Some countries have used policy intervention very successfully to stimulate the use of CHP and district energy. Many others have not. In this final article on the International Energy Agency’s CHP/DHC Collaborative, Steve Hodgson summarizes IEA guidance to policy makers on how to get it right.
We all know that cogeneration/CHP, either on its own or combined with district heating and cooling (DHC) technology, can deliver significant and important economic, environmental and energy security benefits. It’s also clear that, a handful of countries apart, the potential for CHP/DHC is nowhere near to being met. The gap between proven benefits and on-the-ground take-up is usually explained as a series of market and social barriers or obstacles which can be removed by sound and co-ordinated government of local, regional and/or government policies that both address unfair barriers and go on to support the increased take-up of the technology.
This is the area where CHP and district energy trade and lobbying associations have been working for quite some time – trying to get governments and energy regulators to intervene to allow CHP/DHC to grow to its full potential. The point always made is that CHP and district energy systems use conventional, proven technologies and are therefore ready for large-scale deployment now, without any further research and development or testing work.
As readers will already know, (see previous articles in COSPP March/April 2008, September/October 2008 and January/February 2009), efforts by lobbying organizations on behalf of CHP/DHC were considerably boosted in 2007 by the creation by the International Energy Agency (IEA) of the IEA ‘CHP/DHC Collaborative’ of relevant trade associations, government departments and companies working in this area. The collaborative set out to first study and then improve the situation:
- to quantify the potential benefits of investment in CHP/DHC
- to gather data on CHP/DHC capacities in countries around the world in a form so that these can be compared, and then to ‘score’ countries accordingly
- to identify exactly which policies had worked for those countries which have a healthy CHP/DHC sector, and to devise a policy route-map for others to use.
The published output from the collaborative includes a first report ‘Combined heat and power: evaluating the benefits of greater global investment,’ 11 country scorecards, and a final report ‘Cogeneration and district energy – sustainable energy technologies for today and tomorrow,’ both available at the IEA Collaborative website: www.iea.org/G8/CHP/chp.asp.
This article summarizes the central part of the final report – ie. the types of policy interventions available, and how to put a co-ordinated policy structure together. Much more information, including many examples of policies being used around the world, is available in the report itself.
IEA analysis discovered that barriers exist in many places which prevent CHP/DHC from reaching its full potential, and that targeted policy measures are needed to remove these obstacles to achieve the benefits of CHP/DHC. Experience from successful countries also indicates that the most effective approaches were in countries which made a strategic decision to invest in CHP or DHC as a key energy security/climate solution.
These countries set targets and created dedicated government departments to achieve these targets. These departments were charged with identifying CHP/DHC potential, including the barriers that prevented the realization of this potential. They were given the authority to then develop policy tools and solutions to address these barriers in a systematic way.
The evidence from many countries is clear – CHP does not need substantial financial incentives to make it happen. Rather, it requires the effective use of often modest, targeted policies to systematically address barriers and allow for full realization of the potential for CHP and DHC. Common barriers include:
- economic and market issues, relating to the difficulty in securing fair value prices for CHP electricity that is exported to the grid
- regulatory issues, relating to non-transparent, inconsistent interconnection procedures and backup charges
- social/political issues, particularly in relation to a lack of knowledge in society about CHP benefits and savings
- difficulties in integrating the greenhouse gas emissions benefits into emissions trading or other regulations, due to CHP/DHC’s status as combined technologies that include heat and power.
The IEA analysis of country profiles found several common elements in the strategies used in countries that have addressed these barriers most successfully. From this finding, the IEA has identified a consistent set of policies that can be used to address the barriers faced by CHP and DHC. They are:
- financial and fiscal support
- utility supply obligations
- local infrastructure and heat planning
- climate change mitigation (emissions trading)
- interconnection measures
- capacity building.
These individual policies have often proved to be most effective when combined in comprehensive CHP/DHC strategies implemented by a central policy department or agency.
FINANCIAL AND FISCAL SUPPORT FOR CHP
The main types of financial and fiscal support relevant to CHP are as follows:
Up-front investment support: appropriate when financing for CHP projects is difficult to secure, either because potential developers do not have access to capital or because project returns do not correspond to the short timeframes used by commercial investors. Examples include grants (direct support) and accelerated depreciation (fiscal).
Operational support: operational support can be used to reflect the full value of CHP electricity and/or heat, for example by internalizing its environmental benefits. Feed-in tariffs (direct) and fuel tax exemptions (fiscal) are common types of operational support.
R&D funding: government funding for low-carbon CHP technologies, like fuel cells, can help an industry to develop commercial CHP products for a sustainable energy system in the future. Financial support can help to trigger CHP development in a number of situations:
To cover additional investment costs: CHP systems, including DHC supply networks, often require higher up-front investment than conventional alternatives, even though running costs can be lower. Some energy consumers may not have the capital to make this investment. Grants or low-interest loans can help bridge this gap by covering part of the additional costs.
To internalize externalities: financial support can be granted to reflect the environmental and social benefits of CHP. For example, greenhouse gas emissions trading can reward CHP for the carbon dioxide emissions saved relative to separate heat and power generation.
To address market imperfections: energy markets are not always open and competitive, and may value all forms of generation consistently. For example, generation in high demand areas has a higher value than that elsewhere. As a result, CHP sometimes receives less for its electricity than society would have to pay for electricity from other new power plants. Financial support can help adjust such inefficiencies in electricity markets.
UTILITY SUPPLY OBLIGATIONS
Utility supply obligations (USOs, also known as energy portfolio standards) are a market-based mechanism using certificate trading to guarantee a market for CHP electricity. They place an obligation on electricity suppliers to source a certain percentage of their electricity from CHP. The share of supply to be met by CHP can increase year-on-year, in step with policy targets.
Electricity suppliers can meet the obligation in two ways – by owning a CHP facility or by buying CHP electricity from a CHP facility bilaterally or on the market.
The energy market regulator provides CHP plant operators with certificates for each unit of electricity or carbon dioxide. Electricity suppliers can then purchase the required number of certificates from the CHP plant operators. The sale of certificates provides additional revenue to support CHP plants.
Supply of, and demand for, certificates will determine their value, but the regulator can create enough predictability to incentivize investment in CHP by creating a ceiling and floor on prices.
Independent CHP plant operators may find it difficult to find buyers for the electricity they produce. This can be the result of:
Market procedures: in competitive electricity markets, small independent generators often do not have the expertize or resources to participate in electricity trading, so they rely on demand from a local supplier or consumer.
Size: electricity suppliers generally prefer sourcing electricity from a small number of large power plants. Small CHP plants may therefore not find a buyer for their output, although using multiple smaller generators can increase diversity and security of supply.
Long-term contracting: in regulated markets, suppliers often buy electricity through long-term contracts with a small number of power plants. Consequently, independent power producers can only enter the system when one of these expires.
Costs: electricity from new efficient CHP plants can be more expensive than electricity from the existing generation system.
USOs can assist in addressing these issues by creating demand for CHP electricity through obligation on electricity suppliers; and allocating tradable certificates for CHP electricity.
LOCAL INFRASTRUCTURE AND HEAT PLANNING
Local infrastructure and heat planning create a rational framework for providing heat and cooling efficiently by identifying and linking demand and supply, and supporting the best energy sources available. DHC infrastructure can create the necessary linkages, while CHP is a versatile energy supply source that can meet demand efficiently.
Heat planning typically combines facilitating measures with regulation. Municipal governments in Denmark, for example, first assessed heat demand and supply options, then introduced restrictions on electric heating and power generation without heat recovery. At the same time governments supported R&D in emerging renewable CHP technologies to stimulate a transition to a low-carbon heat and electricity system.
Local heat/energy planning at a municipal or building level can help to trigger CHP/DHC development in a number of situations by:
Co-ordinating heat, cooling and energy supply: heat planning facilitates CHP development by creating stable heat and cooling loads through DHC networks. Local governments have the spatial planning tools to facilitate this process and to address the regulatory challenges of construction, installation and energy sales.
Helping to overcome the high upfront costs of heating and cooling networks: DHC networks are a valuable long-term asset for optimizing energy supply and creating a bridge to low-carbon systems, but the upfront investment is often not feasible under private sector criteria. Local governments can support DHC network investment through loans and guarantees, or by investing themselves, as with other long-term infrastructure.
Setting standards for building environmental performance that may not be achieved through market or other incentives: the accelerated use of small-scale CHP and other low energy solutions in buildings will often require a critical mass of customer demand to bring down product costs. Building regulation standards, applying to thousands or millions of new buildings, can create this demand in a relatively short period.
CLIMATE CHANGE MITIGATION (EMISSIONS TRADING)
There is a growing range of policy measures designed to address the challenge of climate change; in particular cap-and-trade emissions trading schemes (ETS) which are becoming an increasingly popular measure. These schemes follow the example of carbon taxation, which has been successful in supporting CHP and DHC development in countries like Sweden.
The main challenge facing CHP in ETS design is that, with CHP, on-site emissions increase, while overall global emissions decrease (power plant emissions displaced by CHP exceed the additional on-site emissions when a boiler is replaced by CHP).
Unless ETS design reflects this issue, CHP will normally be penalized through having to buy more allowances than would be needed with a heat-only boiler and grid supplied electricity.
Figure 1. CHP policy decision pathway
Two other important issues for CHP are:
- determining the sector to which CHP belongs to. If CHP is categorized in a sector whose allowances are capped stringently, this will disincentivize CHP
- defining the boundaries for inclusion of CHP. For example, conversion of individual residential boilers (not included currently in ETS schemes because they are too small) to a large urban CHP/DHC scheme (which would be included) would disincentivize the emissions reducing investment.
The main types of measures are:
Interconnection standards – providing clear rules for obtaining physical connection to the distribution/transmission network depending on connection voltage levels. They outline the procedures for the application process in a clear and transparent way. They also set out the technical requirements for connection.
Measures enabling grid access – relating to the participation of CHP plants in the grid network. They can, for example, be developed to give CHP generators priority access to the electricity system. These measures include:
- Net metering: this allows for the flow of electricity both to and from a customer’s facility through a single, bidirectional meter, and can enable the plant to secure an electricity sales price equivalent to the purchase price
- Priority dispatch: this ensures that generators will have priority in exporting into the grid system
- Licensing exemption: this allows CHP operators to generate without a generator license, helping to keep costs down
- Incentivizing network operators enables them to benefit where they may lose revenue by connecting CHP plants to their systems.
Grid connection enables a CHP plant to sell any surplus electricity to the grid, and to import when the site needs exceed the CHP output. A key factor determining the market viability of CHP is therefore its ability to safely, reliably, and economically interconnect with the utility grid system.
However, grid connection has traditionally been one of the main challenges to encouraging increased uptake of industrial and commercial CHP. In some cases, the process of interconnection to the network has been unclear and at times inconsistent. The implementation of measures that facilitate interconnection of CHP systems, on the other hand can provide developers with clear guidelines or incentives for connecting to the grid. The implementation of such interconnection measures can be done at a national level or regional level. The rules or standards are mostly proposed and enforced by electricity sector regulators after discussion and agreement with grid operators, CHP interests and other parties.
CAPACITY BUILDING (OUTREACH AND R&D)
Capacity building can be undertaken in two ways:
Outreach and education raises the awareness of CHP, making known to potential users the benefits of CHP and the types of sites particularly suited to CHP. This can be implemented through training programmes, active campaigning or the creation of a central CHP office or champion.
R&D supports the development of CHP technologies and applications towards market commercialization. R&D funding can also be applied towards the training of potential users to facilitate CHP technology uptake.
Incentive policies for CHP can be most effective if the potential users are aware that the CHP opportunity exists and if emerging technologies are mature enough to be applied on a commercial basis.
IDENTIFYING NEXT STEPS: A PATHWAY
To help develop a process for choosing and implementing effective CHP policies, the IEA recommends decision pathway as follows:
- Can CHP/DHC help achieve policy objectives?
- Is there potential for further development?
- Identify market and other barriers
- Identify and introduce the most suitable best practice polices
Figure 1 illustrates the decision pathway.
These steps will apply differently to different countries, depending on the share of CHP/DHC already achieved and the overall national experience with CHP. For example:
Little CHP/DHC experience – such countries may not have undertaken any steps and will need to start by gaining a full understanding of how CHP can align with broader policy objectives.
Some CHP/DHC experience – such countries may already have an understanding of how CHP can help meet objectives but have until now only adopted piecemeal approaches to CHP. There are also likely to be still significant barriers and an incomplete understanding of the full potential for CHP.
CHP success stories – such countries will typically have a share of CHP in electricity generation exceeding 25% and are already enjoying the benefits of this growth. However, there may be minor barriers remaining, but also new opportunities, for example, for expanding renewable CHP development.
Whatever the stage of CHP/DHC development in a country or jurisdiction, the IEA believes that there is proven experience elsewhere that is directly relevant and that can be applied to help achieve important policy goals. There is almost certainly at least one example – and probably several – of co-ordinated strategies and individual policies in its report that apply today – and so enable a country to secure many of the benefits already gained by growing numbers of countries and cities around the world.
So, has the IEA moved the argument forward? Certainly – policymakers who are taking any notice now have reasonably good comparative data on the use of CHP/DHC around the world for the first time, and can also study the patterns of policy and achievement in 11 countries. Of more use going forward is the codification of policy measures contained in the final report, and the pathway of policy measures able to stimulate and support CHP.
Steve Hodgson is the editor of COSPP.