Kyoto commitments: CHP will help the UK

Following its Review of Energy Sources, carried out over the last year, and adoption of the new stricter consents policy for natural-gas-fired power generation, the UK government will nevertheless still give special consideration to what it calls 'good quality' CHP projects. This puts CHP in the forefront of future UK power generation projects and such schemes, along with renewable electricity generation, will 'meet with more favourable assessment, recognising their environmental and other benefits', over straight combined cycle power generation even with marginal heat export.

Government minister, Michael Meacher, reaffirmed at the UK Combined Heat and Power Association's National Conference held at the Queen Elizabeth II Conference Centre in London on 19 November 1998 that combined heat and power will make a vital contribution to meeting the UK's climate change targets for CO₂ emissions reduction.

Other speakers at the conference included Professor Stephen Littlechild, Director General of the Office of Electricity Regulation (OFFER), whose office merges shortly with the Gas Regulator to form the Office of Energy Regulation, Dinah Nichols, Director, Environmental Group, Department of Environment, Transport and the Regions (DETR), David Chidgey MP, Trade and Industry spokesperson for the Liberal Democrats, Bob Kennett & David Green, respectively Chairman and Director of the CHP Association, together with speakers from industry, finance and consulting companies.

"Good quality" CHP schemes

These "good quality" chp schemes:

must achieve high levels of efficiency over the year ie 70 per cent or greater

must clearly identify on-site or nearby heat uses, recognising that community heating (CH)-type CHP takes time to develop the heat market and

should allow flexibility for export of electricity where justified by the nature of the host site's energy requirement

The next stage of the Energy Review will concern electricity trading arrangements, including the abolition of the 'pool' and its replacement with arrangements similar to those used to trade other commodities, and must accommodate and facilitate growth of CHP and renewables. This will recognise that CHP sites need assured long term access to markets and capability to buy-back and top-up electricity and sell electricity exports at a fair market price.

To counter the trading power of the big players in the market, it was suggested by the Minister that CHP trading clubs could be formed to give strength in numbers. Other options could be regulatory-based possibilities for giving CHP access to a balancing price based on some average price. (Perhaps this should recognise the specific additional energy savings gained by the heat sold, 30 per cent to 50 per cent of the fuel input – a value based assessment leading to a carbon trading system in the future?.)

The minister also drew attention to:

Lord Marshall's report, Economic instruments and the business use of energy, including proposals for CHP to be included in a carbon trading scheme and an energy tax, preferably on input fuel not export electricity or heat and where revenues are recycled back to industry or community heating and domestic consumers or exports into the system.

A change in the non-domestic rating for CHP schemes.

Continued government support for community heating schemes – a new guide was issued in May by John Prescott MP, Deputy Prime Minister which reiterates revenue support via the Public Finance Initiative.

'Gain not pain' – regarding climate change, the government's view is that there is much to gain in the UK assuming for its CO₂ targets a 121/2 per cent reduction against a basket of gases CO₂, CH₄ etc., and a domestic target of 20 per cent reduction by 2010, both based on 1990 levels. The following benefits were cited :

More energy efficiency in industry brings greater competitiveness

A better transport system helps the economy

Opportunities for jobs in the traditional and new energy/environmental technology industries.

With an economic CHP potential of between 10 and 19 GWe in industry, commerce, the public sector and community heating, CHP is one of the largest single measures to meet the UK's climate change commitments.

The need for incentives

David Green, Director of the CHP Association, reiterated and confirmed much of what the Minister said. However he felt that without incentives the UK CHP target of 10 GWe by 2010 would be very difficult to meet. The UK will hardly meet the target of 5 GWe by 2000.

The Netherlands has recently given tax credits of $300 million for CHP. Germany's new government is also considering ecological taxation (which it will certainly need if it phases out nuclear power). Carbon trading is an opportunity for the future and for the UK to trade overseas but will take time to develop, possibly ten years, as with acid gas trading. The UK is ahead in the thinking on these lines.

In the area of social exclusion, in the UK 8 million homes lack affordable warmth and new measures are required to address this problem. Scottish Power, for example is developing new packages for local authorities. CHP is part of the solution for a sustainable electricity (and heat) market. The government recognises the poor uptake of CHP/CH and will be pressing local authorities for their reasons.

It is expected that the Marshall Report will take some time to develop and there is a need for interim measures to avoid stagnation – this would be in the form of implementing stricter and more explicit consents which will need a more speedy response to applications if better progress on CHP is to be made.

Regulation

Professor Littlechild said that growth in CHP has fallen off and faces decreasing electricity prices. Now that the nuclear levy has been phased out, the "non fossil fuel obligation" (NFFO) is a the only levy on electricity in the UK.

At currently 1 per cent the NFFO has been very successful in the development of renewable electricity. However an initial survey by OFFER on the investment needed to obtain 10 per cent renewables by 2010 had shown that an £11 billion to £15 billion investment at 5 to 6 p/kWh electricity prices and a levy rate of 6 to 8 per cent for 15 years could be required. Professor Littlechild believed that, whilst this is an early-day estimate, CHP could be more economical and emphasised the benefits of embedded generation in local networks.

More progress is needed on deregulation especially in gas supply but there is, nonetheless, sustained downward pressure on upstream gas prices. OFFER is pressing for the major players in power generation, National Power and PowerGen to divest themselves of some capacity to create more competition.

In the 'pipes and wires', distribution area, competition could be coming in with new competitive pipeline systems as in the Netherlands and locally sited facilities. In the retail sector there is now effective choice and competition for customers but price volatility does not help the development of CHP schemes.

Climate change

Dinah Nichols said there is no doubt that climate change is a problem. Over the next century, world average temperatures will increase by 1 to 31/2 °C on the 'business as usual' scenario. The cost effects of climate change – flooding, drought, wind damage etc, are likely to dwarf the costs of implementing further reductions in CO₂ and other greenhouse gases.

The UK has seen a reduction in carbon emissions of 13 MtC in the period 1990 to 1997 (168 to 155 MtC or nearly 8 per cent reduction). Consultation is needed in future, resulting in ranking of options for achieving reductions, with the major targets being transport, industry and the domestic energy markets.

Lord Marshall was attracted by international trading of carbon emissions but there are complex issues to be resolved, not the least being to put a price on the emissions. Trading between firms would allow firms to sell their excess to companies for whom it would be more cost effective. However compliance and enforcement were some of the major issues to be resolved. There is a proposal for a 'dry run' UK pilot emission trading scheme.

Growth in UK CHP capacity

Michael Meacher said that the UK has doubled its CHP capacity in the last ten years, to almost 4 GWe (or 6 per cent of total capacity), reducing its energy costs by over £0.5 billion and cutting CO₂ emissions by around 5 million tonnes of carbon a year. (This is equivalent to 31/2 per cent of total 1990 UK carbon emissions or over 11 per cent of those from power generation.) The government wants to more than double the CHP capacity to 10 GWe by 2010 and this could give the CHP business an investment opportunity of around £5 billion.

It has to be said that the UK's European partners already have CHP capacity well in excess of the UK's 6 per cent with, for example Denmark at 40 per cent, the Netherlands at 35 per cent, and Germany at 14 per cent. However much of these countries' capacity has been built up in highly regulated or local authority (Stadwerke) controlled systems over the past 40 years and includes socially-subsidised community heating-based CHP.

Since the late 1980s, in the UK's increasingly de-regulated market, CHP capacity has been increased on strictly commercial, market-based lines. The government recognises that the present market contains "major flaws and distortions" and will carry out a programme of reforms to correct these, for example, to abolish the 'pool' trading system.

Since the government's confirmation in October of this year of its de facto moratorium on natural gas generation except where it is associated with combined heat and power, some 300 MWe of new CHP has been approved including the 130 MWe plant at BP's chemical plant at Grangemouth. New CH/CHP schemes are underway at the Greenwich Millennium Village, Tower Hamlets (East London), the latter with £2.7 million credits from the government's Private Finance Initiative. Others in discussion are at Allerton Bywater (Leeds) with the CHP Association participating and at Manchester, another PFI pathfinder project.

The dash for gas

Michael Meacher went a long way to answer the question posed in the MPS Comment of August 1998 -'Can the UK restrain the dash for gas?' – when he indicated that the UK is committed to ensuring security, diversity and sustainability of energy supply.

There is a recognition that gas-fired CCGT in the UK now has roughly equal market share with that of coal-fired and nuclear at around 30 per cent. The government does not want to return to the dominance of any one fuel source as previously coal was at 70 per cent prior to the dash for gas.

However over the period up to 2010 there will need to be additional power generating capacity to cater for the expected annual growth in demand of 11/2 per cent and for the phasing out of old fossil-fired and nuclear plant. For example, according to the Engineering Institutions' Energy Study Group's source document, the first of any replacement nuclear plant would have to be ordered in 3 to 4 years, ie by 2002. It is difficult to see that any CHP or renewables programme can bring in the necessary 1000 to 2000 MWe of plant which new clean coal or nuclear bring in one plant. Alternatively the market would then have to probably rely on further CCGT plant, whose economics are still likely to be more favourable.

Targets

With the change in government in May 1997, there has been sluggish growth in UK CHP in the last two years, possibly 150 MWe per annum. To meet the 2010 target of 10 GWe the average built capacity has to be 500 MWe per annum, an annual build achieved only once perhaps in the last ten years, which has averaged 200 MWe per annum.

In order for combined heat and power to grow effectively in the UK so as to meet targets on climate change, there is a continuing need for the markets in gas and electricity to be made more transparent and for fair pricing of electricity for purchase on-site, for export, buy-back and top-up. The new consents

policy needs to be explicit in its criteria and speedy in assessments. There needs to be an early resolution of this policy. It is likely to take ten years to allow emissions trading systems to be developed, following the pilot study.

There would appear to be no reason why the energy taxation/recycling aspect, possibly in a CHP-Obligation form, could not be incorporated earlier into the consents policy. Also, special treatment of community heating is needed. All of this should boost UK CHP efforts to achieve its targets.