Still in the dark?

Cogeneration in the UK

Britain’s CHP industry has been in the doldrums for a few years now, with very few new plants being built and some existing ones ceasing to operate. Thomas Bouquet surveys the historical reasons for this stagnation – suggesting weak government support among others – but indicates that better times are not far away.

In the opening paragraph of his article ‘Changing conditions for cogeneration in Europe’ in the July-August 2004 issue of COSPP, Peter Làƒ¶ffler sounded an optimistic note: ‘In recent years, one of the EU’s policy objectives has been to develop cogeneration as a means of reducing carbon emissions, saving primary energy and enhancing security of energy supply. But the start of the electricity market liberalization around 1990 had disastrous effects on the development of cogeneration, and recovery from these hard years has been slow. Now, a new picture is emerging, with the outlook for cogeneration considerably brighter’. 1

Reading these lines, cogenerators in the UK must have wondered whether or not this applied to them, and what has changed, or is changing, in the UK – if anything. COGEN Europe’s new European Cogeneration Review report on the UK2 – released in July of this year – is an in-depth analysis of the CHP industry’s legal and economic environment and looks at the issues influencing the sector’s current and future activity. And the good news is that, after four difficult years, the prospects are looking better.

But first, let’s take a step back in time in order to understand what went wrong, before looking at how things are slowly improving.

Up to 1990, approximately 2000 MWe of CHP capacity was installed in the UK. Most of the plants were sized to meet on-site energy needs, due to restrictions on electricity exports imposed by the state-owned, vertically integrated monopoly utility, the Central Electricity Generating Board.

The 1989 Electricity Act initiated a profound liberalization of the electricity supply industry and signalled a major market opportunity for the development of new CHP capacity, with full market opening in 1999. Advances in gas turbine technologies and improved access to natural gas markets – well ahead of EU requirements – complemented the process. Table 1 summarizes the development of CHP between 1995 and 2002.

How will they affect the development of cogen?

Around the world, the price of natural gas is rising. But what does this mean for the competitive position of cogeneration – much of which is fuelled by gas? Aurelie Morand and Michael Brown report the results of economic analyses carried out by WADE which suggest that, in the many countries that generate a good proportion of their power from gas, cogeneration becomes an even better bet with higher gas prices.

The traditional indicator of the market viability of cogeneration plants is the price of electricity. Since electricity is the highest-value product of a cogeneration system, a market that prices it highly will increase project returns. So far, so simple. However, another part of the commercial equation is the cost of system inputs: the fuel. Natural gas is continuing to grow in importance as a fuel for cogeneration; indeed in many countries it is the fuel of choice. Yet gas price trajectories are upward, in some cases steeply upward. What impact will there be on cogeneration market development?

Some of the most startling gas price rises have been seen in the US, as Figure 1 shows. The trend of the last 2-3 years is dramatic, and there has been little, if any, let-up. In Europe, trends are similarly upward, but not so severe. In this case, there continues to be a strong link between the market prices for oil and gas and, with the price of the former more than doubling over the last five years or so, the impact on gas prices has been significant. Prices have continued to surge in 2004. The UK gas market operates slightly differently and price rises there have been a little more subdued (though they have continued upward this year). Figure 2 shows typical European trends.

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