Liberalization drives CHP
The only consistent factor in the cogeneration power market is rapid change. A host of irresistible but sometimes contradictory forces are gathering momentum, making optimistic and pessimistic forecasts appear equally plausible. Jonathan Adkins, market consultant with Datamonitor Industrial examines the factors driving the current positive direction of the market, noting that its success is closely related to its flexibility and adaptiveness.
Cogeneration – or combined heat and power (CHP) – involves the simultaneous production of heat and power. It has the advantage of making more efficient use of fuel and having a less damaging effect on the environment than if heat and power are produced separately. That cogeneration is often environmentally preferable to the separate production of heat and power has been recognised by many governments which have subsequently provided subsidies to cogeneration plants.
In addition, several industrial groups have promoted cogeneration because of the energy savings they can make. There is clearly potential in Europe for further initiatives along these lines, particularly as subsidies are already under attack from utilities, ostensibly on the grounds of efficiency and cost – and these campaigns have now begun to make their mark in certain countries. However, gaining significant primary energy savings depends on operating regimes many industrial clients would be hard pressed to implement.
The environmental benefit of CHP is one of the core drivers behind the growth in its uptake, as it is one of the few processes that can significantly help to curb emissions of carbon dioxide (CO2). In addition, in contrast to conventional power stations, solid fuel-fired CHP plants based on fluidised bed technology do not require a separate desulphurization plant to reduce emissions to regulatory requirements.
Sulphur emissions are controlled by the injection of limestone into the combustion chamber, and nitrogen oxide emissions are restricted by optimizing the combustion temperature. Industrial wastes, which have a low calorific value and high moisture content, can also be burned in fluidized bed burners and this can help to reduce a company`s burden of having to dispose of waste in other ways.
The European Commission (EC) stated in October 1997 that it was imperative that the European Union (EU) encouraged more efficient use of fossil fuels if it was to curb the production of greenhouse gases. In order to improve energy efficiency, the EU`s executive body accepted a proposal on the promotion of CHP which suggests a strategy to facilitate CHP development and reduce the barriers to its expansion. The strategy aims to establish the actions and policies to ensure that CHP benefits are exploited by its significant penetration in gross electricity generation in the EU by 2010.
While studies have shown that 40 per cent of the EU`s electricity could be supplied by cogeneration plants, the current level is much lower according to the EC. This is due to the lack of incentives provided by national energy policies, too many obstacles and also the relationship between the cogenerators and the electricity production utilities. It should, says the Commission, be feasible to double the share of cogeneration in the EU from nine per cent to 18 per cent by 2010, thus reducing CO2 emissions by four per cent.
At the Global Climate Change talks in Kyoto, Japan, the EU agreed to reduce greenhouse gases by eight per cent from 1990 levels, during 2008-2012. Cogen Europe, an association of European equipment manufacturers and utilities which aims to promote cogeneration technology, felt that with the right incentives, it should be possible to increase CHP`s share of generation to 30 per cent by 2010 at very little cost.
CHP is also highly efficient, converting 85 to 90 per cent of the energy content of the fuel, compared with 30 to 40 per cent for a conventional condensing power plant. In addition, CHP plants generally have a high level of availability, enabling uninterrupted energy production, and it is also possible to have a highly automated plant, thus reducing staffing levels and keeping operation and maintenance costs low.
As well as energy savings and environmental benefits of combined heat and power, a third consideration is the economics. This can be expressed as the yearly cost saving (depreciation plus operation and maintenance plus fuel cost) of the CHP plant compared with the separate production of heat and power.
Clearly, the availability and reliability of CHP is of extreme importance as no energy savings can be realised when the plant is not operating. In the case of unexpected outages, energy being sold to the consumer is lost leading to major costs associated with lost production time and having to purchase back-up power, the prices of which can be very high.
While the investment cost of a CHP plant tends to be higher than that of a separate heat and power plants, operation and maintenance costs are less than for separate plants, assuming the same fuel is used.
Despite the environmental and efficiency benefits of CHP, there are still considerable barriers to its uptake in many countries. Although CHP plants are more efficient than conventional plants, the efficiency benefits are often ignored as it is the outputs, rather than the inputs, which are taxed. Thus, rather than the energy component of the tax being scaled to reflect the global availability of the raw fuel (e.g. higher tax on gas and oil than coal due to short term availability) or the environmental effects as measured by a CO2 component, the tax is being levied on energy being sent out (that is, the electricity and heat produced).
This is because it is difficult to place a tax on hydropower, wind and nuclear power as input fuels, and when electricity is exported to different countries, it is not possible to identify the fuel source.
In addition, emissions regulations are inflexible and the environmental benefits of cogeneration are not factored into the pricing of electricity and heat generated from the plants. Internalising environmental costs would support energy efficient technologies such as cogeneration.
Tariffs for surplus electricity sold to the grid by cogenerators are low, particularly in Belgium and Greece for example. Yet tariffs for standby power and back-up (top-up) power to the cogenerator can be severe, such as in Finland, where a capacity fee for the whole year has to be paid even if a CHP plant is out of operation for only an hour.
There may also be bureaucratic barriers in those countries where authorisation and licensing arrangements take considerable time to be completed, thereby acting as a disincentive to cogeneration development. In France, for example, the procedure to put a cogeneration plant into operation is lengthy as it requires a conformity certificate, a declaration of compliance with environmental requirements, and a permit to build and a grid connection. To make matters more difficult, in this regard Electricité de France`s (EdF) technical conditions can often provide bureaucratic difficulties.
With natural gas being favoured for most new CHP plants, limited gas supply is a constraint in certain countries, such as Greece, Portugal and some parts of Scandinavia, where there is a low availability of natural gas. Natural gas has become a widely used fuel for power generation and is expected to continue to increase its share.
However, countries will only be able to use it once it is widely available and reasonably priced versus other fuels, with fairly predictable prices. If natural gas is unavailable, other fuel options such as coal may be unfavourable because of the environmental limitations and carbon taxes levied against them.
Other barriers existing in European markets include:
* Opposition from the electricity utilities which, understandably, do not wish to lose major industrial customers who choose to install a CHP plant rather than purchasing their electricity from the public network;
* A bar on wheeling power through the grid
* Low electricity prices
* Long payback periods for industrial users
* Current overcapacity in generation
* A lack of incentives such as grants, tax exemptions and other government initiatives.
However, many of these constraints will decrease through the initiatives and actions of government and industry bodies promoting CHP. The pace of CHP development is therefore set to increase.
A varied pace
So far, the pace of CHP development across the EU has been varied, with some national governments strongly encouraging the use of combined heat and power to increase generating efficiency and reduce emissions. For example, cogeneration has been heavily promoted in Scandinavia and the Netherlands and the strong commitment to CHP in these countries has paid dividends for the growth of the sector.
Cogeneration in Denmark now accounts for over 50 per cent of the country`s total electricity generation, a share well ahead of the closest countries – the Netherlands and Finland. But elsewhere, major barriers exist, typically where there is a single electricity monopoly, such as in France and Belgium, and where low prices for CHP-generated electricity sold to the grid acts as a disincentive to build CHP plants.
Cost cutting, subsidies for cogeneration to reward the primary energy savings and emission reductions, and the formation of new industrial alliances will drive investment in CHP. However, falling utility rates as liberalization makes its mark will counter these drivers.
In some countries industrial power rates are nevertheless so high that it is difficult to imagine a truly competitive utility without the kind of bloodbath major utilities – and some governments – are doing their best to prevent.
Fastest future growth
The CHP market can be separated into two segments. The first is that which is used by utilities to generate electricity and district heat for towns and cities and is used mainly in countries such as Germany, Austria and Scandinavia. This centralised form of CHP is used where there is a greater need for water and space heating throughout the year.
A second segment is the use of decentralised cogeneration where plants are used by industry to generate heat and power for industrial applications, with any excess electricity sold to the grid.
The fastest growth is expected to occur in decentralised systems as more major users are able to identify the considerable cost savings available by installing a CHP plant, particularly in those industries which do not require such short payback periods on investments. The payback period on a CHP plant is typically from four to six years and in industry it is often the case that the payback period on investments is two years, thus making CHP seem less attractive.
The development of district heating systems is constrained by economics as the cost of providing the infrastructure necessary to transport the heat is extremely high. In the past this burden was shouldered by the state and municipal authorities. However, the situation is now changing to one of less public support and more reliance on private investment from which major investment is only a remote possibility.
Greece leads the way
Overall, the most rapid annual growth in CHP capacity in the EU is expected to occur in Greece, followed by Ireland. However, both countries are starting from a small base and the actual capacity additions are small relative to those added by other countries. The main driver behind the growth in these two markets is the introduction and expansion of natural gas and the natural gas network, improving the economics and environmental consequences of cogeneration.
The largest absolute increases are expected in the UK where the Labour government has a target of 10 GW of cogeneration capacity by 2010, with this addition marginally higher than that expected in the Netherlands. Other significant additions to capacity are forecast to occur in Germany and France (currently one of the EU`s smallest markets for CHP).
Further development of CHP could be encouraged by national governments through the exemption of CHP from energy taxes, strict limits on emissions for combustion plants and the obligatory purchase of energy from CHP plants for energy distributors, as well as encouraging city authorities or other investors to finance cogeneration schemes. It would also be encouraged by the opening of the gas market to competition in 1999 and all cogenerators being able to compete for supply contracts.
The cogeneration market has essentially grown up around the deregulation and liberalization in gas and electricity markets and the introduction of new technologies such as combined cycle gas turbines and waste to energy. Looking to the future, it is likely that the cogeneration market will continue to adjust to technological advances and change.
The likely next big movement technology-wise in the industry will centre around micro-cogeneration systems, a view shared by Cogen Europe.
These comprise small gas engine and fuel cell units and their target markets are set around residential and smaller commercial sectors. The main impact of these on the market will only be felt, however, if their commercialization is a success and governments continue to abide by electricity market openness.
Datamonitor Industrial (formerly known as MarketLine International) is an independent market analysis firm specialising in the global power equipment and energy industries. Datamonitor publishes a wide variety of market information reports on the power generation, transmission & distribution equipment industries based upon primary research and significant expertise in the area. Datamonitor can offer a tailored research and analysis programme to meet your strategic information needs.
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Figure 1. Cogeneration forecast share of electricity generation in Europe, 1996-2010 Source: Datamonitor Industrial
Figure 2. The most rapid annual growth in CHP capacity in the EU is expected to occur in Greece
Figure 3. Projected industrial share of installed cogeneration capacity across Europe by the year 2003