Wind energy developers and environmentalists urged senators Wednesday to find another way to address a steel company’s plan to convert blast furnace gas to energy.

However, AK Steel Corporation and Air Products & Chemicals Inc. told lawmakers that including cogeneration technology in the state’s renewable energy portfolio was critical to making the companies’ proposed $310 million project in Middletown economically viable.

The proposal (SB 271 & HB 443) would define technology that converts waste heat and gas from steel operations into electricity as renewable energy, making it eligible for renewable energy credits that utilities need to meet the requirement for 12.5% of the state’s power to come from renewable sources by 2025.

AK Steel’s Alan McCoy told members of the Senate Energy & Public Utilities Committee that power from the cogeneration plant would be more expensive than market prices, especially during the initial years of operation. So making the electricity it produces eligible for RECs would “improve the economics of the project,” he said.

“While we understand that the market will continue to determine the price of these credits, we strongly believe that this project fulfills the intent of the legislature to promote non-traditional forms of electricity production,” he said.

Joseph Terrible, Air Products’ senior business development manager, said the companies face a tight deadline to retain a $30 million grant from federal American Recovery and Reinvestment Act, which requires the plant be in operation by September 2015. “To meet that date, capital commitments for construction must be made by mid-summer 2012,” he said.

The value of RECs the plant produces and the federal stimulus grant will help offset the high cost of the project, which is nearly twice the amount for a comparable natural gas power plant, he said. “Without the economic benefit this legislation could provide, there will probably not be enough incentive to proceed with the project given the effect of lower-cost natural gas and the weak economy on electric power prices.”

The proposed facility would generate about 1 million megawatts of electricity a year, enough to serve more than 85,000 households, he said. That would displace 600,000 to 800,000 tons of carbon dioxide emissions annually, in addition to nitrogen oxide, particulates, and mercury pollution that would otherwise come from coal-fired power plants.

Mr. Terrible said the cogeneration technology could help improve the competitiveness of North American steel makers.

“It is not our intent or desire to undermine the value of renewable energy credits to other clean sources of power,” he said, noting that the cogeneration facility would produce less than 15% of the state’s total requirement for renewable energy when it comes online in 2016. That percentage would decrease as the quota nearly quadruples by 2024, he added.

Several witnesses said adding cogeneration to the state’s renewable energy portfolio would depreciate the value of RECs from wind and solar energy facilities and jeopardize development of the fledgling industries in Ohio.

Speaking on behalf of the American Wind Energy Association, Eric Thumma, director of policy and regulatory affairs for Iberdrola Renewables Inc., said wind developers’ investments in Ohio facilities were predicated on projections for the future size of the renewable energy market.

Adding cogeneration to the state’s renewable energy standards “could fundamentally undermine future renewable energy investments in Ohio by flooding the market with renewable energy credits from these projects and by creating uncertainty as to the state’s commitment to fostering a sound, reliable market for renewable energy,” he said.

The renewable energy market is “exceedingly volatile” and Ohio already has an oversupply of RECs, he said. Adding cogeneration could dampen further investment and drive down REC prices so much that could even impair AK Steel’s ability to recover its investment.

Mr. Thumma said adding cogeneration technology to the state’s energy efficiency or advanced energy standard portfolio would be a better option – something several witnesses recommended as an alternative. Testifying as an interested party, Nolan Moser, director of energy and clean air programs for the Ohio Environmental Council, said the group “very vigorously supports cogeneration,” but is concerned the bill would negatively affect other forms of green energy.

“We do not want to see cogeneration projects being developed at the expense of other renewable energy projects,” he said. “The bill, as drafted, could quite literally wreck the REC marketplace.”

Responding to a question from Chairman Sen. David Daniels (R-Greenfield), Mr. Moser said he believed adding cogeneration to the state’s energy efficiency requirements would prove more beneficial to AK Steel’s proposed facility.

That would allow the company to reach a “reasonable arrangement” with a utility that would provide a guaranteed long-term revenue stream, rather than be subject to the volatility of the renewable energy market, he said.

Witnesses representing Environment Ohio, Ohio Business Council for a Clean Economy, and the League of Women Voters of Ohio echoed similar concerns about the measure’s potential impact on renewable energy development.