Investors look again at CHP as Asian energy demand increases

Petronas Towers in Malaysia are supplied with electricity, steam and chilled water through a trigeneration system featuring two sets of 5 MW class GPB60 (Engine m7A-01) from Kawasaki

In response to surging demand for power and the need to hit green targets, many Asian states are looking to raise the role for cogeneration in their energy mix. But Richard Baillie asks which nations are leading the way and how last year’s disaster at Fukushima alters the calculus.

While Asia shows an interest in cogeneration, its nations display many approaches.

Japan ” time for a renaissance

Japan is no stranger to CHP. In fact, CHP started to gain a foothold here in the 1980s, during the time of the Japanese bubble economy. A second CHP wave arrived in the mid-1990s and faded with the Asian Financial Crisis in 1997. The most recent period of CHP growth was during the middle of the last decade, but this too was relatively brief, ending with the global financial crisis in 2008.

CHP’s latest eclipse came as a slump in investment combined with a spike in the price of oil and LNG following the 2008 financial crisis so that many companies stopped operating their cogeneration units. Some companies with cogeneration facilities also transferred production from their factories in Japan to other Asian countries.

Will the latest wave of interest in cogeneration prove to be longer and deeper than those that preceded it? Right now, the outlook is fairly positive. Japan is looking again at CHP as it faces a national energy challenge that will involve implementing new energy policies that reduce reliance on nuclear power as a direct result of the Fukushima-Daiichi disaster in 2011.

The Ministry of Economy Trade and Industry forecasts that promoting CHP could deliver almost 7 GW of new capacity, including fuel cell applications, by 2030. As things stand, Japan’s 8.7 GW of CHP capacity delivers 4% of the country’s electricity supply, with industrial CHP accounting for up 80% of installed capacity.

Moreover, Japan is also starting to see a wider role for CHP in helping to meet emissions targets and energy efficiency goals, accompanied by the introduction of area-wide district energy and other measures to address barriers and raise awareness. The downside is that Japan lacks a national CHP/DHC development strategy and barriers to interconnection remain in place.

Nevertheless, with Japan seeking to boost its renewable energy and energy efficiency programmes, CHP is almost certain to take a bigger slice of the energy pie. Backed by a strong policy network, CHP could generate 199 TWh per year in Japan by 2030, according to the International Energy Authority (IEA). And if Fukushima really did undermine Japan’s confidence in nuclear power, as public opinion polls suggest it has, then cogeneration seems well-placed to benefit, particularly if electricity companies raise purchase prices to buy in more electricity.

Given the security of supply issues that Japan now faces, all kinds of CHP are likely to get greater backing from policymakers. But there is likely to be a strong focus on micro-CHP through a concentrated effort to establish Japan as a key provider of smaller-scale commercial and residential CHP units using micro-turbines and fuel cells. In fact, a variety of policies to boost this market already include subsidies for high-efficiency gas-fired units and tax benefits for small- and medium-sized businesses that adopt CHP.

Japan certainly appears ready to take micro-CHP and fuel cell CHP to global markets, and the IEA suggests that Japan could use its expertise in these areas to boost energy efficiency in developing economies in Asia and throughout the world. But a growing domestic market is also being fuelled by rising fears over blackouts and fuel costs, which has led to unprecedented demand for home-grown 1 kWe fuel cell micro-CHP systems from manufacturers such as Panasonic, JX and Toshiba.

District energy has also been tipped as a potential growth area, albeit from a small base, as the government is beginning to see such systems as part of the nation’s wider energy efficiency and emission reduction strategies.

China ” full steam ahead

China’s energy consumption has been growing at a frantic pace in recent years, driven by massive and unprecedented economic development, and its government has started to pay increasing attention to energy efficiencies as part of a goal to reduce energy intensity by 20%.

In its efforts to hit such targets, China is actively promoting CHP and has now become the world’s second-largest country in terms of CHP capacity, which provides more than 18% of nationwide thermal generation capacity. Almost 13% of the nation’s electricity and 60% of urban central heating is now generated with CHP.

Most of this capacity is coal-fired, serving municipal heating systems and energy intensive industries. It mainly consists of mid-sized or small heat plants and boilers as until quite recently large power plants in China would only very rarely implement CHP projects.

China is estimated to have tapped into less than 20% of its industrial CHP potential. The National Development and Reform Commission has set a goal of 200 GW of CHP by 2020 ” which, based on current projections, would exceed a fifth of installed power capacity.

While ambitious the target is eminently reachable. Opportunities for CHP growth abound. China has a large district heating sector that has traditionally relied on heat-only boilers rather than on more efficient and less polluting CHP. Compared with other countries, China also has a low share of CHP in both electricity and heat production, which brings opportunities for CHP to access grids for greater reliability and to expand grid-based cogeneration via policies and incentives.

Yet several factors have slowed adoption of distributed energy and cogeneration strategies. High coal and gas prices coupled with artificially low electricity tariffs exacerbate the economic challenges of specific projects. Continuing government control and slow energy industry liberalization create regulatory uncertainty within the electricity sector. Suspicions of technology dependability and maintain-ability still exist, and, as in Japan, grid interconnection issues persist.

SerayaPower completed cogeneration project at Jurong Island in Singapore Source: Siemens

International bodies have for some time tried to hasten the growth of CHP in China. The Global Environment Facility (GEF), the world’s largest public fund to protect the global environment, has been particularly active in Chinese CHP. Projects in cogeneration and on-site renewables have been part of its role under the financial mechanism of the United Nations Framework Convention on Climate Change (UNFCCC).

In recent years, the GEF has invested more than $100 million in distributed energy, including on-site power production and cogeneration in China’s industrial sector, as well as several projects in distributed power and heat from biomass.

Investments of this type should help to accelerate the growth of distributed energy and cogeneration. Capital and tax incentives from sources such as The World Bank are also helping to make the numbers add up, while rising electricity tariffs and increased natural gas availability due to pipeline extensions are also making new investments more feasible.

Looking to the medium term, distributed energy and cogeneration systems should become more inviting investments due to: greater policy consistency, market restructuring, the wider acceptance of CHP technologies, feasibility studies and demonstration projects. Occasional severe power shortages in some provinces have highlighted the need for greater control over energy costs, as well as sustainability through locally generated energy.

Indeed, there is now evidence that the market is changing, with big deals starting to happen without outside help. In July 2012, Huaneng Power International was able to get its ambitious Huaneng Tongxiang gas-fired cogeneration project green-lit by the Zhejiang Provincial Development and Reform Commission. Huaneng Power, one of the largest listed power producers in China, owns a 95% share in the project, the third to come on-line in the past two years.

In 2011, Huaneng Power obtained similar approval for two gas-fired cogeneration projects ” the 400 MW Huaneng Jinling Plant in Jiangsu province and the 1500 MW Huaneng Chongqing Liang Jiang plant in Chongqing. The Huaneng Tongxiang cogeneration project, which comprises two 200 MW combined-cycle gas turbine units, will require an estimated investment of $234 million, of which 20% will be project capital, contributed by Huaneng Power and New Town Development and Construction Company Limited of the Linhang Economic Area of Tongxiang, Zhejiang. The remaining money will come from bank loans.

Foreign investors are also lining up to get in on the act. In 2011, Singapore-based fund manager Swiss-Asia Financial Services launched an infrastructure investment fund, the China District Energy Fund, with a target size of €500 million ($630 million).

The fund’s very first investment was to buy a CHP plant in Chengdu, the capital of Sichuan province, and its core strategy is to buy, refurbish, upgrade and expand brownfield CHP energy assets in Greater China, and then exit them via either a stock-market listing or sale to another fund over a period of 7″10 years.

CHP plant operators in China have also received incentives from the government aimed at reducing carbon dioxide emissions. Given its substantial needs in energy infrastructure ” $30 billion ($38 billion) is invested annually ” and low power efficiency, China is receptive to energy efficiency projects with low implementation costs.

Micro-CHP and fuel cell CHP forms an important market in Japan Source: Fuel Cells 2000

‘Due to the steady cashflow generative nature of CHP assets, the fund presents a relatively low level of uncertainty in the return drivers and offers an attractive investment proposition in an inflationary environment,’ said Pying-Huan Wang, Swiss-Asia’s head of infrastructure investments. ‘Investors will also be able to take advantage of the expected RMB appreciation in the medium term.’

The fund’s primary industrial partner will be Dalkia, a division of Veolia Environnement and Electricité de France (EDF). Dalkia specialises in CHP and made €8 billion ($10 billion)in revenue in 2009. It already has operations in six cities in the China region and has committed to invest up to €75 million ($95 million) in the Swiss-Asia fund.

South Korea ” the early adopter

South Korea is also giving strong backing to its CHP industry. With generous subsidies of up to 80% of the system cost, more than 400 fuel cell micro-CHP systems were installed by the end of 2011. Companies such as Samsung are getting involved in development and the city of Seoul has ambitious plans to grow the micro-CHP industry in the coming years.

As in Japan, CHP is firmly established in South Korea, mainly due to its role alongside the country’s extensive district heating systems. South Korea’s rapid development as a major economic and industrial power has resulted in a surge in energy demand but with growth in industrial electricity demand set to slow, the residential and commercial sectors are expected to account for most new demand, with CHP district heating having a potentially important role to play.

Indeed, the district heating market has expanded steadily during the past decade, both through tax incentives and government support for CHP through planning policy. That said, the share of industrial CHP in electricity consumption remains relatively low, covering about 11% of industrial electricity consumption over the last decade.

The call for more combined heat and power plants parallels South Korea’s switch to natural gas from a coal-dominated market. Natural gas burns cleaner than coal and is generally the fuel of choice in CHP plants. Korea District Heating Corporation (KDHC) recently completed four new CHP plants totalling 801 MW plus 763 Gcal that will lift the company’s total capacity to 1510 MW plus 1419 Gcal. Each of the new CHP units is designed for combined-cycle operation and to burn imported LNG.

Thailand ” the cooler option

Being heavily dependent on imported oil, it is unsurprising that Thailand was among the first Asian countries to introduce policies to encourage cogeneration, distributed generation and power from renewables.

Thailand’s first foray into private sector decentralised energy began in 1992 with the passage of the Small Power Producer (SPP) regulations, which were aimed at promoting power generation from renewable fuels or in cogeneration facilities in the private sector. The SPP programme led to a significant increase in renewable energy capacity, but the complexity of regulations and the low tariff produced only fairly large biomass projects. SPP renewable energy projects average 18 MW, and virtually none of less than 6 MW were built. In 2006, the Very Small Power Producer (VSPP) regulations were drawn up to provide streamlined interconnection arrangements for smaller renewable energy generation.

The Thai Ministry of Energy’s Energy Planning and Policy Office (EPPO) puts commercially viable CHP new potential capacity at about 3300 MW. The government also commissioned a study that found that CCHP plants were particularly appropriate for Thailand. One example is the CCHP plant that cools Thailand’s Suvarnabhumi International Airport. Low-pressure steam from the 55 MW CCGT is used to chill water that provides all the cooling needs for the world’s second-largest airport terminal and surrounding facilities.

Most investors in the SPP or VSPP projects are small or medium-sized companies, although Banpu and Glow have built up their business from the SPP and the private power programme and are both listed on the Stock Exchange of Thailand.

India ” after the blackout

CHP could be one of the beneficiaries of the deep shock that followed India’s July 2012 blackout. India already leads in biomass CHP in its sugar industry but has plenty of unrealized potential for tapping waste heat for CHP.

The IEA estimates that India could grow from its current base of less than 10 GW to have almost 28 GW of CHP in 2015 and 85 GW in 2030. CHP and district heating and cooling could be implemented in smaller industrial parks, special economic zones and other areas with a concentration of large commercial and software establishments needing secure, low-cost heat, cooling and power, according to the agency.

A glimpse of the future – the Singapore way

In all of the countries we have looked at so far, government regulation is a crucial factor: in Singapore, the reverse is true. Singapore is unique in Asia in the sense that the government does not subsidize any form of energy supply but simply encourages competition through a liberalized electricity market framework.

As a result, development and implementation of CHP and distributed generation technologies have occurred with few government interventions. Yet CHP currently accounts for about 15% of Singapore’s installed capacity as companies invest in cogeneration and trigeneration projects despite the absence of government subsidies and other direct financial incentives. These projects range in capacity from a few hundred kilowatts to hundreds of megawatts, frequently operating at efficiencies above 80%, utilizing a variety of fuels (including gas, wood and waste), and producing electricity, steam, chilled water, compost and heat.

That Singapore has found so many adopters merely by leaving it up to the market speaks volumes to the efficiency, environmental performance, and economic competitiveness of CHP and distributed energy systems as a whole. It might not be too long before other Asian states follow Singapore’s example.

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