Despite its undoubted advantages in terms of increased fuel use efficiency, and therefore reduced greenhouse gas emissions, cogeneration, has been struggling recently. Indeed, in the past two or three years or so, the market share of cogeneration has stagnated or even declined in some countries, with lean times, redundancies and closures within the CHP sector. And yet cogeneration, quite rightly, is widely seen as a good thing and enjoys strong political support, with measures in place in several countries intended to bolster it (notably the German cogen legislation introduced earlier this year).
In the European Commission's 1997 cogeneration strategy "an overall indicative Community target" was set which consisted of doubling the share of cogenerated electricity from 9 per cent in 1994 to 18 per cent by 2010. But, with the current figure believed to be not much more than about 11 per cent, progress towards this goal has been slow.
So, if it is such a good idea why is cogen having such a difficult time? Among the factors working against it have been low electricity prices, high gas prices (to which cogen plants are sensitive as they tend to be relatively small), and the rigours of increased competition/liberalisation, with new trading arrangements, eg in the UK and the Netherlands, having the effect of discriminating against the smaller generator in general and CHP in particular.
Cogen plants tend to cost more per kW installed than conventional electricity generation systems, again because they are relatively modest in size and because there tends to be more plumbing involved. Also, because their use is dictated by heat demand, load factors tend to be lower for CHP units than for larger baseload electricity generation plants and output can be less predictable. In addition the cogen lobby has identified a number of other barriers to decentralised CHP, including high connection costs, the burden of high grid reinforcement costs placed on the cogen developer, high costs for use of the distribution systems, overly complex and drawn out permitting and administration procedures, and lack of full recognition of the benefits of decentralised cogen plants.
The long awaited new cogeneration directive recently proposed by the European Commission (see this month's news) aims to reverse the trend.
In justifying its new directive, the Commission points out that the EU is very dependent on external energy supplies, with imports currently accounting for 50 per cent of requirements, and projected to rise to 70 per cent. It also notes that, far from declining, greenhouse gas emissions in the European Union are on the rise "making it difficult to respond to the challenge of climate change and to meet the commitments under the Kyoto protocol." In its current version, which seems opaquely worded and badly structured, even by European Commission standards, the details of the new proposed directive are difficult to discern and interpret. But the broad aim is, in the Commission's words, to "create a framework" to promote cogeneration, recognising that, in the short term, while external costs are not fully reflected in energy prices, "regulatory certainty and in some cases financial support are vital for cogeneration", in order to create "a level playing field", with support options including direct price adjustment, tax exemption, green certificates and investment aid.
The proposed directive suggests that support should be focused on plants of less than 50 MW, or on the first 50 MW in the case of larger plants. The Commission says its rationale is that bigger installations have easier access to favourable financing and fuel prices. Its aim is not to disqualify larger installations, says the Commission, but to avoid overcompensating them.
Proposed provisions include: a requirement for member states to "analyse national potentials for high-efficiency* cogeneration and barriers to their realisation"; a requirement for evaluation "of the experiences gained with the application and coexistence of different support mechanisms for cogeneration used by member states"; establishment of the "principles for the interaction between cogeneration producers and the electricity grid", with a major aim being facilitation of grid access for cogen plants using renewables and microcogen plants below 1 MW; and a requirement for member states to "evaluate current administrative procedures with a view to reducing the administrative barriers to the development of cogeneration".
The directive will now go through the mill of what is a called a co-decision procedure, involving the European parliament and council of ministers. So let us hope that the wording is tightened and clarified.
Sensibly, the directive accepts that cogeneration is not appropriate if there is insufficient heat demand. It is also not going to aim to reach the same percentage in each country - a good example of the famous "principle of subsidiarity" at work in practice. The market penetration of CHP varies widely from country to country, principally because of climatic differences, with Denmark, the Netherlands and Finland recording the highest levels (around 62, 53 and 36 per cent respectively), while at the other extreme are Greece, France and Ireland, at about 2 per cent.
Predictably, the pro CHP lobby has criticised the existing form of the directive saying it does not go far enough. It also questions the bias towards smaller plants and criticises the lack of specific targets for each country in the current directive (although such targets would be difficult to establish from the outset, and anyway do not seem to have been ruled out as a future possibility).
Overall, the directive, while needing further work, is a move in the right direction. If external costs, reflecting environmental impacts (CO2 savings in particular), were to be truly represented in the energy markets, cogen would fare much better than it currently does. While this "internalisation of external costs", to use the economists' jargon, shows signs of happening in the future, the CHP sector is in desperate need now of some measures to boost its fortunes and tide it over. And to meet its Kyoto commitments the EU will need all the help it can get.
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