The market for small-scale cogeneration in Italy is potentially at least 3500 MWe, but the economic case for new plants is weakened by a lack of financial incentives, writes Andrea Tomaselli. A well-designed framework of incentives would help the cogeneration industry to develop higher efficiency machines and standardized control systems, which energy services companies could then offer to the market.

Italy isn’t just a country of sunshine. The northern part (as far as Tuscany) enjoys continental weather, with cold winters and hot summers; the southern part is on the Mediterranean and has a growing cooling demand.

According to 2006 market research performed by Assoesco (the Italian Association of Energy Service Companies), market potential for small-scale cogeneration in Italy comes from sites with a heating (or heating plus cooling) base load demand of between 600 and 6000 MWh/year (thermal), an amount that corresponds to 50 to 500 kWe. Such sites are mainly in the civil and tertiary sector, but industrial cases can arise.

The heat demand may come from a single site (such as a business centre or a hospital) or may be from several sites next to each other. The first is an example of single site heating (SSH), the second of multiple site heating (MSH).

In typical MSH, a small heat line (some hundreds of metres in length) connects several sites so that they reach a critical mass for cogeneration. This model has nothing to do with traditional urban district heating, where a big central power station feeds long pipelines which distribute the heat. That type of installation has many constraints and reaches only a fraction of the sites potentially suitable for cogeneration.

SSH and MSH fit perfectly within the definition of small cogeneration (50-1000 kWe) and represent around one third of the total Italian cogeneration potential. Smaller plants than this will serve a domestic market in the future. Larger ones serve the industrial market (or rare cases of urban district heating), which has already been exploited. Figure 1 illustrates the overall market for cogeneration in Italy.

Figure 1. Italian cogeneration market
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According to Assoesco, an estimate of Italy’s cogenerative potential can be made as shown in Table 1. Taking a 100 kWe cogenerator as the weighted average of the sites, we get a gross cogenerative potential of 2500 MWe. Using a 70% rebate factor to eliminate those sites where cogeneration would be technical unfeasible puts the technical cogenerative potential at 1750 MWe.

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Considering all sites which individually need a heat demand of less than 600 MWht/year but which can be grouped into MSH, Assoesco estimates that Italy has an additional technical cogenerative potential of 1750 MWe. This gives a total technical potential of about 3500 MWe. The figure is much more accurate than that derived from many other Italian data sets and is based on concrete evaluations and experiences. This potential, if installed and run for an average of 5000 h/year, will save 1 million oil equivalent tonnes per year (MTEP/year) and more than 7 Mt/year CO2 as a consequence.

Finally, the economic potential is obtained by summing the sites at which small cogeneration is economically sensible as well as technically feasible. This greatly reduces the cogeneration potential, owing to the high costs of the technology. Today’s small installed volumes lead to a lack of standardization and no economies of scale.

A 120 kWe Trigen in Carugate for furniture retailer Ikea
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With present incentives (White Certificates provide less than 0.05 €/kWhe), only a poor 5% of the technological potential is economically sensible. This dramatically low figure is confirmed by figures from cogenerator producers and annual public reports that show that each year, Italy experiences the installation of only a few tens of small-scale cogenerators.

Economics of small-scale cogeneration

To get a deeper understanding of the economics of small-scale cogeneration, it is instructive to look at a typical profit & loss account for a 100 kW heat-only cogenerator (see Tables 2, 3 and 4).

Figures in Table 2 make basic assumptions that refer to a good heat user with a small power demand (typically a sports centre with a swimming pool).

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Profitability is evaluated by the internal rate of return index, which shows the interest rate of the investment over the depreciation period. Results are very low: none – but a pioneer would put money in such an investment.

As a matter of fact, the few plants which are being installed in Italy give much better profitability because operators have employed them at all of the potentially good sites and have looked for the right combination of conditions (strong heat consumers, full tax on natural gas, high continuity of heat and power demand).

But if we really want to exploit the huge potential of small-scale cogeneration, it will have to be employed in the ‘average’ plant, so it will have to cope with the profit & loss shown in Table 3. The figures clearly show why, despite such a huge market potential, so few small cogeneration plants have been installed so far. But will this situation persist?

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Why it doesn’t yet work

The figures in Tables 2, 3 and 4 are more accurate than producers’ data sheets because they reflect concrete plant-running experience. But they do have a positive side: taking input data variations into account they show that good profitability can be achieved.

A 100 kWe cogeneration for Ispra Nuoto’s sports centre in Monza
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So what are the main factors which determine financial profitability? They can be divided into two groups:

  • government influenced data, such as incentives, fiscal treatment and permitting
  • Industry influenced data, such as efficiency, cost reduction and volume effect.

Government incentives

On the government side, the first crucial point is the matter of incentives: today’s White Certificates system, which is in theory one of the most advanced in the world, gives around 0.5 c€/kWh to cogenerated power. The figure comes from a combination of a debatable TEP calculation method (Scheda 21, AEEG Italian Authority for Energy) and a sinking certificates value. On launch of the certificates in 2004, this value was expected to be more than €200/TEP. When the market opened, the value started at about €100/TEP but is today between€40/TEP and€80/TEP.

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The economic effect of such a method is shown well in Tables 2 to 4 (for a 100 kW cogenerator: €4000/year for five years, which become less €2000/year in the trigeneration case) and brings no help to cogeneration.

A 120 kWe Trigeneration system for Afin in Milan
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Besides that, many other points help to explain the poor financial results:

  • In Italy, gas for power generation is eligible for a tax rebate, but only below 0.25 mc/kWh. This value corresponds to an electrical efficiency of 40%, and small cogeneration plants work at 28%-35%. Therefore the rule effectively unfairly financially penalizes small cogeneration;
  • Net metering is not available yet, and small cogenerators often have to be switched off during the night, losing an opportunity to increase efficiency;
  • Fiscal rules allow a tax rebate on back-up burner natural gas (Art 26 TUA), but the application of the law is not clear and differs from region to region;
  • Power cogenerated on an internal line (between the meter and the user) is taxed in the same way as power generated in the normal way, even though it doesn’t flow through an external grid and has no transportation losses.

A second point on the government side is the ‘historical effect’, whose economic impact is difficult to evaluate. In Italy, power production has been monopolized for 50 years, and many regulations still need to be changed. Running a 100 kW cogenerator requires almost the same papers, authorizations and signatures as running a 20 MW power plant. For example, the Italian government requires power production to be registered daily – by hand – on a special printed register. The annual fiscal declaration is so complicated that it would be difficult for a non-expert to fill it in correctly. Electricity distributors may still define the parallel connection rules without any real discussion with their counterparts. It is even debatable whether an esco is allowed to cogenerate heat and power on a client’s internal line.

Industry improvements

On the industry side, we must underline that there is still a lot of work to do in small cogeneration:

  • Electrical efficiency must be improved: microturbines can certainly raise performance and derating behaviour; ICE applications at variable speed with inverters are still in the research stage and are not available as commercial products.
  • Thermal efficiency is generally poor: few buyers look at thermal efficiency and even fewer monitor heat production (although escos, who would have to sell it, do). Therefore the usual heat exchangers provided by small cogeneration packagers are generally weak and not greatly reliable. No attention is paid to different operating conditions.
  • The problem of power and heat accumulation, which is crucial in small cogeneration and which could be solved, is treated by universities and research centres as old-fashioned. They would rather deal with what they see as more modern matters than heat accumulation.
  • Remote control systems, which are absolutely necessary to make small machines economically feasible, are still in the stone age. Regardless of producers’ claims, no reliable and standardized product is on the market, nor are any associations thought to have launched a European standard protocol for small cogeneration remote communications and control (standardization of the mess of proprietary protocols is difficult).

A 125 kWe ICE cogeneration system for biogas waste water treatment for Amias in Cassano Spinola
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Last but not least, we must try to put ourselves in the position of end users. Very few of them (be they hotel managers, swimming teachers or building administrators) would ever dream of buying and running a small cogenerator. It is a big job. The plant requires technology and time to monitor and analyze its performance. It also needs people with knowhow to make sense of collected data and define actions to keep the plant’s efficiency at the highest level. It also needs readily available hands to perform O&M activities. If we think about the work day of a supermarket director, who has to manage cashiers and frozen fish, it’s not difficult to understand why that person seldom chooses to buy a small cogenerator.

Who can make it work and how

And yet the 3500 MWe small cogeneration potential is still there, it is not a dream. It can begin to be exploited by the government making the first move. The government could clear the regulations in the path of cogenerated power and grant it an incentive which is:

  • sufficient in value to attract investors (see the second profit & loss calculation)
  • reliable during the lifetime of the plant.

Industry will follow quickly. ESCOS will because energy services cannot be outsourced to other countries and are an attractive market to enter. Technology producers will because they are driven by demand.

An 80 kWe cogeneration system for Condominio S. Siro used to power 250 flats in Milan
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On the government side, at least, European Directive 2004/8/CE was implemented in Italian law on March 2007 (DLGS 20/07), but the operational Decrees still have to be published. Among them, the most important is the Decree linked to Article 6, which will define the incentive rules. White Certificates will be based on IRE, with a modulation mechanism based on power level (the lower the power, the higher the quantity), emission levels and innovative use of heat (i.e. trigeneration). These are good ideas which still need to be formalized into concrete rules that will transform the present profit and loss. Among the other expected Decrees are:

  • the elimination of the tax overcharge
  • net metering rules to allow power exchange with the grid
  • clear rules for the fiscal treatment of back-up burners
  • a tax rebate for cogenerated power on an internal line.

To have effect, the whole frame will need new White Certificate levels to be defined (the first period of the law has expired) to ensure they will have an attractive value in the future.

A 100 kWe cogeneration system for Cassano Nuoto at a sports centre in Cassano Magnago
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On the industry side, there are Escos – new companies which install their own plants and run them next to their clients, selling them heat and power at a low cost. Escos may be able to specialize in small cogeneration and will learn to cope with public documents, select the right technology for each site, run the plants at the highest level of efficiency (because plant profits drive them) and – above all – free their clients from any worries about cogeneration. Clients must look at cogenerators as black boxes which generate money for them, give them a good environmental image in the eyes of their customers, provide emergency power if necessary and which they never have to bother about the operation of.

If these suggestions are put into practice, the data in Tables 2, 3 and 4 will improve and may reach an acceptable financial level (internal rate of return 23%, simple payback period of around 4 years) that will ensure the market is exploited as envisioned.

Figures should change as follows:

  • Net metering: the possibility should exist to exchange power with the grid without any system charge but the sole power cost; around 1 €/kWh power value recovered for a third of the plants;
  • The White Certificate value recovered should be at least €120/TEP;
  • Elimination of power taxes for power produced and used on-site (under an internal line);
  • Saved TEP should be calculated by 42/02 rules instead of Scheda 21
  • Grant TEE for 10 years, instead of today’s 5 years.

This is the way to exploit the market, and we believe it is going to happen.

Andrea Tomaselli is a member of the board of Assoesco, the Italian Association of Energy Service Companies, and CEO of Heat & Power srl, an energy services company specializing in small-scale cogeneration.

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