‘Cogeneration can meet Europe’s climate change needs’. We have heard it before and once again at one of the opening presentations at the 7th Cogen Europe Conference held in Brussels in mid-October.
Mark Whitely was representing a carbon management company known as Energy for Sustainable Development Ltd (ESD). Speaking just ahead of CoP6 (the sixth meeting of the Conference of the Parties to the United Nations Framework Convention on Climate Change) in The Hague in November, Whitely first looked at how climate change targets were currently being met.
Whitely pointed out that countries were far from reaching their Kyoto targets and that cogeneration could play a much bigger role. The main part of his presentation covered the ‘Future Cogen Project’, a project aimed at providing market intelligence on 28 European countries as well as a forum for industry discussion. So far, six country studies have been completed.
He concluded that cogeneration was being squeezed between gas and electricity liberalization i.e. rising gas prices and falling electricity prices. “If climate change policy is downgraded in The Hague, it will be a major threat to cogeneration. The future of cogeneration is on a knife edge and the short term market is clouded in uncertainty.”
This point was echoed by Dr Peter Radgen of the Fraunhofer Institute. He noted that German electricity spot prices were below the cost of electricity produced by CHP plants. And while he believed that there was a future for natural gas fired CHP in the medium term, there was no future for coal fired CHP.
One slide presented by Radgen painted a bleak picture of Germany’s industrial CHP market. It showed that eight per cent of CHP plants had closed down and that 30 per cent had profitability problems.
European action plan
Uncertainty is heightened in the European market where liberalization is proceeding at differing speeds. However, there are still plans being implemented to improve the outlook for the CHP market.
Gänther Hanreich, Director of Directorate D – New Energies & Demand Management, European Commission, DG TREN, outlined: “The EC Action Plan to Improve Energy Efficiency and the Role of CHP”. The Action Plan is the most recent Commission policy document in the field of energy efficiency.
It was adopted by the Commission in April 2000 and subsequently Council Conclusions were adopted at the Energy Council in May. The Action Plan estimates the potential for energy efficiency improvements in the EU by 2010 is about 18 per cent of current consumption.
Hanreich noted: “In line with the objective of the SAVE programme for energy efficiency, the Action Plan sets an indicative target of improving energy intensity by one percentage point per year. Meeting this target would realise two thirds of the 18 per cent potential, corresponding to an estimated reduction of CO2 emissions by 200 million t/year, or about 40 per cent of the total EU Kyoto commitment.”
Hanreich said conservative estimates suggest that this would save CO2 emissions of more than 65 million t/year, corresponding to about ten per cent of the total Kyoto commitment.
The Action Plan also reaffirms the separate Community target of doubling the share of CHP in electricity from nine per cent in 1994 to 18 per cent by 2010. Putting this into context, Hanreich said: “This proposed indicative target should be seen against the background of an estimated technical potential for CHP of up to 40 per cent of total electricity production.”
Three years after the adoption of the CHP strategy, Hanreich said that the EC “unfortunately cannot identify any noticeable progress towards the 18 per cent target”. He went on to say that the CHP market was at best in stagnation in most European countries: “From time to time we hear of existing capacity being taken out of the system [which was] before needed from a technical point of view.”
According to the latest CHP statistics from Eurostat for the year 1998, the overall share of CHP in total EU production is about ten per cent. Hanreich noted that this figure should be treated with “some caution” as the collection and methodology of the statistics is, at the moment, not entirely coherent.
Hanreich, like many of the speakers, saw liberalization as one of the reasons for slow growth in CHP. He spoke of a study on the impact of liberalization on CHP which has been co-financed under the SAVE programme.
The study concludes that electricity prices are often close to, or even below, the costs of coal fired condensing power plants. According to the study, this sort of price competition is typically taking place in markets with overcapacity, where utilities are operating old and written-off power plants running at marginal costs.
Such a competitive market is good news for the consumers but increases market uncertainty and short-term decisions. Hanreich also argued that it favoured big market players with sufficient financial reserves to withstand temporary market turbulence.
He also felt that CHP plants built under different political and economic framework conditions were not well-equipped to compete under such circumstances. “The owners of CHP plants – typically industrial companies whose core business is not energy production or local authorities responsible for public supply – do not have the financial means to engage in this sort of price competition. It may therefore be argued that for CHP a level playing field is currently not in place.”
The opening of the gas markets is also important to the future development of cogeneration since most new installations use natural gas. It is expected that liberalization will in the long term lead to lower gas prices, although no significant price cuts have yet been identified.
“It should be kept in mind that the gas directive has a special provision, which allows member states in some circumstances to introduce a threshold for eligible customers, in effect excluding CHP plants from market access. Clearly if CHP plants are not able to buy gas in an open market, this could mean higher gas prices and therefore be very detrimental to CHP,” said Hanreich.
Hanreich pointed out that in order to achieve the overall 18 per cent targets, member states should formulate national targets and strategies for the development of CHP. “CHP targets should be set within the framework of the countries’ overall Kyoto obligations.”
He also said that emission trading, which is being discussed at Community level, could prove beneficial to CHP, as the environmental benefits of CHP would be reflected in the price of emissions permits. “Even if emission trading would only be applicable to big producers, above say 50 MW, it would still be a step in the right direction,” he said.
Indeed the idea of a system of CHP certificates linked to national quotas has been put forward. This idea, which is modelled on the concept of green certificates developed in the field of renewables, is also apparently under consideration in some member states.
Promoting CHP through government incentives is something which is also of interest in the US. Certainly, with the spotlight back on the US after the breakdown of talks at CoP6 (see PEi December 2000, page 14), any moves it makes to reduce emissions by promoting CHP will be welcomed.
Mark Hall, vice president of Trigen Energy and the USCHPA talked on the challenges facing CHP in the US and how to double CHP in the country.
The challenge was announced by the Department of Energy (DOE) at the CHP Summit in December 1998. The National CHP Road Map, announced in October 2000, will see the national installed CHP capacity increased from 46 GW in 1998 to 92 GW by 2010.
Federal facilities are now required to reduce energy use and carbon emissions by 30 per cent compared to a 1990 baseline. The use of CHP is being explicitly encouraged.
Meanwhile, the US Department of Treasury has proposed tax credits whereby CHP operators would receive an investment tax credit of eight per cent as well as a 1.5 per cent production tax credit.
Despite good progress, with 3100 MW of new CHP capacity being installed in 2000, Hall said that due to its regulatory system, “the US will have a hard time doing anything but penalising CHP projects”.
He cited Massachusetts as an example where CHP projects smaller than 50 MW were not being installed. With a law requiring all plants to achieve NOx emissions of less than 2 ppm, the cost of installing expensive cleanup equipment would make small CHP plants uneconomical.
A real challenge
So with the recent breakdown of talks at CoP6 and market uncertainty surrounding both electricity and gas, CHP will face its toughest time yet. Hanreich gave perhaps the most fitting conclusion: “Meeting the Community target for CHP will be a challenge. It will require commitment from all parties, not least the national governments. The closer we come to 2010, nice words will no longer be enough. Political will is also needed.”