Baseball, Warm Weather and Clean Heat Standards – It’s Springtime in the Northeast

Written on: May 5, 2024

Author: Joe Uglietto

Flowers aren’t the only thing in bloom this season. New York plans to implement an economy-wide Cap-and-Invest program in 2025. Massachusetts and Vermont plan to implement Clean Heat Standards in 2026. New Jersey and Rhode Island have introduced legislation for Clean Heat Standards. Other states won’t be far behind. What began as a trickle of “clean energy” legislation is predictably turning into a flood for the entire region. What will this mean for heating oil retailers and wholesalers? What can they expect and how can they start to prepare now?

If you’re a heating fuel retailer in New York, you’ll face several challenges when the state’s Cap-and-Invest program is implemented next year. While several important questions remain unanswered, the current version of the program will require all retailers that sell more than 100,000 gallons annually to purchase allowances for the fuel that they sell. These allowances will be purchased at a quarterly auction, before the retailer sells any of its fuel. The cash flow impact on your business is obvious. You’ll need access to additional capital upfront in order to purchase these allowances. Inevitably, the cost of these allowances will be priced into retail cost of fuel, increasing costs to New York consumers. We can also access higher AR balances as customers struggle to keep up with their bills, increasing the need for dealers to access capital regularly. If there’s a silver lining to be found in New York’s Cap-and-Invest program, it’s that dealers will know exactly how much the cost of these allowances will be, so they’ll be able to accurately price it into their fuel.

In contrast, Clean Heat Standards do not require additional capital for heating fuel retailers prior to selling the fuel. Clean Heat Standards require heating fuel retailers to purchase credits on the open market or pay the alternative compliance payment price at the end of each compliance period. For example, for all heating fuel sold in 2026, a retailer would need to purchase and retire credits to meet compliance by June 2027. One of the challenges retailers will face in a Clean Heat Standard is knowing where to price their fuel to account for the credits they will have to purchase later. In the Massachusetts Clean Heat Standard, there will be two separate markets, with different compliance obligations and different alternative compliance payment price levels. The cost of compliance in each program will have to be considered by retailers when pricing their fuel.

One thing is certain. Regardless of the program, the price of fuel will increase for consumers. In order for retailers to effectively prepare, it will be important to increase their access to capital prior to the program’s implementation. In both the Vermont and Massachusetts Clean Heat Standards, renewable fuels are incentivized. In preparation for the beginning of these programs, retailers should be establishing relationships with biodiesel and renewable diesel suppliers, and should be blending biodiesel and renewable diesel into their fuel. NYSERDA has not yet determined how it will treat renewable fuels in New York’s Cap-and-Invest program, but there is a possibility that blending biodiesel or renewable diesel will lower the number of allowances required to meet compliance.

Retailers in other states need to remain vigilant. New York, Massachusetts and Vermont will give you insight into what may be coming down the pike for you.

We can expect 2024 to be an extremely active year. New legislation in some states, new rules in others, and the imminent go-live of the New York, Vermont and Massachusetts programs will keep our company – and probably a fair number of industry stakeholders – up at night. You can rest assured, knowing that Diversified Energy Specialists will be with the industry every step of the way, keeping retailers, wholesalers, and industry stakeholders abreast of the various regulatory programs and their rule-making processes. If you’d like to join our email list to receive our updates, email me at joe@diversifiedenergyspecialists.com.

Renewable Energy Insights is a regular column by Joe Uglietto, president of Diversified Energy Specialists, a leader in the renewable energy markets and consultant to the industry with a focus around emissions reductions and renewable energy innovation.