2006 marks the 4th annual WADE World Survey of Decentralized Energy. The report, released in late May, concludes that 24% of all electricity generated from new plant added in 2005 was from decentralized energy. Market barriers still exist, but there are also signs that hint at a rising trend for DE in the years to come. Jeff Bell reports.
The growing appeal of decentralized energy (DE) is attributed to the many benefits it exhibits when compared with conventional, remotely situated, centralized generating plants. The environmental benefits of DE are widely recognized and an increasing body of evidence suggests that the economic benefits are also significant. Given the many advantages of DE (from reduced air pollution to increased economic output and reduced dependence on foreign fuel imports), one would expect DE technologies to be popular with power consumers.
DE technologies consist of power generation systems that produce electricity at or close to the point of consumption; these include high-efficiency cogeneration (CHP), on-site renewable energy systems, and other on-site applications. WADE classifies such systems as DE regardless of project size, fuel or technology, or whether the system is on-grid or off-grid.
A quarter of electricity from new capacity installed last year came from DE, and evidence suggests that DE will continue its rising trend worldwide (npower cogen)
Perhaps the most straightforward indicator of the economic appeal of any product is the extent to which it captures the vote of the world’s market-goers. In other words, the overall merits of a product, as perceived by people, is reflected by the proportion of the market that product captures. So just how successful is DE as gauged by this indicator? Every year (starting in 2003) WADE has conducted a survey of international electricity markets in an attempt to shed some light on this very question.
WADE’s mission is to generally increase worldwide development of high-efficiency cogeneration (CHP), decentralized renewable energy and other on-site power systems that deliver substantial economic and environmental benefits. WADE maintains that in order for any market to grow, it is important to understand that market. Understanding a market requires sufficient baseline information, and this is the main purpose of the WADE annual survey.
There has been a marked upward trend in the proportion of on-site power generation in the overall generation mix. Figure 1 illustrates the upward trend: DE accounts for a 24% market share of new annual generation compared with 13% in 2002.
Figure 1. DE market share
This trend (albeit only for 4 years of data) clearly shows that the DE markets worldwide are currently buoyant and there is little reason to suggest that DE market share will not continue to grow in the near future. Figure 2 shows a snapshot of the percentage share of generation from DE in many of the world’s most important electricity markets.
Figure 2. DE market share in some important world electricity markets
Despite these encouraging trends, a number of persistent market barriers continue to slow the uptake of DE globally. Some of the factors which continue to plague DE markets include:
- lack of interconnection arrangements
- unfavourable or no feed-in tariffs
- lack of financing for DE projects
- emphasis on less economical means of reducing environmental impacts of the electricity sector
- lack of recognition of the environmental benefits of DE in government support programmes
- obstructions in local planning procedures.
Many of these barriers have in common the fact that they are artificial. In other words, in most cases there are zero-cost policy solutions to remove these barriers, but because of factors such as political inertia they remain unchanged in many areas of the world.
There are several factors that suggest that DE may continue to gain favour in power sector investors in the years to come.
High energy prices
Fossil fuel prices are increasing around the world. Oil and gas prices have hit record highs in many places worldwide in both real and nominal terms. Even coal, the ‘cheap’ alternative to cleaner fuels, is under increasing price pressure as demand surges in places like China. Although the link between fuel prices and electricity prices is not always straightforward, and will of course vary depending on a region’s generation portfolio, power price trends are also generally upwards. Increasing power prices are a direct driver of DE investment as end-users seek alternatives to the buying expensive power from the grid. Although increasing fuel prices may make the economic case for all forms of power generation less convincing, DE – because of its high fuel-use efficiency – should emerge as the favoured approach when compared with less efficient approaches such as CCGT. In other words, where spark spreads do not favour investments in gas-fired generation, DE projects will be more economical than centralized alternatives.
Need to meet capacity demand cost-effectively
Demand for electricity is increasing around the world. People are demanding reliable power at an affordable price and they are demanding it now. Consequently, many options to meet capacity shortfalls that had fallen out of public favour are being re-examined. For example, western Europe’s first new nuclear plant in years is under construction in Finland. Public debate is intense in many other European countries as to whether or not nuclear is the best option for cost-effectively meeting demand for power, given the environmental constraints imposed. It is seen by many as a means to meet demand while avoiding carbon emissions known to destabilize the global climatic equilibrium.
Work by the Rocky Mountain Institute (see COSPP Nov-Dec 2005) shows that DE can meet power supply and pollution reduction targets, all with much less investment over the life-cycle of the infrastructure than required for centralized alternatives. According to the RMI, annual DE additions have exceeded nuclear additions in terms of capacity every year since 2003 and in terms of output since 2005. The 2006 Survey lends additional evidence to this view, and recent modelling work by WADE (see COSPP May-June 06) suggests that DE may be the most cost-effective means of meeting the power sector goals in the UK, a country where the nuclear debate is rising on the public agenda. The comparatively rapid time that DE capacity can be deployed compared with central plants suggests that the share may continue to increase in the future.
More often than not, power sector studies designed to compare the economic attractiveness of various available generating technologies omit the transmission and distribution (T&D) costs. If the cost of delivering power is examined rather than the cost of simply generating it, then DE invariably becomes immediately more attractive. DE, especially when sited in load pockets, can significantly reduce the need for T&D upgrades.
Continued and increasing pressure to mitigate environmental impact from the power sector
One of the acknowledged advantages of DE is the environmental benefits the technologies offer in terms of reduced carbon emissions and other air pollutants. The EU Emissions Trading Scheme (EU-ETS) and the Kyoto Protocol’s Clean Development Mechanism (CDM) may yet offer DE technologies an import strategic comparative advantage compared with centralized power generating technologies. Certainly climate change and other environmental concerns will remain important market drivers for years to come.
There are already about a dozen approved methodologies based on DE, and more than 100 projects have been approved or have been registered and are waiting approval. The ‘Certified Emission Reduction’ credits arising from CDM projects are yet another attribute of DE that increases the competitiveness of the technologies compared with large central plants.
The EU-ETS also has significant potential to positively affect DE economics. Although CHP projects have so far been ill-favoured in the scheme, EU Member States have a great opportunity to provide incentives for DE in their National Allocation Plans, which will come into effect for the 2008-2012 period.
Other carbon schemes are likely to follow suit, and schemes such as the US Regional Green House Gas Initiative or the state-level schemes in Australia will eventually tie into the existing schemes and will have the effect of driving DE investment around the world.
Increasing competitive pressure on companies
Companies, even well established ones, are struggling to adapt to increasingly complex markets around the world. Technological changes, economic realities, and increasing pressure from stockholders as well as the general public (which ultimately compose their customer base) to be environmentally and socially responsible are just some of the issues facing companies. There is some indication that companies are finding DE as a surprising solution to facing many of these intersecting problems. DE can improve competitiveness, increase self-reliance, reduce costs and help meet or exceed environmental compliance, all while sending the message to the public that the company is doing ‘the right thing’. Many companies around the world have been placing increased emphasis on DE in 2005, and these include such ‘unlikelies’ as BP, Exxon and Dow.
Increasing activity of advocacy groups
Many countries around the world now have specific local advocacy groups whose mission is to promote decentralized energy technology – be they based on renewable technology or fossil fuel technology, or both. Countries with such groups include most OECD countries, but these also include a growing number of developing countries, notably Brazil, India and China. An analogous group in Russia is conspicuously absent.
WADE is working to build similar organizations in a growing list of countries. Advocates of DE organizing to systematically identify local benefits of DE, categorize barriers and build the support needed to overcome them will arguably be the single most important driving factor for DE in the coming years. Far from having concluded its work in promoting DE, WADE’s work in building support for DE is just getting started.
The World Survey 2005 concluded that the prospects for DE were improving and building upon a market momentum that emerged the year before. The main message of the World Survey 2006 then is a promising one for those with a stake (economic or otherwise) in the DE sector. A growing number of investors in the power sector appear to be quietly realizing the economic benefits of DE. Despite this, it is clear that conventional wisdom still favours central plants, and proponents of DE still have much work to do to persuade mainly government and policymakers of DE’s societal benefits. There remain many artificial policy barriers that are preventing DE’s market share from increasing even further. Still, we have seen steady market development in all DE sectors in the last four years, and many separate factors seem to be converging which will likely improve the market prospects even further in the years to come.
Jeff Bell is Research Executive at WADE. E-mail: email@example.com
The WADE Survey 2006 is available for free download from the WADE website: www.localpower.org
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The initial World Survey, released in 2003, was the first time any organization had attempted systematically to inventory DE as a proportion of power sector sales as a whole. For example, no one had before, from the perspective of the world market as a whole, attempted to tease out from existing market data which thermal power plants were remote utility plants and which were generating power at the factory or building site, or which wind turbines generated power on-site as opposed to in remote wind farms. When this market research was first conducted, many doubts and uncertainties surrounded the process and the results should be thought of as guesses at best rather than hard facts. Now, four years on, the WADE research remains imperfect, but there have been continual strides to improve the data’s quality, and new methodological changes (explained below) are just one reflection of the iterative improvements. Still, the World Survey remains the most reliable and transparent publicly available resource tracking DE markets around the world.
Changes from previous years
The World Survey 2006 adopted two main changes relative to previous Surveys.
The World Survey 2005 saw modest DE growth from the previous survey, suggesting that DE represented 7.2% of the world’s overall electricity generating capacity, up from 7.0% the previous year. Capacity figures are the most readily available figures, which was the main reason why WADE chose those figures upon which to base its analysis in previous years. The first change that readers may notice is that the 2006 Survey estimates generation figures rather than the capacity figures that were previously tracked.
Because some forms of electricity capacity remains dormant for large periods of the year, capacity figures are an imperfect indicator of the true contribution of various technologies in the power sector portfolio. Stand-by and peaking plants, for example, may represent a significant proportion of capacity in a given area while hardly contributing to the overall generation.
Although in past surveys WADE did attempt to omit plant with very low capacity factors, WADE decided that this year tracking actual power output (measured in MWh) is a more appropriate indicator of a technology sector’s contribution to overall power supply than tracking capacity. Even though in many cases generation data are more difficult to obtain, the better story that the data tells make it a more appropriate indicator for the survey.
The second change that was adopted in the 2006 Survey has broadened the applications tracked to include all thermal-based DE applications, including peaking and stand-by thermal generation. Past Surveys had only looked at plants used in continuous operation applications because they were the ones that were most likely to be used in cogeneration applications. This change was incorporated for two reasons: to include on-site power applications that had previously been omitted, and to simplify data collection. (Although on-site peaking and stand-by applications are not as likely to recover heat as continuous-operation on-site plants, and therefore environmental benefits are not as prevalent, they do still offer many of the benefits of DE including reduced line losses, increased reliability and reduced need for T&D investment.)
Because standby plants and peaking plants by definition have low capacity factors, including them as DE will not add substantially to the DE generation figure of ultimate interest.
Because the 2006 Survey strove to estimate the proportion of electricity generated by DE compared with the world as a whole, the first step of the exercise was to try to approximate the total generation from all power plants added in 2005.
WADE applied growth assumptions to the latest year of International Energy Agency data in order to approximate that 512 TWh of power was generated from capacity added in 2005. Once a realistic estimate of generation from total newly installed plant for 2005 was established, the next step was to estimate how much electricity had been generated from all new DE plant that were installed that year.
On-site thermal DE represents by far the biggest share of DE, so the next challenge was to convert available data on installed capacity into estimates of generation. WADE used publicly available data to estimate thermal on-site power applications sold in 2005. Adding to this the estimates of generation from steam-turbine-based DE in China and India, WADE concluded that about 122 TWh of generation can be attributed to thermal DE capacity added on-line in 2005.
Although on-site renewable energy accounts for a much smaller portion of the DE mix, WADE has also estimated generation from the added capacity of two important technologies in 2005: rooftop solar photovoltaics and on-site wind. About 2.55 TWh was generated from on-site PV installed in 2005 and about 0.93 TWh was generated from on-site wind added in the same year. Currently there are no publicly available data sources that identify on-site applications of small hydro power or geothermal power, so for the moment they have been omitted from the Survey. Thermal systems smaller than 0.5 MW, and steam-turbine-based DE outside of China and India, remain similarly absent from the findings.
In total then, once the two sectors of renewable DE have been accounted for, total generation from new DE capacity added in 2005 equals 125.48 TWh. Compared with the generation from total global capacity additions in 2005, this means that DE has a market share of 125.48/512, or about 24% of total generation from all new capacity installed in 2005.