Tier II vs. Tier III: New AEC Resource Classifications Under PRESS

Under the PRESS Act, Pennsylvania's two-tier AEPS would be replaced with three tiers. Most of the conversation focuses on Tier I — the headline 50% in-state low-carbon target — but the more consequential redefinition for today's certificate holders is the split between the new Tier II and the brand-new Tier III. Several resources that have lived in Tier II since 2004 would move into Tier III at enactment, with implications for pricing, contracting, and project finance. Here's a side-by-side, resource by resource.

Proposed three-tier structure

Which legacy resources move

Under Act 213 today, all of the following are Tier II: waste coal, municipal solid waste, integrated coal gasification, wood pulping byproducts, CHP, hydro, distributed generation, and demand-side management. Under PRESS, the first four move into the new Tier III. CHP, hydro, distributed generation, and DSM stay in Tier II — joined by fuel cells, biomass, co-located storage, and high-percentage hydrogen plants. The split is essentially a clean-energy-coherence test: cleaner thermal and flexibility resources stay in Tier II, and legacy thermal resources get a dedicated home in Tier III.

Resource-by-resource walk-through

• Combined heat and power (CHP). Stays in Tier II. CHP that meets the PRESS efficiency thresholds continues to qualify for Tier II AECs on both electrical and (where applicable) useful thermal output. A redefined, narrower Tier II is a constructive setting for CHP project economics.
• Fuel cells. Stay in Tier II. Fuel cells were Tier I under Act 213 in some categorizations, but the PRESS structure places them squarely in the redefined Tier II alongside other high-efficiency thermal and flexibility resources.
• Biomass. Moves into Tier II under PRESS (it had been Tier I under Act 213). The exact eligibility thresholds — feedstock type, sustainability criteria, GHG accounting — will be defined in final bill text and accompanying regulation.
• Co-located energy storage. New addition to Tier II. The qualifier "co-located" is important: storage paired with a Tier I or Tier II generator. Stand-alone storage is likely treated separately.
• High-percentage hydrogen plants. Stay in Tier II. The "high-percentage" qualifier refers to the fraction of hydrogen in the generator's fuel mix; the threshold will be defined in final bill text. Lower-percentage hydrogen plants drop into Tier III.
• Hydro. Stays in Tier II. Note that low-impact hydro continues to qualify for Tier I under PRESS, so hydro is the one resource that can fall into either Tier I or Tier II depending on facility characteristics.
• Distributed generation and DSM. Stay in Tier II. These remain the principal demand-side and behind-the-meter components of the Tier II bucket.
• Waste coal. Moves to Tier III. Waste coal has historically supplied a large share of cleared Tier II volume in Pennsylvania, and its migration to a separate Tier III market is the single biggest supply-side change in the PRESS framework.
• Municipal solid waste (MSW). Moves to Tier III. Same dynamics as waste coal: established generation base, new dedicated market.
• Integrated coal gasification combined cycle (IGCC). Moves to Tier III.
• Wood pulping byproducts. Moves to Tier III.
• Lower-percentage hydrogen plants. Land in Tier III rather than Tier II, with the threshold to be set in final bill text.

Why this matters for AEC buyers

• Tier II becomes a tighter, more clean-energy-coherent bucket. Demand per certificate is set by a ~10% obligation against a smaller pool of eligible resources. All else equal, that argues for firmer pricing in the redefined Tier II.
• Tier III is a new, dedicated home for legacy thermal resources. A ~5% obligation defines its size. Pricing will move on its own supply-demand curve, separate from today's Tier II market and likely on a distinct cleared price track.
• Tier I expands meaningfully. A ~35% in-state target with SMRs and fusion now explicitly included is a major demand-side change for Tier I AECs and will shape the relative pricing across all three tiers.
• Long-term contracts written against "Tier II" need to specify resource type. Otherwise the parties may end up on opposite sides of the tier line if PRESS is enacted, with no contractual mechanism to adjust price or volume.

Pricing dynamics to anticipate

Three pricing dynamics are worth modeling once PRESS enacts (or even as scenarios while it remains in committee):

• Tier II firming. With waste coal and MSW out of the pool, the residual Tier II supply curve is dominated by CHP, fuel cells, hydro, distributed generation, and DSM. The ~10% obligation against this narrower pool tends to support stronger cleared prices, though the magnitude depends on the pace of new project deployment.
• Tier III as a standalone market. Waste coal and MSW generators move into a small, supply-concentrated Tier III market with a ~5% obligation. Cleared Tier III prices will reflect that concentration; expect a distinct price discovery period in the months following enactment.
• Cross-tier substitution mechanics. PRESS will need to address whether and how compliance buyers can substitute one tier of certificates for another (typically a higher tier for a lower one). The substitution rules are a key driver of relative pricing across tiers.

Contract language to consider

For any AEC contract being negotiated now that extends past the projected PRESS enactment window, two provisions are worth adding explicitly:

• Tier-mapping clause. Specify each underlying generator and its expected PRESS tier classification, and define what happens if the final classification differs (price adjustment, volume adjustment, or termination right).
• Vintage clause. Define whether certificates issued under Act 213 prior to enactment carry their original Tier II classification or are reclassified to PRESS Tier II / Tier III at enactment. This depends on the final bill's grandfathering language, but the contract should anticipate either outcome.

Bottom line

The Tier II label survives under PRESS, but the underlying resource mix changes. Cleaner thermal and flexibility resources stay (and are joined by fuel cells, biomass, co-located storage, and high-percentage hydrogen). Legacy thermal resources move into a brand-new Tier III with its own dedicated obligation. CHP, fuel cell, storage, and DSM operators are positioned reasonably well; waste coal and MSW operators face a separate, smaller, dedicated Tier III market. Long-term AEC contracts written without tier-mapping and vintage language carry unresolved reclassification risk. For the demand-side analysis, see Will PRESS Reduce Demand for Tier II AECs? and PRESS vs. AEPS.