fuel companies.
Subsequent rulemaking, codified in statute 40-3.2-108, defines the clean heat resources gas distribution utilities can implement to achieve the mandated reductions: energy efficiency, beneficial electrification, clean hydrogen, and recovered methane. To mitigate rate increases and the financial burden on consumers, each clean heat plan is subject to a cost cap equal to 2.5% of annual gas bills for all the gas distribution utilities full-service customers. Plans must be filed with the Public Utilities Commission (PUC) for review and approval and must include a scenario in which emission reductions are maximized within the cost cap and a scenario in which the emission reduction targets are met regardless of the cost cap.
Unlike the clean heat standards proposed in Vermont and Massachusetts, the Colorado statute does not allow emission reduction credits to be traded between regulated gas utilities or establish a mechanism for non-utility entities to generate and sell clean heat credits. In the absence of a compliance market, each gas utility must submit an annual report that calculates emissions reduced or avoided through implementation of the approved clean heat plan. Utilities must also report on program spending, clearly identifying spending directed toward income-qualified programs and programs serving communities historically impacted by air pollution or other energy-related pollution. Like the other clean heat regulations, Colorado’s law recognizes
Like the other clean heat regulations, Colorado’s law recognizes that low-income people and people of color have been disproportionately impacted by energy-related pollution. Gas distribution utilities are not required under the law to direct a specific amount of funding toward income-qualified programs, but clean heat plans are required to prioritize investments that benefit these disproportionately impacted communities. The Colorado clean heat standard is also unique in recognizing the significant potential to reduce methane emissions from active and inactive coal mines in the state in addition to more common methane sources such as landfills, wastewater treatment plants, and agricultural operations. Developing methane recovery projects is seen as a significant economic development opportunity, particularly in rural Colorado where poverty levels are higher than in the urban areas, suburbs, and wealthier mountain resort communities.
While Colorado’s clean heat standard shares some common features with the programs under consideration in Vermont and Massachusetts it reflects the state’s unique energy and political landscape.
Conclusion
The Clean Heat Standards emerging across several states represent a significant step toward addressing greenhouse gas emissions from the heating sector. Colorado, Massachusetts, and Vermont have developed tailored approaches to fit their specific energy landscapes and climate goals. Vermont’s broad definition of obligated parties reflects its reliance on delivered fuels, while Massachusetts has proposed a robust framework to drive substantial progress toward decarbonization through beneficial electrification.
Colorado’s Clean Heat Standard exemplifies a different yet complementary approach by focusing exclusively on regulated gas distribution utilities and setting clear emission reduction targets. The statute’s emphasis on cost caps and prioritizing investments in historically disadvantaged communities highlights Colorado’s commitment to balancing environmental goals with economic considerations.
While all three policies share common elements, the differences highlighted illustrate the potential for Clean Heat Standards to evolve in response to local conditions and stakeholder input. Collectively, these state-level initiatives demonstrate a growing effort to focus decarbonization efforts on the heating sector, offering valuable insights and frameworks for other states to consider as they develop their own clean heat policies.
Photo by Bombermoon