There is evidence of growing strength in the European market for CHP systems – at least for small-scale units and those fuelled with biomass, writes Thomas Bouquet. But the market for large-scale industrial plants will depend largely on how these are treated within the EU’s Emissions Trading Scheme and, in particular, how Member States treat CHP within their national allocation plans for the second phase of the scheme.
It has been quite some time since European cogeneration stakeholders have been so upbeat about the market. From manufacturers to local facilitators, there are clear signs that the tide has turned or is starting to turn. From full order books to a renewed focus on regulatory issues, there are many indicators pointing to the healthier state of the CHP market. However, it would be too quick to assume that this is true for all market segments and, indeed, true throughout Europe. The European CHP market is a particularly fragmented one, one in which investors have to rely as much as possible on detailed information on local market and regulatory frameworks.
Rather than using a purely geographical approach, this article will discuss small-scale and large-scale cogeneration separately. This is a testimony to the recent trend in the market: small-scale has the wind at its back.
Small-scale CHP systems: can’t get enough of them
One of the biggest stories that I took away from the Power-Gen Europe event in Cologne, Germany in June was definitely the chorus of positive feedback from manufacturers of small-scale CHP units. While much of the sustained activity has been a direct result of booming markets in non-European countries, EU countries still represent the largest chunk of the market segment. With many manufacturers’ order books full all the way into 2007, it is worth taking a closer look at those European markets driving this segment.
The market for gas engines – and to a lesser extent small gas turbines – has been dynamic in the last year in a number of European countries where the bulk of new CHP have been installed. Hungary, Germany, Belgium and Italy have seen strong activity, and the large UK and Dutch markets have finished the year on a good note, making up for depressing figures in France and a hesitating market in Spain. Provisional figures for German CHP engine manufacturers for 2005 thus show a jump of about 30% in sales over 2004.
Although the market for gas engines has been dynamic in a number of European countries in the last year, small-scale CHP in general has still to improve its visibility (Cogenco)
Yet small-scale and especially very small-scale CHP still suffers from a lack of visibility in Europe. This holds especially true for the commercial sector, where hotels and recreational centres in particular offer tremendous application possibilities but where CHP is but rarely considered as an option. The delays in the implementation of the European Buildings Directive (2002/91/EC) have meant that until now, new and refurbished buildings with a total useful floor area of over 1000 m2 had not had to study the economic feasibility of CHP, an obligation under Article 5 of the Buildings Directive.
CHP from renewables
If there is one specific segment in which European demand is clearly high, it is that of biogas and biomass-fuelled CHP. Indeed, demand seems to be outstripping the offer of engines and turbines capable of running on such fuels. If the drive for biogas and biomass-fuelled installations can be explained in part by the substantial increase in natural gas prices over the past year, then a lot of the interest is evidently fuelled by the opportunities provided by supportive national incentive programmes and schemes. This explains why many of the requests for information for such units have been coming from Belgium, Germany and Italy: these three countries have similar support frameworks that highly reward electricity generated by renewables.
A biomass-fired boiler house in the Czech Republic. Biomass-fuelled CHP is the one sector in which European demand has been high (Biomass Technology Group B.V.)
It is easy to understand the appeal that biomass CHP holds for potential investors when one looks closely at the green certificate support mechanism in the Brussels-Capital Region. Assuming a wood-fired CHP system with a 25% electrical efficiency (50% thermal), the plant operator would receive 3.6 green certificates for each MWh of electricity produced – certificates that translate into about €253 per MWhe. The situation in Wallonia (Belgium’s southern region) is only slightly less rewarding, with such a system receiving approximately €184 per MWhe. For the sake of comparison, a natural-gas-fired system in Wallonia (35% electrical efficiency and 53% thermal) would get about one green certificate for every 3.5 MWh of electricity generated, which is about €32 per MWhe.
Issues of concern: grid connection and air quality
Grid interconnection issues have always been central in the arguments between proponents of decentralized systems and those who deem CHP installations a burden on the networks. With the liberalization of the electricity markets, many had hoped utilities would take a fresh look at CHP interconnection and scrap the old prevailing attitudes which have discouraged CHP through high connection costs or delays. Both the transparency and fairness of rules have to be improved. Unfortunately, while the situation is improving overall in most European countries, much has still to be done, as was recently pointed out by the findings of the ELEP project (European Local Electricity Production – www.elep.net).
Air quality has been identified as an increasingly important issue for small-scale CHP installations. With the draconian new limitations on NOx emissions being implemented in some European regions (in Austrian provinces for example), there is mounting unease at the idea that local air pollution standards could thwart the deployment of small-scale CHP in the near future before equipment manufacturers and installations would actually have the time to adapt to the (much) stricter standards. It is challenging for very small systems to meet emission thresholds of 80 mg/m3 for NOx and there is a fear that more local authorities will impose stringent levels, as has recently been done in Milan (100 mg/m3). These tough thresholds are, however, not the norm and in many areas, notably in southern Europe, NOx levels haven’t so far been a concern for engine or turbine providers.
Industrial and large-scale CHP: a tougher market with regulatory uncertainties
Industrial and large-scale CHP presents itself as a separate market from that of small-scale CHP. As a Hitachi representative explained at Power-Gen Europe in Cologne, ‘the low-hanging fruits have long been plucked’ – when it comes to the most technically and economically viable projects. While no one will contest this statement, it does not however imply that more of the technical potential could and should not be realized, despite limited if not non-existent support mechanisms for industrial CHP in most European countries.
A number of issues, however, have stood in the way of a dynamic industrial CHP sector. Gas prices is one of the most prominent issues, along with the uncertainty surrounding the reference values for separate electricity and heat production to be adopted under the CHP Directive 2004/8/EC (likely to be officially adopted in the weeks following the July 2006 Comitology meeting by the Member States representatives, ending a long period of uncertainty). Both these concerns have been the subject of many discussions. However, what are much less discussed are the impact of the European Emissions Trading Scheme (Directive 2003/87/EC) and especially the scheme’s National Allocation Plans on industrial CHP.
Allocation of carbon allowances has been a messy business so far
The EU Emission Trading Scheme (ETS) is a cornerstone in the fight against climate change at the European level. It is the first international trading system for CO2 emissions in the world and covers over 11,500 energy-intensive installations across the EU, which represent close to half of Europe’s CO2 emissions. These installations include combustion plants, oil refineries, coke ovens, iron and steel plants, and factories making cement, glass, lime, brick, ceramics, pulp and paper. As a result, most large-scale CHP installations are covered by the ETS.
The National Allocation Plans (NAPs) determine the total quantity of CO2 emissions that Member States grant to their companies, which can then be sold or bought by the companies themselves. The idea is that Member States limit CO2 emissions from the energy and industrial sectors through the allocation of allowances, thereby creating scarcity, so that a functioning market can develop later and overall emissions are then really reduced.
The European Commission’s official statement, issued in May of 2006, the first year of operation of the EU Emissions Trading Scheme, acknowledged that companies under ETS were long on allowances by 63 million extra.
Large-scale CHP has not been able to maximize its full potential due to gas prices, policy uncertainty and unfavourable treatment by the Emissions Trading Scheme (Centrax)
In spite of this, installation level data shows that in some Member States, highly energy-efficient CHP installations had to buy emission allowances on the market to cover their positions (this is especially the case for a number of UK-based CHP installations) due to allocation methodologies that failed to prevent cogeneration installations from being short in case of increases in total output over the period. This goes against the very spirit of the ETS, which is meant to reward highly efficient installations while forcing large, inefficient CO2-emitting installations to make progress towards more environmentally friendly operation. A cogeneration plant with an overall efficiency of over 80% should have no need to buy allowances when a power station with an efficiency of less than 40% does not.
While 2005 was the first year of the ETS and some trial and error was expected, efficient CHP installations should not be hit by an under-allocation of carbon allowances under the second phase of the ETS (covering the period 2008-2012). Meanwhile, many projects will stay on hold until phase-2 National Allocation Plans (NAPs) have been adopted. The implications of this are being felt in industrial CHP markets in EU Member States.
In order to help national administrations prepare their phase-2 NAPs, COGEN Europe has issued a position paper highlighting the best practices found in some of the EU countries’ phase-1 NAPs, together with some detailed recommendations on how to make the scheme work towards greater efficiencies and lower emissions from the power sector and industry. Indeed, not all large-scale CHP installations have been hurt in their operations by insufficient allocations, as some countries have to some extent harnessed the NAPs to reward and encourage CHP.
Phase-2 National Allocation Plans: how they could encourage CHP
There are a number of ways that NAPs could be used to encourage the development of CHP. With phase-2 NAPs currently on the drawing boards of Member States, here are some key elements that should be considered:
Adapting the NAPs based on the ‘benchmarking approach’
The ‘benchmarking approach’ is the most common promotion tool for high-efficiency cogeneration. In order to determine the allocation to the installation, the two reference values (tonnes of CO2 emitted per GWh of electricity and TJ of heat) are multiplied with the output values (GWhe and TJ). Thus, efficient installations performing better than the benchmark receive enough allowances to cover their emissions, whereas inefficient installations are short of allowances and are therefore incentivized to improve efficiencies. For phase 1, benchmarking systems promoting high-efficiency cogeneration are found in Germany, the Netherlands and Poland.
A CHP station in Charlottenburg, Berlin. Germany is one of the few countries that will implement its National Allocation Plan in a way that will act in favour of CHP investments (Bewag)
In order to adapt their NAPs according to the best-practice example, Member States should consider four principles:
- There should be no methodology in the allocation formula that raises the benchmarks for cogeneration plants.
- The benchmarks should be differentiated between fuel inputs. This would promote cleaner technologies and processes, not just cleaner fuels.
- There should be a production premium for high-efficiency cogeneration, giving a clear incentive for the use of cleaner processes.
- As an alternative to benchmarks based on average emission level, there should be a mix of best available technology (BAT) and average emissions, with a floor for the cumulative benchmark (heat and power) no lower than 630 kg per MWh of power output.
Germany will be implementing the proposed recommendations in part if the draft NAP2 remains unchanged. Under the proposed system, cogenerated electricity in accordance with Annex II of the CHP Directive would have a compliance factor (a factor allowing for certain technologies to receive preferential treatment [or the opposite] in the allocation of allowances) of 0.9875, while non-cogenerated electricity would see a much stiffer compliance factor of 0.85 applied (and therefore receive fewer allowances than if the electricity qualified as cogenerated electricity). Such a difference in compliance factors should send a very positive message to investors in CHP.
Taking out the compliance factor
Taking out (i.e. setting at 1) or softening (i.e. setting as closely as possible to 1) the compliance factor is the second-most common mechanism for using the NAPs as a promotional tool for cogeneration. This mechanism can be employed when grandfathering has been chosen as the guiding principle and no distinct cogeneration sector has been created. The compliance factor (also dubbed ‘potential of technological improvement factor’ or ‘progress factor’), which directly results from the intra-sector division of allowances and which is valid for the entire sector, can be taken out by applying the default value of 1 for CHP installations. This approach (with country-specific variations) is used, for example, in Austria, Belgium, France, Greece and Spain.
The production-based premium is the simplest mechanism for the promotion of high-efficiency cogeneration. For each GWh of cogenerated electricity produced, an additional amount of allowances is allocated to the installation. This approach implies that one part of the allowances pool is earmarked for cogeneration at the beginning of the process of designing the allocation plan. The production-based premium can be introduced into both the benchmarking and grandfathering systems. Member States that use a production-based premium include the Czech Republic and Germany.
Using historical emissions per power output rather than yearly emissions
It is important that the number of allowances should not be based on historical emissions per year, but rather on historical emissions per power output during the baseline year. Consequently, in order to calculate the number of allowances, the last factor should be multiplied with the forecasted power output during the allocation period. Given the variability of power output from cogeneration, this flexibility is necessary for achieving a fair allocation.
Taking the national potential for high-efficiency CHP into account
When deciding the allocation of allowances between sectors, the growth potential for high-efficiency cogeneration should be taken into account. Following Directive 2004/8/EC, Member States will during this year carry out studies on the national 2010, 2015 and 2020 potentials for high-efficiency cogeneration. These results should be part of the basic considerations when deciding on the growth factor for the cogeneration sector.
The time ahead
The way in which cogeneration installations and new CHP entrants are treated in phase-2 NAPs will to a large extent determine the market outlook until 2012 in the large-scale end of the business. While small-scale installations in most countries benefit from operational support under the form of feed-in tariffs, tradable certificates or tax exemptions, large-scale CHP installations are often not eligible for these support schemes, or benefit from them to a lesser extent. The last year has seen renewed activity in the lower power ranges, driven by better visibility and better remuneration for electricity exports. The question for the year ahead is twofold: will the strong small-scale market maintain its strong pace and will industrial CHP at last see its patience rewarded with a supportive long-term framework?
Thomas Bouquet is a Project Manager with COGEN Europe, Brussels, Belgium. Fax: +32 2 772 82 90 E-mail: email@example.com
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European statistics for cogeneration: still a mess
Eurostat, the statistical arm of the European Commission, released earlier in March this year a document with the rather lengthy – yet informative – title of ‘Combined heat and power (CHP) electricity generation in the EU-25 in 2002 totalled 299.2 TWh, 9.9% of total gross electricity generation.’ This seven-page report has at its core a number of tables giving vital market information such as CHP electricity generation and capacity figures, breakdowns by economic sector and fuel inputs, amongst others.
Drawn up by national administrations with a common methodological grounding, these statistics from the year 2002 are the latest to have received the official stamp of the EU Commission. This, however, does not imply that they are exempt from criticism. Italy and the Czech Republic are two good examples of how distortions can limit the value of the statistics. According to the 2002 data, installed CHP capacity in Italy is 4380 MWe, while in the Czech Republic it reaches 5012 MWe. What is not apparent here is that while the Italian figure only covers high-efficiency CHP capacity installed, the figure for the Czech Republic also includes the lower-efficiency CHP capacity. If the same was done for Italy, then its installed CHP capacity would rocket to about 13 GWe.
This key issue is apparent in the unofficial 2003 statistics obtained by COGEN Europe. In addition to these CHP ‘boundary’ issues, other problems abound, including: the fuel categories do not match those of the CHP Directive; small plants (typically under 100 kWe) are not taken into consideration; and efficiencies by fuel type are impossible to calculate.
If the sector wants to have reliable European-wide statistics, local players must work together with their national administrations. Not only would these statistics be a great source of market information, but reliable statistics are vital at a time when national governments have to draw up their countries’ potentials.
The 2002 Eurostat statistics can be downloaded from the website https://epp.eurostat.cec.eu.int/portal/ under the product reference code KS-NQ-06-003.