The International Energy Agency’s Thomas M. Kerr presents a summary of a new report from the CHP/DHCCollaborative, which was launched in March 2007. Here, he attempts to guide policy makers and industry by quantifying the energy, economic and environmental benefits that might result from greater use of CHP and district heating/cooling technologies.

Thomas M. Kerr, IEA, France

At the conclusion of the Group of Eight (G8) Summit in Heiligendamm, Germany, in July 2007, the leaders developed a communiqué to summarize key messages. Among other things, the communiqué directed countries to “… adopt instruments and measures to significantly increase the share of combined heat and power (CHP) in the generation of electricity”. As a result, energy, economic, environmental and utility regulators are looking for tools and information to understand the potential of CHP and to identify appropriate policies for their national circumstances.

The new IEA report, CHP: Evaluating the Benefits of Greater Global Investment1, answers policy makers’ first question: What are the potential economic, energy and environmental benefits of an increased policy commitment to CHP? It includes, for the first time, integrated global data on CHP installations and analyzes the benefits of increased CHP investment in G8+5 countries (the G8 nations and Brazil, China, India, Mexico and South Africa). A second report, to be published later in 2008, will document ‘best practice’ policy approaches in the energy, environmental, utility regulatory, financial and local planning arenas that have been used to expand the use of CHP.

The IEA has gathered data from around the world to assess the current share of CHP electricity generation of total national electricity generation. Two challenges have confronted this task:

  • Not all countries systematically collect CHP data
  • Where countries do collect data, they tend to use similar methodologies. But there is no international definition or standard to ensure that all data reported as CHP are truly comparable. The main exception to this is the European Union (EU), where there is a standard methodology across all member states.

To address this lack of data and the differences in definition of CHP, the IEA has attempted to collect reliable and comparable CHP data from over 40 countries. Taking into account the differences in methodologies between countries and the depth of research that these countries undertake, we believe that this new data on current CHP status, as well as being the most comprehensive available, forms a solid basis for the potential and benefits modelling discussed below. Table 1 summarizes current estimates for global CHP capacity for those countries where data was collected.

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Figure 1 presents results from the same analysis for the G8+5 countries in terms of the CHP shares of total national generation.


Figure 1. G8+5 countries: CHP as a share of electricity generation.
Source: IEA data and analysis; data merged from years 2001, 2005, 2006.
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In general, with the exception of Russia, CHP makes a relatively small contribution to electricity production in the major countries.

There is, however, some variety among countries, which can be explained by different national circumstances. For example:

  • Germany has made more progress in incentivizing CHP, in particular based on district heating and industrial CHP
  • Brazil, where the relative demand for residential and commercial heating is much lower, has based its electricity system on the development of large-scale and remote hydro generation. Only in recent years has a market for CHP opened up, based mainly in the industrial sector with a particular focus on bagasse-based CHP in sugar cane mills
  • Russia, with a significantly higher share than the other countries, has a long tradition of heat supply to all sectors through district heating networks linked to power plants. It has extended this energy supply model throughout the country.

CHP potential – an accelerated CHP scenario

CHP accounts for around 9 per cent of global power generation. Its economic potential, however, is likely to be significantly greater. For example, the following countries have identified the potential for CHP, each using different assumptions:

  • A number of European studies cite CHP potentials in the range 150-250 GW and more than a doubling of CHP capacity by 2025, giving a CHP electricity capacity share of more than 17 per cent. EU CHP potential analysis is ongoing and will improve in the future, as the EU CHP Directive is implemented. The CHP Directive requires member states to undertake comprehensive national studies of the potential for CHP.
  • The Canadian government, in 2002, identified a potential for CHP, under a ‘CHP Promotion’ scenario, of 15.5 GWe in 2015, which is around 12 per cent of projected national capacity (current CHP share of generation is about 6 per cent).
  • Estimates of CHP potential in the US range from an additional 48-88 GW of new CHP potential to 110-150 GW (excluding CHP/DHC). If implemented by 2015, the CHP share of total electric capacity would rise from a current level of 8 per cent to 12-21 per cent.
  • The UK CHP economic potential study undertaken by the government identified an economic potential for CHP of 17 per cent of total national power generation by 2010 (currently 7.5 per cent), with a potential for an additional 10.6 GWe of CHP on top of the current level of 5.4 GWe by 2015.
  • The German CHP target was in 2007 raised to 25 per cent (a doubling of the current share) by 2020, based on a National Potential Study conducted by the government under the EU’s CHP Directive. This study also cites economic CHP potential to be up to 50 per cent of electricity capacity.
  • In India, the additional potential for industrial CHP alone has been identified as exceeding 7500 MWe.
  • CHP potential in Japan for 2030 has been identified as up to 29.4 GW, around 11 per cent of projected total capacity for that year.

Given the findings of these existing and planned studies, for this analysis, a simple top-down approach was chosen, rather than a detailed bottom-up approach that might, for example, study specific CHP candidate sectors and assign growth rates to each, taking into account national circumstances. The top-down approach can be compared with existing CHP potential studies which have been undertaken by some of the countries, using a wide range of different methodologies and approaches. Given the G8 ministers’ charge to enact CHP-friendly policies, the more pressing need is to estimate the potential benefits of expanded CHP use as a way to guide these future CHP policies.

The level of CHP development in a country depends on heating and cooling demand in the industrial, commercial and residential sectors. This demand was used as the basis for the approach taken to analyze CHP potentials: to estimate, taking into account different national circumstances, the proportions of current and future heating/cooling demand in each of the countries that could be reasonably served by CHP.

The assumption underpinning these estimates was that there exists a pro-CHP policy regime (for example one that removes barriers to CHP and introduces targeted incentives) that corresponds to rates of CHP development that approach the rates seen over the past three decades in countries such as Denmark, the Netherlands and Finland.

Figure 2 shows the expected rise in CHP as a share of national electricity generation in this sort of accelerated CHP scenario. Most countries see a small increase until 2015, with a correspondingly larger growth by 2030 as policies are enacted and begin to be widely implemented. As a whole, the share of CHP rises from 11 per cent of electricity generation today to 15 per cent in 2015 and 24 per cent in 2030.


Figure 2. G8 +5 countries: CHP potentials under an accelerated CHP scenario, 2015 and 2030.
Source: IEA data and analysis
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CHP application and fuel use will vary greatly depending on the country concerned. For example, in China, a considerable proportion of CHP in the short term is likely to be based on coal and used in district heating and industrial applications. In the period to 2030, greater use of natural gas and renewable fuels is envisaged with the development of smaller applications providing both heating and cooling at the individual building level. In France, by contrast, gas is likely to be the predominant fuel for CHP in the short term with the share of renewable fuels growing as the market moves beyond 2015.

Different national circumstances explain the different results. Brazil, for example, is projected to remain a hydropower-based economy. It will consequently have less opportunity for CHP. Similarly, a high growth in end-use energy efficiency is projected for Japan. This is an important reason why there is less scope for CHP investment there than in other countries where heating/cooling and electricity demand grow faster. The relatively slow growth of industrial energy demand in Mexico also explains why CHP grows more slowly there. Russia, by contrast, is already a heavy user of CHP, and, given projected high energy demand growth there, CHP has a clear opportunity to expand even more widely.

The benefits of increased use of CHP

To analyze the benefits of achieving the CHP potential that could be realized in the 13 countries, the IEA adapted an existing model developed by the World Alliance for Decentralized Energy (WADE) 2.

In summary, the model ‘builds’ new power generation, according to user-defined preferences, to meet future electricity demand growth and to replace some capacity that already exists today but that will be retired in the future. The model thus allows the user to determine different power generation mix scenarios to meet future energy demands. The model then produces outputs that compare the different scenarios in economic and environmental terms.

For this analysis, the model was programmed to build and compare two scenarios: the Accelerated CHP Scenario (ACS) described above and the IEA World Energy Outlook 2007 Alternative Policy Scenario (APS). The APS takes into account those policies and measures that countries are currently considering and are assumed to adopt and implement, taking account of technological and cost factors, political context and market barriers.

The main results of the CHP benefits modelling are shown in Figures 3-5. Figure 3 compares the IEA APS with the ACS in relation to capital cost investment in the electricity sector and breaks down the overall total investment requirement in new generation capacity (CHP and non-CHP), and new transmission and distribution (T&D) system capacity. There is a 3 per cent reduction in overall costs by 2015 ($150 billion), which mainly represents the reduction in investment required in new non-CHP generation capacity. By 2030, these cost reductions climb to 7 per cent ($795 billion). They are derived through:

  • Savings in T&D network investment. Since CHP generates electricity at the point of use, the requirement for T&D is reduced as CHP market share increases
  • Savings through a significant reduction in non-CHP generation. The capital cost of new CHP investment is lower than the average capital cost of the central generation plant that is displaced. In addition, since greater use of CHP reduces T&D network energy losses, it also reduces the overall amount of generating capacity required to meet a given amount of demand.

Figure 3. Cumulative global power sector capital costs, 2005–2015 and 2005–2030.
Source: IEA data and analysis
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It is sometimes claimed that CHP, and other low-carbon decentralized energy solutions, will result in an increase in energy costs for consumers. The impact of CHP market growth on delivered electricity costs was therefore assessed. Figure 4 compares delivered electricity costs to the end consumer for the two scenarios. The overall cost is again divided into the different constituents, including T&D system investments.


Figure 4. Delivered electricity costs, 2015 and 2030
Source: IEA data and analysis
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Overall, there is a small reduction in delivered costs to end consumers in both time periods, 1.1 per cent in 2015 and 0.3 per cent in 2030. Thus it appears that increased use of CHP may not lead to increased electricity prices. Note that the fuel component of the delivered costs is higher in the ACS as some non-fossil and coal central generation is displaced by higher price natural gas. This is in turn offset by lower T&D and generation plant costs.

The analysis also shows that there is a reduction in fossil fuel use in power generation. These savings are in part offset by the fact that some new CHP in the ACS displaces nuclear capacity projected by the APS. In 2015, the fuel use in the ACS is 1.1 per cent less than the APS; in 2030, the saving rises to almost 6 per cent of total fossil fuel use in the 13 countries.

This reduction in fuel use leads to significant cuts in GHG emissions arising from new power generation. Figure 5 shows the comparison between the two scenarios for carbon dioxide (CO2) emissions arising from the new power capacity.


Figure 5. Carbon dioxide emissions, 2015 and 2030 Source: IEA data and analysis
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In 2015, in the ACS, CO2 emissions arising from new generation are reduced by more than 4 per cent (170 Mtonnes/year), comparable to around 40 per cent of the EU-25 and US Kyoto targets (the difference between 1990 Kyoto base year emissions and the respective targets), while in 2030 this saving increases to more than 10 per cent (950 Mtonnes/year).

This is comparable to:

  • The annual emissions arising from 140 GWe of coal fired power plants operating at a load factor of 80 per cent
  • One and a half times India’s total annual emissions of CO2 from power generation.

Figure 6 gives an indication of the contribution that CHP can make to achieving global climate stabilization.


Figure 6. Contribution of CHP to a 450 ppm stabilization scenario Source: IEA data and analysis
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The World Energy Outlook APS already makes an important start toward bridging the gap and therefore includes a degree of CHP market growth above and beyond what exists today, while the ACS demonstrates a possible additional contribution that CHP can make towards stabilization.

Conclusions and next steps

The analysis confirms that CHP, including CHP/DHC, offers policy makers and industry significant benefits and should be an essential strategy as we investigate paths toward a lower carbon, more efficient, lower cost and reliable energy future. Some of the key conclusions are:

  • CHP can reduce CO2 emissions arising from new generation in 2015 by more than 4 per cent (170 Mtonnes/year), while in 2030 this saving increases to more than 10 per cent (950 Mtonnes/year) – equivalent to one and a half times India’s total annual emissions of CO2 from power generation. CHP can therefore make a meaningful contribution towards the achievement of the emissions stabilization necessary to avoid major climate disruption. Importantly, the near-term reductions from CHP can be realized starting from today and as a consequence of the economic benefits offer substantial opportunities for low- and zero-cost GHG emissions reductions.
  • Through reduced need for transmission and distribution network investment and displacement of higher cost generation plant, increased use of CHP can reduce power sector investments by $795 billion over the next 20 years, around 7 per cent of total projected power sector investment over the period from 2005 to 2030.
  • If the energy saving and capital cost benefits of CHP are allocated to its electricity production, growth in CHP market share can slightly reduce the delivered costs of electricity to end consumers. This is contrary to the common view that CHP and other decentralized low-carbon solutions result in higher electricity costs to consumers.
  • The specific potential identified for each country varies widely depending on different national circumstances and opportunities. For example, Brazil, a largely hydropower-based economy, is not expected to see such high growth as Germany, which is likely to be more dependent on fossil fuels and biomass. More work is needed in the +5 countries (Brazil, China, India, Mexico, South Africa) in particular to analyze the potential for CHP expansion.

This report provides a projection at the global level of the potential benefits that a more deliberate investment in CHP could deliver. However, it is only one piece of the puzzle.

The conclusions above beg the question: “Why is there not more CHP/DHC if the economic and environmental justifications are so strong?” One of the key challenges is that many projects look favourable ‘on paper’; that is, when analysed in isolation from existing market and regulatory practices. However, in practice, the adoption of these technologies has historically been limited by important barriers, including:

  • Lack of integrated urban heating/cooling supply planning
  • Electricity grid access and interconnection regulations
  • Lack of knowledge about CHP benefits and savings
  • The lack of an agreed methodology to recognize energy saving and environmental benefits.

A few countries have been successful in increasing the use of CHP and DHC by investing in a comprehensive set of policies designed to overcome market barriers and allow them to compete equally in the marketplace. These countries and others will need a closer look as policy makers attempt to find solutions and models that are suitable for their unique circumstances.

The IEA’s International CHP/DHC Collaborative is working on these issues. CHP: Evaluating the Benefits of Greater Global Investment is the first of two reports; the second will be published later in 2008 and will include lessons learned from policies summarized from a series of case studies covering key energy, environment and utility regulatory/planning approaches that have been taken in different countries. The next report will also include a list of priorities for different regulators that are interested in implementing more advanced policies.

1 Combined Heat and Power: Evaluating the Benefits of Greater Global Investment, IEA, 2008.

2 WADE, www.localpower.org

Thomas M. Kerr is a senior energy analyst at the IEA, Paris, France, www.iea.org