Industrial CHP: state of the market
June 21st 2009

There has always been a strong case for adoption of Combined Heat and Power (CHP) by large scale industrial businesses requiring significant amounts of heat in their respective operations, but the benefits are becoming increasingly accentuated as society gets serious about tackling climate change

Industrial CHP is among the most cost-effective carbon abatement technologies available at scale in the UK today. In tandem with the long term rising price of energy and the opportunity cost of waste, the efficiency and cost savings delivered by utilising waste heat are an increasingly attractive option for a wide range of businesses.

Complementing the black and white economic fundamentals is a government increasingly receptive to CHP.We have witnessed a gradual shift towards an overall energy strategy in which heat is slowly but surely being given parity with electricity. While government policy is by no means as integrated as it could be, substantial progress has been made in this direction. The mere five pages devoted to heat in the 2007 Energy White Paper has since grown into the comprehensive Heat & Energy Savings Strategy, launched in February 2009. In the view of the Combined Heat and Power Association (CHPA), this represents a substantial improvement, it provides much needed direction and promises to assist in the development of a strong and vibrant market for all CHP technologies.

The receptive attitude of Government has in turn resulted in a range of measures to help support those opting for CHP.The CHPA pushed for an exemption to the Climate Change Levy and this was secured in the 2009 budget. This sits alongside numerous additional measures all providing a range of financial support for the uptake of industrial CHP (see breakout box for more details). There is however a degree of continued frustration that regulatory risk is hampering investment decisions. Concern to this effect remains regarding a seeming over reliance by the UK Government on the European Union Emissions Trading Scheme as a means of stimulating the market for CHP. The overwhelming strength of specific energy and cost savings should however go a significant way to negating such uncertainty in decisions on development of plant.

In relation to the energy market, the sharp fall we have witnessed in the spark spread from the heady heights of 2008 (see accompanying graph), could certainly be seen to dampened potential cost benefit of opting for CHP (given the resulting decline in overall energy prices). But as is always the case – and especially so for CHP – spark spread trends should to be viewed in the longer term.

When put into such a context, the outlook for CHP remains positive. Even given such a sharp decline from September 2008, it has for the time being at least, seemingly bottomed out at well over £10 per MW.We can however expect the price to continue fluctuate over the short to medium term against the backdrop of a tough economic climate. But the longer term trend is upwards, as the cumulative impact of various carbon abatement measures continue to feed through into the overall market price for energy. This in turn again serves to reinforce the nascent attraction of looking to CHP as a logical addition to large scale industrial operations.

Set against this background the regulatory and commercial landscape for industrial CHP is clearly positive. As more businesses incorporate CHP into their operations, it will become an increasingly familiar facet across the industrial sector. And not before time, as we increasingly realise the opportunity it presents to combat climate change in a manner that also delivers bolsters the bottom line; the perfect win-win.

Main benefits of CHP

Reduced carbon emissions

CHP reduces carbon emissions, typically by up to 20%. The Government's latest statistics show that every 1 MW of CHP operating in the UK reduces carbon emissions by between 510 and 760 tonnes every year. Across the UK economy, Government estimates indicate that CHP saved between 10.6 and 15.4 million tonnes of CO2 in 2006.

Enhanced energy security

CHP reduces primary energy consumption, typically by more than 10%. Conventional gas-fired power generation is set to expand, with an estimated 15 GWe of new capacity to come on line in the period to 2020 and CHP.To this end CHP utilising gas will serve to reduce our reliance on gas imports.

Lower energy costs

Making more efficient use of fuel reduces overall energy consumption and with it the costs of energy. CHP plants that are “Good Quality” under the government’s CHPA Quality Assurance programme save a minimum of 10% of the primary fuel that would be required to provide energy under the alternative boiler and grid electricity scenario.

Support available for uptake of CHP

The Government has established a package of measures are intended to provide a stimulus to CHP investment. The CHP Quality Assurance Programme (CHPQA) provides the definitional rules for supporting CHP.

Climate Change Levy (CCL) Exemptions

This tax is usually chargeable on taxable commodities for lighting, heating and power by consumers in Industry, Commerce; Agriculture; Public administration; and Other services. Good Quality CHP is exempt from the CCL on both fuel inputs and exported electricity. If CHP plants can capture the full CCL benefit then it can be worth £4.41 per MWe for electricity and £1.54 per MWe for gas.

Enhanced Capital Allowances

The ECA's put simply support the cash flow for a project. ECA’s are 100% first-year capital allowances on investments in certain energy-saving equipment. Businesses are able to write-off the whole cost of their investment against their taxable profits during the period in which they make the investment. Good Quality CHP is one of the technologies eligible for support under the ECA scheme, as it qualifies as “energy-saving plant and machinery”.CHP plant and machinery covered by the ECA scheme is detailed on the Energy Technology Criteria List.

Preferential Treatment of Business Rates for CHP Plant The Government has introduced preferential treatment under the business rates regime for Good Quality CHP plant.

Renewable CHP and planned incentives:

Renewable Obligation Certificates (RO) CHP schemes that utilise a renewable energy fuel are rewarded with a premium on each MWh of electricity produced under the Renewables Obligation (RO) mechanism. Ofgem has said next year's Renewables Obligation (RO) buy-out price is likely to be £37.19 per megawatt-hour (MWh). For CHP if you use all the heat you can claim two ROC's!

Renewable Heat Incentive (RHI)

In the Energy Act the Government bought forward provisions to introduce a Renewable Heat Incentive (RHI). The RHI is supposed to provide renewable heat generators with a fixed income for metered renewable heat production (£x per metered MW/h). This will be banded by technology and paid for by fossil fuel heat suppliers. No values are known yet.