Memorandum submitted by The Combined Heat
& Power Association
BACKGROUND TO
THE COMBINED
HEAT & POWER
ASSOCIATION
1. The Combined Heat & Power Association
(CHPA) works to promote the wider use of Combined Heat and Power
(CHP) and community heating. The Association is the UK's leading
advocate for high efficiency CHP technology.
2. The CHPA has an active role in COGEN
Europe to secure effective European wide policies for CHP.
3. The CHPA has well over 60 members and
represents a significant proportion of the total CHP capacity
within the UK. Our members are made up of CHP developers (small
and community scale, large scale industrial and utility companies),
end users, suppliers, public sector bodies and professional services
providers. In nearly all cases fiscal regulatory incentives, and
in particular CCL, play a vital role in the economic viability
of CHP. The CHPA hopes that the comments and suggestions made
in the course of this response help the Committee in their research
and informs future Policy in this area.
SUMMARY OF
MEMORANDUM
4. CHP or cogeneration, presents an important
opportunity to realise carbon dioxide savings in a range of commercial
and industrial applications. These savings are archived through
the generation of heat and power on-site, or local to the power
use, providing the opportunity to utilise the heat that would
otherwise be wasted, whilst also avoiding significant transmission
and distribution losses.
5. The Climate Change Levy (CCL) has been
a significant and important incentive for the operation of CHP
plant through the Levy Exemption Certificates (LEC) scheme.
6. It has had a mixed impact in encouraging
the wide-scale development of new CHP plant, with the real value
of the CCL often proving insufficient to ensure the long-term
commercial viability of new CHP investments in the UK's liberal
energy markets. The value of CCL does not reflect changing energy
costs, In particular the differential between fossil fuel and
electricity prices, on which the commercial viability of CHP depends.
The recent introduction of indexation to RPI is a help, however
RPI does not reflect relative movements in fuel and power prices
that impact directly on the viability of CHP plant.
7. It has had the greatest impact in encouraging
some very large industrial projects that benefit from economies
of scale and positive project circumstances and in the commercial
sector, which faces higher prevailing market prices for energy.
8. Climate Change Agreements (CCAs) have
had a negligible impact on CHP development since installation
and in some sectors did not contribute towards the meeting of
sectoral targets. Likewise the requirement placed upon sectors
to develop CHP where it is "cost effective" led to varying
definitions as to what "cost effective" meant at a time
when, after the introduction of NETA, CHP economics were difficult.
Additionally, where CHP plants have been installed, unrecognised
potential may still exist where higher power to heat ratios are
possible in addition to greater primary energy savings. CCAs have
also worked to compromise benefits to CHP from CCL exemptions
in providing an 80% discount on CCL liabilities for business.
9. Enhanced Capital Allowances (ECAs) have
had very limited impact owing to the restrictions placed on accessing
the benefit. Notably CHP plant developed and owned by utilities
for the benefit of their customers are not eligible to receive
ECAs. Furthermore the benefit of ECAs can only be realised in
circumstances where the company owning the CHP plant is earning
a profit and therefore eligible for relief from corporation tax.
10. With regards to the development of new
CHP capacity, the lack of certainty over the future availability
(from April 2013) and the accessible value of the CCL benefit
means that in today's market the CCL is failing to act as a meaningful
driver to the CHP developer. A CHP project today is likely to
receive, at best, four years of cashflow benefit from CCL; a larger
project somewhat less.
11. The lack of future certainty over the
CCL will also limit the scope for continued operation of the existing
CHP fleet, much of which will require significant mid-life investment
over the next five years. Without CCL benefit, or a benefit of
enhanced value, this fleet may be decommissioned or become a dedicated,
flexible power-only plant that will be able to access higher revenues
from mid-merit or peak-power markets. Running in a flexible power-only
mode will compensate an operator for the loss of CCL revenues
but removes the GHG benefits associated with cogeneration.
12. The loss of benefits associated with
Good Quality Combined Heat and Power (GQCHP) are now likely to
be further undermined by forthcoming changes to the assessment
criteria proposed by the Government's CHP Quality Assurance (CHPQA)
scheme to comply with the EU Cogeneration Directive (2004/8/EC)[1].
RESPONSE TO
SPECIFIC QUESTIONS
RAISED
Is it right for the Levy and Agreements to target
energy use, or should they be reformed to target carbon emissions
directly? If so, how should they be changed?
13. Carbon emissions are increasingly becoming
the common currency of climate change policy. However each policy
instrument should focus on the practical changes that a consumer
can make to improving energy efficiency or reduce direct emissions.
Customers cannot directly influence the carbon intensity of grid
electricity generation.
14. It is of central importance that future
reforms or extensions to, or replacement of, CCL is done in a
way that guarantees that there is continuity in regulatory incentives,
those have played a key role in building CHP capacity to date.
15. Adoption of carbon as the metric would
help to bring greater transparency to this instrument but will
highlight the fact that carbon emissions from electricity generation
are already covered by the EUETS. For participants in the EUETS
it would raise questions about double counting of their own non-electricity
emissions.
With the advent of UK-wide carbon budgets from
2008 (proposed under the draft Climate Change Bill), how valuable
is the focus of the CCL and CCA on the efficiency with which business
consumes energy? Would it be better to have an instrument that
enforced absolute caps in energy use (or CO2 emissions)?
16. The merit of absolute caps is highly
dependent upon the ability of businesses to respond to this incentive.
17. Caps imply a tradable certificate-based
system that affords businesses covered by a scheme, the flexibility
to purchase allowances to meet their capped limit. Many businesses
may not have the ability or inclination to actively trade in such
a market, thereby restricting liquidity and any inherent benefit
of the cap-and-trade model.
18. However, should the proposed Carbon
Reduction Commitment be extended to cover sites currently under
CCAs, this could be a possibility. Care must be taken to ensure
that onsite generation, in particular, CHP is not disincentivised.
The risks of disincentives can be presented by a range of circumstances,
for instance allocation of free allowances for conventional "merchant"
power generation or inappropriate assumptions over the carbon
emissions associated with the output from CHP plant that does
not qualify as CHP electricity.
19. As a rule, the calculation of emissions
generated on site should be based on the fuel inputs (as with
ETS) rather than as currently proposed in the CRC consultation.
How well do the Levy and Agreements fit together
with other existing and proposed climate change policies, and
what can be done to ensure maximum impact from complementary policies
with minimum administrative burden and overlap?
20. As an energy levy, the CCL operates
in a fundamentally different manner to the EUETS:
— With CCL, the levy rate or "price"
is fixed, leaving the level of compliance to reach its equilibrium
level, whereas.
— With EUETS, an attempt is made to
fix the extent of abatement, leaving the cost of compliance, in
the form of an allowance price, to reach its own level.
21. This difference in operation between
the mechanisms means that they have the potential to operate in
a complementary manner, each addressing the limitations of the
alternative.
22. By way of illustration, a carbon tax
variant of the CCL could establish a floor in the market price
for carbon, whilst allowing the price of carbon to float above
this level. This approach would provide business with the certainty
of a minimum avoided cost for carbon abatement measures, which
is lacking from the current matrix of incentives for capital-intensive
abatement options such as CHP.
23. The need to fill gaps in the coverage
of existing and proposed policy instruments remains prominent.
Under a recently proposed policy instrument, sites that do not
come under EUETS and have less than 25% of their energy emissions
covered by CCAs, in addition to having a yearly half hourly metered
electricity consumption of more than 6000MWh, will be subject
to the Carbon Reduction Commitment scheme to commence in 2010.
Until this is introduced, there will continue to be many sites
which are not in EUETS and yet have a majority of their energy
emissions not covered by a CCA.
What have been the economic impacts of the CCL
and CCA on the organisations subject to them, and the wider UK
economy?
Impact of CCL and Related Incentives on CHP
24. The Association is concerned that CHP
as a relatively low-cost, high impact carbon abatement technology
has not been strongly incentivised by the CCAs.
25. The following table illustrates the
uptake of CHP in the CCA sectors since the introduction of the
Agreements. In interpreting the data, it should be recognised
that a major CHP project will typically be operationally commissioned
some two to five years from project inception. Thus any impact
arising from a CCA would normally only be attributable to plant
entering into operation from 2004-05 onwards.
26. The data demonstrate that there has
only been a small increase in CHP capacity that may be linked
to the CCA framework. In 2002 industrial CHP electrical capacity
stood at 4,089 MWe across 292 sites, whilst total CHP electrical
capacity stood at 4,595 MWe on 1,509 sites[2].
Recognising the constraints of project lead times described and
so disregarding the period 2002-04, the 183 MWe of capacity added
in the period 2005-07 represents an increase of less than 5% in
industrial CHP capacity over the 2002 figure.
Table 1
NEW ADDITIONS OF CHP CAPACITY IN SECTORS
IMPACTED By CCAS
|
| CHPQASector | GQCHP Capacity (QPC), in MWe
|
| Year of entry into operation
|
| 2002
| 2003 | 2004
| 2005 | 2006
| 2007 |
|
| Chemical industry | | 40.2
| | 53.1 |
0.6 | |
| Commerce | 0.1
| 0.4 | |
| 0.2 | 1.7
|
| Electrical and instrument engineering |
| | 0.6 |
| | |
| Extraction, mining and agglomeration |
| 22.4 | |
| | |
| Food, beverages and tobacco | 5.5
| | 31.4 |
5.2 | | 14.5
|
| Horticulture | 11.9
| | | |
| 3.9 |
| Manufacturing and Retail | |
| | |
| |
| Mechanical engineering and metal products |
| | |
| | |
| Mineral products (eg glass, cement, bricks) |
| | |
| | |
| Non ferrous metals | | 2.9
| 1.4 | |
| |
| Oil refineries | |
| 740.0 | 58.0
| | |
| Other | 4.1 |
| | |
| 3.2 |
| Other industrial branches | |
| | | 1.3
| |
| Paper, publishing and printing | 1.4
| 175.6 | |
| | 10.7
|
| Power generation | |
| | | | 22.0
|
| Textiles, clothing and footwear |
| | | |
| |
| Timber | | |
| | 2.7
| 3.6 |
| Transport | |
| | | |
|
| Vehicles | | 3.0
| 0.4 | 2.0
| | |
| | |
| | | |
|
| Total GQCHP Capacity (MWe) | 22.9
| 244.4 | 773.8
| 118.3 | 4.8
| 59.6 |
| Total number of schemes | 9
| 9 | 6
| 5 | 4
| 13 |
|
| Source: CHPQA, 2007 |
27. The principal incentive for CHP presented by the
CCL is through an exemption from the Levy for both the input fuel
and that proportion of the power produced that is deemed as "Qualifying
Power Output". Qualifying Power Output is determined under
the Government-sponsored CHP Quality Assurance (CHPQA) framework
that identifies those CHP plant that meet minimum standards for
energy efficiency and primary energy savings.
28. Initially this benefit was restricted to the power
consumed on-site, thus limiting its impact and so encouraging
the development of sub-scale CHP plant matched only to the power
demand of a site. In many applications the heat load of a site
provides the opportunity for the development of a significantly
larger CHP plant, however this situation would necessitate the
export from the site of any power that is surplus to the site's
requirements. In many cases, without the value derived from the
CCL exemption, this scale and configuration of plant would not
prove commercially viable.
29. The value of the incentive has been further eroded
by the 80% discount from the Levy that is afforded to qualifying
sites under CCAs. In this situation the incentive for CHP presented
by the Levy is only 20% of that for sites outside of an Agreement.
In these circumstances a site in a CCA does have the facility
to export the power from its CHP plant in order to realise a greater
proportion of the CCL benefit, replacing the exported power with
conventional grid supply. However this arrangement introduces
further complexity and contractual cost.
30. In any situation the benefit of the CCL exemption
for exported power is subject to leakage of value through the
supply chain that is needed to take the power from the CHP plant
to the final consumer. Parties along the supply chain, including
the final consumer, will seek to access some of the additional
value created by the CCL exemption. The extent of this leakage
will relate to the transaction costs, the volumes of power involved
and the relative market position of the counterparties involved.
In general terms the smaller a CHP plant, the greater the impact
of this leakage.
31. The residual value of the CCL exemption to a CHP
project will vary on a site-by-site basis. The theoretical maximum
incentive available would be £4.41 per MWh of electricity
produced. Small-scale CHP plant on a site within a CCA may see
this incentive reduced to approximately £0.80 per MWh once
the effect of the 80% CCA discount and a sharing of the benefit
with the customer are taken into account. If the plant is required
to export power to realise this benefit, then the value could
be reduced further. Larger plant will tend to fare better, and
such plant owned by a utility may expect to realise approximately
£3.57 per MWh.
Future Risks for CHP Presented by the CCL
32. Looking forward, there is no guarantee from the Government
over whether the CCL will be retained beyond 2013, or what the
level of taxation will be. This situation presents major uncertainties
for CHP plant, for which the benefits afforded by the CCL represent
a significant contribution to the revenues of any investment.
Any investment case will only recognise the revenues from CCL
exemption until the 2013 date, thus limiting the value of that
investment. The lack of clarity over the future of the CCL will
have an increasingly deleterious effect on the expansion of new
CHP capacity and scope for refurbishing and retaining existing
capacity.
Wider Competitiveness Effects for UK Business
33. Incentives for CHP vary markedly between European
Member States, bringing significant impacts for the competitiveness
of those sectors exploiting CHP. Strong incentives in Belgium,
for instance, are resulting in new investment in the energy infrastructure,
and specifically CHP. The recent Cabinet announcement by the German
Federal Government, augmenting existing feed-in tariff arrangements
with additional investment incentives is expected to lead to a
wave of investment in lower-cost and low-carbon energy supply
infrastructure that will help support the competitive position
of the industrial sites that benefit from this investment. [Reference
Cabinet position]. Relatively weak levels of incentive for CHP
in the UK, allied to the uncertainty over the continuing availability
of the benefit will therefore tend to undermine the long-term
competitive position of the UK industrial sector, as competing
Member States' industries benefit from policies that support investment
in CHP capacity and related energy infrastructure.
Should the Climate Change Agreements be reformed in any way?
For instance, should the Agreements be simplified, or the sectoral
targets made more stringent?
34. The incentivisation of CHP must be harmonised across
the various sectoral Climate Change Agreements to include the
installation of CHP in meeting the sectoral energy saving targets.
Likewise sectoral targets should be made more stringent.
35. The entire pattern of incentives for the non-EUETS
sector should be simplified, in order to provide clarity for the
sectors affected, for businesses providing low-carbon goods and
services, and for Government to better understand the impact of
these incentives.
What are the main barriers to accelerating energy efficiency
in the business sector? How can these be overcome?
36. The CHPA can only comment in respect of CHP.
37. CHP is a higher capital cost investment to meet energy
needs compared to simple boiler plant and taking grid electricity.
Therefore this will require a player to make significant capital
outlay or enter into a long-term "Energy Service" type
contract. These represent a liability to both business and the
developer. Business needs some measure of certainty over long-term
costs and benefits to enter into such commitments.
38. By contrast the policy derived incentives for investments
are short-term and uncertain in nature, as described previously:
— EUETS needs a stable framework and long term targets
to provide firm value beyond Spring 2013.
— CCL exemption on electricity exports is due to
expire in Spring 2013.
— Qualifying conditions for new Good Quality CHP
developments are now much more stringent under revisions to the
CHPQA scheme imposed by transposition of the EU Cogeneration Directive.
For existing schemes the revisions will come into force from the
beginning of 2011 and will result in a considerable, and as-yet
undefined, reduction to CCL exemption benefits.
39. Consequently the conditions for expansion of CHP
capacity are not favourable under the pattern of incentives and
prevailing market conditions within the UK.
Alongside the CCL, the Government introduced the Enhanced Capital
Allowances, to further encourage firms to make energy saving investments.
How well is this scheme working? How well does it fit with other
existing or proposed climate change instruments?
40. The ECAs scheme is potentially a major driver for
the expansion of CHP.
41. However, its impact is only limited since access
to the ECA scheme is subject to a range of restrictions. These
restrictions prevent a number of potential developers of major
CHP schemes from accessing the benefit and so reduce the value
and viability schemes and prevent them from being taken forward.
42. Limitations include:
— A requirement that the investor/developer is the
end-user beneficiary of the scheme.
— Access to taxable group profits, in order to realise
the benefits of the accelerated capital allowance.
43. These restrictions limit the eligibility for, or
benefit from, ECAs for many CHP developers. This includes utility
developers who could be a major driving force in the development
of UK CHP capacity.
The Levy exempts electricity from renewables, though so far
this appears to have had little impact. Should it play a greater
role in incentivising the growth of renewable electricity, and,
if so, how?
44. The CCL is a relatively minor component of the value
of a renewable energy project, with the exception of energy-from-waste
schemes which are ineligible for support under the Renewables
Obligation (RO). For those schemes that are eligible, the economic
driver presented by the RO is approximately a greater order of
magnitude and therefore has tended to eclipse that presented by
CCL.
45. Furthermore, for renewable electricity schemes using
mature technology that are eligible for the RO, the constraints
on expansion of capacity are primarily grid access and planning.
For emerging technologies, the lack of sufficient value over the
long-term to drive early-stage investment in technology development
and deployment is also a constraint.
46. Looking forward, it is possible that this and future
Governments may seek to reduce the relative benefits afforded
to the certain technologies under the RO. In the recent Department
for Business, Enterprise and Regulatory Reform: Consultation response
for the Reform of the Renewables Obligation, the Government has
proposed that future landfill gas developments and co-firing should
be liable to receive only 0.25 ROCs/MWh of qualifying renewable
generation. In these circumstances the benefits afforded through
CCL exemption are more significant.
8 October 2007
1
As at the date of submission, the CHPQA scheme has proposed new
qualifying criteria, although these remain to be ratified. The
proposed criteria will apply to existing CHP schemes from the
end of 2010-Jan 2011and already apply to new schemes from Jan.
2007. In addition to meeting the existing conditions embodied
in the CHPQA scheme, plant will now be required to simultaneously
meet 70% energy efficiency and minimum Primary Energy Saving conditions
(as set out in the Cogeneration Directive 2004/8/EC). Further
information regarding the changes to CHPQA to accommodate the
EU Cogeneration Directive http://www.chpqa.com/html/presentations/CHPA_members_brief_13-sept07-r1_18Sep.pdf Back
2
DUKES 2007: http://stats.berr.gov.uk/energystats/dukes07_c6.pdf Back
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