CHP/DHC Country Scorecard: United Kingdom

Transcription

1 CHP/DHC Country Scorecard: United Kingdom The central principle adopted by the United Kingdom (UK) with respect to energy policy has been the use of markets to achieve policy goals at least cost to the consumer and taxpayer. The UK has one of the most liberalised energy markets in the world, a major long-term carbon emissions reduction goal (80% reduction by 2050) and advanced an innovative approach via certificates obligation programme for renewable energy. The need for the generation of low-carbon heat and power was emphasised as an important element in the UK government s 2007 Energy White Paper. This follows the 2010 target of attaining MWe of Good-Quality installed Combined Heat and Power (CHP) set in One challenge has been the development of mechanisms to support and encourage the development of CHP in its various forms without adversely affecting the functioning of energy markets. While installed capacity of Good-Quality CHP has doubled since 1990 and was responsible for 7% of all electricity generation in 2007, growth in recent years has slowed and now amounts to nearly 5.5 GWe. Energy Overview The UK was the first country in the world to liberalise its energy markets through the privatisation of state monopolies, creation of competition among successor energy companies and opening up access to gas and electricity markets. In the 1970s, electricity generation was provided from publicly owned coal, oil and nuclear generation. However, following the privatisation of the state gas and electricity boards in the 1980s and 1990s, natural gas took on an increasingly important role within the generation mix. In the 1990s, a sustained period of construction of combined cycle gas turbine stations led to the replacement of older, less-efficient coal-fired capacity such that today 36% of all electricity generated is from gas, 39% from coal and 19% from nuclear sources. 1 FIGURE 1: ELECTRICITY GENERATION BY SOURCE IN THE UNITED KINGDOM, 1973 TO 2020 SOUrCE: ENERGY BALANCES OF OECD COUNTRIES, IEA/OECD PArIS, TWh Oil Gas Coal Combustible renewables and waste Nuclear * Hydro Solar etc * Wind * negligible 1 1. Department for Business Enterprise and regulatory reform (BErr), Digest of UK Energy Statistics 2008 (DUKES 08) (July 2008).

2 Since the early 1980s, the UK has predominantly been a net exporter of energy as a result of the exploitation of indigenous reserves of natural gas and oil located in the North Sea. However, since 2004 it has become a net importer of fuel. The government realises that increasing exposure to worldwide energy markets brings with it challenges to ensuring security of supply while maintaining affordability of energy to end users. The latter can be a significant contributing factor to the incidence of domestic fuel poverty whereby more than 10% of a household s income is spent on fuel to heat the home to an acceptable standard. TABLE 1: ENERGY IMPORTS AND EXPORTS IN THE UNITED KINGDOM Unit: Mtoe TOTAL NET IMPORTS Coal Exports Imports Net imports Oil Exports Imports Bunkers Net imports Gas Exports Imports Net imports Electricity Exports Imports Net imports is negligible, - is nil,.. is not available SOUrCE: THE UNITED KINGDOM: 2006 REVIEW, IEA. Please note: in the course of preparing UK energy projections, some off model adjustments to take account of prospective measures in the UK s Climate Change Programme have not necessarily been fully included in the CO 2 emissions projections. All forecasts are based on the 2004 submission. These drivers, together with the need to avoid climate change, led the UK government to include the following energy policy goals in its 2007 Energy White Paper: to put the UK on a path to cutting its carbon dioxide emissions by 80% by 2050, with real progress by 2020; to maintain the reliability of energy supplies; to promote competitive markets in the UK and beyond, helping to raise the rate of sustainable economic growth; and to ensure that every home is adequately and affordably heated. The government has adopted a market-led approach to meeting its energy objectives and generally focuses on policy making on the most cost-effective solutions. The generation of electricity from renewable sources has taken on an increasingly significant role within the UK since the early 1990s, with increasing generation from sources such as onshore wind. In its 2003 Energy White Paper, the government set a target for the UK to obtain 10% of its electricity from renewable sources by While it is not anticipated that this target will now be met, the drive to increase renewable energy capacity has been reinforced by the government s commitment within its 2007 Energy White Paper to review its renewable Energy Strategy in light of the binding target set between EU member states that 20% of the EU s total energy consumption is to come from renewable sources by This marks a widening of focus from electricity production to the broader supply of renewable energy for transport and heating, and could bode well for renewable energy CHP. 2

3 Climate Change Context The UK is a signatory to the UN Framework Convention on Climate Change (UNFCCC) and is committed to legally binding reductions of greenhouse gas (GHG) emissions of 12.5% against base year levels by the period The UK s target annual level of emissions implied by this reduction would be 682 MtCO 2 equivalent. 2 In addition, the government has set a long-term goal of achieving a 80% reduction in carbon dioxide emissions by 2050, with real progress being demonstrated by Emissions trading is seen as the principal means by which to achieve cost-effective GHG savings. 3 The UK was the first country to implement an economy-wide greenhouse gas emissions trading scheme (ETS) in the form of the UK ETS in The UK ETS ended in December 2006 following the launch of the EU ETS. Total annual UK emissions of all GHGs for 2004 were estimated to be 662 MtCO 2 equivalent, a reduction of 15.1% for all greenhouse gases between the base year and The same data indicates emissions of CO 2 to be 559 MtCO 2, a fall of 5.6% between 1990 and One measure that is to be enabled by the Climate Change Bill is the Carbon reduction Commitment, which will act as a mandatory cap and trade emissions trading scheme for nonenergy intensive organisations that are not otherwise covered. The government indicates that the commitment will encourage CHP through the following: 6 Participants will surrender emissions allowances (purchased on the open market) on the basis of fuel used, thereby favouring the use of high-efficiency technologies such as CHP; Exports of electricity will be credited to the participant at the grid average emissions factor, which will tend to be higher than the emissions factor of the fuel used to generate the electricity; and Consumption of heat from CHP and imports of heat by participants will be zero-rated (i.e. not requiring the surrender of emissions allowances), providing an incentive for participants to import heat and hence develop the market for heat in the UK. For its Phase II National Allocation Plan (NAP), the UK allocated 246 million allowances per year. Key features of the NAP are that the majority of emissions reductions will be borne by large electricity producers. However, to encourage further development of CHP, a dedicated sector for Good-Quality CHP has been introduced, and 33% of allowances within the New Entrants reserve have been ring-fenced for use by Good- Quality CHP (see discussion in policies section below). 4 The UK government is currently in the process of introducing a Climate Change Bill, the key features of which are to: 5 Put into statute the UK s targets to reduce carbon dioxide emissions through domestic and international action by at least 80% by 2050 and at least 26% by 2020, against a 1990 baseline. Introduce five-year carbon budgets, which will set binding limits on carbon dioxide emissions necessary to meet principal targets. It is intended that three successive carbon budgets (representing 15 years) will be enacted soon. Introduce an independent Committee on Climate Change to report annually to Parliament on the UK s progress towards attaining its targets and budgets. Act as primary legislation through which more specific measures may be implemented. require the UK government, on a regular basis, to assess the risks to the UK from the impact of Climate Change and report to Parliament Department for Environment, Food and rural Affairs (Defra), EU ETS Approved Phase II National Allocation Plan (2007). 3. Department for Business, Enterprise and regulatory reform (BErr), Meeting the Energy Challenge A White Paper on Energy (May 2007). 4. For more information on on CHP and GHG Emissions Trading Schemes, see Combined Heat & Power and Emissions Trading: Options for Policy Makers, IEA 2008, 5. At the time of writing, the Climate Change Bill continues to be debated in Parliament and hence is subject to change. 6. Department for Environment Food and rural Affairs (Defra), Implementation Proposals for the Carbon Reduction Commitment Report on the Public Consultation (June 2007) and Government s policy decisions (March 2008).

4 CHP Status: Technology, Applications and Market Activity According to the 2008 Digest of UK Energy Statistics (DUKES), in 2007 Combined Heat and Power capacity (Good-Quality only) stood at MWe, a small (-0.2%) decrease from Electricity generation attributable to GQCHP in 2007 was 28.6 TWh, equivalent to 7% of total UK electricity demand. 1 Figure 2 provides an overview of growth in UK capacity since FIGURE 2: INSTALLED CAPACITY AND NUMBER OF INSTALLATIONS BY YEAR SOUrCE: DEPArTMENT FOr BUSINESS, ENTErPrISE AND regulatory reform (BErr), DIGEST OF UK ENERGY STATISTICS 2008 (DUKES 08), JUly 2008 No. of sites / installed capacity (MWe) Number of sites Electrical capacity (MWe) Net capacity added during year Overall, the majority of UK CHP capacity is fuelled by natural gas (see figure 3), and the availability of gas has facilitated the expansion in CHP generation since the mid-1990s as well as displacing coal and oil-fired capacity. As a result of this, the extent of growth in CHP capacity and generation tends to be strongly linked to the price of gas. Furthermore, the ease of access to the natural gas network can also present a significant influence on the cost effectiveness of a scheme, although overall the establishment of a national gas network should afford a high degree of flexibility in the siting of power generation at the site of heat consumption. FIGURE 3: FUEL MIX FOR CHP INSTALLATIONS SOUrCE: DEPArTMENT FOr BUSINESS, ENTErPrISE AND regulatory reform (BErr), DIGEST OF UK ENERGY STATISTICS 2008 (DUKES 08), JUly 2008 Gross CHP fuel used (GWh) Other fuels renewable fuels Natural gas Fuel oil Coal Year Notes: Other fuels include: process by-products, coke oven gas, blast furnace gas, gas oil and refinery gas. renewable fuels include: sewage gas; other biogases; municipal waste and refuse derived fuels. 4

5 CHP/DHC COUNTry SCOrECArD: UK Industrial Applications District Heating 90% of all UK CHP electrical capacity is utilised in industrial processes. Approximately 75% of this capacity is located in the oil/gas and chemical sectors. Historically, such plants have been owned and operated by the host site. However, since the 1990s, third-party arrangements via energy supply contracts have become more common, reflecting a general move to outsource non-core operations, the need to secure professional development and operating expertise, and the lower rates of return that are generally expected by utilities. This approach also encourages opportunities for heat networking between multiple users. Many of the major energy supply companies within the UK (E.ON UK, rwe npower, EDF, Scottish & Southern Energy and Scottish Power) operate cogeneration businesses focussing on industrial markets. The use of CHP for district heating (also known in the UK as community heating) is significantly less than in other European countries less than 6% of UK CHP electricity capacity is associated with DH. However, there are notable examples of DH schemes employing CHP in Southampton, Sheffield, Nottingham and london. A case study for one such scheme is the Pimlico District Heating Undertaking (PDHU) in london (see text box). In many cases DH schemes are developed and operated by independent, not-for-profit companies established by local councils. One such example is Aberdeen City Council, which established the Aberdeen Heat and Power Company ltd. to raise finance, install and operate three CHP-based community energy schemes serving the council s own housing developments together with other public buildings, including the city ice rink. Case Study 1. Pimlico District Heating Undertaking The Pimlico District Heating Undertaking (PDHU) is the longest running example of district heating in the UK, having served the Pimlico district of london since The scheme originally received waste heat from the 400 MW coal-fired Battersea Power station with heat supplied by pipelines beneath the river Thames, making it one of the first applications of CHP with district heating in the UK. Although the scheme had the effect of improving the efficiency of the power station, the principal impetus for the creation of the scheme was to effect an improvement in air quality, motivated by widespread coal burning in households and industry. A key feature of the scheme is the 41m tall accumulator tower, which can store up to tonnes of hot water produced by scheme in order to permit efficient generation of electricity during periods of low heat demand. Following the closure of Battersea Power Station in 1980, a 30 MW coal-fired boiler house was constructed to provide heat to the scheme but no longer with the capability to generate electricity. These boilers were later converted to natural gas in In 2006, a 4.5m ( 5.7m) programme to expand and upgrade the scheme, including modernisation of 5 Figure 1: Plan of PDHU heat network. Current connected properties shown in red, future connections shown in purple (Images Courtesy of CityWest Homes) the heat distribution network and the construction of a new energy centre with two 1.6 MW reciprocating engine CHP units, was completed. 1.2m ( 1.5m) of the programme s budget was provided by a grant from the Community Energy Programme with a further ( ) provided by a major UK energy supplier through the predecessor programme to CErT (see Government CHP Promotion Policies ). The upgrade programme is estimated to deliver CO2 savings of tonnes per year and reduces the risk of fuel poverty in households on housing benefit.7 The scheme now serves over local dwellings, 60 commercial properties and two schools, with a third in the process of being connected.8 The operating company continues to pursue opportunities for further expansion of the scheme. Figure 1 shows developments currently served by the PDHU (in red) together with properties to be connected to the scheme in the future in purple. 7. Energy Saving Trust, Pimlico District Heating Undertaking a case study of community heating (CE125), March Data from CityWest Homes.

6 Commercial and Public Administration Commercial CHP is a significant market sector within the UK with 81% of the number of CHP schemes having an electrical capacity of less than 1 MWe. 1 Schemes in this size range are predominantly packaged plants based around reciprocating engine technology, although gas turbine prime mover units are also available in this capacity range. The majority of schemes in this sector are fuelled by natural gas; hence, access to the transmission network is an important factor in determining viability of potential schemes. Case Study 2. CHP at Buckingham Palace The royal Family residence of Buckingham Palace has been a notable supporter of CHP as part of its wider range of initiatives to reduce its impact on the environment. A CHP unit was installed at Buckingham Palace in 1994 together with a second CHP scheme at Windsor Castle in Over the period up to 2006, the two schemes generated 13 GWh of electricity and were responsible for estimated CO 2 emissions savings of tonnes. Through the use of CHP at these two sites, the royal Household has been able to experience significant energy cost savings. In 2001 it was estimated that the Buckingham Palace scheme alone achieved savings of some per year in heat and electricity costs. 9 In 2006, both units were replaced with modern reciprocating engine units with electrical and heat capacities of approximately 230kWe and 360kWth, respectively. The Windsor scheme also has the capability to operate as a standby generator in the event of a power failure, enhancing security. Residential Application The domestic use of micro-chp is at a pre-commercial stage within the UK, with the first commercially available Stirling engine-based micro-chp units expected to enter the market in early A micro-chp accelerator programme has been operated in the UK by the Carbon Trust since 2005 to test several candidate technologies in a domestic and small commercial environment over a prolonged period. The programme aims to determine the technical, regulatory and financial implications of micro-chp technology and identify any potential barriers to their uptake. Interim observations from the trial made in November indicate that GHG and cost savings arising from micro-chp tended to better when the CHP unit was required to operate in response to prolonged and consistent heat demands. Domestic micro-chp systems monitored during the trial were shown to have the potential to provide carbon savings of 5% to 10% for older or larger houses which tend to have high, consistent heat demands. The trial also indicated that carbon savings may not be significantly better than existing technologies for smaller or newer properties due to their tendency to have low, intermittent heat demand. The final results of this programme are anticipated in early A key influencing factor in the up-take of micro-chp, however, is expected to be the provision of competitive conditions by utilities for the buy-back of excess electricity generated by this and other forms of micro-generation Micro-CHP Accelerator Interim Report, Carbon Trust, November

7 Good-Quality CHP and the Combined Heat and Power Quality Assurance Programme The term Good-Quality CHP refers to CHP capacity that is registered and certified by the UK CHP Quality Assurance Programme (CHPQA) as being of high efficiency. 11 This is an auditable government accreditation methodology for assessing, certifying and monitoring CHP schemes providing heat to industry, commercial and domestic customers. The CHPQA database provides a comprehensive set of data on UK CHP schemes. Proposed and existing schemes are assessed by CHPQA, based on design and operational data. Units range in electrical capacity from reciprocating enginebased schemes of a few hundred kilowatts to combined cycle gas turbine power stations of up to MWe. In addition to validation and certification of around 900 schemes a year, site audits are carried out by the programme to verify information, design and operation. The methodology allows public support measures to be targeted only at Good- Quality CHP that provide significant energy and environmental benefits. CHPQA provides the following: A methodology for assessing the quality of CHP Schemes, and their qualification as Good-Quality CHP for all or part oftheir inputs, outputs and capacity. A means whereby responsible Persons can apply for the registration and Certification of their Schemes in accordance with the criteria for Good-Quality CHP and hence qualify for benefits. Application to the CHPQA programme is voluntary. A robust methodology for calculating primary energy savings from CHP which comply with Article 12(2) of the European Union Directive 2004/008/EC Promotion of Cogeneration based on a useful heat demand in the Internal Energy Market. Quality Index (QI) definitions have been revised to take account of the above EU Directive and are applied to new schemes (from January 2007) and from January 2011 for existing schemes to ensure the following: that GQCHP Schemes with a total installed capacity of <1 MWe provide > 0% primary energy savings compared with the Directive s harmonized reference values for separate production of heat and electricity; that GQCHP Schemes with a total installed capacity of >1 MWe provide >10% primary energy savings; and that GQCHP Schemes with a total installed capacity of >25 MWe have an overall efficiency of at least 70% (based on Net Calorific Value). Certification issued under the CHPQA programme may be used for determining the eligibility of schemes for fiscal or other benefits and for determining compliance of schemes with regulatory requirements where quality is relevant to entitlement. A key example of such a fiscal benefit is Climate Change levy (CCl) exemption for all Good-Quality CHP fuel inputs and electricity outputs, although the latter is only confirmed until March 2013 due to State Aid clearance. Government CHP Promotion Policies The UK government has recognised the role that can be played by CHP in achieving its long-term sustainability goals. In 2000 the government signalled its support for CHP by announcing a target of attaining an installed capacity of Good-Quality CHP of at least MWe by As part of the strategy to achieve this target, the following key measures have been implemented by the UK government. Exemption of GQ CHP Fuel Inputs and Electricity Outputs from the Climate Change Levy The Climate Change levy was introduced in April 2001 as a single-stage tax assigned on commodities such as electricity and certain fossil fuels. The levy is imposed by the energy supplier at the time of supply to end users; it is not applicable to domestic consumption of energy. The levy is applicable for electricity, natural gas, liquefied petroleum gas for heating use, coal or coke but not on oil or road fuels. The current value of the levy is 0.456p/kWh (~0.58 c/kwh) for electricity and 0.159p/kWh (~0.20 c/kwh) for natural gas. 12 The UK government has committed to retaining the exemptions from the CCl until March 2013, but thereafter there has been no indication that the incentive will be maintained. In order for CHP capacity to be deemed Good-Quality it must be registered and certified by the CHP Quality Assurance programme (see text box above). Following the certification process, all or some of the energy input will be identified as being eligible for a rebate. In cases where electricity is exported from the CHP scheme to an external customer, Ofgem, the market regulator, issues levy Exemption Certificates to signify that some or all of the power output of the scheme is exempt. The total value of CCl exemption for GQCHP in the UK is approximately 100 million ( 130 million) per annum See HM revenue and Customs (HMrC), CCl Info Sheet 01/08, Climate Change levy (CCl) - rates to rise at 1 April Unrestricted excerpt from CHPQA report to Defra (Policy Confidential), 2008.

8 Increased Support for Renewable CHP From April 2009 under the UK renewables Obligation (ro), electricity generated by Good-Quality CHP fuelled by biomass will be eligible for additional renewables Obligation Certificates (rocs) for each MWh of renewable electricity generated. As a rule, revisions to the ro have aimed to award CHP generators with a premium of 0.5 rocs per MWh over power-only plants, except in the case of so-called Advanced Conversion Technologies, where there is no marginal incentive. In addition, grants for capital purchases of biomass-fuelled heat-only or CHP equipment have been made available through the Bio-energy capital grants scheme run by the UK Department for Environment, Food and rural Affairs (Defra). Four funding rounds have been held to date, with further rounds planned until The scheme is aimed at projects in the industrial and commercial sectors in England. Projects based in Scotland have received similar support through the Scottish Executive s Biomass Support Scheme, although this is now closed to new applications. Requirement for Power Station Developers to Consider Potential for CHP In December 2006, new guidelines were issued requiring power plant developers to demonstrate that they had fully explored opportunities for utilising waste heat. 14 Developers seeking to construct or make modifications to a power station of greater than 50 MWe capacity are required to obtain consent under Section 36 of the Electricity Act 1989 from the Department for Business Enterprise and regulatory reform (BErr). 15 The consenting process is structured to consider the environmental consequences of the proposed development. These new requirements require developers to demonstrate that they have identified existing or anticipated heat customers in the vicinity of the proposed site and have considered the economic feasibility of meeting potential heat demands. This guidance demonstrates that the government sees the use of waste heat from large power stations to be a good practice. In support of this guidance, the government commissioned the production of national heat maps to assist in the identification of potential local industrial heat opportunities. 16 Treatment of CHP under the EU Emissions Trading Scheme The EU ETS is a mandatory Cap and Trade emissions trading scheme for energy-intensive activities such as energy production (including CHP), processing of ferrous metals, mineral production and processing and paper processing. Each EU member state is given a cap or limit amount of emissions allowances that it is permitted to issue to participating installations based on the member state s emission reduction target. Each member state is then required to produce a National Allocation Plan (NAP) with its rationale for distributing allowances. Each allowance represents the emission of 1 tonne of CO 2 equivalent. The UK Phase 2 NAP recognises the unique nature of CHP by incorporating the following features: Introduction of a Good-Quality CHP sector. In Phases 1 and 2, the UK NAP allocated allowances on a two-stage basis, first to activity sectors and then to individual installations. In the Phase I NAP (2005 to 2007),CHP plants were classified by the sector to which they were most closely aligned (e.g., the sector where they provided the majority of their energy output). This resulted in CHP plants receiving varying levels of allocation (due to allocations assigned on projected sector growth) and led to concerns that the cost-effectiveness of CHP investment would vary between sectors. To address this issue, the Phase 2 NAP includes a dedicated Good-Quality CHP sector to provide uniform treatment of CHP across all sectors and to work towards a more harmonised treatment of CHP across EU member states. Ring-fencing allowances within New Entrants Reserve for Good-Quality CHP. In the Phase 2 NAP, a number of allowances were set aside in a New Entrant reserve (NEr) to be allocated for free to qualifying installations that commenced or extended operation between 1 January 2008 and 31 December Part of the NEr has been ring-fenced for use by GQCHP new entrants. In total the NEr comprises 81.6 million allowances (6.6% of all allowances to be allocated for Phase 2). Of this, 27.5 million allowances have been ring-fenced for use by GQCHP installations. In addition to the above policies, the government provides support for CHP in the following ways: Eligibility of capital expenditures in Good-Quality CHP for Enhanced Capital Allowances (ECAs), allowing developers to write off the full cost of their investment against their taxable profits during the period in which they make the investment. However, ECAs are not available to utility developers. A reduction from 17.5% to 5% in value-added taxes on select grant-funded domestic micro-chp installations. A target by the government for 15% of all government consumption of electricity is to come from Good-Quality CHP by relaxation of the criteria under which a licence to generate, supply or distribute electricity is required to encourage small-scale decentralised energy schemes. Modification of the arrangements governing access to the wholesale electricity market to provide equality between large and small generators. Provision of guidance to local Planning Authorities by the department for Communities and local Government which recommends planners give positive consideration to the inclusion of community energy schemes within new developments. 17 Under the Carbon Emission reduction Target (CErT) programme, the six main UK energy suppliers are obligated to achieve carbon emissions saving in the domestic sector. 18 It is anticipated that the future roll-out of micro-chp by energy suppliers will contribute these targets Department for Communities and local Government (ClG), Planning Policy Statement: Planning and Climate Change Supplement to Planning Policy Statement 1, December E.ON UK, npower, EDF Energy, British Gas, Scottish Power, Scottish and Southern Energy. 8

9 CHP and the UK renewables Obligation First introduced in 2002, 19 the renewables Obligation (ro) is the UK Government s principal policy mechanism for supporting the generation of electricity from renewable sources. The principal aspects of the ro are as follows: licensed suppliers of electricity are required to obtain a prescribed proportion of their total energy from renewable sources of energy. This proportion increases in successive obligation periods. renewables Obligations Certificates (rocs) 20 are issued for demonstrated generation of electricity from renewable sources. rocs can then be retained or traded between companies in order to meet their supply target, thereby creating a market for renewable electricity generation. As an alternative to obtaining the necessary volume of rocs, suppliers are entitled to pay a buy-out fee for each unit of electricity against their target for which rocs are not available. The buy-out fee is adjusted each obligation period against inflation. All buy-out payments are then pooled and redistributed to parties that have produced rocs during an obligation period. Since its introduction, the ro has been amended to encourage participation by smaller generators and to avoid distortion of the market by a single technology. Currently, eligible renewables receive 1 roc for each megawatt-hour of electricity generated, irrespective of the technology. In its 2007 Energy White Paper, the UK Government indicated its intention to introduce banding of the ro in order to provide varying levels of support to different technologies. Following further consultations, a banding structure is expected to be introduced for England and Wales in Proposed accommodation for renewable generation incorporating CHP is through a higher banding than equivalent power-only schemes. Table 2 summarises the differing levels of roc support that are proposed for various technologies. TABLE 2. PROPOSED ROC AWARD RATES FOR CHP AND POWER-ONLY SCHEMES UNDER THE RENEWABLES OBLIGATION ORDER 2009 ROC award rate (ROCs/MWh) Generation Type CHP schemes Power-only schemes Energy from waste Biomass co-firing Energy crop co-firing Dedicated biomass or energy crop rocs generated from co-firing of biomass or energy crops will only be permitted to contribute to 10% of a supplier s obligation. rocs generated from the co-firing of biomass or energy crops within a CHP scheme will not be subject to this limitation. Non-CHP schemes operating before 2006 receiving rocs through the co-firing of biomass or energy may receive a lower rate of rocs/mwh. CHP schemes operating before 2006 will have their rocs allocation rate fixed at 1rOC/MWh (known as grandfathering ). In addition, the government is undertaking a consultation on the UK renewable energy strategy. As part of the consultation, the government is proposing a new incentive mechanism to encourage generation of heat from renewable sources. The consultation document includes two incentive mechanisms: a renewable heat obligation (operating on a similar basis to the existing renewables Obligation); and a renewable heat incentive. 22 The renewable heat incentive will be intended to pay revenue on the basis of the quantity of heat generated in a similar manner to a feed-in tariff. If enacted, this would be the first major use globally of a renewable heat incentive The renewables Obligation was enacted separately in 2002 in Scotland and in England and Wales. The renewables Obligation was introduced separately in the Northern Ireland market in renewables Obligation Certificates are termed rocs for England and Wales, SrOCs for Scotland and NIrOCs for Northern Ireland. (Each roc is worth about 44). 21. This is subject to State Aid approval from the European Commission. 22. Department for Business, Enterprise and regulatory reform, UK Renewable Energy Strategy Consultation (June 2008).

10 Stakeholders Government Department of Energy & Climate Change In October of 2008, a new Department of Energy & Climate Change was formed, merging the responsibilities of the Energy Group of the Department for Business, Enterprise and regulatory reform and those of the Climate Change Policy Group in Defra. This Department has primary responsibility for CHP and DHC, within its wider authority for energy supply and energy efficiency. Office of Climate Change (OCC) The OCC acts as a shared resource for government departments involved in the domestic and international work relating to climate change. Its role is to run policy-focused projects on issues cutting across several policy areas, co-ordinating and consolidating analysis between government departments and to provide high-level management of UK climate change commitments. Regulatory Bodies Office for Gas and Electricity Markets (Ofgem) Ofgem is the UK regulator for electricity and natural gas. Its two primary goals are to promote effective competition and to regulate the companies which run the gas and electricity transmission networks. It also plays a role in facilitating discussion on energy matters by acting as a forum and a participant in debates dealing with energy issues. Ofgem is funded by fees paid by energy companies that are licensed to run the gas and electricity infrastructure. Ofgem holds responsibility for administering the UK renewables Obligation. The Energy Saving Trust (EST) The EST is an independent organisation funded by the government to promote domestic energy efficiency and microgeneration amongst the general public. In particular the EST provides advice on community energy (including district heating) and held responsibility for the former Community Energy Grant programme. Industry The Combined Heat and Power Association (CHPA) The CHPA works to promote the wider use of combined heat and power and community heating in the UK. It has a membership of over 80 organisations from across the private and public sectors and aims to work with its members, government and other non-government organisations to address the barriers that currently face CHP and Community Heating and to ensure that Government policies allow CHP and Community Heating to play their full role in delivering economic, social and environmental benefits to the UK. The Micropower Council The Micropower Council is a cross-industry body whose membership comprises electricity and gas companies, manufacturers, trade associations, professional institutions, not-for-profit companies, non-government organisations, charities and private individuals, all of whom have a strong interest and expertise in the development of the micropower/microgeneration sector, which encompasses micro-heat, micro-chp, and micro-electricity technologies. Non-Governmental Organisations The Carbon Trust (CT) The CT is an independent organisation funded by the government to promote the reduction of carbon emissions within business and industry. It provides independent information and impartial advice on energy savings and carbon management and promotes government energy efficiency programmes. The CT supports the development of small-scale low-carbon technologies through initiatives such as technology accelerator programmes. In particular, the CT currently manages a technology acceleration programme for micro-chp systems, 23 which involves a major field trial of 87 micro-chp units in domestic and small commercial environments. 23. See 10

11 Barriers to CHP Uptake The principal barriers to the uptake of CHP within the UK are generally held to be financial and regulatory as opposed to technical (although technical issues exist in the case of micro- CHP). Typical obstacles faced by CHP are as follows: Inconsistency between incentive frameworks and market signals. Although price volatility has been a hallmark of UK energy markets, investment decisions for CHP will be made in the context of future prices, particularly the differential between electricity and gas prices (the spark spread ). Future spark spreads appear insufficient to secure CHP investment, without some adjustment to correct for the weaker risk/return profile of CHP plants in comparison to conventional generation. The Climate Change levy will help address this issue; however, its expiration in 2013 creates uncertainty. Volatility of fuel and electricity prices. In the past, concerns regarding future volatility of fuel (especially natural gas) and electricity prices have led to CHP being seen as a higher-risk option compared against conventional methods. As the power output from CHP units is influenced by external factors such as the need to meet varying or unpredictable heat demands, CHP operators are at a commercial disadvantage. While improvements have been achieved in attaining equality (e.g. reduction in the period ahead of real-time at which market participants are required to fix their output predictions to the system operator), ongoing efforts may be required to further maintain competitiveness of CHP in the market. Lack of recognition of CHP in climate change policies. Widelyheld expectations that the establishment of a carbon market will directly support the expansion of CHP capacity have not yet been fulfilled. Carbon prices have been unstable and allocation arrangements for CHP remain uncertain. This situation could be addressed by a long-term and stable carbon market, with robust price signals. UK authorities may also wish to explore alternatives for recognising CHP benefits in GHG trading schemes. 24 at a range of scales, at sites where there are opportunities to maximise heat recovery and optimise the overall energy system efficiency. The asymmetry of incentives with incentives to optimise electricity supply in place without corresponding incentives for heat may compromise development of power generation at areas of major heat demand (e.g., the northeast of England). Lack of investment in heat transmission and distribution infrastructure. Heat networks are typically capital-intensive and can be high-risk until customer connections are secured. Under current market and policy conditions, there is often insufficient incentive to invest in heat distribution infrastructure other than over a very limited area. Government policy is increasingly focussed on the heat market, and has recently completed a call for evidence as part of a consultation exercise on a UK strategy for heat. By establishing a market for low- or zero-carbon heat, with strong incentives to supply low-carbon heat and with an investment programme in heat networks, the commercial opportunities to develop viable CHP schemes might be further increased. The matter of incentives for the production of renewable heat is also being addressed in the ongoing consultation for the UK renewable Energy Strategy. Regulatory framework. levy Exemption Certificates (lecs) for Good-Quality CHP under the Climate Change levy appear to be an important support mechanism however, for electricity exports, these have only received State Aid Clearance until March Furthermore, investors might be unable to access the full value of lecs due to the existence of Climate Change Agreements and the restriction to exported power only. Lack of locational signals for heat utilisation. like many countries, the UK energy market lacks consistent signals to investors to site generating assets in locations that optimise the opportunity for heat recovery and utilisation. This is in contrast to arrangements for power grid connection, where there are strong signals to site plants in areas closer to areas of electricity demand. Historic investment in gas transmission and distribution infrastructure has provided the UK with the physical flexibility to establish power generation, Combined Heat & Power and Emissions Trading: Options for Policy Makers, IEA 2008,

12 CHP Potential and Benefits A report for Defra in 2007 looked at the potential for CHP deployment in the areas of industry, individual buildings and community heating in accordance with the requirements for the EU Cogeneration Directive. 25 The report identifies a potential for new generation by 2010 of as much as 61TWh of electricity with associated energy savings of 44 TWh; these are significantly higher potentials than previously believed. These values increased to 81 TWh of electricity and savings of 57 TWh by A summary of these results are given in Table 3. The largest potential is demonstrated within the medium- to low-temperature industry group, which represents 70% of the total potential additional electricity delivered in This group was followed by the other industries and individual buildings groups. 26 Community heating and high temperature industry presented significantly less potential, sensitive to a number of factors including prevailing market discount rate. TABLE 3. ADDITIONAL POTENTIAL FOR COST-EFFECTIVE CHP BY 2010 AND 2015 (15% DISCOUNT RATE FOR INDUSTRY AND BUILDINGS, 9% FOR COMMUNITY HEATING) Year Group Capacities (MW) Delivered Energy (TWh) Energy Savings Electricity Heat Electricity Heat (TWh) 2010 Medium to low temperature industry High temperature industry Other industry (refineries and lng) Buildings Community Heating (9% discount rate) Total Medium to low temperature industry High temperature industry Other industry (refineries and lng) Buildings Community Heating (9% discount rate) Total SOUrCE: AEA report FOr THE DEPArTMENT FOr ENVIrONMENT, FOOD AND rural AFFAIrS (DEFrA), ANALYSIS OF THE UK POTENTIAL FOR COMBINED HEAT AND POWER (OCTOBEr 2007). Note: Some overlap in potential values may exist between the medium to low and high temperature industry and also buildings and community heating groups. As a result, totals should be taken as upper limit values. 25. AEA report for the Department for Environment, Food and rural Affairs (Defra), Analysis of the UK potential for Combined Heat and Power (October 2007). 26. Industrial developers consider that this Defra study underestimates the potential for the utilisation of CHP capacity on refining and major petro-chemical sites, where the strategic nature of operations provides for secure, long-term heat loads. This perspective is supported by analysis undertaken by Poyry in June 2008, which indicates the potential for at least 11 GWe of new CHP capacity on 10 sites in the UK. See Securing Power: Potential for CCGT CHP Generation at Industrial Sites in the UK, Poyry Energy Consulting, June 2008, 12

13 realising the Benefits of CHP and DHC Figure 4 shows that from , growth in CHP was strong. However, progress since 2000 has been modest despite the enactment of government policies. In 1993, total electrical power output from all sources of Good-Quality CHP was over GWh. 27 In 2007, total electrical power output from GQ CHP was over GWh, 1 equivalent to 7.3% of UK electricity production. The majority of CHP growth occurred between 1993 and 2000, with significant slowdowns occurring before 2004, when the 760 MWe Immingham CHP plant was commissioned. This contraction in growth was due to a combination of factors including falling spark spreads (a collapse in the power price at the time of rising gas prices) and the introduction of a wholesale market. Future volatility in fuel and electricity prices is expected to continue. While the forward curves in the UK s liberalised market suggest that the spark spreads are likely to be close to the levels necessary to attract CCGT investment, they may not be sufficient to incentivise CHP. Existing fiscal incentives have the capability to close this gap, but without certainty over the availability of the CCl exemption post-2012, new investment may not occur. The creation of a value for carbon is not anticipated to provide greater certainty with regard to the cost-effectiveness of CHP investment in the period leading up to The establishment of price history and greater certainty in emissions trading may provide a more stable market and pricing framework that can support heat infrastructure investment. FIGURE 4: CHP MARKET PERFORMANCE 1993 TO 2003 SOUrCE: DEPArTMENT FOr BUSINESS, ENTErPrISE AND regulatory reform (BErr), DIGEST OF UK ENERGY STATISTICS 2008 (DUKES 08) LONG TERM TRENDS, JUly 2008 GWh % Electricity generation (GWh) load factor (%) Overall efficiency (%) Proportion of total UK power output (%) Department for Business Enterprise and regulatory reform, Digest of UK Energy Statistics 2008 (DUKES 2008), Long Term Energy Trends (July 2008).

14 Summary Policy recommendations Consider establishment of locational signal for CHP investment Assess the viability of an investment framework for CHP/DHC infrastructure Expand resources available to undertake energy planning at a local level Consider creating a national CHP target and strategy for beyond 2010 Continue emphasis on the potential for efficient CHP for large power station developments Continue support for renewable CHP/DHC Monitor markets for continuing competitiveness of CHP Explore options for cost-effectively introducing new CHP/DHC technologies Further investor confidence in support mechanisms Consider establishment of locational signal for CHP investment The United Kingdom currently has little signal for investment in high-efficiency cogeneration plants, or for the recovery of waste heat from power generation. While the Climate Change levy is an effective incentive for existing CHP, the expiration of this measure in 2013 means that new plants will not substantially benefit. Under these circumstances, the United Kingdom is recommended to review the efficacy of existing investment incentives, with a view to establishing incentives that remain compatible with the liberal energy market but which provide a signal to locate new power generation plants in areas with high heat demand. This signal could be targeted to achieve maximum overall efficiency from the United Kingdom s framework for energy supply. Assess the viability of an investment framework for CHP/DHC infrastructure District heating infrastructure faces different, and potentially more difficult, obstacles to investment than CHP. These relate primarily to the high capital cost and high risk profile of projects during their early stages of development, when there is a high degree of uncertainty over future system loads. Nonetheless, district heating can form an important element of a nation s energy infrastructure, affording the opportunity for appropriate mechanisms to securitise investment in these networks, appropriate to its own market heritage. These might comprise a combination of public finance, public procurement policies to provide anchor heat loads and the use of planning powers to secure new customer connections. Expand resources available to undertake energy planning at a local level In contrast to a number of OECD countries, control of energy policy in the United Kingdom has been largely retained at the national government level. In a number of respects, however, patterns of energy supply are being determined increasingly by local conditions, particularly with respect to heat utilisation and renewable energy supply. With these factors becoming increasingly important, relevant local authorities and institutions should be equipped to address and manage these conditions. A first step could be undertaking local heat mapping, leading to greater support to parties developing projects and providing for advanced local energy strategies. Consider creating a national CHP target and strategy for beyond 2010 While the MWe goal is not anticipated to be achieved by 2010, many countries have seen that a CHP target acts as a strong motivator to achievement of larger policy goals. Therefore, the identification of a further target beyond 2010 would be a good next step. A target should also be supported with the development of a CHP strategy with clear targets and measures for supporting the development of the strong GQCHP programme, including fiscal measures for incentivising greater use of CHP and district heating. Continue emphasis on the potential for efficient CHP for large power station developments The introduction of the requirement for developers of large power stations to consider the potential for combined heat and power at the consenting stage has been a positive step to raising its profile as a desirable option for utility-scale power generation to address market power issues faced by CHP. Forthcoming changes to the planning process of significant infrastructure projects should maintain or strengthen this emphasis. Continue support for renewable CHP/DHC The development of CHP schemes using renewable sources of fuel provides zero-carbon sources of electricity and heat and is wellsuited to applications without ready access to established fuel networks. While support is anticipated to increase for such schemes through measures such as the renewables Obligation, the government should also consider the costs and benefits of providing additional support, perhaps in the form of capital grants, to firmly establish renewable CHP technologies. Monitor markets for continuing competitiveness of CHP Global experience has shown that wholesale electricity market arrangements can develop in such a way so as to place smaller generators, including CHP, at a disadvantage to large operators. Ongoing monitoring of trading arrangements would help ensure that all market participants are provided with equal opportunities to contribute to the market. Explore options for cost-effectively introducing new CHP/DHC technologies Having undertaken extensive research into the introduction of micro-chp technology, the UK should consider ways to disseminate findings to relevant stakeholders to anticipate and address potential barriers, so that the maximum benefit presented by these technologies is achieved. Further investor confidence in support mechanism longevity and accessibility of support mechanisms will stimulate investment through improving investor certainty. Steps to extend lec support beyond March 2013 should be assessed for costs and potential benefits. 14

15 CHP/DHC Scorecard To aid in comparing amongst countries, the IEA has developed a scorecard of national CHP/DHC policy that takes into account three criteria: The effectiveness of past policies in developing the CHP/DHC market over the last 5 years; Statements and commitments of intent in respect of future CHP/DHC policy, for example through the creation of national growth targets; and The existence today of meaningful policy incentives that are already causing significant market growth or that are likely to do so in the near future. Each country is given a scorecard rating as follows: No material policy effort or intent to promote CHP/DHC. The market is not expected to grow for the foreseeable future. Some minor recognition of the role of CHP/DHC, but policies are not fully effective or are otherwise insufficient to influence market development. There is a clear recognition of the role of CHP/DHC, accompanied by the introduction of some measures to accelerate the market, but CHP/DHC are not high priorities compared to other energy solutions. In addition, the country lacks an integrated CHP/DHC strategy. As a result, market growth is likely to be modest. CHP/DHC is at or close to the top of the list of energy policy priorities and a series of effective policies are being implemented as part of a coherent strategy. Important growth is expected in CHP/DHC markets. A world leader in prioritising CHP/DHC, with a clear and proven strategy for bringing about significant market development and the implementation of at least one global best-practice policy measure. UK Rating: 15

16 The International CHP/DHC Collaborative The International CHP/DHC Collaborative was launched in March 2007 to help evaluate global lessons learned and guide the G8 leaders and other policy makers as they attempt to assess the potential of CHP as an energy technology solution. The Collaborative includes the following activities: collecting global data on current CHP installations assessing growth potentials for key markets developing country profiles with data and relevant policies documenting best practice policies for CHP and DHC convening an international CHP/DHC network, to share experiences and ideas Participants in the Collaborative include the Partners, mentioned in the acknowledgments, as well as the Collaborators, a group of over 40 government, industry and non-governmental organisations that provide expertise and support. The Collaborative Network, the larger group that is informed about meetings, publications and outreach, has almost 300 participants. If you are interested in participating in the Collaborative or want more information, please visit Acknowledgements This report was prepared by Tom Kerr of the IEA. AEA Technology plc, led the analysis and initial drafting and provided other support. The authors would like to thank Alyssa Morrissey of the US Department of Energy s Office of Energy Efficiency and renewable Energy, who was seconded to the IEA during the production of this report. IEA would also like to thank all of the reviewers, including rwe npower and the UK Combined Heat and Power Association, and all of the Partners and Collaborators in the IEA s International CHP/DHC Collaborative. Questions and comments about this document should be sent to: Tom Kerr International Energy Agency 9, rue de la Fédération Paris Cedex 15 France tom.kerr@iea.org design by 16