A new directive on cogeneration is about to become law in Europe, clearing the way for a formal framework supporting its development. PEi examines whether this will be enough to re-energise the growth of CHP.

The formal adoption of the cogeneration directive by the European Parliament in December 2003 is a major step forward for the combined heat and power (CHP) industry in the region. After enduring several years of market uncertainty and low levels of growth, the industry finally has a firm footing on which to grow.

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Figure 1. The cogeneration directive should provide the European cogen industry with a firm foundation for growth

The directive represents a chance for the European cogeneration industry to come out of the doldrums. Rising gas prices, falling electricity prices and uncertainty brought about by electricity market liberalization had made life difficult for operators of cogeneration plants. These factors also meant that few new cogeneration plants were being built.

The objectives of the directive are therefore to provide a legal framework for the support and development of cogeneration, and to reduce both market and institutional barriers to its development in Europe. Although it does not set mandatory targets for European Union (EU) member states, it establishes a series of concrete measures in favour of cogeneration and provides a framework to increase the use of cogeneration.

The directive is due to be signed by the president of the European Council and the president of the European Parliament in February 2004. It will then be published in the Official Journal of the European Union, when it will enter into force. Member states have around two years to transpose the directive into national law.

The cogeneration directive was first proposed by the European Commission in mid-2002, and its route to adoption has not been an easy one. Indeed, its prospects looked bleak in December 2003 when the European Parliament’s Industry and Energy Committee refused to drop a series of amendments to the directive that had already been rejected by the European Parliament. A conciliation procedure, which would have stalled the progress of the directive until after Parliamentary elections this year, was avoided when the Council and the Parliament agreed on a compromise proposal.

Difficult discussions

One of the key sticking points between Parliament and the Council was the need for a harmonized definition of cogeneration and a uniform way of calculating and categorising cogeneration, says Simon Minett, director of Cogen Europe. “There was a long-running debate over the methodologies of how to define cogeneration and exactly what is a CHP plant and so on. There was a desire at the beginning of the directive to solve these issues but it became clear that this was not going to be possible,” said Minett. “It was a tremendously difficult discussion – one which involved debating the laws of thermodynamics.”

In the end, these points were stripped out of the directive altogether, and instead there is a framework which says that CHP plants need to be defined, and that there is a minimum efficiency that plants must reach in order to be defined as a CHP plant. “If you are above this efficiency level then everything you do is accepted to be CHP,” says Minett. “If you are below it then you need to work out what part of your output is CHP. Then there is an energy saving test to apply to make sure that good quality CHP is supported and rewarded.”

Further to this framework, a technical committee will be established to hammer out the exact details of defining what is CHP and what proportion of a plant’s output can be regarded as cogeneration. This committee will also carry out a study examining the operating performance of cogeneration plants in order to provide reference data for the energy savings test. The technical committee will have to finalize its findings within about a year.

Another issue between the European Parliament and the Council of Ministers was that of setting binding EU and national targets and timetables, which Parliament believed would be crucial for a sustainable increase in cogeneration. The Commission’s proposed directive never included binding targets, leading organizations such as Cogen Europe, Euroheat and Power and WWF to criticize the directive for being weak and lacking ambition.

Minett is philosophical about the absence of targets, however: “We would have liked the directive to have had targets because this gives some certainty to the market, but there was little chance of that happening. Member states are basically saying that they have enough targets and they don’t want any more, and to be fair to them they have a point – I can see why they have resisted it. But for me, the argument for having a target is that if you don’t know where you’re going, how are you going to get there?”

Nevertheless, member states will be required to investigate the potential for CHP in their markets and identify the barriers to the development of cogeneration. They will have to publish their findings on a regular basis and describe what progress they have made towards fulfilling their potential. While this may sound like a “soft” alternative to targets, Minett believes that it will put member states under pressure to take action, and he points to the success of the renewables directive and hopes that the cogeneration directive will have a similar effect.

“Member states anticipated the renewables directive and realised that they would have to start doing something about renewables and remove barriers. An example of that was the UK, which initially had schemes and mechanisms which were weak and didn’t achieve a lot of growth. They then changed that and put in an obligation; the UK is now quite a good market for renewables and that wouldn’t be the case if it hadn’t been for the renewables directive.”

The Commission is planning to come up with a set of guidelines on how studies into the potential for CHP should be done.

Figure 2. European cogeneration capacity – 28 countries (GWe)
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Streamlined rules

A key issue for CHP plants in recent years has been network access. Member states now have to ensure that cogeneration plants get access to the grid on a non-discriminatory basis, with the rules being similar to those in the renewables directive. In addition, they must now move to minimize the administrative burden faced by CHP plant operators trying to obtain consents and planning permission to build new plant.

“In places such as Italy, you can wait anything from six months to two years to get all the authorizations needed because you have to get approval from the federal government, the regional government and city authorities, and they all may have conflicting and non-transparent ways of doing business,” says Minett.

“In Greece there is a rule that says that you cannot put a generator on the roof of a building because it is deemed to be a fire hazard. For hospitals and hotels, the roof space is actually a very convenient place to put a CHP generator, and may indeed be the only space available in a crowded city location. It’s a barrier. The whole point of the directive is to fast-track CHP plants into the system.”

Support measures

Crucially, the directive allows member states to provide state aid for cogeneration through a clause which specifies certain types of “support measures” – tax relief for example. A number of countries – the UK, Spain, Germany and the Netherlands – already have state aid schemes for cogeneration, but Minett hopes that the directive will encourage member states to be more creative. “If a member state identifies a potential for cogeneration and barriers that need to be removed, and it decides that it wants to use CHP as a means of reducing energy consumption and link it in with environmental objectives, then they are allowed to develop a scheme which provides state aid.”

The directive is not going to change the market for cogeneration overnight, says Minett, but it is a good starting point. It provides legal certainty for governments and market players over what exactly CHP is, and how it should be treated. All this means that an open dialogue about the potential for CHP and the barriers that exist can take place. And the directive comes at a time when the cogeneration market is just starting to return: “You are starting to see things changing anyway because electricity prices are on the up and gas prices are broadly stable,” says Minett.

In addition, the onset of emissions trading in Europe has the potential to provide the cogeneration market with a further boost. EU member states are currently working on the creation of national allocation plans, which will determine how large industry and energy installations will participate in Europe’s emissions trading scheme, beginning in 2005. The cogeneration industry is currently busy persuading governments that the increased use of cogeneration is one of the largest potential options available to reduce carbon emissions, and that good quality CHP plants should therefore be incentivised in national allocation plans.

All these factors mean that the future is finally looking bright for cogeneration. “If [the key markets] do reasonable evaluations and start to move towards putting in place mechanisms to encourage the market to develop, then the directive will have done its job,” says Minett. “All we can say at the moment is that time will tell.”