Cogeneration and the new EU energy strategy

Policies on energy efficiency should not only change the behaviour of energy’s end users but also maximize the efficiency of electricity generation, argues COGEN Europe’s Fiona Riddoch, who welcomes evolving European energy policy aimed at more efficient generation.

The European Union’s new flagship energy strategy ‘Energy 2020’, adopted by the European Council on 17 June, 2010, reflects the priority of energy policy in overall EU policy and incorporates the EU’s energy and climate goals – a 20% cut in carbon dioxide emissions, 20% of end-use energy from renewables, and a 20% drop in primary energy use by 2020. As part of this strategy, the flagship initiative ‘Resource-efficient Europe’ aims, among other things, to decouple economic growth from the use of resources. The energy and climate objectives for 2020 now form an integral part of this strategy.

‘Energy 2020’ goes on to indicate that current progress towards Europe’s 2020 energy and climate targets is inadequate: ‘despite the importance of energy policy aims, there are serious gaps in delivery’.

The new EU energy strategy proceeds to lay out the five priority areas which must be addressed if the gap is to be closed:

n achieving an energy-efficient Europe;
n building a truly pan-European integrated energy market;
n empowering consumers and achieving the highest level of safety and security;
n extending Europe’s leader-ship in energy technology and innovation;
n strengthening the external dimension of the EU energy market.

Thus, achieving an energy-efficient Europe is now among the five top priority actions on energy for the next phase of Europe’s energy strategy. The energy efficiency section of the strategy is listed as the first priority to tackle.

The strategy proposes that energy efficiency be mainstreamed into all relevant policy areas, including education and training to change current behavioural patterns. Energy efficiency criteria must become conditionality ob-ligations in all spheres, notably for allocating public funds. Within the detailed actions proposed there is clear intention to act on cogeneration.

Up to this point in policy action on energy efficiency within EU energy policy, the target has been ‘end use’ energy efficiency recorded in Eurostat as ‘final energy consumption’. This has meant that the substantial losses in the power generation sector, associated with traditional condensing power plants, were left beyond scrutiny as these are not included in the final energy consumption statistics. The 2006 Energy Efficiency Action Plan did highlight this point and showed in the section on improving energy transformation the extent of the losses throughout the energy system, and including losses from the power generation sector.

Taking the perspective of gross inland energy consumption, the EU25 consumed 1750 million tonnes of oil equivalent (Mtoe) in 2005 (see Figure 1). The transformation losses, of which a significant proportion is the heat dumped to the atmosphere (or water) by condensing power stations, is a significant 33%.

The intention of ‘Energy 2020’ is explicitly to include the full energy supply chain under policy measures to improve energy efficiency – in other words, gross inland energy consumption reductions are now being treated in the discussion on energy efficiency.

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Figure 1. Primary energy consumption EU25 (1750 Mtoe) in 2005

COGEN Europe has consistently promoted the full supply chain approach in Brussels, highlighting the fact that upstream energy efficiency gains (in energy production and transmission and distribution) multiply the energy savings achieved at the end user’s level. Up to this point there has been resistance to further measures on energy efficiency in any sector covered by the carbon dioxide reduction legislation of the ETS. However, the new energy strategy may be signalling a change in this approach. It also clearly points to strengthening the position of cogeneration in the market of making energy efficiency a criterion for the authorization of new generating capacity.

The intention for imminent action on cogeneration policy in this parliamentary term is clear.

EUROPE IS OFF COURSE TO REACH 2020 ENERGY EFFICIENCY TARGET

In the working paper, released simultaneously with the new energy strategy, the Commission revealed its latest estimate of Europe’s progress against its energy savings target. The last assessment at the end of 2008 was that, based on historic progress from 2004 to 2008, Europe would achieve an energy saving of 13% against the target by 2020. The latest assessment of November 2010 now puts that estimate at only 9% savings by 2020.

Despite the projected impacts of all Europe’s energy efficiency end-use legislation in buildings, products, energy services and cogeneration – as well as its Member States’ energy-efficiency action plans – there is still a very large gap between aspiration and progress on the energy savings target.

THE EXISTING DIRECTIVE: A FOUNDATION FOR COGENERATION

The Cogeneration Directive offers a clear way forward for Member States in improving energy-efficiency performance. Based on an agreed primary energy savings methodology, a cogeneration installation will bring the Member State a minimum of 10% primary energy saving over separate production of heat and electricity on the same fuel. Where a suitable national political focus and leadership is in place and proportionate support mechanisms have been developed, growth in the sector can be stimulated rapidly. Hence action now will produce a result for 2020.

Germany set a nat-ional target to double cogeneration by 2020 and has seen a jump in projects within the first 12 months of the new Cogeneration Law. Belgium, which set a target to double CHP to 2 GWe installed capacity by 2012, has already achieved this in 2010 through a very successful green certificate scheme.

The Cogeneration Directive introduced a measurement and analysis process to the world of cogeneration that the EU hoped would stimulate 27 Member States to promote cogeneration by the pure logic of the process. As a result, Europe now knows from its Member States’ own assessment that there is an additional economic potential of 120 GWe of cogeneration in Europe today, which is achievable by 2020. Moreover, we know what the barriers are to achieving the potential – and there is a structure of Guarantees of Origins and a legal provision for support mechanisms that allows some supervision and quality assurance for any promotional programme.

Interestingly, considering the Commission’s renewed focus on the transformation sector, the Cogeneration Directive covers the full supply chain from generation through to end-use applications, bridging into activities under the ETS sector. Hence, EU Member States seeking to win efficiency gains in the transformation sector already possess the legislative structure with which to proceed. The question is what further legislative steps are needed?

NEW LEGISLATION: AN OPPORTUNITY FOR COGENERATION

Some points are clear. There are still large structural and market barriers to cogeneration around connection to the electricity grid, development of the role of cogeneration services within a supply mix heavy with intermittent sources, and rewarding the cogeneration operator for emissions offset somewhere else in the generating system. Removal of these market barriers, re-addressed for renewables in the new Renewables Directive, must be part of any new provisions. Additionally there must be a trigger for the Member States to take action on the identified potential and this should logically be linked to Europe’s energy efficiency target.

This could come from a range of different approaches. There are several market approaches which should be considered first. A cogeneration plant has specific generating characteristics as do traditional condensing plants, nuclear power or renewables. For cogeneration the defining characteristic is that it should follow the heat load which it serves if it is to deliver the energy efficiency savings it is required to deliver.

Different sizes of cogeneration plants manage this requirement in different ways but – through the use of variable operation and short term thermal storage, and depending on the fuel used – there are several interesting new services which the sector can sell to the electricity market. If these are recognized through reasonable dispatch rules for cogenerated electricity and cogenerators are also rewarded for their services in lowering transmission and distribution losses, their characteristic of consistent availability and also being reasonably responsive to variations in electricity demand (outside the ‘must run’ sector), a new economic model for cogeneration could be created which would increase the commercial attractiveness of the sector.

Taking a classic policy approach to stimulating the market requirements to improve the efficiency of processes, including the use of heat, and to discourage the wholesale dumping of heat from condensing power plants, industry and other processes would create renewed interest in cogeneration. Targets on energy efficiency in general, or efficiency improvements in the generation sector, would also stimulate cogeneration. All of these, supported with some market-based mechanism to do with maximizing the utility of CHP in the overall system so that it can sell services and be rewarded for consistency of supply and responsiveness of small systems, to certificate trading schemes coupled with targets and caps, would stimulate cogeneration.

NEW ENERGY EFFICIENCY LEGISLATION

In its ‘Work Programme 2011’, the European Commission laid out its schedule of pressing tasks. Within the section ‘Sustainable growth’ the Work Programme includes bringing forward a European Energy Efficiency Plan (EEAP). This EEAP, which will take the form of a Communication, will identify the key measures to fully achieve the cost-effective energy savings potentials of 20% by 2020, across all sectors, including building, utility, transport and industry.

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Figure 2. Total installed cogeneration capacity by installation size (GWe)

Also a new Directive on Energy Efficiency and Savings will be proposed that: ‘will provide an enhanced framework for energy efficiency and savings policies of Member States, including targets, role of National Energy Efficiency Action Plans, exemplary role of public sector, financing, consumer information.’ The proposed new Directive will also define instruments to develop the energy services market and the roles of energy companies in promoting energy savings throughout the energy supply chain, including supply to end-users.

Finally, it will set framework conditions for increased generation, transmission and distribution efficiency, including strengthened measures for the promotion of cogeneration and district heating and cooling. This new piece of legislation will be replacing the existing Energy Services Directive.

The remaining question which will have to be resolved in the early months of 2011 is: what is the most effective interaction of legislation on cogeneration with the new Directive on Energy Efficiency and Savings?

It is clear that the Commission wishes to strengthen the policy around cogeneration. It will be hard to keep the strong groundwork already done by the Cogeneration Directive and maintain the new shoots of financial confidence in investors without providing the continuity and assumptions of that structure.

What is certain is that creating another wholly new and ambitious piece of energy efficiency legislation has both opportunities and risks for cogeneration. The Commission must take care to maintain investor confidence through the period of policy creation, agreement and Member State legislation which will follow an announcement of proposal some time mid 2011. Given that, allowing for all legislative stages, the new Directive will not take effect in Member State legislation until 2015, the Commission must make clear provision to maintain investor confidence in cogeneration in the interim.

COGEN Europe has recently published the first industry projection of the market for cogeneration to 20501. It emphasizes the foundation role of cogeneration in EU energy policy – that all combustion of any fuel should be as efficient as possible. The opportunity to deliver energy efficiency savings through cogeneration is considerable, but the barriers to cogenerators engaging profitably in the electricity market and the development of a true market in heat need to be addressed for energy efficiency to gain value in a fully liberalized energy market.

Fiona Riddoch is the managing director of COGEN Europe, based in Brussels, Belgium. Email: Fiona.riddoch@cogeneurope.eu

REFERENCE
1. COGEN Europe report, ‘Cogeneration as the foundation of Europe’s 2050 low carbon energy policy’, 01.12.2010

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