Select Committee on European Scrutiny Forty-First Report


3. COGENERATION OF HEAT AND POWER


(23708)

11381/02

COM(02) 415


Draft Directive on the promotion of cogeneration based on a useful heat demand in the internal energy market.

Legal base:Article 175 EC; co-decision; qualified majority voting
Document originated:22 July 2002
Deposited in Parliament:31 July 2002
Department:Environment, Food and Rural Affairs
Basis of consideration:EM of 11 September 2002 and SEM of 31 October 2002
Previous Committee Report:None, but see footnote 5
To be discussed in Council:By May 2003
Committee's assessment:Politically important
Committee's decision:Not cleared; further information awaited



Background

  3.1  As its name suggests, cogeneration involves the production of both power and heat from a single energy source, and, according to the Commission, it is a "highly efficient" means of helping to improve the security of the Community's energy supply by reducing its reliance on external sources, and of enabling it to meet its obligations under the Kyoto Protocol to reduce greenhouse gas emissions. It was also the subject of a Communication in 1997, which established an overall Community indicative target of doubling the share of electricity produced from cogeneration from 9% in 1994 to 18% in 2010.[5] However, the Commission notes that, despite the "promising potential for cogeneration", there has been no significant increase in its market share in recent years, and its potential remains under-used. The Commission has therefore sought in this document to create the stable framework which the previous Communication saw as necessary to provide a foundation for increasing the level of cogeneration.

The current proposal

  3.2  The Commission says that cogeneration plants have had to face a number of problems, notably higher fuel prices than the larger traditional electricity producers, restricted access to the electricity market, high installation costs, and fewer operating hours than larger baseload plants. Against this background, it sees its proposal as having two specific aims:

  • in the short term, as an instrument to consolidate existing high-efficiency installations in the internal energy market, and where feasible, to promote new ones, by providing regulatory certainty and (in some cases) financial support for cogeneration based on useful heat demand;

  • in the medium to long term, as enabling the creation of a framework which will ensure that high-efficiency cogeneration constitutes a key element when decisions are taken on investment in new generating capacity.

  3.3  More specifically, it says that the proposed Directive will lay down a framework which addresses such issues as the lack of internalisation of external costs, and that the practical application of this framework will to a large extent be for individual Member States, bearing in mind the heterogeneous nature of the sector, and differences in such factors as climate. Consequently, it says the aim should be, not to ensure the same degree of penetration in each Member State, but to promote cogeneration wherever an economically justified potential is identified.

  3.4  The Commission identifies the following main elements in its proposal, which it says builds in some respects on the recently adopted Directive for promoting electricity from renewable resources.[6]

— Definition of cogeneration

  3.5  It says that cogeneration is currently defined in different ways across the Community, some being used only for statistical purposes, whilst others are related to eligibility for national support schemes. Ideally, it would like to create a common basis for definition, but, in view of the wide differences which already exist, it intends to introduce a two-step approach, consisting of:

  • a harmonised basic definition of electricity from cogeneration, aimed at eliminating current ambiguities and at creating a uniform basis for statistical analysis and monitoring;

  • a methodology to define high-efficiency cogeneration, expressed in terms of energy savings, and used for such aspects as certification of origin, identification of national cogeneration potential, and eligibility for support.

  3.6  The Commission suggests that cogeneration should be divided into three market segments, which it differentiates according to the nature of the installation, namely:

  • industrial applications of heat, which normally require steam or hot water above 140°C;

  • central heating applications, which require warm water between 40°C and 140°C;

  • agricultural applications, as for example in heating greenhouses, where the temperature could be below 40°C, or aquaculture, where it could be as low as 15-25°C.

It also proposes that, as large installations have easier access to favourable financing and fuel prices, direct support for the production of cogenerated electricity should be concentrated on that produced either in installations with a capacity below an indicative threshold of 50 Mwe, or, in larger installations, only for the amount produced below such a threshold.

— Guarantees of origin

  3.7  The Commission says that the proposal will establish mechanisms, similar to those used for renewable energy sources, to ensure that producers and others with an interest in cogeneration can request a guarantee of origin, specifying the fuel source used, the use of the heat generated with the electricity, and the dates and places of production. The Commission adds that it is important for reasons of transparency and for monitoring that cogeneration is defined and counted in the same way across the Community, and it assumes that in cogeneration units with an annual overall efficiency of 75% or more, the total energy generated is considered to be cogeneration, whereas for units with an efficiency of less than 75%, electricity not produced by cogeneration must be discounted. A threshold of 85% would be set for units which can switch to non-cogeneration.

— Efficiency criteria

  3.8  The Commission says that, in order to ensure that only cogeneration offering actual benefits as compared with separate production of heat and power is promoted under this proposal, there needs to be a mechanism to determine these benefits, and that this should be based on the energy savings made. However, given the complexity this would entail, arising from such factors as differences in energy mix across the Community and the lack of empirical data for new production, it concludes that a single harmonised reference value applicable across all Member States is not feasible. It therefore seeks to establish a common methodology for calculating energy savings, which will enable Member States to define national efficiency reference values, as compared with the separate production of heat and electricity.

  3.9  In doing so, the proposal distinguishes between new[7] and existing production. The former would be compared with the best new state-of-the-art power production technology it is assumed to replace, and would need to provide energy savings of at least 10% to qualify as high-efficiency cogeneration. Electricity from existing cogeneration would be compared with the average efficiency of existing national fossil-based electricity production, but, in this case, nuclear power and renewable energy would be excluded from the mix, as in practice they are not normally displaced by cogeneration electricity. The Commission suggests that existing cogeneration should provide energy savings of at least 5% to qualify as high-efficiency. In the case of small-scale cogeneration, and that based on renewable energy sources, savings of less than 5% may be regarded as high efficiency cogeneration.

— National potential for high-efficiency cogeneration

  3.10  The Commission says that setting targets helps to quantify and monitor what the Community and Member States wish to achieve, and that it therefore considered whether indicative targets for the market share of cogeneration should be set for each Member State. However, it believes that, with the different national frameworks as regards market potential, energy mix, availability of fuels, industrial structure, and demand for heating, establishing such targets would be technically difficult. It therefore proposes at this stage to require Member States to analyse national potentials for high-efficiency cogeneration, together with any barriers, in a systematic and comparable manner, and based on the three main categories identified in paragraph 3.6 above. Member States would be obliged to report regularly on progress towards realising national potentials, and the measures taken to promote cogeneration. The Commission would then assess the progress made, and publish its conclusions.

— Support schemes

  3.11  The Commission notes the variety of different national support schemes, including direct price support, tax exemptions or reductions, green certificates, and investment aid. It says that, whilst the justification for this will disappear as external costs are fully internalised in the market, support will in many cases be justifiable in the short to medium term. It concludes that public support schemes should include a phasing-out provision, and that any support given must be successful in promoting high-efficient cogeneration. It therefore intends to evaluate the cost effectiveness of the different support schemes used by the Member States, and to present a report.

— Grid system issues

  3.12  The Commission says that, in order to function properly, the internal electricity market has to provide a level playing field for all existing and new producers, and that objective, transparent and non-discriminatory rules governing access to the grid system, and the tariffs charged for the purchase of electricity, is of particular importance in aiding the market penetration of cogeneration, given that in many cases producers are smaller and independent operators. It says that such producers tend to face the same difficulties as producers of electricity from renewable sources, and that this proposal is thus based in many respects on the corresponding provisions in Directive 2001/77/EC in guaranteeing grid connection and in setting tariffs.

— Administrative matters

  3.13  Finally, two administrative aspects of the proposal should be noted. First, the Commission believes that harmonised rules on administrative procedures relating to cogeneration could be helpful in removing barriers to its further development, but, given that these vary significantly across the Community, and given also the need to respect the principle of subsidiarity, it makes no proposal for this. Rather, it requires Member States to evaluate their existing frameworks, and to report both on the results of their evaluation and on any action taken as a result. Secondly, this requirement is one of a number which the proposal would place on Member States, including obligations to report within two years on efficiency reference values, the national potential for high efficiency cogeneration, an analysis of potential barriers, and the measures taken to facilitate access to the grid system.

The Government's view

  3.14  In his Explanatory Memorandum of 11 September 2002, the Parliamentary Under-Secretary of State at the Department for Environment, Food and Rural Affairs (Lord Whitty) says that the Government does not have a final position on the details of the proposal, pending clarification of a number of issues, completion of a Regulatory Impact Assessment, and an analysis of the responses to a consultation exercise it launched in September. However, the UK supports the aim of creating a framework for the promotion of cogeneration based on useful heat demand in the internal energy market, where the Minister says the Government is committed to a sustainable approach, and regards cogeneration as having an important part to play.

  3.15  Having said that, the Minister identifies various concerns about the proposal:

  • a number of key definitions are ambiguously worded, and require clarification, and the definition of electricity from cogeneration is likely to involve the installation of additional metering in many installations, each of which could cost "many thousands of pounds";

  • much of the data required for the guarantee of origin is already provided by operators in the UK under the Combined Heat and Power Quality Assurance programme (CHPQA), but this is at present voluntary, and changes may be needed to make it (or an alternative system) mandatory, which would result in an additional burden for little benefit;

  • whilst the Government supports the development of criteria to determine energy efficiency of cogeneration, and believes that the approach proposed by the Commission broadly reflects the methodology under the CHPQA, it is concerned that the use of best of class performance represented by large-scale operators would be "inappropriate" for judging new small-scale cogeneration plants, and it is also concerned that the new cogeneration plant would have to achieve double the energy savings required of existing installations;

  • the Government agrees with the proposal that Member States' support schemes should be based on useful heat demand, which reflects current best practice within the UK, but will seek to resist the suggestion that support may not be given to installations with a capacity of over 50MWe, which it regards as inconsistent with the treaty base under which the proposal is being made: it adds that withdrawal of support to larger units could jeopardise the UK's target of 10,000 MWe of installed good-quality cogeneration capacity by 2010, since about half of the additional 5,000 MWe capacity needed to meet this target is expected to come from installations in excess of 50 MWe;

  • the Government is concerned that the proposals on guaranteed grid access could force the sharing of costs where it may not be appropriate.

  3.16  The Minister says that overall the proposal is likely to have the opposite effect in the UK to that intended. First, because the issue of certificates of origin appears to be mandatory, operators of cogeneration plants which do not benefit from existing public support measures will be faced with the burden of compliance for little apparent gain. Secondly, the business case for many installations has depended on long-term public support based on the UK's current eligibility rules, and, if support has to be withdrawn because of a 50 MWe size limit, or the amount is significantly reduced because of changes in the methodology used, many installations will become uneconomic. Thirdly, the definition of cogeneration proposed is likely to involve additional, and costly, metering at many installations.

Supplementary Explanatory Memorandum of 31 October 2002

  3.17  The Minister has also supplied a Supplementary Explanatory Memorandum of 31 October 2002, enclosing a partial Regulatory Impact Assessment, which he says will be updated in the light of responses to the consultation exercise (which closes on 21 December). In the meantime, this confirms that, as it stands, the proposal is likely to have the opposite effect in the UK to its stated intention, as a result of the increased compliance costs it would involve for the 1,500 or so cogeneration installations in the UK (of which 1,200 are registered under the CHPQA, and 1,000 are certified as good- quality combined heat and power). More specifically, the Assessment suggests that the consequence of the proposal would be the loss of current support (given in the form of exemptions from the climate change levy, and enhanced capital allowances) ranging from £82 million to £109 million as a result of the definition of cogeneration and a limit of 50 MWe on the size of plant eligible for support.

Conclusion

  3.18  We will await the full Regulatory Impact Assessment promised at the end of the Government's consultation exercise before taking a final view on this document. However, we note with concern that the Government considers that the development of cogeneration may actually be harmed, at least in the UK, as a result of what is proposed. In addition, it is hard to resist the impression that the Commission is seeking to bring about a degree of harmonisation here which is in danger of running ahead of what is possible in practice, given the very different circumstances in the various Member States. One consequence of this is that, in an endeavour to acquire further information to provide the basis for later proposals, it is also imposing reporting requirements on Member States whose principal effect will be to generate additional paper rather than increased combined heat and power.


5   (18501) 11623/97; see HC 155-ix (1997-98), paragraph 19 (3 December 1997). Back

6   2001/77/EC. OJ No. L.283, 27.10.01, p.33. Back

7   Starting operation on or after 1 January 2004. Back


 
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