Select Committee on Environmental Audit Memoranda


APPENDIX 24

Memorandum from The Combined Heat and Power Association

OVERVIEW

  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 and ineffective.

  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.

INTRODUCTION

  The Association welcomes the opportunity to contribute to the Environmental Audit Committee inquiry into renewable energy.

    "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 use."

    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, November 1998.

  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[43].

  The benefits of CHP are well known. The following table summarises the Government's view[44] of the relative benefits of CHP, energy efficiency and renewables in the context of emissions reductions.

Technology
Market potential
CO2 saving potential (MtC)
Benefit (£/t C)
CHP
12,000 to
19,000MW
6
£100
10% renewables target
  
5.4
-£50 to -£100
Energy efficiency (domestic)
  
2-4
£60 to £180
Energy efficiency (industrial/commercial)
  
4-6.5
Order of £30
Fuel duty
  
2-5
  
EU voluntary agreement to reduce CO2 from cars
  
5-8
  
Total saving potential
  
24.4-34.9
  


  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.

TACKLING FUEL POVERTY

    "Community Heating schemes using CHP take disadvantaged people out of fuel poverty, providing affordable warmth and cheaper electricity".

    The Rt Hon Tony Blair MP, Prime Minister, CHPA Millennium Guide 2000.

  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 power—some 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 schemes.

  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.

CHP—THE CURRENT POSITION

  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 reductions delivered:

      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.

ISSUES

Embedded generation

  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 "Energy—the Changing Climate"[45].

    "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." (para 10.50)

  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 decades—investment 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.

NETA

    "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 generators."

    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 renewables.

  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"[46] or renewables.

  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.

ISSUES RAISED BY THE EAC

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 and development

  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 renewables—for example energy crops or agricultural or forestry residues—have a thermal efficiency in the range of current coal fired power stations—up 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 scheme.

  The issue of additional ROCs for those generators that do deliver CHP would recognise and reward the greater environmental benefits.

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 offshore wind.

  The Association believes the Government should strengthen the role of the RDA's in relation to the promotion of sustainable energy.

  In addition, local authorities should be empowered to play a key role in the development of the heat market—especially 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.

CONCLUSION

  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.

January 20001


43   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

44   From DETR consultation paper on UK Climate Change Programme, October 1998. Back

45   Royal Commission on Environmental Pollution, June 2000. Back

46   Government response to Environment, Transport and Regional Affairs Committee Report on UK Climate Change Programme, 8 August 2000. Back


 
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