Despite the uncertain economic climate, Delta-ee expects Europe to present a growing opportunity for some low-carbon, on-site technologies, including small-scale CHP in buildings and smaller industrial facilities. Michael Brown shows how past trends can give pointers to the future for decentralized energy.

To uncover how future European markets for decentralized energy systems might evolve, an interesting starting point is to view past energy forecasts from today’s perspective. Figure 1, for instance, contrasts Europe’s energy mix in 2010 with International Energy Agency (IEA) forecasts from its World Energy Outlook publications in 2002 and 2004. Natural gas and renewables provided a much higher share of generation than predicted, while carbon emissions were much lower.

Figure 1. A comparison of Europe’s power sector in 2010 with WEO forecasts *2002 WEO predictions for renewables and carbon emissions; 2004 WEO prediction for gas

Figure 2, similarly, compares a series of CHP forecasts from 2000 or earlier, including one from the long-range scenario planning of a major European supplier of equipment to the European CHP sector. The figure also shows the actual outcome in 2010 – hardly any market growth at all over the decade.

Not shown on the graph, but worth highlighting nonetheless, are the following bullets from a presentation slide on residential scale micro-CHP (1-5 kWe) shown in 2000 by a leading sector specialist:

  • technology issues mainly resolved;
  • products expected to reach market in two years;
  • significant market penetration within 10 years.

UNDERSTANDING THE FUTURE

In part, this retrospective shows how challenging forecasting can be. But it also highlights four important messages from the last 10–20 years that can also help us understand the power sector’s future.

Policy – the fundamental driver

The most profound driver of energy markets is policy – and this is hard to model and forecast.

It is not difficult to conclude that the boom in renewables (the one clear manifestation of climate policy), the shift towards combined cycle gas turbine (CCGT) power generation (as a consequence of policy-driven liberalization of the power sector) and the flatlining of the CHP market (as a consequence of its relative neglect by policymakers) are all directly linked with specific policy choice.

Reducing carbon emissions

The most profound driver of policy has now shifted decisively towards the goal of reducing carbon emissions. Energy sector carbon emissions are significantly lower today than forecast over a decade ago, reflecting this shift. Even the landmark agreement of the Kyoto Protocol in 1997 failed to end significant political, corporate and scientific scepticism about the link between man-made emissions and climate change. Today, in dramatic contrast, the consensus on the importance of strong and long-term action to reduce carbon emissions is almost complete.

Power of the environmental NGO lobby

European policymakers have tended to pick high-appeal technology winners based in large part, we believe, on effective lobbying by environmental non-governmental organizations (NGOs). The big winner, so far, of policymakers’ pursuit of lower emissions has been generation from renewables, especially solar PV, as well as onshore and – more recently – offshore wind. Ambitious targets to be delivered through feed-in tariffs or renewable certificate systems have provided the mechanism.

Figure 2. European CHP capacity – below the low end of expectations

How has this policy success been achieved? Certainly the renewable industry has done a good job of communicating its message and highlighting the benefits. But, in our experience at least, up there among the most effective and persistent policy influencers in the corridors of power are the ‘green’ NGOs. And they have tended to focus more strongly on politically attractive renewable electricity than on the more mundane options of low-carbon heat, or on high-efficiency fossil-fuel options like CHP.

Inertia of the incumbent

In some ways the energy utility industry has tended towards the conservative. For example, the major energy companies have not invested strongly in on-site distributed generation in general and CHP in particular. One reason for this is that it might reduce the market for their existing generation assets. The changes that have taken place in the power generation sector have instead been mainly around fuel switching: essentially from large-scale coal and oil plants to large-scale gas and wind plants. The electricity system today therefore remains largely as it was decades ago: remote generation and long-distance transmission and distribution to load centres, and final sale of kWh to end consumers.

The first three of these factors have, we believe, important implications for how decentralized energy markets are likely to move over the next few years (and we will also return to the fourth point). Not least is the consequence of the strong growth in unpredictable wind and solar generation, requiring new flexibility in the electricity system, including through demand-side CHP and heat pumps.

HOW WILL EUROPEAN MARKETS MOVE?

So what are our views on how European markets will move in the short term and towards 2015 and 2020?

First, policy will remain the predominant driver of energy markets. All things considered, energy is just too important to be left entirely to the free market: lights must remain on; consumer bills must not go too high; carbon emissions must come down. These are not going to happen by themselves.

Second, carbon is now firmly front-and-centre of mainstream energy policy both at the EU level and at the national level in many countries. It may be taking a temporary back seat while Europe wrestles with its debt crises, but it will return strongly. Indeed, it is significant how resilient climate-change ministry budgets have proved to the draconian spending cuts now being introduced across Europe.

Third, and most importantly, while the policymakers’ habit of picking technology winners will continue, their gaze now covers not only electricity but also two other types of solution: low-carbon heating and energy efficiency. And the reason for this is, we believe, linked to the growing recognition by the green NGOs and others that we need much more than renewable electricity generation to achieve our long-term emissions reduction targets.There is a strong and growing accumulation of evidence for this:

  • The European Commission, definitely not to be underestimated in both its persistence and its global policy influence, produced in 2011 a flagship initiative to promote efficiency: the proposed Energy Efficiency Directive. We believe the final directive – while neither perfect nor as ambitious as the Commission would like – will have high impact across the EU in accelerating the introduction of new incentives for efficiency, including CHP.
  • The European Climate Foundation, a highly regarded green NGO, published a landmark study in 2010 that stated ‘energy efficiency is vital to European decarbonization and green growth strategies’.
  • Not only the green NGOs are getting involved. Within industry, new initiatives for ‘supply-side efficiency’, including CHP and waste heat recovery systems, have been launched. In 2011 these included EME2 (www.eme2.eu), whose members include GE Energy and German energy utility EWE.
  • In February 2012, the UK government launched an initiative that would have been hard to imagine even one or two years ago. It created a new and influential division within its Department of Energy and Climate Change, the Energy Efficiency Deployment Office. Not only that – DECC is separately bringing forward a landmark heat strategy aimed at decarbonizing heat supply in residential and commercial buildings.
  • Less than two years ago, Poland published a major strategic energy plan: Energy Policy Until 2030. Of its six main pillars, the first is: ‘To improve energy efficiency’. It also features strong objectives for CHP and decentralized energy systems.
  • Even smaller EU Member States are embracing this new approach to energy policy. In Delta-ee’s view, two of the most innovative incentive regimes for CHP that have ever been introduced in Europe in recent years have been developed in Slovenia and Slovakia.

EVIDENCE FROM OUTSIDE EUROPE

We also see other evidence from outside of Europe that markets for low-carbon products and technologies that can be deployed at the customer end of the energy chain are likely to increase greatly.

  • Japan is one of the world’s most energy-innovative countries. As an advanced economy with precious few energy resources of its own, it has to be. It now also has the new challenge of maintaining a strong energy infrastructure with a much reduced contribution from nuclear power. METI, the energy ministry, is therefore making priorities of the ‘three Denchi brothers’ – fuel cells, batteries and solar PV cells – a trend that highlights the growing importance being given to energy storage and on-site CHP and renewables in Japan. And, we believe, not just in Japan.
  • China is not only a major energy user but is already an emerging energy product manufacturer and technology developer. It is acutely conscious of the need to accelerate efficiency and reduce emissions. Anyone who has been to a Chinese city will recognize the importance of this. Its recent 12th five-year plan has seven main pillars, no fewer than three of which are energy related. They are: energy efficiency, both supply-side and demand-side; new energy vehicles, including electric vehicles and the need for end user located charging infrastructure; and ‘new energy’.We see China not only as a major market for such decentralized energy systems, but also as a strong force in technology innovation – witness its rapid emergence as a leading manufacturer of PV and wind turbines.

Figure 3. Market projections for 0.4–3.0 MWe gas-fired CHP and biogas power in Europe

Figure 4. Total sales of heat pumps primarily for heating (includes ground source and air source heat pumps, and excludes exhaust air heat pumps and heat pumps used for cooling) in Germany, France and the UK.

DECENTRALIZED ENERGY MARKETS TO 2020

To come to the most important question of all: What might these new variations on old themes mean for decentralized energy market development in the short-term and out to 2015 and 2020?

Recent Delta-ee research provides three examples of how the market may develop:

Gas engine CHP and biogas system growth

Gas engine CHP and biogas system sales are likely to expand in Europe at a decent annualized rate of about 8% between now and 2020. In late 2011, Delta-ee completed new country-by-country research on the European 0.5–3.0 MWe gas engine market1. Figure 3 shows our consolidated forecasts for Europe’s top five markets. After a slow start, due largely to macro-economic factors, we see clear evidence of several drivers underpinning stronger growth in the medium term, particularly in the biogas market.

Figure 5. Gross margin potential from mass market energy services in one European country to 2020

Steady growth for air source heat pumps

Air source heat pump sales are likely to expand in several major European markets. As part of our analysis of European heat pump products and markets, Delta-ee has projected steady growth in deployment in several markets, underpinned by strengthening renewable energy policies and building regulations, and continuing though incremental improvements in cost and performance. See Figure 4.

Energy utilities will transition

The ‘inertia of the incumbents’ is also changing. Energy utilities will transition, albeit at a gentle pace, from suppliers of kWh to providers of mass-market energy services. In 2011, Delta-ee research2 identified the emerging utility activities and the prospects for roll-out of mass market energy services in Europe (e.g. micro-CHP, energy efficiency, heat pumps, boiler servicing, home energy management systems).

The concrete evidence is still patchy – but we believe increasingly compelling – that the consumer-facing strategies of the utility incumbents are shifting. Delta-ee has calculated that the total gross margin potential from energy services in the EU in 2020 will be between €10 billion and €15 billion ($13–20 billion). Figure 5 summarizes the data from one of the major European markets that we have researched.

CONCLUSIONS

Overall therefore, we see a growing body of evidence from analysis of both past and recent trends – and in particular how reality has diverged sharply from expectation – which gives some solid indicators of a more decentralized future, including for CHP. These pointers suggest an expanding opportunity in Europe, and some EU countries in particular, for a growing range of decentralized energy product sectors.

Michael Brown is a director of Delta Energy & Environment, Edinburgh, Scotland, UK Email: michael.brown@delta-ee.com

REFERENCES

1 The European Market Outlook to 2020 for 0.4–3.0 MWe Gas Engines. Delta Energy & Environment, 2011

2 Mass Market Energy Services – the Outlook to 2020. Delta Energy & Environment Multi-client Study, 2011

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