Fiona Riddoch, COGEN Europe, UK
In January 2008 the European Commissioner for Energy Andris Piebalgs addressed a cogeneration seminar in Brussels. He reflected on the challenges facing Europe’s energy policy and highlighted his intention to increase efforts on energy efficiency in the 12 remaining months of his tenure. On taking up his position at the Directorate General, Piebalgs had said that energy efficiency was his priority and now, just 12 months from the end of his period at DG TREN (Directorate-General for Energy and Transport), he is returning to the theme. His message to the seminar was clear: industry should push cogeneration forward the energy efficiency agenda is more important than ever.
The Grifols facility near Barcelona, Spain now fitted with a cogeneration system
The present Commission has not performed well on energy efficiency. Commissioner Piebalgs was right in identifying energy efficiency as his priority. But the priority seems to have been overtaken by other more glamorous plans. The Energy Efficiency Action Plan from 2006 did not deliver a convincing follow up to the initial Green Paper on the topic. Sufficient resources in DG TREN have not been allocated soon enough, with resource being added only in 2008. The whole issue, by being taken out of the original Energy and Climate package and treated in the separate Energy Efficiency Action Plan, appears to have been relegated to second place.
It would be unfair to put the blame for missed energy efficiency opportunities only on the Commission. In fact, historically, the Commission has done better than virtually all of the Member States. The recent reports from Member States on their energy efficiency policies, delivered mid-2007 (required under the Energy Services Directive), confirm this judgement. The plans are, for the most part, unambitious and energy transformation and distribution services are barely addressed. Cogeneration is considered in only a quarter of the plans and even in these largely without real direction, or full evaluation. But it is not unjust to observe that the Commission has failed to keep up the momentum, without which any expectation of a radical and necessary shift in overall EU energy efficiency policy will not occur.
If Europe is serious about energy efficiency, the autumn strategic energy review on security of supply should be a rallying call for the sector. It is clear that efficiency improvements at all stages of the fuel supply chain are a necessary first step in improving security of supply. Simple efficiency will reduce consumption and hence dependency on suppliers. The fuel savings achievable through cogeneration are demonstrable and the EU Cogeneration Directive sets a framework which will support Member States in promoting this energy efficiency technology. Security of supply stands to benefit from cogeneration as does CO2 abatement, European industry and enterprise.
POLICY AND SUPPORT BRINGS RESULTS
But what greater role can industry play in promoting the cogeneration sector? The technology is mature and the channels of supply are in place. There is investment in development and there is adequate experience, knowledge and applications know-how available.
The reality is that the history of success of cogeneration in Europe is a story of policy and support. The average installed level of cogeneration across Europe is less than 10 per cent of electricity generation. The market has been generally flat for several years. There have been historical notable successes for the cogeneration market with percentage of electricity generated in Denmark at over 50 per cent, Finland at around 40 per cent and the Netherlands at around 30 per cent. However, this was achieved as a direct result of a favourable policy structure deliberately set by government to encourage better energy efficiency, and achieved painstakingly over decades, requiring considerable political will.
It is not difficult to understand why policy plays a crucial role in promoting cogeneration. While there are applications where cogeneration is a self-evident choice, for example in areas where heat loads are high and grid supply is unreliable, there are a limited number of these in Europe. At the moment the market is strong in countries with strong economies and limited infrastructure such as India and China. However, in the EU during the past five years installing cogeneration has not been an obvious first choice.
Installation of cogeneration faces the owner of the plant with the challenges of the markets for both power and heat. This is potentially in addition to their core business, or if it is their core business and they are selling heat to multiple users, there is an even higher demand for capital investment. Both of these characteristics spell additional risk and bring the investment decision under additional risk costs.
A favourable Member States policy structure adds clarity to the financial decision. Certainty of policy structure, with removal of barriers to grid connection, should be enough to encourage investors in cogeneration for larger investments. But there is plenty of evidence that investment in energy efficiency also requires a high rate of return in order to be attractive.
UNCERTAIN RETURN ON INVESTMENT
Even in straightforward and technically low risk projects, the return on investment looks increasingly difficult to assess with volatile fuel prices and general energy market uncertainty. Far better, customers think, to leave the energy market to the experts and buy heat and power separately.
A recent European Policy Centre task force on ‘Rational Use of Energy’ reported its findings in a publication (EPC Working Paper, ‘Gain without pain: Towards a more rational use of energy’, March 2008). The task force looked across four sectors, (buildings, appliances, transport and industry) and in all four the same pattern could be observed: in order for energy efficiencies to be promoted, a pay-back period of two years, with a maximum three years, seems to be necessary. Private or public house-owners, buyers of cars or appliances and operators of industrial processes appear unwilling to invest, or pay extra for efficient items, unless they have reason to expect a return on the investment or the added price of solidly above 20 per cent per annum.
Most observers today consider CO2 the highest priority pollutant facing the world and still we are only ready to take action against it if we can make a comfortable 20 per cent or more annual gain. If this is really the measure used for assessing cogeneration investments then Europe must focus on the financial models that its policy can offer to stimulate investment.
Maybe the recent focusing on market-based mechanisms to the extent of marginalizing other policy instruments is a problem. It is certainly proving to be in the case of the EU Emissions Trading Scheme (EU ETS). This flagship market-based instrument for reducing CO2 would manifestly penalize cogeneration in the form put forward by the Commission earlier this year. The major problem for cogeneration in the ETS is that the system is based on point emissions of CO2. A cogenerator is faced with having to gain benefits for offset emissions elsewhere or be penalized for a net increase in emission on bringing electricity generation on site. There are ongoing, vigorous efforts by the cogeneration sector to have the potential negative impact of the proposed legislation mitigated through the Parliamentary and Council process, but there is still a forceful belief prevalent among policy makers that market mechanisms are somehow independent of policy decisions.
The explanation of the remarkably good performance of energy demand in terms of energy efficiency achieved in the Danish economy (constant energy consumption with 70 per cent economic growth over a 25 year period) was largely due to conventional ‘demand-and-control’ policies, supported by economic incentives, and if the EPC study is correct the market alone will not provide the right signals to invest in cogeneration across Europe under the present circumstances.
STRONG SUPPORTING POLICY IN SPAIN AND GERMANY
The European market for cogeneration has remained fairly constant over the past few years, and over this period, while the need for strong supporting policy was recognized, the process to enact it through the EU Cogeneration Directive (2004/08/EC) was glacially slow. Projects in medium to small capacities, however, continued to come forward in the food industry, hospitals and universities. Projects based on bio-derived fuel were meanwhile stimulated by the renewables legislation and continued to be the sole bright spot on the market. Traditional sectors for industrial cogeneration such as paper, chemical industry, cement, all using cogeneration, continued through the period to renew and upgrade plants.
However, more encouragingly, the cogeneration market in Europe is starting to see real innovation in policy support as some Member States make full use of the energy efficiency potential offered by cogeneration and fully implement the promotional possibilities contained in the Cogeneration Directive. Both Spain and Germany have recently completed substantial pieces of legislation that significantly improve the position of cogeneration.
Gas engines, such as from GE Jenbacher, are used in cogeneration applications throughout Europe
In Spain the new legislation Royal Decree 616/2007 and 661/2007 have transposed the Cogeneration Directive and established a favourable financial framework for cogenerators. The latter introduces the option of taking feed-in tariffs for electricity and has significantly increased the remuneration (up to 40 per cent) with respect to the previous framework. Both Royal Decrees recognize the improvement in security of supply, distributed generation benefits and higher energy efficiency provided by cogeneration. More significantly the Decrees address the issue of getting the financial model right.
GE Energy has signed a contract with pharmaceutical company Grifols S.A. to provide two natural gas engines for a cogeneration plant to be installed at Grifols’ facilities in Parets del Vallés, 23 km north of Barcelona. Grifols is a Spanish holding company specializing in the hospital-pharmaceutical sector present in more than 90 countries. The generated power and heat will be used to support an expansion of factory operations, while surplus electricity will be sold to the local grid. Grifols’ new power plant is an example of the type of cogeneration plants envisioned under the new Spanish law ‘Real Decreto 661/07’ that encourages industrial sites to install such systems to boost their energy efficiency.
For Grifols, GE Energy will supply two natural gas-fuelled JMS 620 GS-NL Jenbacher cogeneration modules, with a combined electrical output of 6.09 MW and a combined thermal output of 5.7 MW. In addition, two heat recovery steam generators will be connected with the gas engines to provide the plant with needed steam and contribute to the facility’s hot water supply. The system will offer an electrical efficiency of 44.1 per cent, with a total efficiency of 86.7 per cent.
The German government has not only set a target to double cogeneration by 2020, but has identified a budget for energy efficiency improvements and removed the capacity limits on plants that can attract financial support from feed-in tariffs. Germany has made huge commitments to the renewables sector and seen the economy and the market respond as a result. Europe is now watching to see what will be achieved for cogeneration.
The article was first published in the July/August 2008 issue of our sister publication Cogeneration and On-site Power Production.
Typical installation upgrade
A typical installation upgrade is the Aconda Paper factory near Girona in Spain. Aconda Paper SA operates two paper production units producing 80 000 tonnes of coated paper per year in CHP application, and operates 8640 hours per year. The paper factory traditionally has operated with cogeneration and in 2005 began a project to upgrade the original 1989 installation with newer higher efficiency Siemens cogeneration units (SGT-300).
The project started in 2006 and was driven by a traditional replacement cycle and also a strategy to improve environmental performance and take advantage of additional energy efficiency benefits. The 7.9 MWe output plant exports 50 per cent of the power to the grid showing an overall cogeneration efficiency of greater than 75 per cent.