Environmental Audit Committee - Green EconomyWritten evidence submitted by Combined Heat and Power Association

Executive Summary

Combined heat and power (CHP) contributes to the green economy and has the potential to facilitate the continued decarbonisation of energy use. The UK’s industrial competitiveness can, and must, be maintained whilst addressing emissions and wider sustainability concerns.

CHP simultaneously generates heat and power (electricity) in a single highly efficient process. CHP is fuel-neutral with a range of plant designs that utilise renewable or fossil input fuel. Whatever the feedstock, CHP represents the optimal use of that fuel. With significant deployment across industry, CHP is already providing cost effective carbon abatement and supports the industrial competitiveness and employment for companies operating in a global marketplace.

The CHP industry employs 116,000 people, which could more than double as installed capacity reaches its full potential of 14 GW.

The six GW CHP capacity installed to date saves 13 million tonnes of CO2 per annum.

As an energy efficiency technology CHP simultaneously improves industrial competitiveness and reduces emissions. The UK Government has recognised the value of CHP. HMRC stated:

“CHP provides one of the most cost-effective approaches for reducing CO2 emissions and plays a crucial role in the UK Climate Change Programme.” HMRC Notice CCL1/2 July 2010

Until recently support for CHP through Climate Change Levy (CCL) exemption has enabled businesses to invest in, and operate, CHP plants. Last year, however, the Government announced the removal the CCL exemption for new and existing CHP, previously available to 2023, as part of the Carbon Price Support (CPS) scheme. The removal of support for CHP will lead some plant to reduce operations or shutdown altogether. This will threaten the competitiveness of industry, increase UK emissions and put jobs at risk. The removal of the CHP Levy Exemption Certificate (LEC) alone will cost industry £1 billion.

To ensure that the green economy prospers across all sectors, it is vital that the Government reinstates accessible, enduring, bankable support for CHP to ensure it is the natural choice over separate production of heat and power. The Government’s proposals for a relief under the CPS are welcome but cannot achieve existing levels of support for CHP. This barrier to decarbonising industrial heat and electricity through CHP, however, can be removed if the Government acts now to address the following:

Ensure there is sufficient relief for CHP from CPS, based on the proportion of fuel that is used in CHP for heat generation.

Retain CHP LECs until 2017.

Ensure that long term support replace the value of CHP LECs when these come to an end.

CHP offers a technology for energy users to participate in the decarbonisation agenda whilst retaining competitiveness and growing efficiency. With the right policy framework Government could open up a new front to tackle climate change whilst driving industrial growth.

Environmental Audit Committee: Green Economy Inquiry

The Environmental Audit Committee is currently examining the concept of a green economy in the UK, what it should look like, and how it will help deliver sustainable development. Further to this, the Committee also wishes to examine the barriers preventing the transition to a green economy and the Government’s role in tackling these and creating the conditions necessary for a green economy to thrive.

CHP and the Green Economy

The Green Economy Environmental Audit Committee inquiry seeks to understand exactly how to bring together the two concepts encapsulated in the term “green economy”. It is essential that the greening of the UK economy must not be at the expense of industrial competitiveness, but neither should unabated emissions, a market failure, be allowed to continue.

Combined heat and power (CHP), can be used in many applications across the economy, from microCHP replacing domestic boilers to large-scale industrial CHP. CHP simultaneously generates heat and power (electricity) in a single efficient process. This contrasts with conventional ways of generating electricity where up to two thirds of the overall energy consumed is lost. CHP is fuel-neutral with plant designed for a range of fossil and renewable fuels, but whatever the input fuel, CHP represents the optimal use of that primary fuel. As CHP is essentially an efficiency gain it provides cost effective carbon abatement whilst increasing industrial efficiency.

This paper focuses on industrial CHP applications, as currently they account for the majority of installations and are under significant threat from current policy reform which, if not addressed, will result in significant impact on UK businesses.

CHP’s role in greening the economy

The CHPA wholly supports the concept of a green economy that addresses not just carbon emissions reductions but wider sustainability and resource concerns. It is important, however, not to consider the “green economy” as separate to the wider economy. Rather, to meet the UK’s challenging carbon targets,1 we must consider how to green the economy as a whole.

Industrial demand accounted for 27% (104 TWh) of the UK’s total (384 TWh) electricity demand in 2010,2 and 30% (272 TWh) of the UK’s total (907 TWh) heat demand3 in 2005. Decarbonising these businesses can make a considerable contribution to greening our economy.

Whilst CHP is deployed in commercial and domestic applications in the UK, the vast majority (89%),4 of the six GWe installed to date5 is in this industrial sector. Analysis in 2008, however, estimated that there is an additional eight GWe industrial CHP capacity6 not yet deployed in the UK.

CHP gets to the heart of the green challenge, tackling emissions from both heat and electricity generation. The carbon saved by CHP installations is calculated against a baseline of electricity generated by alternative means; fossil fuels. The UK Digest of United Kingdom Energy Statistics (DUKES) calculates the carbon saved by CHP annually and in 2010 estimated that the 6 GWe CHP capacity installed to date saves up to 13 million tonnes of CO2 per annum.7

Carbon saved by CHP in 2010

tCO2/MWe

Total CO2 saved from CHP

Carbon savings against all fossil fuels

2.17

12.98 MtCO2

CHP—Keeping industry competitive

In addition to playing a vital role in greening industry, CHP also helps industry remain competitive. As the most efficient use of primary fuel CHP reduces energy costs whilst reducing emissions. Combined, these cost reductions ensure UK products remain competitive in an international marketplace and that industry remains in the UK.

CHP—A green industry

The CHP industry itself is also one of the UK’s “green industries” contributing to the economy and providing jobs. The CHPA commissioned a report in 2009,8 which, based on primary data from CHPA members, calculated the number of employees employed directly by the sector plus those in the supply chain. The report calculated that a total of 116,000 people were employed by the CHP industry across the six GWe of installed CHP capacity. This could more than double as installed capacity reaches its full potential of 14 GWe.

CHP and the Policy Framework

Government endorsement for CHP

HM Revenue and Customs (HMRC) made explicit the UK Government’s endorsement of CHP recognising the cost and carbon reduction benefits of this energy efficiency technology.

“CHP provides one of the most cost-effective approaches for reducing CO2 emissions and plays a crucial role in the UK Climate Change Programme.”9

Whilst the Government has recognised the potential of CHP at a strategic level, however, the policies that currently support its deployment are under threat.

Current support for CHP

In recognition of CHP’s role in carbon reduction, current UK energy policy provides exemption from the Climate Change Levy (CCL) for CHP plant. This includes vital Levy Exemption Certificates (LECs) for all power sold off-site as well as an exemption on the tax on input fuel. These exemptions have enabled businesses to invest-in and operate CHP plants.

Removing support for CHP

From 2013, the Government will remove the CCL exemption for CHP, replacing the CCL CHP input fuel exemption, the new Carbon Price Support (CPS) tax on CHP input fuel. Whilst this tax is designed for the power market, the design proposes that fuel for heat in CHP will also pay this tax. This new tax will lead to a significant increase in costs for sites operating CHP, especially energy intensive industries and manufacturing sectors. These manufacturing sites are essential for providing new jobs and investment during fragile economic conditions.

As part of the CCL reform, the Government will remove CHP LECs from 2013. The Government’s proposed solution is replacement of LECs with some measure of relief on the CPS but industry modelling (developed and shared with the Government) clearly shows that even with 100% relief there is insufficient value or certainty to retain existing levels of support for CHP.

Cost implications

The removal of LECs and introduction of CPS will have a significant impact on CHP operators in the UK. Industry modelling indicates that in real terms, the value of lost LECs from 2013–14 to 2022–23 will be £1.56 billion.10

In addition to this, the impact of the introduction of the CPS from in the first year alone is an additional £127 million.11

The combined impact of the removal of LECs and introduction of the CPS will mean that sites face significant additional costs which will penalise CHP operators for having invested in CHP to reduce emissions. The scale of this burden will render not only the investment case for new plant unacceptable, but as these changes also apply to existing plant, it is likely that these operators will revert to separate generation of heat and power, negating cost effective carbon savings and increasing their cost of operations.

How can CHP continue to contribute to greening the UK economy – removing the barriers

The major barrier to decarbonising industrial heat and electricity through CHP, the proposed reduction in financial support, is simple to address. To ensure that businesses, who responded to government signals and invested, continue to operate their CHP plant, the Government must ensure that support is not withdrawn. To enable CHP to fulfil its potential in greening industry affordably, CHP must have enduring bankable support to ensure it is the natural choice over separate production of heat and power.

The policy framework must:

Ensure fair treatment for CHP under Carbon Price Support, through an exemption based on the proportion of fuel that is used in CHP for heat generation (the carbon price support is designed to impact electricity generation NOT heat generation).

Retain the Climate Change Levy CHP Levy Exemption Certificates until 2017.

Ensure that accessible long term bankable support to replace the value of Climate Change Levy CHP Levy Exemption Certificates when these come to an end.

Without these changes, not only will new stations not be built, but existing stations may close and the current carbon savings and low carbon energy supply from them will be lost. Replacing the value of LECs is the only way to ensure CHP electricity is sufficiently valuable for them to continue generating.

Industry needs a commitment now that Government will ensure that CHP plant retain the full value of existing exemptions

CHP offers a technology for energy users to participate in the decarbonisation agenda whilst retaining competitiveness and growing efficiency. With the right policy framework Government could open up a new front to tackle climate change whilst driving industrial growth.

6 January 2012

1 80% carbon reduction on 1990 levels by 2050

2 Industrial consumption of electricity in 2010, Digest of United Kingdom Energy Statistics (DUKES) 2011 p119 /120 http://www.decc.gov.uk/en/content/cms/statistics/publications/dukes/dukes.aspx

3 2005 UK heat demand, BERR Heat call for Evidence 2008 p12

4 DUKES 2011 p164

5 DUKES 2011 p159

6 Poyry Energy Consulting, Potential for CCGT CHP generation at industrial sites in the UK 2008, p1

7 DUKES 2011 p167

8 CHP Employment Survey, Delta Energy & Environment March 2009 p3 & 4

9 HMRC Notice CCL1/2 July 2010 (subsequently replaced by CCL1/2 November 2011)

10 CHP industry modelling, fully shared with Government.

11 The actual level will depend on the level of relief given to CHP plant. Numbers based on no relief as no other information has yet been published.

Prepared 18th May 2012