The EU Cogen Directive - the rebirth of CHP or a lost opportunity?

The recent British Broadcasting Corporation (BBC) programme 'If...the lights go out' presented a bleak (and somewhat alarmist) view of how the United Kingdom will meet its energy needs in 2010. On the same day, the House of Commons Trade and Industry Committee published its report on the resilience of the national electricity network^[1], in response to the power cuts experienced in 2003. In its report, the Committee expresses concern that the capacity margin (the amount of spare generating capacity over predicted demand) is likely to fall, unless generators start to build additional capacity soon.

At the same time the European Union (EU) is pushing ahead with its commitment under the Kyoto Protocol to reduce carbon dioxide emissions with the implementation of the EU Emissions Trading Scheme. The scheme will impact significantly on electricity producers.

In this context, high efficiency cogeneration or combined heat and power (CHP) technology has the potential to achieve the twin policy aims of the EU to reduce emissions (particularly carbon dioxide) through the more efficient use of fuel and, because of its localised nature, to contribute significantly to security of supply.

The Cogeneration Directive became European law on 21 February^[2] and must be incorporated into the law of each member state by 21 February 2006. It sets out a framework for the promotion and development of cogeneration on an EU wide basis.

While it has been broadly welcomed by the cogeneration industry, the Directive does not address the fundamental economic problems afflicting the industry that, at least in the UK, have bought new CHP construction to a virtual standstill.

What does the Directive do?

Despite a lengthy preamble extolling the virtues of cogeneration (the generation of electricity and the simultaneous use of the heat created by the generation process), the Directive contains little of substance to promote and stimulate the construction of new CHP plants. See overleaf for the Directive's key requirements.

Does it work?

In a fragmented market, the initiative taken by the Commission to review the potential for cogeneration across the member states must be welcomed. The establishment of a common standard and assessments of the barriers (technical, administrative and legal) and potential of the technology are excellent short-term goals.

However, in the draft Directive published in July 2002^[3], the Commission identified the following factors that were limiting the growth of cogeneration (barriers that are all too familiar to the UK CHP industry):

• Low electricity prices
• High connection costs
• High grid reinforcement costs
• High distribution costs
• Lengthy administrative procedures
• Lack of recognition of embedded benefits
• High fuel prices

The key requirements of the Directive are:

The Directive does not tackle any of these issues head on. Instead it delays dealing with the main issues by obliging the member states to review and report over the next three to four years - an ideal timeframe to build and commission significant CHP capacity.

The Directive does not provide a framework that encourages the development of cogeneration plant over other types of generation. If cogeneration is going to achieve its potential to contribute to security of supply and reduction in emissions, the industry needs strong signals from policy makers that it will be given favourable support in the medium to long term.

Moving forward

Within the limited scope of the Directive, there are opportunities for the UK CHP industry to enter into active dialogue with the Government about the shape and implementation of a national cogeneration policy - particularly in contributing to the Article 6 report, exploring the potential for support schemes under Article 7 and in the Article 9 review of administrative procedures. This is also an opportunity for the Government to demonstrate joined up thinking in developing its energy policy. Defra carried out the consultation exercise on the draft Directive in 2002, but other agencies, notably the department of trade and industry (DTI), Ofgem, HM Revenue & Customs (HMRC) (in relation to the climate change levy), the planning authorities and the Environment Agency will all have important roles in the implementation of the Directive.

The biggest barrier in the UK to the growth of cogeneration is, paradoxically, the opposite of the tariff issues referred to in Article 8. The introduction of the new electricity trading arrangements (NETA) in 2001 has affected CHP generators in two ways. First, the wholesale price of electricity has fallen dramatically, meaning less income for generators from electricity that they sell onto the system. This has affected all types of generators (notably British Energy) and not just CHP plants.

Secondly, under NETA the imbalance charges (effectively the financial penalty for either generating less or consuming more electricity than was notified to the system operator) can be significant. This is a particular problem for a CHP producer, whose electrical export is dependent upon the heat and electricity requirements of its customers. CHP operators are unlikely to start building again in the UK unless the balancing mechanism rules are made more favourable - the indications from the Government and Ofgem are that this is unlikely to happen.

For favourable business conditions, CHP producers may look east to the accession countries that are joining the EU in May this year. Many of the former Eastern Bloc countries have significant community heating schemes that will require significant investment and upgrading after years of neglect.

There is a real risk that, by failing to recognise the potential that cogeneration offers, the UK will not achieve its two very important policy objectives of emissions reduction and security of energy supply.

Footnotes

[1] House of Commons Trade and Industry Committee published its report on the resilience of the national electricity network.

[2] The Cogeneration Directive became European law on 21 February

[3] The draft Directive published in July 2002