The European Experience with Cogeneration
Since 1997, the European Union (EU) has been creating a legal and regulatory framework for the encouragement of cogeneration as an instrumental and accessible tool in its effort to promote energy efficiency and a sustainable future. Cogeneration – the generation of both heat and electricity in one plant using the same fuel – relies on “recycling” excess heat energy which would normally be vented out as exhaust. Combined heat and power (CHP) plants offer significant reductions in energy losses and have achieved production efficiencies as high as 95%, compared with a world wide average of about 34% in electricity-only plants.
With Europe’s energy sector accounting for close to 30% of total EU greenhouse gas emissions, improvements in generation efficiencies are a key component of EU environmental policy. The European Commission (EC), in its 1997 Communities Strategy, set an overall target of doubling the share of electricity production from cogeneration in the EU to 18% by 2010 which would result in an estimated yearly reduction of over 65 Mt of CO2 emissions. The EU expects cogeneration to be the single most important contributing factor in meeting its Kyoto targets.
Although historically Denmark generated most of its energy from coal, coke, wood, and pelt, during the 1960s it gradually switched to cheap imported oil. By 1972 Denmark derived 90% of its energy from oil imports. During the energy crisis in 1973 when oil prices rose to previously unseen heights, Denmark’s policy makers acknowledged the nation’s vital interest in energy independence. Cogeneration was identified as a cornerstone of the Danish energy conservation strategy in 1975. Three decades of responsible and dedicated policymaking have paid off: between 1980 and 2005, the share of CHP in the total electricity produced in Denmark doubled from less than 20% in 1980 to 42.6% in 2006, and the share of CHP in heat provision increased to 75%; this has resulted in a 15% decrease in CO2 emissions a year.
Denmark’s extensive heating demands through a large part of the year qualified the country as a prime candidate for cogeneration. By 1973 Denmark had built over 200 district heating (DH) networks, which generate heat at a central location and distribute it to households and commercial heating systems. This is oftentimes more efficient and less polluting than individual heating, especially in densely populated areas. The earliest phase of CHP development capitalized on the well-developed DH network in Denmark. The Energy Plan adopted in 1976 set a clear trend of switching from oil consuming power plants to coal-fired CHP and the 1979 Heat Law provided the needed market to make CHP profitable. Cities in Denmark were divided into areas suitable for DH and those more suitable for the traditional individual provision heating through natural gas. Households in identified areas were mandated to connect to the DH grid, which was made a local monopoly exempted from all competition when natural gas use was restricted and electric heating banned. This promoted the building of large centralized CHP plants near cities in Denmark to supply the district heating systems with their excess heat. Denmark’s ten major cities with city-wide DH now have 95-98% of their heat produced in such large CHP plants. The increased investment and operational costs were paid for by the consumers who have in turn saved on heating fuel costs.
Furthermore, CHP plants benefited from various economic and regulatory incentives. The government regulated power stations, introduced a CO2 tax, a green tax, low interest rates and guarantees for CHP investments, and subsidies and grants for cogeneration plants. While electricity prices in Denmark are now some of the highest in the industrialized world, without taxes, they would be among the lowest. The tax proceeds are used to subsidize investments promoting efficiency such as cogeneration and generation from renewable energy sources.
Increased environmental awareness led the government to encourage CHP generation based on renewable and local fuels such as natural gas, waste, and biomass. In 1986, the government mandated 450 MWe of small scale CHP based on these fuels. However, the development of additional CHP capacity stalled due to resistance from electricity companies. In response, the government increased the CHP target to 1,400Mwe and allowed municipalities, industry, and local customers to participate in CHP generation along with the energy sector and developed the natural gas network along with the program. Deregulation combined with continued economic incentives led to the fulfillment of the ambitious goal.
As Denmark’s industries are not energy-intensive, industrial CHP developed more slowly. The government tried to promote it through a combination of green taxation, electricity tariffs, and subsidies; however, a prospective opening of the energy market to competition and an anticipated decrease in energy prices thwarted the effort. Since then, voluntary agreements in industry regarding green taxation have revived the program and industrial CHP potential has been evaluated at 670 MWe.
Cogeneration will likely remain an important instrument in Denmark’s efforts to meet its CO2 emissions reduction targets. The CHP sector continues to develop – the Danish Avedøre 2 plant built in 2002 remains the most efficient power plant today with 95% efficiency. It uses natural gas and biogas for its electricity and heat production and is an important step towards achieving Denmark’s goal of phasing out coal-based generation by 2030. Since the 1980s, the Danish GDP has increased by 50% while its energy needs have remained constant, thanks to increases in efficiency. Cogeneration has not only boosted Denmark’s energy security, it has also resulted in significant reductions of CO2 emissions, provided valuable experience to Danish energy companies, and work to Danish citizens – Denmark exported US$7.45 billion in energy technology and equipment in 2005. Although cogeneration is necessarily limited by the availability and proximity of heat requirements, there is still unused potential. For example, the possibility of CHP balancing out temporary outages in renewable sources (wind, solar) is also worth considering and exploring.
CHP expansion in the Netherlands was driven almost exclusively by the electricity demands of Dutch industries. Since the early 1980s, CHP share in the Dutch electricity production increased from 7% to over 30%. However the share of CHP in heat production remained almost constant at slightly over 20% during the same time period. The initial impetus for CHP generation came from companies like Shell, Dow Chemicals, DSM, and others in energy intensive industries. When the energy crises hit in the 1970s, these Dutch giants already appreciated CHP technology and as energy prices doubled, they increasingly recognized the need to achieve energy independence from power producers. High electricity prices, combined with an already large internal market for heat and power, made cogeneration economically attractive to the industry. Initially, CHP was designed to serve only the companies’ internal energy demand and thus minimize interactions with the power producers.
At the same time, the Dutch government sought ways to reduce energy consumption and prices. In 1979 it created a Commission on Cogeneration in the Industry and used its findings to reduce barriers to energy cogeneration. In an effort to prioritize energy conservation, the government expanded cogeneration beyond the industrial sector by supporting and facilitating CHP feasibility studies for smaller companies, as recommended by the Commission on Cogeneration. The National Investment bank, created in 1982, provided loans at favorable terms, and an investment subsidy for CHP projects increased simultaneously. Gasunie – the Dutch natural gas and infrastructure company – also helped start many cogeneration projects by conducting feasibility studies, as it had a stake in the increased sales of natural gas to the CHP sector.
Furthermore, climate change became a factor when, in the late 1980s, the government recognized CO2 emissions reductions as an added benefit of cogeneration. This understanding catalyzed voluntary agreements with the industry about reduced energy use and an environmental action plan with the electricity sector on CO2 emissions reductions. In 1987, chemical company Azko Nobel and regional utility EGD started the first joint venture project in the Netherlands. When the industry and the electricity sector collaborated in CHP joint ventures, both profited from the increased investment certainty and the energy savings achieved. Both parties now had a stake in the success of the project, and the distribution companies enjoyed a stable market for heat produced in their CHP plants while the industry gained access to cheaper capital from the distribution companies.
The Electricity Act of 1989 mandated the separation of electricity production and distribution. Distribution companies suddenly had to accept all locally produced electricity and pay a very favorable feed-in tariff – an important provision ensuring that utilities buy cogenerated electricity from producers at above market prices based on their avoided costs of central production. The subsequent proliferation of CHP resulted in a decreased demand for centrally generated electricity, caused higher electricity prices, and ultimately reinforced the incentives for cogeneration. Furthermore, electricity prices became tied to the prices of natural gas, which served as the main fuel both for traditional energy generation and cogeneration. This, combined with a special gas price for CHP producers, provided steady revenues for cogeneration plants and stabilized the industry. In fact, CHP became so attractive that it resulted in significant overcapacity and a temporary moratorium on large-scale cogeneration in 1994. The moratorium, however, boosted small-scale CHP projects.
Cogeneration growth stopped after the 1998 Electricity Act liberalized the electricity market and removed the favorable feed-in tariffs and subsidies. With low and uncertain electricity prices, new investment in CHP became unprofitable. However, as the total CO2 reduction achieved through co-generation should reach 5 to 10 Mt CO2 by 2010 (5 to 10% of the total reduction necessary to reach the emission level agreed to in the Kyoto protocol), the Dutch government decided to give cogeneration another boost. Subsidies for grid-delivered cogeneration electricity were redeployed in 2001 and cogeneration certificates based on the CO2 emissions of a plant were implemented in 2003.
Both Finland and Latvia derive a significant proportion of their power from CHP. They have cold climates and thus a strong demand for both heat and power throughout the year. The liberalization of the European energy market, the associated decrease in electricity prices, and the stability of the market did not hurt cogeneration in the two countries due to well developed DH systems and a strong demand for both CHP outputs.
Finland has historically had an open energy market – industries and distributors were allowed to both produce and sell electricity. Separating generation from transmission and distribution was a big step towards increasing the share of CHP in Finland. This ensured that no individual energy producer had privileged access to the Finnish transmission network. At the same time, transmission and distribution were given the status of natural monopolies.
A large part of CHP success in Finland can be attributed to a well-functioning DH system. Customers in Finland, unlike Denmark, are able to choose how they want to heat their homes. Thus DH has to be a cost-effective alternative to be successful. In Finland, DH constitutes around 50% of space heating, 75% of which is supplied by CHP. In addition, over 70% of the electricity generated from polluting sources comes from CHP plants. Overall, Finland derived 34.9% of its electricity from CHP in 2006. In Helsinki, Finland’s capital, these numbers are even higher: 97% of Helsinki’s energy and 92% of its district heat come from CHP plants. Recently, district cooling has been added to CHP’s useful outputs in Helsinki. Finland shows that CHP can flourish even in a liberalized market: although there are some tax advantages for CHP in Finland, subsidies are low and cogeneration development has flourished primarily as a result of the actions of limited municipality companies.
Latvia is well suited for the development of cogeneration: it is a net importer of electricity and produces a lot of its heat in separate facilities. The government sets yearly quotas on renewable energy sources, including CHP generation, and has established feed-in tariffs for cogeneration. Their amount depends on the type of fuel used in the CHP plants: renewable fuels are favored over non-renewable ones. In order for CHP plants to be eligible for benefits they have to be at least 80% efficient and distribute at least 75% of their thermal output to a district heating network.
The government has also established a uniform procedure for the sale of electricity surplus to the grid. In 2006, Latvia derived 42.6% of its power from CHP. However, the Latvian cogeneration sector still faces obstacles, including hard-to-obtain licenses and competition with heating produced from cheap fuels like wood chips.
Each of the four examined countries followed its unique path towards energy efficiency. Denmark’s cogeneration sector was and is dominated by large centralized CHP plants supplying heat to an extensive network of district heating systems. The Danish government has created a strong positive regulatory and economical environment for the support of CHP. Although Finland and Latvia also capitalize on their DH networks, their energy markets are much more liberalized, leaving the industry to essentially fight for itself. In the Netherlands, industrial projects and joint ventures account for most of cogeneration growth in the past 30 years.
These cogeneration movements began due to:
• An energy crisis
• Extensive heating needs
• A desire to become energy independent
• The need for cheap electricity
• A concern for the environment
• The goal of meeting Kyoto targets for emissions reductions
Common strategies for boosting CHP include:
• Investment subsidies
• Official government support for CHP
• Feed-in tariffs
• Mandated access to the grid
• A separation of production from distribution of electricity
• CO2/green taxes
• Targets for CHP and CO2 emissions
Government involvement was warranted to jump-start the cogeneration industry. In most countries traditional separate generation of heat and power is so entrenched in the system that an outside impetus must be given to catalyze innovation. Government plays a crucial role in providing legitimacy, knowledge dissemination, a sound regulatory environment, and financial support. It is vital that all cogeneration plants, regardless of size, be given access to the grid and the ability to sell their excess energy to local consumers. Governments also must ensure that savings to the grid, saved transmission and redundancy costs, and environmental benefits are factored into the feed-in tariffs for CHP. So long as the free market does not include these externalities in the price of electricity, government involvement is not only reasonable, but essential.
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