From a spark to a flame

CHP, or cogeneration, is a good

idea. It is not, however, a new one. First proposed around the turn of the century, CHP implementation has historically been marginalised by the unbending pylons of the electricity supply industry and its reinforcement of a commodity-led, producer-dominant relationship with consumers, hindered only by weak, price-led intervention, serving efficiencies in energy provision rather than energy per se.

With privatisation in 1990, however, has come substantial restructuring. The division of the industry into separate generation and distribution elements, with limited competition in the former, suggests a strengthened political impetus towards alternative generation technologies. The UK’s CHP capacity has doubled in the last ten years to around 3,700MW, reducing energy costs by more than £2bn and cutting CO2 emissions by close to five million tonnes of carbon per year.

New CHP units are now being installed at the rate greater than 100 per year. In 1998, more than 200MW of new CHP plant was installed and a further 550MW given consent. According to Meacher, achieving the UK’s objectives for CHP is going to require further industry investment of somewhere in the region of £5bn.

“This is a vital area of policy,” he continued. “Combined heat and power makes a vital contribution to meeting the UK’s climate change targets. The Government has therefore made special provision for the assessment and approval of good quality CHP projects under the stricter consents policy for gas generation as part of its Review of Energy Sources.”

Thus, the strong policy commitment key to the effective development of CHP, as witnessed in the Netherlands, Denmark and Finland, has manifested itself in the UK.

Recent years too have witnessed significant advances in turbine and engine technology which offer clear prospects for more widespread development of CHP, as Graham Meeks of ETSU explains: “Most small-scale CHP applications tend to be based on an internal combustion diesel engine, which, apart from entailing prohibitive initial capital investment and maintenance costs which drive up the cost per installed kW unit, produce relatively low grade heat. Gas turbines used in larger schemes, while offering exceptional levels of operational efficiency and exhaust gases in the region of 550ºC – very good for raising steam – again entail prohibitive build costs which often negate any efficiencies gained through the cogeneration process.”

This scenario is set to change, however, with a number of companies currently developing small-scale gas turbines capable of delivering the best of both worlds, and at around a quarter of the size and weight of their predecessors. “It is seen as a technology which should enable CHP to reach a far larger market than it presently does,” he says.

Another CHP-enabling technology, absorption cooling, whereby a cooling requirement is driven by heat, rather than electricity or mechanics, has advanced considerably in recent years. Around 5,000 are sold every year in Japan, 3,500 in China, 500 in the USA – and between ten and 15 here in the UK. Absorption chillers, which can provide a valuable use for surplus heat or steam, particularly during the summer, improve the utilisation of CHP plant and, significantly, can improve the viability of a CHP proposal.

On which Meeks says: “The thing about CHP is that it involves a big capital investment requirement, and because of that companies are not necessarily willing to invest. On a good scheme you are looking at payback periods in excess of three years. Most businesses, when they are looking at making a capital investment of £1m or more – which is what you are looking at for a megawatt-plus plant – it’s going to be on something which is related to their core business. CHP isn’t part of their core business.”

Typically, CHP costs from around £600/kW to £1,000/kW, depending on (economies of) scale. Much, however, is dependent upon the operating conditions of the plant. CHP is particularly sensitive to operating hours, with much of the revenue stream and cost savings coming from the avoided cost of power, so the longer the plant is operating, and operating during peak tariff periods, the more benefit there is to be gained.

Feasibility study

At this stage, according to the Department of the Environment’s Good Practice Guide 227, How to appraise CHP – A simple investment appraisal methodology, available through the Energy Efficiency Best Practice Programme (EEBPP), companies face a dilemma: it is difficult to justify the cost of a feasibility study before knowing if the proposed project is likely to prove economically viable. However, overlooking the potentially significant advantages offered by CHP is likely to prove costly in the medium to long term.

Where the guide enables a preliminary appraisal of the potential of a process or site for profitable adoption of CHP, the Transco-funded CHP Feasibility Prog-ramme, established in 1997 and available through the Combined Heat and Power Association (CHPA), awards grants to cover much of the cost of a feasibility study. In its first year, feasibility studies for 13 industrial schemes were supported, with grants totalling nearly £280,000. Industries involved included a brewery in Glasgow, chemicals manufacturers in Cleveland and a tissue manufacturer in Kent. More than £400,000 has already been awarded. Also, there are grants available to industry for CHP up to 1MW, again via the CHPA, from the Department of the Environment, Transport and the Regions to bring payback periods down to three years for capital purchase schemes and five years for “off-balance sheet finance” schemes, provided by energy services companies, commonly subsidiaries of generators.

Typically, the energy services company will supply, maintain and operate the CHP unit. The host site then buys in the gas fuel, sells it on to the CHP operator, who, in turn, will sell back the electricity and heat to the host. Any surplus is exported back to the local distribution network. Many companies find the financing structure very attractive in taking the investment, as the name suggests, off the balance sheet.

A CHP plant would be expected to last for somewhere in the region of 15 years. The economic basis for CHP lies in the avoided cost of electricity. The Review of Electricity Trading Arrangements, currently being considered by the Government, has the broad remit of reducing wholesale electricity prices via, it is envisaged, a means more akin to other commodity markets. If the Government is to honour the terms of reference of the Review, specifically that it does not prejudice the opportunities for CHP and renewables such that the Government’s own hard targets be met, then special considerations will have to be made. As Meacher himself noted: “Crucially, CHP sites need to be assured of their capability to buy back-up and top-up electricity, to sell electricity exports at fair market prices. There must be assurance for those interested in installing CHP, and assurance for funding institutions.”

There is, this year, a tranche of Government-led reviews – notably including a tax on the business use of energy and other instruments to encourage energy efficiency, energy sources for power generation, and utilities regulation – as well as a consultation on the Government’s Climate Change Programme, which will affect everyone in the energy chain. Each and every one will influence the adoption rate of CHP.