Memorandum by the Combined Heat and Power
1. The Combined Heat and Power Association
(CHPA) welcomes the opportunity to provide written evidence to
the Trade and Industry Select Committee.
2. The Association is a non-governmental
organisation working to promote energy efficiency and environmental
improvement through the wider use of Combined Heat and Power (CHP).
3. Achieving the wider use of CHPthe
combined and highly efficient production of heat and power in
a single operationdelivers a number of benefits to the
UK, such as:
it improves customers' competitive
it improves the environment; and
it contributes to the alleviation
of fuel poverty.
4. Successive Governments have adopted targets
for the GWe deployment of CHP technology in the UK. The most recent
target is to double UK CHP capacity to 10 by 2010. This will account
for a significant part of the UK's strategy to reduce greenhouse
gas emissions. The European Union, and, more recently, the USA,
have adopted similar targets.
5. CHP technology is inherently diverse,
as it varies in size from small domestic units to schemes for
major urban areas, and also includes both small and larger scale
industrial CHP schemes. Current UK capacity is some 4.6 GWe, based
at 1,500 different sites, and fuelled by a diversity of energy
6. The Association's evidence responds to
the questions posed by the Committee in its Press Notice of 20
7. Q1. Given the imminent dependence of
the UK on energy imports, how can the UK maintain a secure energy
supply? What mix of fuels would maximise security?
8. A key aspect of supply is diversity.
This means diversity of scale; diversity of energy options; diversity
of entry points into the UK for any imports and so on. Central
to the Association's perception of diversity is efficiency, in
that through the efficient production and use of energy then diversity
is enhanced by the minimisation of the wasteful use of energy.
If the UK is to use gas extensively, then ensuring it is used
efficiently in our homes and in power production is vital. CHP,
by virtue of its thermal efficiency of over 70 per cent, should
therefore have a significant role to play.
9. Q2. Is there a conflict between achieving
security of supply and environmental policy? What is the role
maintaining security for renewables, and Combined Heat and Power
10. There is no inherent conflict between
security of supply and environmental policy. There is however,
the potential for conflict where a policy of diversification in
primary fuels, for the purposes of enhancing security of supply,
results in the switching from cleaner fuels or renewable energy
to more polluting energy sources.
11. The Government's analysis in its Energy
Projections for the UK
(EP68) presents a range of scenarios for the mix of primary fuels
in 2020. Under the Central Low scenario, natural gas will represent
over 50 per cent of total primary energy supplies and 69 per cent
of primary fuel used in power generation; in these circumstances
a case can be developed for diversification in primary fuels.
The choices that would be made at this stage would determine whether
or not a conflict between security of supply and environmental
policy would emerge in practice. A policy of diversification towards
renewables and CHP would help eliminate this conflict by delivering
a net reduction in carbon, sulphur dioxide and NOx emissions.
12. There is a clear role for CHP in delivering
security of supply objectives without compromising objectives
of sustainability. CHP can contribute towards an improvement in
security of supply in two ways:
it can improve the efficiency by
which primary fuels are converted into usable energy services,
thereby reducing dependence upon scarce fossil fuel energy sources;
it can contribute towards improved
diversity and reliability of power supply, as part of a pattern
of distributed, or "embedded", power generation.
Contribution to Security through Efficiency
13. In its project scoping note of June
2001 the Cabinet Office's Performance and Innovation Unit notes:
"With the UK's nuclear power stations decommissioned
and coal generation likely to have only a limited role, UK energy
consumption is likely to be increasingly dependent on oil and,
in particular, gas.
With the decline of projected North Sea oil and
gas production from 2004, oil and gas will be increasingly imported.
By 2006, the UK is expected to be importing up to 15 per cent
of its gas compared with 2 per cent currently".
14. Under these circumstances, it would
appear that priority must go to utilising existing supplies of
energy, including natural gas, in the most efficient manner, thus
minimising the requirements of all forms of primary energy.
15. The latest estimates produced by the
suggest that new investment in power generation capacity will
be dominated by Combined Cycle Gas Turbine (CCGT) technology.
The latest data available from DTI indicate that this generation
technology reached "just under" 50 per cent efficiency
in 2000. However, gas-fired CHP is typically more than 70 per
cent efficient and can thus offer the prospect of improved utilisation
of scarce gas resources. Typically, CHP achieves a 25 to 35 per
cent reduction in primary energy usage compared with electricity-only
generation and heat-only boilers
based upon the current pattern of power generation and boiler
plant efficiency, and even achieves a 20 per cent saving in relation
to the highest efficiency new CCGT and gas fired boiler plant.
16. EP68 indicates that CCGT generating
capacity will rise by over 160 per cent under both Central Growth
scenarios between 2000 and 2020, increasing the consumption of
natural gas in the electricity supply industry by between 17.9
Mtoe (Central High scenario) and 25.2 Mtoe (Central Low scenario).
If this expansion in gas-fired power generation were made through
CHP plant instead of today's CCGTs, UK demand for natural gas
would be reduced by between 5.1 (Central High scenario) and 7.1
Mtoe (Central Low scenario)a saving of between 4.2 and
5.5 per cent respectively in total UK primary natural gas consumption.
Firing of CHP plant with renewable fuels would further reduce
this overall natural gas consumption.
17. As set out above, cost is a key consideration.
The latest data available from the PIU
shows that the cost for CHP-generated power in 2020 will be in
the range 1.6 to 2.4 p/kWh, whilst that for CCGT will be in the
range of 1.8-2.1 p/kWh. Costs are marginally cheaper for CHP,
suggesting that CHP should properly be considered a "no-regrets"
18. The second advantage from CHP is in
respect of its potential to deliver improved security and reliability
of power supplies to consumers, through a distributed pattern
of power generation. The future development and operation of distribution
networks, to accommodate higher levels of distributed, small-scale
generation, is seen as crucial to the delivery of a more diverse,
sustainable, pattern of energy generation.
19. The present configuration of power networks
is predominately centralised, based upon large generating units
that are often remotely located. This arrangement relies for security
upon a highly capital-intensive transmission network, constructed
using public funds but now dependent upon private investment for
future maintenance or development. Furthermore, since the network
is based around large generating plant, the consequence of any
single generator failing will be a major interruption to supply,
and hence centralised networks typically carry high levels of
reserve to maintain security of supply.
20. Distributed networks are characterised
by large numbers of smaller-scale generation plant, which by virtue
of their size are connected at the lower-voltage levels of the
distribution networks. Since most renewable power generation is
small-scale, it is envisaged that much of the almost four-fold
increase in renewable generation that will be connected to the
distribution networks, up to 2010 and beyond, will, in itself
contribute to a highly diverse generation mix for the UK.
21. Distributed networks rely for their
security upon the interconnectivity of a larger number of smaller-scale
generators, each generating predominantly to meet the requirements
of consumers locally. This arrangement can offer a number of advantages.
Firstly, since distributed generation
plant is of a small scale, the impact of a single generator failure
upon system security will be much less than that under a centralised
system, while the probability of single generator failing will
be similar. Consequently, the level of system reserve required
under a distributed arrangement is likely to be considerably lower,
thereby improving the overall thermal efficiency of the system
and minimising investment requirements.
Secondly, the configuration of a
properly designed, highly interconnected distributed network may
prove more robust against system failures, thus improving reliability
of supplies to consumers. Since such networks would generally
enjoy a high level of resilience, and with generation units located
near to the consumer, the impacts of any system disruption can
readily be localised without affecting supplies to the majority
22. CHP is ideally suited to operate as
part of a distributed pattern of power generation. Since the high
thermal efficiency of CHP is derived from the utilisation of the
heat produced, the scale of CHP plants are generally small and
in common with renewables these plants are most appropriately
connected at the low voltage levels of the distribution networks.
However, in contrast to some forms of renewables, which are by
their nature intermittent, CHP plant can be designed to operate
in a manner that actively supports the network.
The DTI recognise that, "CHP
. . . avoids significant transmission and distribution losses,
and can provide important network services such as black start
(the capability to re-energise elements of the network after grid
failures), improvements to power quality, and the ability to operate
in island mode if the grid goes down.
Woking Borough Council operates its
own private-wire network. As a private-wire network, based upon
CHP, the network has the capability to operate in an island (ie
independent) mode when failures occur to supplies from the local
distribution network. As presently configured, Woking's energy
services company can restore a full load supply to customers of
its own network within 12 seconds. The network is presently being
improved further, with the installation of a fuel cell CHP plant.
This fuel cell is able to switch to "grid-independent"
mode in 0.5 milliseconds: well within the eight milliseconds standard
for computers. It will also have the capability to re-energise
the larger CHP plant on the networkso called "black-start"
capabilitywith the consequence that customers should see
no interruption at all in their electricity supply in the event
of a grid failure.
23. However, the potential for CHP to provide
such benefits is constrained at present by the configuration and
passive operation of distribution networks, which in turn are
constrained by the institutional and regulatory framework. Electricity
networks will need to evolve from their current radial design,
constructed to carry power from remote power plant to the final
consumer, towards an interconnected network that accommodates
multi-directional power flows. It will also require a move away
from the passive management of today's distribution network to
a more active control by the distribution network operator. This
will require a significant change in the regulatory framework
that creates the various incentives for network operators.
24. Q3. What scope is there for further
25. The energy savings, which CHP achieves,
are largely in relation to primary energy production, rather than
in delivered energy which is typically addressed through policy
instruments such as HEES, EESOP's etc.
26. A recent, detailed study, undertaken
by ETSU for the Department of the Environment, Food and Rural
Affairs, suggests that the economic potential for CHP in the UK
is in the range 12,000 to 20,000 MWe.
Since this work was completed it is likely, however, that prevailing
economic conditions for CHP have deteriorated significantly. It
is understood that DEFRA are now considering commissioning a repeat
of this study to reflect the prevailing market conditions.
27. A number of further studies provide
an alternative perspective on the potential for further utilisation
of CHP. DTI's own projections, contained in EP68, suggest that
only 7.6 GWe of CHP will be operating in 2010. A study conducted
by Cambridge Econometrics
using the Treasury's own model of the UK economy, demonstrated
that operating CHP capacity would reach only 6.6 GWe by the same
date. Taken together, these studies clearly demonstrate the extent
to which the technical potential for CHP to contribute to both
environmental and security of supply objectives is presently compromised
through a combination of market conditions and inadequate incentives.
28. Q4. What impact would any changes
have on industrial competitiveness and on efforts to tackle fuel
29. CHP has the potential to deliver both
improved industrial competitiveness and supplies of affordable
30. The decision by industrial and commercial
customers to proceed with CHP projects will always be based upon
a firm commercial case; given the right economic conditions, with
fair, cost-reflective and stable energy prices then consumers
will adopt CHP for their energy supplies. This was the case during
the 1990s, when investment in CHP resulted in UK CHP capacity
more than doubling over the course of a decade to the 2000 level
of 4.7 GWe.
31. Following the introduction of the Climate
Change Levy, the Chancellor exempted CHP from the Climate Change
"I have decided that renewable energy sources
and combined heat and power will be exempt from the levy."
Rt Hon Gordon Brown MP, Chancellor of the Exchequer,
9 November 1999 (Hansard col.883)
32. H M Customs and Excise, in giving effect
to the Chancellor's statement, failed to extend the "exemption"
of CHP from the Climate Change Levy to CHP-produced power supplied
off site via a licensed supplier (the normal "route to market").
The need for this to be done is now urgent in order to begin to
restore the viability of a number of existing and potential CHP
33. Indeed, since the introduction of NETA,
the energy market conditions have failed to sustain investor confidence
and the development of new CHP capacity has virtually ceased;
in spite of the hitherto buoyant pace of CHP development. Suppliers
of CHP plant report a 95 per cent fall in orders for new plant
and project engineers indicate a fall of over 80 per cent in levels
of CHP business.
Under these conditions the potential for CHP to deliver competitiveness
benefits to industry is clearly limited.
34. In relation to fuel poverty, CHP has
been used extensively in conjunction with efficient community
heating systems, to deliver low cost and reliable supplies of
energy to the domestic sector. A recent report to BRECSU for the
estimates present economic potential for 1,700 MWe of CHP capacity
in community heating, in addition to the 17,000 MWe described
above. Realisation of this potential would be equivalent to approximately
one million homes being connected to community heating by 2010.
35. The Prime Minister has highlighted the
potential for community heating to deliver benefits to both the
fuel poor and the environment. A £50 million programme of
capital support for the refurbishment or development of community
heating schemes will start in April 2002. However, the extent
to which these schemes derive their heat supplies from CHP will
depend upon the economic viability of the CHP plant itself. In
addition, DEFRA are partially supporting 6,000 micro CHP schemes
36. Q5. Is any change of Government
policy necessary? How could/should Government influence commercial
decisions in order to achieve a secure and diverse supply of energy?
37. The potential economic, environmental,
social and security of supply benefits of CHP have been recognised
by Government. This is implicit in the Government's policy commitment
to achieve a target of 10 GWe of installed CHP capacity of 2010.
In practice, however, market conditions are now such that this
target is at risk; the reality is that much CHP plant is now running
far below optimum levels, and many companies with the expertise
and experience to develop new CHP capacity are exiting the market
38. Urgent changes in Government's policy
towards CHP are now needed if CHP is to fulfil its potential and
make an effective contribution towards the alleviation of future
security of supply problems. Ultimately, this calls for the establishment
of a stable and predictable marketplace which provides for a favourable
environment for investment in new CHP capacity. A number of measures
will contribute to the achievement of this objective:
The full exemption of CHP from the
CCL by exempting all the power generated by these plants, including
that exported off-site. This is an immediate priority.
CHP-generated power should be excluded
from the Renewable Obligation liabilities which will cost the
CHP industry over £100 million.
Arrangements must be created which
remove CHP and renewable generators from the risks of "imbalance"
introduced under the New Electricity Trading Arrangements. These
must go beyond Ofgem's proposals for consolidation, which have
proved unworkable both technically and commercially. Stable and
predictable pricing arrangements should be available, as originally
outlined by the Government.
The Government should use the powers
it has taken under the 2000 Utilities Act to provide a similar
incentive for investment in new CHP capacity to that enjoyed by
renewables under the Renewable Obligation.
Urgent efforts must be directed towards
the development of electricity networks that actively support,
and optimise the value of, distributed generation plant. This
must include not only a revision of existing technical regulationaffecting
the physical connection and operation of assessment of generation
assetsand commercial arrangementsaffecting the charges
levied on distributed generators for connection and use of the
systembut also the regulatory incentives necessary to drive
forward a fundamental change in configuration and operation of
39. The issues of security of supply within
the energy sector have been highlighted within the context of
the Energy Policy Review, presently being conducted by the Cabinet
Office. Under these circumstances it will be a priority for Government
make most efficient use of available
energy resources; and
encourage diversity in energy sources
40. Combined Heat and Power has the potential
to deliver a major contribution towards these objectives.
41. The Combine Heat and Power Association
welcomes the opportunity to contribute to the Trade and Industry
Select Committee's inquiry and looks forward to the important
contribution the Committee is in a position to make towards the
development of an effective, and sustainable, energy policy for
31 October 2001
The views expressed in this paper cannot be
taken to represent the views of all members of the CHPA. However,
they do reflect a general consensus within the Association.
1 Energy Paper 68: Energy Projections for the UK,
DTI, 2001. Back
Energy Paper 68: Energy Projects for the UK, DTI, 2001. Back
DTI, Digest of UK Energy Statistics 2001. Back
Derived from data presented in The Managers Guide to Custom-Built
CHP, DETR, 2000. Back
PIU Energy Policy Review Group, 25 September 2001. Back
DTI, Digest of UK Energy Statistics 2001. Back
DTI, Digest of UK Energy Statistics 2001. Back
Combined Heat & Power to 2020: The Economic & Environmental
Implications of Exploiting the Potential of CHP. Back
DTI, Digest of UK Energy Statistics 2001. Back
Based upon data supplied by Alstom Power and Centrax. Back
Based upon information provided by Fortum Engineering Ltd. Back
PB Power Ltd Energy Services Division, The Potential for Combined
Heat and Power with Community Heating in the UK, October 2001. Back