CHP support mechanisms in different countries – from feed-in tariffs to investment incentives

A survey of European countries’ support mechanisms for CHP and district heating revealsà‚ a range of measures: feed-in tariffs, fiscal and investment incentives, and power purchasing obligations. The complex picture is partly a result of CHP supplying its products to two distinct markets. Euroheat & Power’s Sabine Froning and Norela Constantinescu report.

Policy support for CHP varies in accordance with historical developments. Most European district heating systems were initiated to exploit the inevitable and large heat losses from thermal power generation. Placing CHP plants near final consumers turned out to be a viable solution. Early examples of district heating can be found in Germany (Hamburg, Berlin, Dresden), Denmark (Copenhagen), France (Paris) and later in Sweden and Finland. In the 1970s, due to the two world oil crises, district heating became one of the most effective options to reduce oil dependency and consequently became part of the national energy policies, mainly in those countries that already had experience of it.

In Eastern Europe, national energy policies focused on reducing primary energy supply for electricity generation by using CHP and district heating, which were developed mainly on the basis of planning decrees. The transition to a market economy and the restructuring of the industries in these countries led to the decrease of energy consumption as a whole. Heat consumption in particular decreased dramatically. This drop in consumption was one of the main reasons why the district heating sector experienced a deep recession. Latest statistics show, however, that the trend has been stopped and the situation has been stabilized.

Industrial processes are also applications in which the heat from CHP plants can be used. Industrial heat demands are characterized by a diversity of temperature needs. Medium (between 100à‚—400à‚°C) and low temperature (lower than 100à‚°C) processes such as those in the chemical, pulp and paper, food and machinery industries can be supplied with heat from industrial CHP plants. Countries with industries that require processing that occurs at temperatures in the medium-to-low range tend to use CHP to meet heat demands. An important factor in the use of CHP as an energy supply for an industrial process is also the electricity consumption on site. The sector of industry that has the greatest use of CHP generation is paper, pulp and printing. The countries with the greatest CHP generation are the UK, Austria, Turkey, the Netherlands, Finland and Portugal.

Figure 1 shows CHP production in the European Union. It shows that 54% of electricity produced in CHP units originates in plants connected to district heating networks while the rest is produced in industrial CHP units. It also shows that 58% of the heat is used directly by industry and 42% is distributed to customers via public district heating systems.


Figure 1. CHP supply, public versus autoproducers, in the EU 25 Source: Eurostat
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High CHP production in public supply plants is typical in countries that have well-developed district-heating networks. This is the case for almost all new Member States of the EU, but also in Denmark, Finland, Germany and Sweden, where more than half of the CHP electricity is generated in public supply plants. High CHP production in autoproducer plants is typical in countries which use the heat produced in CHP for industrial processes. The share of CHP from autoproducers goes up to 100% in Spain, Greece, Ireland and Luxembourg. The UK also has a high share of autoproducer plants (92%).

CHP/DHC and RES policies à‚— similarities and differences

EU Directive 2004/008/EC requests Member States to identify their respective potentials for high-efficiency CHP, to remove barriers to its expansion and to establish promotional schemes. The Directive, like other efforts in most countries, focuses on electricity output, while little attention is given to the need to incentivize the establishment of district heating infrastructures to ensure access to and exploitation of larger heat loads.

When looking at the type of policy measures used to promote CHP and at the similarities between electricity from renewables (RES) and heating (including district heating support schemes) the following categories can be identified.

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Feed-in tariffs: These are the most common support mechanisms for CHP and they reward the amount of CHP electricity supplied to the grid. Usually, these mechanisms are structured in a similar way as feed-in tariffs for RES electricity: fixed tariffs for electricity from qualified CHP plants, a bonus on top of the market price for electricity or minimum purchase prices. However, support is often solely provided to small-scale CHP units, especially in Central and Eastern European countries, for example the Czech Republic, Hungary and Latvia. As a result, larger plants are discriminated against and the market is distorted. Also, for new plants, the size is often not determined by actual market conditions and heat loads. While being effective in the electricity market, feed-in tariffs cannot be applied as such to the heat market due to its complexity and to additional practical measures required by the distributed local nature of the heat market. Placing an obligation on the operator of a district heating grid is likely to severely hamper the competitiveness of district heating compared with individual heating technologies. An analysis carried out by the International Energy Agency (IEA) shows that, as an alternative, renewable heat certificates could be used to promote long-term structural changes as, for example, higher compensation could be set for certificates based on RES heat fed into DH.

Fiscal incentives: These include discounts or exemptions from taxes such as energy and environmental taxes or value added tax. A wide range of tax incentives exist. This type of mechanism can increase the competitiveness of the technology for which it is used. It is used in countries such as the Netherlands for CHP, and Finland and Sweden for CHP and RES-based CHP. In Sweden, Finland and Denmark, systems for energy tax and environmental tax ensure a good market position for district heating systems.

Investment incentives: Capital grants and tax discounts/rebates are provided for certain CHP investments or to the developers or owners of renewable heating installations. For CHP, this type of support is used in Denmark, Finland, Sweden, the UK, etc.

Purchasing obligation or guaranteed purchase of qualified CHP electricity is the mechanism through which CHP plants receive priority dispatch by system operators. The definition of qualified CHP is country-specific and includes criteria related to capacity and/or efficiency. This type of support scheme exists in countries such as Austria, Denmark, France, Germany and Italy. It is also used in most Central and Eastern European countries such as the Czech Republic, Hungary, Poland and Slovakia.

Obligation to consider heat use: For district heating, heat mapping and zoning has proven to be an effective instrument in several EU-15 countries to ensure that the most environmentally effective energy infrastructure is chosen from the outset when a new area of housing is being built. On the contrary, in many Central and Eastern European countries, district heating has to compete directly with natural gas systems which have been built in parallel. In these cases, unfair price regulation is likely to have disastrous effects.


A waste-to-energy plant at Kamp-Lintfort processes 221,000 tonnes of waste per year & generates electricity, heat & steam. photo: kreis weseler Abfallgesellschaft mbh & co. kg
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The status of the CHP or RES market has a large influence on the level of support required. Furthermore, the structure of the national industry plays an important role in the development of these sectors. The infrastructure of district heating can enable the use of different technologies. Until now, the possibilities provided by this infrastructure as regards the expansion of both renewable and energy efficient technologies have received little attention from policy makers and are not consistently integrated in policy measures. Few countries cover district heating with specific laws, and even then support schemes are not necessarily foreseen. Denmark has had a district heating law since 1997, while Germany addresses district heating through secondary legislation. Croatia (new heat law with secondary legislation under consideration), Estonia, Hungary (new DH law) and Lithuania have developed heat laws. In Romania, a district heating law is under preparation while the strategy for the sector has been approved through secondary legislation.

CHP support schemes à‚— country cases

Netherlands

An interesting example regarding the development of CHP is the Netherlands, which showed substantial growth in this sector during the 1990s. About 30 PJ of primary energy was saved in a decade. The development took place within a supportive framework which included subsidies for investments, tax exemptions and the permission for distribution companies to exploit CHP installations. Furthermore, during this period, gas turbine technology enjoyed technical progress.

The investment support lasted until 2000, when it was replaced by operational support. Nevertheless, other developments also had a significant impact on CHP: the industrial sector became a more intensive chemical industry, which increased the primary energy consumption of the country and created heat loads for CHP industry as well as a decrease in the gas price. During this decade, the heat output from CHP grew by 30% and the electricity output by 100%.

Spain

The development of CHP took place in 1990. Today, CHP plants in Spain produce almost 20 TWh of electricity and 160 PJ of heat. The support scheme was mainly based on bonuses.

Germany

A law promoting electricity generation from CHP was passed in May 2000. The objective of the law was to support energy conservation and climate protection measures by means of CHP. The law mainly comprised regulations concerning payment for CHP electricity delivered to the grid. This CHP support law was a temporary solution and did not contain any efficiency thresholds or rules on how to calculate CHP production. A study concluded that the use of modern CHP systems ranks among the most cost-effective solutions for reducing CO2 emissions.

A second study looked at a longer perspective, and the government concluded that the study should result in a new law supporting CHP. The new law was issued in April 2002. It has a life of nine years and foresees rules for the certification of CHP production based on an efficiency factor. The CHP law provides support which will ensure the modernization of existing CHP plants and the building of small-scale CHP plants (of under 2 MW) and promotes the introduction of new technology such as fuel cells.

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The law provides CHP plant operators with a certain security in planning, clear definitions, bonus payments and a timetable. The premium payments depend on the type and age of the plant, and decrease annually, being phased out by 2010. By 2007, the law supported the modernization of over 2 GW of capacity in the public energy sector alone.

Analysis conducted by the German government on the effectiveness of the law concludes that it has only been partly effective in terms of preservation and modernization of existing CHP. The current CHP law will be revised in terms of duration and support. A new law under discussion considers a target for doubling the share of CHP/DH.

Austria

The Austrian Eco-Power Act, in force since 2003, provides the support framework for CHP and green electricity (wind, sun, geothermal, hydroelectric power, biomass, landfill gas, sewer gas and biogas) in the form of a purchasing obligation and tariff support. The subsidies for eco-electricity are funded via an extra charge on the electricity price. This measure has also contributed to increasing the competitiveness for new biomass plants. As regards CHP, the feed-in tariff is related only to the electricity generated by CHP and not to the cogeneration process as such. More recently, an extension of the time support was rewarded to biomass and biogas units.

Furthermore, the increase of the RES-produced electricity’s share of power production will be supported by a subsidy provided to new plants by 2011. The volume of subsidy is E17à‚ million per year and is mainly allocated to biogas and biomass (30% for each technology), while 30% goes to the wind industry and 10% to other RES such as photovoltaics. The feed-in tariff will be reviewed every year and decrease over the period. The Eco-Power Act also lays down criteria for energy efficiency and minimum full-load hours for each type of technology. For biomass plants, heat recovery will be obligatory.

Additional support is provided to CHP biomass plants connected to district heating networks. Investments for installation of the heat extraction part are subsidized depending on the ensured heat extraction with 15%à‚—30% of the investment cost.

Central and Eastern Europe

Usually, the support schemes used are mainly purchasing obligations for the electricity produced in CHP plants combined sometimes with tariff support, especially for small and medium-size capacities. For example, in the Czech Republic, CHP electricity is purchased for the market price plus an additional regulated price. Every heat producer considering the construction or reconstruction of a heat source larger than 5à‚ MW must determine whether CHP technology can be used, as must electricity producers for capacities over 10 MWe. In the case of gas turbines, this obligation starts from 2 MWe and with engines from 0.8 MWe. The potential of different CHP technologies is assessed, and the main development has been identified as related to DH.

Conclusions

There is a correlation between the type of preferred support scheme used in a country for CHP and RES electricity. For example, the feed-in tariff combined with a purchasing obligation is the preferred measure in Austria and Germany, both for supporting CHP and RES electricity. A similar situation is encountered in Central and Eastern European countries which use the purchasing obligation combined with bonus/feed-in tariffs for small CHP capacities and RES electricity (for example the Czech Republic, Hungary, Latvia). Nevertheless, the feed-in tariff is extensively used as a support scheme for RES electricity even in countries which do not apply this type of support for CHP. Sweden and Finland prefer fiscal/capital incentives, while the Netherlands and the UK use capital and fiscal incentives.

The effect of the support measures depends on many factors, such as the level of financial support, associated institutional capacity, time frame of the support, economic conditions.

Many countries already had established support policies/schemes for the development of CHP units à‚— even before the CHP Directive entered into force. For some other countries, the requirements to transpose the directive into the national legislation constitute a driver for enhancing CHP development. This is the case of Central and Eastern European countries with large capacities of installed steam CHP plants and which have started to shift to new technologies, implying smaller capacities.

Sabine Froning is Managing Director, Euroheat & Power, Brussels, Belgium.
e-mail: sabine.froning@euroheat.org

Norela Constantinescu is a Project Officer with the same organization.
e-mail: norela.constantinescu@euroheat.org

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