A UK Strategy for Combined Heat and Power

Every 1,000 megawatts (MWe) of CHP can reduce carbon emissions by around 1 million tonnes and energy costs by over £100 million per annum. In recognition of these benefits the 1990 Government White Paper 'This Common Inheritance' set a target for CHP of 4,000 MW, of installed capacity in the year 2000 - doubling the capacity that existed at that time. Early progress was encouraging, and consequently in 1993 the Secretary of State for the Environment announced an increase in the target to 5,000 MWe as part of UK's Climate Change programme. This paper sets out the Government's strategy for meeting this target and setting the basis for CHP growth beyond 2000.

Review of Progress

The steady increase in capacity has resulted from a concerted effort from industry, the CHPA and Government to promote the technology and overcome the barriers to its implementation.

CHP technology has been, and continues to be, a crucial area of the Government's Energy Efficiency Best Practice programme. The programme promotes CHP by providing credible and independent information through publications, articles, videos, and events. In addition it has provided considerable direct support for technology development and innovative applications.

Examples of work under the programme range from independently assessing the field trials of the first remotely monitored and controlled small-scale CHP units, through various Good Practice Guides on all aspects of CHP, to reporting on CHP schemes that have been operating for a number of years, giving confidence in the long term reliability and viability of the technology.

The Government has strongly promoted the use of CHP in the public sector, particularly the health services - in fact over half of all CHP installations are in the public sector.

The climate for CHP has changed markedly, and will continue to change, as a result of the privatisation of the public utilities and the continuing liberalisation of energy markets. From privatisation, the majority of small supplies from on-site CHP schemes have been exempt from licensing and from the fossil fuel levy. In addition, a de-minimis limit was established which allows export of power up to 500 kW, without the need for a supply licence.

Liberalisation of the market is facilitating growth in the provision of integrated energy services, as opposed to simple energy supply, an approach that is particularly compatible with CHP. The Government has sought to ensure that the market develops so as to encourage local generation, including CHP and that there are no unnecessary barriers to CHP. Changes that have benefitted CHP include:

Relaxation of the electricity licensing regime

The licensing regime since privatisation has been revised to make it easier to export surplus power from on-site generation. In particular the Electricity (Class Exemptions from the Requirements for a Licence) (No.2) Order 1995 introduced the following changes, meaning that many more CHP operators became exempt from licensing requirements and hence payment of the fossil fuel levy.

• Increasing the level of supply at which a generation licence is required from 10 to 50 Mwe
• Allowing the temporary supply of power above 50MWe in certain circumstances;
• Extending the transitional exemption granted to certain suppliers at electricity privatisation to 31 March 1998
• Relaxation of the 51% 'own use' rule.

Currently DTI and OFFER are consulting on the evolution of the licensing regime post 1998. On 30 April 1996 the DTI announced plans for a further relaxation of the exemption conditions in the run-up to full supply competition in 1998 to allow exempt suppliers to supply on-site, or over private wires, up to 100MW, to any commercial or industrial customers. Of that amount, up to 1MWe may be supplied to domestic customers subject to the condition that prices charged do not exceed a certain figure.

Relaxation of the resupply of electricity

The rules regarding the resupply of electricity and multi-occupation have been changed, giving more flexibility for CHP scheme operation and the opportunity for more on-site customers to benefit from CHP.

Changes to the on-site supply rules

The introduction of net trading means that electricity used on-site does not now have to be sold through the Pool, removing a burden from the CHP operator.

Revised arrangements for connecting generating plant

These have been implemented through the Distribution Code and Public Electricity Supplier (PES) connection agreements which have become more balanced followingg OFFER determinations. Further consideration is currently being given to the various issues regarding the connection of embedded generation to the PES distribution systems.

Standards of Performance now includes CHP

The Director General of Electricity Supply has agreed that CHP involving Community Heating, where it displaces electric heating systems, can be supported under the Public Electricity Suppliers' obligations under the Standards of Performance requirements. This is being promoted and overseen by the Energy Saving Trust and the CHPA Agency.

Separate treatment for Waste-Fired CHP under the Non-Fossil Fuel Obligation (NFFO)

The NFFO provides long term contracts for electricity from certain renewable sources and aims to create an initial market for this type of power generation. The Government recently amended the Electricity Act so that Municipal Waste-Fired CHP schemes would not be disadvantaged by the NFFO encouraging electricity generation to be maximised at the expense of heat supply. The new arrangements will apply to the fourth round of bids for a share of the fossil fuel levy.

Relaxation of capital finance rules

Relaxations to the local authority capital finance rules are helping to facilitate the development of Community Heating and CHP through partnerships with the private sector. Changes to the rules announced on 21May l996 will remove funding restrictions from PFI deals entered into by local authorities with the private sector. Providing schemes meet risk transfer tests and value for money there will be no cost to authorities' capital resources. Schemes will also be eligible for revenue support.

Constraints and Opportunities

Constraints to progress

• High initial costs of CHP plant meant that it can be difficult for organisations to allocate funds for CHP - as non-core business - even when an attractive return on investment is possible. Community Heating schemes face similar problems in being established, even though they can offer the cheapest energy.
• Unstrategic and uncoordinated energy management is still common. CHP is a long term investment and requires an integrated approach to energy requirements.
• Regulatory constraints can still present a problem for the implementation of particular CHP schemes, particularly regarding the requirements on embedded generators.
• Uncertainty during the period of falling electricity prices has meant that some sites have delayed investment in CHP. Although falls in electricity price have now been partially offset by the more recent reductions in gas prices, uncertainty regarding the future differential between gas and electricity prices continues.
• Lack of awareness and distrust of the technology and its benefits remain, even though CHP and Community Heating are generally reliable and are now well established in many applications.
• A lack of exemplars in certain sectors, where there is potential for CHP, discourages investment because of the perceived additional risk of innovation.

  Opportunities

  The growth of CHP up to and beyond the millennium will depend upon making the most of a number of key opportunities over the next few years.
• Complete liberalisation of the gas and electricity markets in 1998 will allow all energy users, including domestic consumers, to choose their energy suppliers. The exact structure of the regulatory regime to be established in 1998 will be important for ensuring that CHP development is not unnecessarily hindered. Of particular relevance are supply licence exemptions, the arrangements for consumer protection and the requirements imposed on embedded generation.
• An expanding range of products and services from energy companies is becoming available as a result of privatisation and the subsequent market liberalisation. There is an increasing trend towards the provision of bespoke integrated packages of energy services rather than simple fuel and power supply. It is expected that this trend will continue post 1998. The integrated approach and expertise of energy services companies, plus their ability to finance projects, provides excellent opportunities for CHP.
• The Private Finance Initiative (PFI) has an important role to play in continuing to bring the benefits of CHP to the public sector through partnerships with specialist private sector companies. As well as helping to overcome the investment barrier, the PFI should provide the public sector with better access to specialist skills and expertise - such as in CHP - and achieve improved value for money for the public sector.
• Waste to energy schemes, including CHP, were highlighted in the recent Government strategy 'Making Waste Work' as a major opportunity to manage waste more sustainably. Energy recovery from waste is a well established method of obtaining added value before final disposal and will increasingly represent the best practicable environmental option for many wastes. The fourth round of NFFO in 1997 may for the first time include CHP waste to energy schemes.
• Increasing interest in large Community Heating schemes from local authorities and private sector developers is providing fresh opportunities for CHP. Current estimates suggest that approximately half a million UK dwellings are supplied directly with heat. Improvements in both definitions and the quality of data are needed in this area.

  Significant growth of CHP in the UK, over the longer tern, is inextricably linked to the aggregation of heat loads through the greater development of Community Heating, particularly in relation to social housing.

  Community Heating with CHP requires substantial investment and a favourable regulatory for direct electricity sales. Significant growth is likely to come about only through involving private solar resources in establishing the necessary infrastructure.

Strategy to 2000

The Environmental and Energy Management Directorate of Doe will continue to lead the Government's work on CHP, ensuring co-ordination with other Departments. DoE will also continue to work closely with industry, particularly the CHPA, and others, such as the Energy Saving Trust (EST), to promote the economic application of the technology and minimise constraints to its adoption.

Specifically, the Government will:

• Support OFFER and OFGAS in working towards the complete liberalisation of the gas and electricity markets, and to assure that the regulatory frameworks do not tender the development of local CHP based generation.
• Work with the CHP industry and potential hosts to promote an integrated approach to meeting consumers' energy needs. CHP is a prime example of integrated technology and the energy services approach should provide fresh opportunities.
• Promote and facilitate new applications of CHP in order to catalyse replication and developments of new markets. CHP schemes currently being publicised include those at BBC Television Center, Arjo Wiggins Paper Mill in Dover, the new DoE buildings and Leicester City Council.
• Seek cost effective opportunities for CHP in its own estate, particularly via PFI and encourage other parts of the public sector to do likewise. Currently around half of the UK's CHP installations are in the public sector and more projects like the upgrading of the Whitehall District Heating Scheme will be sought Guidelines for Energy Services in the Public Sector will be published during the autumn of 1996. These will be promoted with a view to improving energy efficiency and the up take of CHP in the public sector.
• Widen the promotion of the integrated, open specification approach to private sector energy consumers, with a view to stimulating further CHP installations.
• Continue to disseminate good practice and an independent view on CHP through the Energy Efficiency Best Practice programme. The DoE's managing agents, ETSU and BRECSU, operate strategies for CHP in industry and for CHP in buildings and Community Heating under this programme. In both industry and buildings there are sectors where CHP is well accepted, such as in the paper, chemicals and food industries and in hospitals, hotels and leisure centres. Both strategies aim to concentrate effort on new market applications where there is unrealised potential for CHP. Meanwhile in the established areas, consolidating work will be carried out to maintain momentum. Other common themes of the strategies are raising the profile of CHP and Community Heating amongst non-technical strategic decision makers, and providing support for R & D to facilitate the introduction of new and improved technologies for CHP.
• Use opportunities to promote the technology and inform decision makers via other environmental and energy management initiatives, such as the Environmental Technology Best Practice Programme and Making A Corporate Commitment.
• Promote the development of waste to energy projects as an important part of an efficient and integrated waste management strategy; increasing recognition that the use of renewable fuels is a key element of sustainability, particularly as CHP.
• Encourage the exploration of funding options for CHP/Community Hearing projects, particularly through PFI and drawing on the compatibility between the benefits of CH and the objectives of the Single Regeneration Budget Challenge Fund and other instruments such as the proposed Local Capital Competitiveness Budget.
• Public Private Partnerships Programme Ltd (4Ps) is a new unit established by the Local Authority Associations to promote the use of private finance in the provision of local authority services. The 4Ps will offer advice and assistance to develop pathfinder PFI projects, including community heating.
• Monitor and promote innovative developments in Community Heating such as CHP waste to energy projects, direct electricity sales from CHP to residents, smart metering, the establishment of local energy services companies, and the integration of supply and demand side measures. To catalyse such developments, Government will work closely with local authorities, housing action trusts, housing associations and 4Ps.
• Assess the impact of Government activities on CHP and Community Heating, and particularly continue to monitor the UK's installed CHP capacity. Also strive to produce improved national data on Community Heating installations to assist in planning future work.

Beyond 2000

The Government will consider a post 2000 CHP target in the light of progress towards the 5,000 MWe target and whatever carbon reduction targets post 2000 emerge from current international negotiations.

Work is currently underway to assess the long term potential for CHP in the UK, and this will provide the basis for setting future targets and showing the way ahead. Of particular importance will be the strong development of Community Heating so that heat loads are linked and opportunities for CHP enhanced.

At the same time, innovative technologies are coming close to the market place. In consultation with the DTI, appropriate Future Practice R & D work will continue to be supported by DoE to ensure that improved and more efficient CHP technologies are available to help meet the environmental challenges of the next century.

Further information can be obtained from:

Energy Services Team, Department of the Environment
Tel:(0171)2766262,
Fax:(0171)2763746 (GTN276)

ETSU
Tel: (01235) 436747,
Fax: (01235) 433066 (GTN 3862)

BRECSU
Tel: (01923) 664258,
Fax: (01923) 664787 (GTN 3532)

Combined Heat and Power Association
Tel (0171) 8284077,
Fax:(0171)8280310

4Ps
Tel: (0171) 227 2841,
Fax: (0171) 222 0878

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