Select Committee on Trade and Industry Minutes of Evidence

Memorandum by the Combined Heat and Power Association

  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 CHP—the combined and highly efficient production of heat and power in a single operation—delivers a number of benefits to the UK, such as:

    —  it improves customers' competitive choices;

    —  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 sources.

  6.  The Association's evidence responds to the questions posed by the Committee in its Press Notice of 20 September 2001.

  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 schemes?

  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[1] (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; and

    —  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 DTI[2] 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[3] 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[4].

  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[5] 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" measure.

Distributed Generation

  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 of consumers.

  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[6].

    —  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 network—so called "black-start" capability—with 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 energy conservation?

  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[7]. 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[8] 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 poverty?

  29.  CHP has the potential to deliver both improved industrial competitiveness and supplies of affordable warmth.

  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[9].

  31.  Following the introduction of the Climate Change Levy, the Chancellor exempted CHP from the Climate Change Levy stating:

    "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 plant.

  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[10] and project engineers indicate a fall of over 80 per cent in levels of CHP business[11]. 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 DETR[12] 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 through HEES.

  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 place.

  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 regulation—affecting the physical connection and operation of assessment of generation assets—and commercial arrangements—affecting the charges levied on distributed generators for connection and use of the system—but also the regulatory incentives necessary to drive forward a fundamental change in configuration and operation of distribution networks.


  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 to:

    —  make most efficient use of available energy resources; and

    —  encourage diversity in energy sources and supply.

  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 the UK.

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

2   Energy Paper 68: Energy Projects for the UK, DTI, 2001. Back

3   DTI, Digest of UK Energy Statistics 2001. Back

4   Derived from data presented in The Managers Guide to Custom-Built CHP, DETR, 2000. Back

5   PIU Energy Policy Review Group, 25 September 2001. Back

6   DTI, Digest of UK Energy Statistics 2001. Back

7   DTI, Digest of UK Energy Statistics 2001. Back

8   Combined Heat & Power to 2020: The Economic & Environmental Implications of Exploiting the Potential of CHP. Back

9   DTI, Digest of UK Energy Statistics 2001. Back

10   Based upon data supplied by Alstom Power and Centrax. Back

11   Based upon information provided by Fortum Engineering Ltd. Back

12   PB Power Ltd Energy Services Division, The Potential for Combined Heat and Power with Community Heating in the UK, October 2001. Back

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