The economic benefits of suitably-sited cogeneration plants are considerable, and so well-known that the current lack of investment in the technology, particularly for large-scale plants, is not easy to understand. COGEN Europe’s Fiona Riddoch takes a look the barriers and opportunities around financing new CHP plants in European countries.

Cogeneration is energy efficiency on a grand scale. It provides a substantial energy efficiency saving whenever both electricity and heat are required and can be supplied simultaneously. If we reverse the usual logic of separate planning for heat (industrial processes, light industry processes, space heating, hot water, cooking) and electricity (lighting, electronic equipment, mechanical equipment, communications) and instead consider combined needs for heat and electricity, we find that industries, hospitals, commercial parks and even regions and cities demand both heat and electricity in a combination. This integrated thinking focusing on energy demand rather than supply turns a significant number of demand profiles into CHP demand profiles.

Moreover cogeneration, along with many energy efficiency measures pays back its investment in a reasonable time frame. In terms of the cost of abated carbon dioxide in €/tonne, a measure which links the energy and climate agendas, CHP ranks among the best. According to the McKinsey cost analysis of greenhouse gas abatement technologies of 2009, compared to the +€35/tCO2e for CCS or the +10€/tCO2e for nuclear power, CHP in the steel industry has a negative cost of -59€/tCO2e and a negative cost of -5€/tCO2e in the chemical sector. This is proof enough of the attractiveness of CHP, especially bearing in mind the background of an energy market still in the early stages of liberalization, where energy costs remain subsidized.

Figure 1 shows one of the McKinsey global greenhouse gas abatement cost curves, but without a label for the CHP items.

These cost curves lead to much discussion of ‘low hanging fruit’ and statements of ‘cost effective investment in energy efficiency being an obvious first choice.’ However, back in the real world the growth of CHP is still heavily influenced by government policy and support; there is little sign of any spontaneous purely market driven investment in CHP.


The European Policy Centre published an insightful analysis in 2008 on what it takes to make energy efficiency policy effective. In Working Document No29: ‘Gain without pain: towards a more rational use of energy’, authors Marie-Hélène Fandel and Fabian Zuleeg suggest that society and individuals do not act rationally in making energy efficiency choices. Typically, an overly short payback period for the investment is required by the investors and a range of additional market structure barriers and externalities (which are presently not factored into the financial calculations) prevent much of the investment.

The report concludes that a policy structure to encourage energy efficiency is needed, where:

  • pricing of energy ensures that energy costs are paid by those who benefit from the energy use and reflects all the costs involved
  • incentives and clear standards are put in place which encourage the take-up of existing energy efficient technologies
  • mechanisms are developed which can turn long-term efficiency gains into upfront benefits
  • the public sector acts as both a lever and an example
  • the information needed for individuals and companies to make rational choices is easily available and accessible.

A well known example of a market structure barrier to investment in energy efficiency in the domestic sphere is the landlord-tenant barrier. There is a net improvement to a property if the landlord invests in energy efficiency, because the property maintains its value and structure better and the energy bills fall. However, the immediate benefit of the investment falls to the tenant not the landlord (as the tenant pays the energy bills) thus the landlord has no immediate return on investment and will defer the investment in favour of other uses of the money.

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Figure 1. Mckinsey global greenhouse gas abatement cost curve – some measures have a net cost, some are of financial benefit

The barrier to investing in cogeneration is in many ways similar to the landlord-tenant problem. The landlord in this case is the heat load owner who has an option to invest in what delivers an overall societal benefit but with no short term benefit to themselves. The major benefit of reduced overall primary energy use is a benefit to society as a whole achieved through the investment and efforts of the heat load owner. The challenge is to turn this proposal into an economically attractive proposition for the heat load owner in other words for society to start thinking about integrated energy demand and supply.


Companies and organizations investing in cogeneration are looking for a reasonable return on their investment. Fundamentally, if there is no reasonable return, then investing in cogeneration for the greater good of society is not going to happen through the private sector. Even the public sector may have difficulties with such investments if the greater good accrues at the national not the local level. The situation is made more complex still by the fact that the choice to invest is most often a choice to invest in something which requires additional support and is not part of the owner’s core business.

If your business is food processing, it will be hard to persuade senior management to invest considerable capital in a small electricity generating station, particularly when they realise that the success of their electricity sales depend on their ability to trade successfully in a market where the incumbent players are large, entrenched and have first mover advantage. That is unless the payback is attractive.

The traditional electricity sector is also not going to easily step into the cogeneration business. Providing heat to third parties takes them into new and untested heat territory with the incumbent customer interface and potential contractual problems. The utilities have several other, simpler, lucrative investment options which lack the additional complications of two markets and different customer base of CHP.

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The Berlaymont building in Brussels, headquarters of the European Commission, incorporates a trigeneration system – a fine example for the rest of Europe

Any company, organization or individual choosing to use cogeneration has to establish early on that the overall economic case is good. The case has also to be good enough to represent a reasonable business proposition in its own right.


Industry is an ideal application for CHP. The large heat demand of industry can be supplied jointly with the creation of electricity, greatly improving the efficiency of production of overall energy use and offering already established industrial sites for any new generating capacity.

As the existing condensing power station capacity is phased out, industry should be encouraged to develop the necessary replacement capacity within its existing boundary fence. A Recent Pöyry study for Greenpeace highlighted that, in the UK, there is the technical potential for a further 13.2 GWe of CHP capacity, and all this is contained across the nine major existing industrial clusters of the UK.

The projected cost of fuel price attracts the attention of accountants looking at the return on a cogeneration investment. The fuel price is of course a difficult element to predict but, remembering that an industry using a substantial amount of heat will already be buying considerable quantities of fuel on the market, this is a relatively well understood risk. The electricity price, however, is a troublesome concept. Long-term pricing exists but, like energy policy in general, this is an area of continual policy meddling, unsettling the conservative investor who will end up asking for a higher rate of return to offset the risk.

Indeed the whole area of CHP policy is heavily impacted by government policy. The major single indicator of the profitability of a CHP plant is the ‘spark spread’ (which is simply the difference between the cost of the fuel and the price of electricity sold.) In times of favourable fuel prices and predicted favourable fuel prices, cogeneration investments tend to benefit. However, in all Member States cogeneration suffers under a lack of a clear energy policy of government, or repeated policy changes at a range of levels.

A principle recognized both in economics and engineering is that size matters. The economics of a 400 MWe CHP plant are substantially different from those of a 50 kWe unit. However, market experience says that at the moment even large CHP units are only able to influence a proportion of the investment problems they face through pure economics. Even if they are better equipped to compete on the electricity market, large projects are still placed under intense financial scrutiny and carry more risk and hence require higher expected IRR, while the more subtle market structure barriers affect every segment of the CHP sector.


The Member States reports under the CHP Directive 2004/08/EC include a list of barriers to the development of CHP. The barriers fall into three main categories:

  1.  Economic – access to capital (particularly in new EU Member States), high levels of risk around investment due to changes in the energy market and highly fluctuating fuel prices.
  2.  Grid connection – a wide range of aspects related to connection to the grid are mentioned in many Member States. For example, requiring experts to negotiate with the local distribution system operator (DSO) to identify where a new CHP can be sited, because the information is not prepared for third-party scrutiny, can lead to months of delay. Difficulties in contractual arrangements between CHP and DSO or transmission system operator (TSO) also play a big role, affecting project timescales and costs.
  3.  Individual Member State issues arising from their unique policy history – a particularly striking financial issue for cogenerators exists in new EU Member States. Many of these countries have district heating networks supplying only heat. These networks represent an ideal potential heat load for combustion plants. However, both the business model of the existing district heating schemes and the overall poor structure of the buildings and network pipes represent a huge challenge for investment in these Member States.


The European Union has an energy savings target of 20% (baseline 2005) driving improved energy use by 2020. The EU has also recognized that some level of special financing must be made available in order to enable capital projects on both a large and small scale. The European Investment Bank (EIB) has set aside specific funds for energy efficiency. Its investment in energy efficiency (all aspects) has averaged €2.2 billion per annum, which is 8% of total EIB signatures. In 2006 the bank invested €250 million in CHP projects. However, the EIB identifies credit issues, poor project preparation and the absence of suitably tuned lending instruments as challenges in finding investments which it can address. These issues require both policy and industry focus and a rapid resolution should be the target.

EU Member States are significant funders of CHP through different support mechanisms ranging from tax incentives to feed-in tariffs, and certificate schemes. Most countries have multiple support schemes for different fuels, and capacities of plant. Between capital incentives and financing of working capital these schemes seek to make cogeneration financially attractive for private sector investment. The success of the schemes across the EU is patchy. What is clear is that Member States tend to focus more of their scarce resources in funding renewables than they do in funding cogeneration, despite the lower cost per kWh of delivered electricity from CHP, bringing the argument full circle to: ‘why do we not invest in energy efficiency?’

COGEN Europe believes that we understand much of the problem but that it lacks focus both from policy makers and industry itself. COGEN Europe is dedicating a session to presenting the options at its annual conference on 2 June in Brussels which, this year, will be a joint event with Euroheat & Power ( – see box.

The European Union faces a huge challenge in achieving its 2020 energy savings objective. CHP is an available, ultra-reliable measure to achieve progress in this area; however, for it to prosper Europe has to really understand what it takes to make CHP an economically attractive option in Europe’s evolving energy market

Dr Fiona Riddoch is Managing Director of COGEN Europe, Brussels, Belgium


Teaming up for energy renewal: cogeneration and district heating COGEN Europe and Euroheat&Power conference, 2 June, Brussels

The new European Parliament and Commission face many challenges in energy policy and climate change abatement. COGEN Europe and Euroheat&Power seize the opportunity at their joint annual conference in Brussels to emphasize the proven capability and still untapped potential for cogeneration and district heating in the more efficient use of energy in Europe.

This year will be the first that the organizations representing cogeneration and district heating will use their most visible annual events to send a united message to the Commission and Parliament. Both associations will bring the strongest advocates and the most influential thinkers to Brussels to highlight the significant role which energy efficiency and cogeneration must play in resolving the climate and energy challenges which we face today.

The COGEN Europe and Euroheat&Power Joint Annual Conference is a unique event taking place on 2 June in Brussels with the theme: Teaming up for energy renewal: cogeneration and district heating.

The conference will focus on best practice, policy and strategy to prepare for Europe’s energy efficiency agenda.

The two organizations emphasize the strong common policy ground they share in focusing on an integrated approach to the supply of heat and electricity.

This very special one-day conference brings together representatives of both sectors who will highlight that both district heating and cogeneration systems are vital in achieving the ambitious energy and climate goals set by Europe by 2020 and beyond.

Conference programme

Morning session:

Energy Commissioner Günther Oettinger is invited to give the opening speech, which will be followed by a VIP panel involving representatives of the European Parliament, European Commission, IEA and sectoral champions.

Afternoon session:

In the afternoon, four parallel running sessions covering the major topics challenging the sectors, are foreseen. They focus on the following issues:

Economics of CHP
The role of CHP in smart grids Caring for citizens
Next generation district heating and cooling.

In the evening, a conference reception will take place in the Chalet Robinson.

For more information and registration, please visit or contact


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