Memorandum from The Combined Heat and
The Combined Heat and Power Association is a
non-governmental organisation working to promote the efficient
production and use of energy through the wider use of high efficiency
Combined Heat and Power. The Association welcomes the opportunity
to offer its views to the Environmental Audit Committee.
CHP is a technology with the potential to make
extensive use of renewables, and in doing so to contribute directly
to the Government's target for 10 per cent of electricity to be
derived from renewable sources by 2010. CHP is also an essential
building block of an energy economy that makes much wider use
of sustainable energy sources. Yet these roles are frustrated
by the inadequate nature of the legislation which underpins the
Government's approach to renewable energy.
The Royal Commission on Environmental Pollution
have, for example, highlighted that provision for the development
of heat based renewables is completely lacking from the Government's
new Renewable Energy Obligation.
The Government's new Utilities Act abolished
the provision for supporting investment in ancillary heat distribution
networks that was in the 1989 Electricity Act (as amended).
A new approach is needed.
This should include:
recognition that the goal is greenhouse
gas reductions and that a wide range of sustainable energy technologies
should be supported in order to achieve this; and
specific provision for heat based
or distributing sustainable energy technologies.
Significantly, CHP faces many of the same challenges
in the market as renewables. Both are forms of sustainable technologies
that are embedded in the local electricity distribution system.
Yet although CHP is recognised as one of the most effective climate
change responses available, Government action remains disjointed
A strong and focussed drive to support and promote
CHP to enable the UK CHP industry to deliver the Government's
target of 10GWe by 2010 is a vital complement to the policy initiatives
that have been taken for renewable energy.
Recent studies by Cambridge Econometrics, and
DTI, as well as an EU wide study supported by the DETR all make
it clear that the UK will substantially undershoot its CHP target.
The Government has taken the powers it needs
to create a supply obligation, similar to the proposed Renewables
Obligation, for CHP. This will be vital if current market conditions
are not to severely weaken what has hitherto been an expanding
CHP sector in the UK.
Issues such as NETA and the treatment of embedded
generation that adversely affect CHP as well as renewables should
be urgently addressed.
The Association welcomes the opportunity to
contribute to the Environmental Audit Committee inquiry into renewable
"Our policy on renewables is part of our
wider approach to climate change, and one of a range of initiatives
to support the development of a more sustainable approach to energy
Stephen Byers MP, Secretary of State for Trade
and Industry, October 2000.
It is important to assess the current approach
to the promotion of renewable energy in the context of the wider
approach to climate change and the promotion of a more sustainable
system of energy supply and use.
This submission outlines the contribution that
CHP can make to the achievement of climate change objectives and
identifies some of the barriers it currently faces. The issues
raised by the Committee are then addressed, and finally some common
issues for CHP and renewables are outlined.
Parts of this paper are based on the Association's
"UK CHP Strategy" consultation paper that was launched
in October 2000.
CHP IN CONTEXT
Tackling Climate Change
"We (have) estimated that CHP would account
for at least half the 7 million tonnes of carbon savings we believe
are achievable in industry."
The Rt Hon Michael Meacher MP, Environment Minister,
The wider use of CHP could ensure that at least
an additional six million tonnes of carbon is cut from UK emissions
by 2010. This is more than 25 per cent of the current shortfall
required to achieve the UK's domestic target of a 20 per cent
reduction in CO2 emissions by 2010.
The benefits of CHP are well known. The following
table summarises the Government's view
of the relative benefits of CHP, energy efficiency and renewables
in the context of emissions reductions.
||CO2 saving potential (MtC)
||Benefit (£/t C)
|10% renewables target||
||5.4||-£50 to -£100
|Energy efficiency (domestic)||
||2-4||£60 to £180
|Energy efficiency (industrial/commercial)
||Order of £30|
|EU voluntary agreement to reduce CO2 from cars
|Total saving potential||
This table clearly illustrates both the magnitude of the
potential contribution from CHP and the fact that CHP brings a
significant economic benefit for every tonne of emissions reduction.
A report by BRECSU for DETR estimated an additional potential
CHP capacity of 2,000MWe in community heating. This is equivalent
to some one million homes being connected to community heating
by 2010, and many of these would offer scope for integrating heat
based renewable energy technologies.
"Community Heating schemes using CHP take disadvantaged
people out of fuel poverty, providing affordable warmth and cheaper
The Rt Hon Tony Blair MP, Prime Minister, CHPA Millennium
CHP schemes, particularly those in the residential sector,
are ideally placed to tackle fuel poverty. This is because:
locally based CHP schemes have the ability to
strip out many of the overhead costs associated with the long
distance transmission of powersome CHP schemes have already
achieved savings of 20 per cent or more for domestic consumers
on this basis;
innovative metering and other controls reduce
or eliminate standing charges and deliver consumer focused payment
options that are agreed directly with the local users of the CHP
The key challenge is to secure the capital investment needed
to achieve such savings.
In rural areas, biomass based CHP schemes and other sustainable
energy technologies have the ability to reduce local energy costs
and hence contribute to the alleviation of rural poverty.
The Association has welcomed the Government's commitment
to promoting the wider use of CHP. A number of initiatives have
been brought forward to help consumers secure the benefits of
CHP. These hold out the prospect of a positive incentive for CHP,
but are often limited in their practical effect. They include:
Potential support for small residential CHP schemes
under the Energy Efficiency Commitment (EESoPs):
but this support remains to be confirmed, and Ofgem
are currently taking advice on the extent to which this support
will be available to social housing providers.
UK Emissions Trading Scheme to enable investors
in CHP schemes to secure the commercial value of the emission
but the Government has still to confirm that this benefit
will be available to all CHP schemes.
The Government has now released the report of
its working party relating to network access, management and charging
in order to ensure that embedded generators have a fair and balanced
access to distribution networks:
but any practical measures to assist CHP in the
medium term will be restricted by a regulatory regime that presently
provides no incentive for distribution network operators to adapt
their treatment of embedded generation.
None of the measures outlined about therefore provide unequivocal
support for CHP.
Time lags, tensions and contradictions in current policies
mean CHP developers are not confident in planning future investments
in the industry.
The Association has had a long term concern that embedded
generation systems such as CHP and renewables have been overlooked
in energy market reform.
The apparent disregard of the emergence of embedded generation
was noted in the Royal Commission on Environmental Pollution's
report "Energythe Changing Climate".
"Widespread use of . . . embedded generation, including
combined heat and power plants, will require a new approach to
the management of electricity networks" (para 10.49).
". . . we did not see any signs that the [National Grid]
company had yet appreciated the scale of the challenge or begun
to take the steps needed to place itself in a position to respond
to it" (para 10.50).
The report goes on to recommend:
". . . the Government should take the lead in a fundamental
review of how electricity networks can best be financed, managed
and regulated in order to stimulate and accommodate large contributions
to energy supplies from combined heat and power plants and renewable
sources while maintaining reliability and quality of supplies."
This recommendation reflects the growing recognition that
an electricity supply industry that is based upon a distributed
pattern of power generation can deliver significant benefits to
consumers in respect of security, diversity, quality and reliability
of electricity supply. Critically, with the right mix of high
efficiency and renewable generators, these supplies can be obtained
at a lower cost to the environment than with the present pattern
of centralised generation.
Realising these benefits will require a radical change in
the physical infrastructure of the electricity network and in
its operation. Achieving this change will in turn depend upon
the strategic investment that takes place in the network over
the coming years and decadesinvestment which is determined
by the regulatory incentives placed before the owners and operators
of the networks.
It is therefore essential that Government takes a long term
view in determining the optimum arrangements for electricity supply,
and co-operates with the regulator to ensure that the correct
incentives are put in place to effect the necessary, fundamental
changes in the network.
Against this policy background, the work led by Ofgem, the
DTI and DETR on the management of the electricity distribution
network is critical.
This area was one which many respondents focused on, and
in the light of the recently published Government report on embedded
generation, it is clear that connection charging, and network
security standards are areas where early action is needed.
It is also clear that the current nature of the distribution
price control will inhibit innovative responses to the development
of embedded generation. Extending the principle of performance
based regulation to the treatment of embedded generation, alongside
other such market mechanisms, offers a potential way forward.
"I have asked [the Director General] to look particularly
carefully at a number of benefits I want to be sure that the new
trading arrangements will provide when they come into operation
. . . encouragement for Combined Heat and Power and renewables
John Battle MP, Minister of State for Energy. 8 October 1998.
"New investment in CHP plant where the site is importing
or exporting electricity will be affected (by NETA) . .
. assuming no other offsetting measures, such as fiscal incentives
(new) investment in new CHP (will be) less attractive
(a 15.1 per cent return would fall to a projected 12.6 per cent
rate of return in investment)."
[italics = additions for clarity]
OFGEM/DTI NETA Conclusions, page 185, 21 October 1999.
The New Electricity Trading Arrangements are a critical part
of the energy market framework the Government is creating and
which are likely to be in place for the whole Kyoto commitment
period in which the CHP and renewables targets will be delivered.
The Government clearly intended that the new arrangements
should encourage both CHP and renewables. Yet, as the DTI/Ofgem
environmental appraisal highlighted, the effect will be largely
negative and will decrease the returns available from CHP investments
at the very same time the Government is seeking to accelerate
the take up of CHP.
Indeed, private briefings from those involved have made clear
that the team involved in the development of NETA never intended
to deliver the Ministers aspirations NETA in relation to CHP and
Not surprisingly, it is clear from recent surveys that neither
the renewables nor the CHP industry accept the Government's assertion
that " . . . NETA provide[s] for CHP"
The "most favoured" option from the NETA team has
always been "consolidation" such that the output from
smaller CHP or renewables sites could be aggregated and traded
through a third party. OFGEM and the DTI have highlighted four
potential operators of such a service. Of these none appear to
have yet come forward with commercially attractive options, despite
several months of consideration.
Action is required to ensure that, post-NETA, the electricity
market is not heavily distorted against precisely the technologies
the Government is seeking to encourage.
Are the renewables targets properly formulated and achievable?
A level of 10 per cent of electricity supply from renewables
is relatively modest in comparison with levels already reached
in some other countries with comparable resource availability.
As a contribution to the UK's climate change targets, the renewables
targets must be considered in conjunction with a clear and robust
CHP policy, which is currently absent.
The renewables target and the proposed Renewables Obligation
must recognise the importance of using renewable resources efficiently
by properly valuing heat produced in renewables based CHP.
Levels of achievement so far and the current rate of progress
Britain currently lags behind most European countries in
the level of installed renewables capacity and in the installation
rate. A significant acceleration in the rate of installation is
required if the capacity target is to be met. The proposed Obligation
may achieve such an acceleration, however it may be three to five
years before it is clear whether the parameters selected for the
Obligation are delivering a suitable installation rate.
In the meantime, it would be prudent to ensure that CHP,
the most significant source of emission reductions available in
the energy supply sector, is adequately supported.
Expectations of the proposed renewables obligation and the
definition of "acceptable costs to the consumer"
The Association has no views on what an acceptable cost to
the consumer should be to support renewables.
The Association notes that the Government's figures for the
cost of emissions reductions from renewables indicate that there
is always a cost to the consumer. By contrast, the CHP sector
is ready to deliver significant, reliable and sustainable emissions
reductions along with substantial savings in consumer energy costs,
if an appropriate framework can be provided.
The Association is, however, concerned that the manner of
implementation of the Renewables Obligation may, ironically, impose
significant additional costs upon exporting CHP plant. Earlier
in this response it was noted that exports of power from CHP plants
supplied to consumers via a licensed electricity supplier would
not be eligible for exemption from the Climate Change Levy, despite
their carbon savings benefits. But those supplies made via a licensed
supplier will also be subject to the terms of the Renewables Obligation,
and would hence be liable for the costs of purchasing Renewable
Obligation Certificates. Not only will this have the paradoxical
effect of treating low carbon emission CHP power on the same basis
as the worst fossil-fuel fired electricity, it will also further
undermine the economics of CHP.
One major developer of a recently consented CHP plant estimates
that the effect of the Renewable Obligation will be to cancel
out, or even exceed, any benefit received from exemption from
the CCL. It is not only major CHP plants that will be affected.
Many smaller CHP plants will be forced by NETA to sell their output
via a licensed supplier in order to achieve some level of protection
from the risks of the new market. It is evident that a licence-exempt
route for the supply of CHP power is essential if sustainable
generation such as CHP is not to be handicapped by the costs of
the Renewable Obligation.
The impact of the Government's reforms of the electricity market,
including new trading arrangements for electricity generation,
on the prospects for new renewables capacity.
The Association would draw the committee's attention to the
points made previously in relation to NETA.
The level of Government spending on renewables-related research
The Association supports Government expenditure on renewables
related research and development and hopes that support for other
low carbon technologies, including energy efficiency and CHP will
emerge, possibly through the Carbon Trust.
The level of government support for non-fossil fuels for electricity
generation over time
It is important to recognise that renewables based generators
can also produce heat, and the proposed Renewables Obligation
must recognise the value of heat from renewables-based CHP and
other similar technologies. Generators based on the combustion
of renewablesfor example energy crops or agricultural or
forestry residueshave a thermal efficiency in the range
of current coal fired power stationsup to about 38 per
cent. It is widely recognised that CHP can double this efficiency.
The DTI consultation document on the Renewables Obligation
(page 18) states:
"Electricity generated from renewable sources of energy,
where the heat is also put to beneficial use (ie combined heat
and power (CHP)) will be eligible under the new Renewables Obligation,
where the electricity would be eligible in the absence of CHP."
The implication that CHP could somehow have a negative effect
is not helpful. Instead, the Obligation should (as Labour prompted
when in Opposition through successful change to the 1989 Electricity
Act) positively promote CHP and encourage developers of thermal
generators to seek out suitable heat loads.
The most effective means to demonstrate the value assigned
to CHP is to value its thermal output.
In its response to the DTI consultation paper, the Association
proposed that Renewables Obligation Certificates be issued in
recognition of useful heat generated in a renewables based CHP
The issue of additional ROCs for those generators that do
deliver CHP would recognise and reward the greater environmental
The interaction of the planning system and the development
of renewable sources of power generation
The Association welcomes the steps the Government is taking
to clarify the planning regime in relation to renewables, especially
The Association believes the Government should strengthen
the role of the RDA's in relation to the promotion of sustainable
In addition, local authorities should be empowered to play
a key role in the development of the heat marketespecially
as they are often substantial heat users in their own right.
Local authorities can provide the valuable "anchor"
heat loads that are vital to the commercial success of district
energy networks. Their initiative and co-ordination is also essential
in the planning of these networks.
The Association believes that the proposed Government support
for renewables will accelerate the rate of increase of capacity.
However, the UK's challenging international emissions reduction
target and its ambitious domestic target, both require contributions
from a range of sectors.
In the wider context of sustainable energy supply, a strong
and focussed programme to develop CHP capacity is in order to
provide for the transition to a more energy efficient, renewable
based, society will be vital.
A cross cutting and effective approach across Government
will be vital.
Although it is not specific on how much CHP is included in projections,
the DETR states "However, the gap to the 20 per cent goal
is still 22MtC", Climate Change, Draft UK Programme, DETR,
February 2000. Back
From DETR consultation paper on UK Climate Change Programme,
October 1998. Back
Royal Commission on Environmental Pollution, June 2000. Back
Government response to Environment, Transport and Regional Affairs
Committee Report on UK Climate Change Programme, 8 August 2000. Back