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Germany’s new CHP Act explained

Germany’s new CHP Act is effective from 1 January. In it, the CHP expansion target has been lowered and the regulations have become more complex. Markus Gailfuss asks who will benefit from the new law, and which CHP owners will be worse off.

For reasons of climate protection, highly efficient combined heat and power (CHP) plants in Germany are promoted by the CHP Act. Owners of CHP systems receive temporary funding (the CHP bonus) for the electricity produced by their cogeneration plants, provided the conditions for funding are met. In 2013, more than 7000 CHP plants with a combined capacity of 1400 MW were installed. In 2014, the same number of CHP plants with a higher total capacity – 1700 MW – were realized as new installations or reinstallations with substantial modernization.

In October 2014, a scientific evaluation report on the CHP law was submitted. Based on that study, in 2015 the drafts for the new CHP Act were written. The new Act has 35 paragraphs and is more comprehensive than the previous CHP Act, which featured a mere 20 paragraphs. The new CHP Act (KWKG 2016) is effective in Germany from 1 January.

While CHP plants were previously promoted in Germany regardless of their fuel, the new law does not promote new plants that are fuelled by coal. In addition, efforts within the new law will advance the development of district heating as well as heat and cold storage.

In addition to the promotion of new systems, the CHP Act provides financial support to existing installations. For this reason, the maximum annual funding volume of €750 million ($820 million) was increased to €1.5 billion.

The German government expects the new CHP Act to improve prospects for the maintenance and expansion of cogeneration, targeted to promote the conversion of coal to gas as well as coherence with other goals and measures within the energy transition. The previous expansion target of 145 TWh-150 TWh annually (a 25% CHP share of net electricity production) in 2020 was replaced by a moderate expansion target in the new CHP Act. It is expected that the Act will lead to an increase in net electricity from cogeneration to 110 TWh per year by 2020 and to 120 TWh per year by 2025.

CHP support 2016

To date, CHP plants in Germany received funding support for cogeneration with a capacity of up to 50 kW and over a period of 10 years. Larger plants above 30,000 full-load hours also received funding. Full-load hours are determined using the quotient of electricity produced from cogeneration and the cogeneration capacity of the plant in accordance with the technical specification sheet. While the eligibility period in the new Act for CHP plants over 50 kW with 30,000 full-load hours has not changed, for mini-CHP up to 50 kW this amount has been adjusted to 60,000 full-load hours.

Promotion under the CHP Act is carried out by bonuses, which are limited in time and payable in addition to the market-based electricity price. Newly constructed, modernized and upgraded CHP plants are entitled to funding. The term ‘upgraded’ is used, for example, if an existing boiler is retrofitted with an additional new steam turbine and is therefore upgraded to a CHP plant. The term ‘modernized’ refers to an existing CHP plant where old system parts relevant to determining efficiency are replaced with new components. If the cost of such a modernization exceeds 25%, or 50% of a complete new construction of the cogeneration plant, this modernized plant receives funding of more than 15,000 or 30,000 full-load hours. In the future, modernized CHP plants must provide sufficient evidence that they are more efficient than the old plants. Modernization can only be realized if the existing system has reached a certain age.

Basically, according to the new CHP Act, only electricity from cogeneration is entitled to the payment of a surcharge if it is fed into a public supply grid. There are exceptions for small CHP plants with a capacity up to 100 kW, and for CHP installations used by electricity-intensive enterprises.

Modified support also applies for cogeneration plant owners who provide electricity to end consumers outside of public networks and are paying the full EEG surcharge for that electricity. This regulation applies, for example, to operators of CHP plants in industrial areas, as well as to plants that supply electricity for tenants.

The eligibility period and the level of support attainable through the new CHP Act are shown in the table on page 24. Compared to previously obtainable surcharges for CHP electricity fed into the public supply grid, the new CHP Act enables increases of up to 83%. However, the surcharges for the usage of CHP electricity outside the public grid have been significantly reduced or completely omitted. Special arrangements apply if an electricity- and cost-intensive industry uses self-produced electricity from cogeneration. The granted CHP bonuses correspond to the subsidy rates which were in force until the end of December 2015.

Additional bonus incentives are granted for CHP plants subject to the conditions of the Greenhouse Gas Emission Trading Law (TEHG). In addition, CHP plant owners who replace their existing coal- or lignite-based plant receive a subsidy bonus of €0.6 cents/kWh over the entire funding period.

In order to minimize the administrative burden of micro-cogeneration units, owners of CHP in the power range of up to 2 kW can receive their surcharge payments as a flat one-time payment. This corresponds to a subsidy of €2.4/kW. So far, micro-CHP systems received a KWKG allowance of €1.623/kW.

The ‘usual’ price shown on the energy exchange graph is composed of daily prices for baseload electricity. The average daily data of each quarter forms the ‘usual price’, which is also referred to as the CHP Index. This index determines the remuneration for the electricity from cogeneration that is fed into the general supply grid. In the previous CHP Act this ruling applied during the period of eligibility for CHP and plants of up to 2000 kWe. According to the new CHP Act, this provision only applies to CHP plants up to 100 kWe.

CHP system at Albgaubad swimming baths, Ettlingen, Germany

Credit: BHKW-Infozentrum

Due to the current decline in power prices, existing CHP plants may no longer be able to operate economically in the municipal sector. Therefore, supplementary funding was introduced into the new CHP Act to accommodate existing cogeneration systems over 2 MW in the municipal sector if they are no longer supported by the previous CHP Act. The promotion of €1.5 cents/kWh for existing plants applies only to CHP plants which are operated with gaseous fuels, and includes a maximum funding duration above 16,000 full-load hours.

Exemplary power revenues

The revenue potential generated through the sale of electricity and the new funding patterns can be best illustrated by means of CHP usage in an apartment block with several rented apartments (see Figure 1, page 25, to which the following numbers to refer). An apartment building’s owner has a cogeneration plant installed to provide the entire block with heating and hot water supply. The power is partly sold to the tenants (direct marketing), partly used to light the staircase or elevator (joint-use electricity), partly used for the CHP unit itself (e.g., heating pump) and partly fed to the grid.

The plant owner receives a CHP bonus in accordance with the funding rates seen in column B of the table (below) during the funding period for the amount of electricity fed into the grid. In addition, the owner of a plant up to 100 kW receives the ‘usual’ market value based on the average price for baseload electricity on the exchange during the preceding quarter. As can be seen on the graph on page 23, this conventional market price has fallen considerably in recent years. This was the major reason for the substantial increase in the CHP bonus for grid power. CHP installations above 100 kW must be directly marketed and the price negotiated.

For owner-occupied CHP electricity and general power, a plant owner receives the bonus during the eligibility period set out in row C of the table below. This only applies if the power generated by the plant does not exceed the limit of 100 kW. If this limit is exceeded, the electricity is not eligible. The use of owner-occupied CHP electricity substitutes for the relatively expensive purchase of electricity. Charges for grid usage, the energy tax and all levies such as the EEG surcharge make it relatively expensive to obtain electricity in Germany. New CHP plant owners are required to pay a proportional EEG surcharge (around €2.2 cents) to the grid operator.

A plant operator receives a CHP bonus for the amount of electricity he supplies directly to tenants (end consumers) during the funding period. Above 100 kW, the bonus is relatively low (see column D). Therefore the relatively expensive electricity purchases from the public grid can be substituted by CHP electricity. The CHP owner is required to pay the full EEG surcharge (approximately €6.354 cents/kWh) to the network operator.

Calculation of the CHP surcharge is significantly more complex in the new CHP Act. Not only the capacity of the installed CHP but also the purpose of usage from CHP electricity is taken into account. A calculation tool has been developed by BHKW-Infozentrum (see www.bhkw-infozentrum.de) to assist owners with the calculation of their specific CHP surcharges and the total extent of their expected CHP support. The tool will be available in English by late February.

Cogeneration as flexible amendment to renewable energies

The new Act will integrate new CHP plants even more strongly into the future electricity market. CHP plant owners should be able to react to market signals and become part of variable renewable energy sources.

Source: BHKW-Infozentrum

Figure 1. CHP usage in an apartment block with several rented apartments

Source: BHKW-Infozentrum

Therefore owners of new cogeneration plants with an electrical capacity of more than 100 kW are committed to consume their own produced electricity or to market it directly, which incorporates supplying power to a third party. A third party can also be an end consumer, such as a tenant in an apartment building or an industry in an industrial area.

Negative electricity prices on the market are a sign for times of surplus electricity. The CHP bonus is suspended during that period in order to prevent CHP becoming a competitor to non-controllable renewable energy. The CHP-generated power during such a period receives no CHP bonus, although negative hour contracts are not taken into account within the power delivery duration (60,000 or 30,000 full-load hours). In 2015 there were approximately 110 hours of negative electricity prices.

Special regulations and licensing

Until December 2015, fuel cells benefitted from attractive special arrangements under the CHP Act of 2012. Exemplary here is the CHP bonus of €5.41 cents/kWh, which has been granted for an eligibility period of 10 years regardless of power capacity. In the new CHP Act, fuel cells are classified in the same way as any other technology. Owners of fuel cell CHP plants will receive the higher feed-in tariffs (FiTs) of the 2012 CHP Act if the plant is ordered by 2016 and put into operation by the end of 2017.

CHP support requiries authorization from the authorities, the Federal Office of Economics and Export Control (BAFA). In principle, an application for approval of a CHP plant according to the CHP Act can only be made after the plant is put into operation. Long-term projects such as CCPPs are threatened due to a change in funding conditions regulated by the CHP Act during their project period. This uncertainty has lead to a rather low willingness to invest. To compensate for this, the possibility of a preliminary decision in the new CHP Act for CHP projects over 10 MWe was introduced. The binding effect of a preliminary decision includes amount and duration of the surcharge payment in accordance with the details disclosed at the time of application and the relevant version of the law. The request for preliminary decision must be made before construction begins, and includes specific deadlines concerning construction and commissioning.

Promoting district heating and storage

For several years, district heating and heat storage have been eligible for a single payment within the framework of the CHP Act. In 2013, 1.017 district heating systems with a length of 423 km were funded with a total of €110 million. Plant owners must demonstrate, no later than 36 months after startup, that 60% of the utilized heat has been obtained from a cogeneration plant. In some cases, industrial surplus heat and heat from renewable energy sources meet funding requirements. The funding is for small district heating up to 40% and for district heating with an average mean nominal diameter over 100 mm, for up to 30% of their expenditure. Heat storage can also be promoted by the CHP Act. In 2014, 129 heat storage systems with a total of 122,000 cubic meters of storage capacity were funded with approximately €15.5 million.

Promotion without borders

Cogeneration producers in Europe will benefit from the new German CHP Act in the future. According to the Act, CHP plants built in a European country will be entitled to receive the CHP bonus under certain conditions.

The new CHP Act is written in an even more complex manner than the previous support systems for cogeneration. Numerous new demands must be met in order to allow flexible compensation for CHP plants competing in a fluctuating renewable energies market. A considerable overhead in measurement, direct selling and management of investments will be the consequence.

Through the new CHP Act, the German government demonstrates the importance of cogeneration as a flexible and balancing energy source. It is also an obvious intention of the legislature to grant higher funding for cogeneration plants that otherwise have low revenues, such as in district heating. On the other hand, plant owners who primarily or even entirely use electricity from cogeneration receive smaller bonuses, or in some cases none at all.

In the segment up to 50 kW (mini-CHP), the new CHP Act will predominantly lead to economic improvement. In particular, CHP plants operated in the municipal or residential sectors, or in school buildings with a capacity of 4000 to 5000 hours per year, will benefit from the funding period of 60,000 full-load hours and the respective higher CHP bonuses for electricity fed to the grid.

Fuel cells lose their special privileges within the CHP Act. However, due to a generous transitional arrangement, new projects can be brought forward and initiated until the end of 2016. Subsequently, an additional investment of federal funding is being considered. The expansion of district heating and heat storage with renewables, such as solar thermal support, will continue to be promoted. The CHP Act sets clear objectives and targets until 2022, with an outlook towards 2025.

Markus Gailfuss is CEO of BHKW Consult

www.bhkw-consult.de / www.bhkw-infozentrum.de