CHP SERIES

The development of combined heat and power in the UK

Ken Harvey

This paper reviews the development of CHP in the UK. Processes with large steam demand, eg chemicals, food and drinks, have been the main applications. However, pre-privatization of the CEGB, there was little incentive for CHP. Post- privatization the CHP market has been substan- tially affected by the entrance of a large number of players. Privatization has provided a signifi- cant impetus to CHP applications. It is antici- pated that installed capacity will at least double within the UK by the year 2000.

Keywords: UK; CHP; Development

Combined heat and power (CHP) has for many years been recognized by sections of UK industry as offering significant economic benefits. Processes with large steam demands such as those found in the paper, chemical or food and drinks industries have been the main applications. High pressure steam raised in boilers fuelled by coal or oil would be passed through a steam turbine, the low pressure steam then going for process use. Of the current 2000 MW of CHP currently estimated as installed in the UK, the major proportion is within this indust- rial sector. Even so, almost all of the investment has taken place on sites where there was a need to replace existing boiler plant. The incremental cost was thus reduced and improvement in economic payback achieved. Another characteristic of the schemes was that few involved power export and most were sized to meet the baseload requirements of the site. This reflected the pre-privatization reg- ime where the monopoly of power generation was held by the Central Electricity Generating Board.

The author is with NORWEB plc, Talbot Road, Manches- ter M16 0HQ, UK.

Local electricity area boards were for the most part distributors of electricity, although some small gen- eration schemes, including CHP, had been initiated. However, the dominant position was the ever in- creasing concentration of generation in larger and larger power stations in locations remote from load centres. The Central Electricity Generating Board (CEGB) pursued economies of scale, with its key objective that of improving the efficiency of coal fired conventional plant. Despite this background, which offered little incentive to CHP, underlying trends were reinforcing the wider application. Gas turbines and highly efficient reciprocating engines reduced capital costs. The differential between fuel prices and power prices generally widened. Pioneers in the smaller-scale market developed a package approach with computer assisted systems that in- creased reliability and availability. And the 1983 Energy Act offered some greater flexibility and control to end users. By the time the electricity industry was privatized, the CHP concept was ready for further development and many of the new play- ers created by privatization had recognized this.

The new industry structure ended the CEGB's effective monopoly in electricity generation. One of the key objectives of the government was to intro- duce competition wherever this was practicable. In particular it gave the 12 new regional electricity companies (RECs) which replaced the 12 area boards the incentive to promote competition in generation. They would have a stronger incentive to pursue economic schemes for local generation and for managing peak demand so as to reduce require- ments for bulk generating capacity. The response has been that within a relatively short time nearly all of the RECs have promoted independent power station projects. Several have also formed joint ventures for the development of mainly package CHP projects in the smaller-scale market. The com-

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CHP series: development in the UK

panies formed from the breaking up of the CEGB have also responded to the new environment. With their extensive large-scale power generation experi- ence, their aims in the CHP market have been the industrial sector where larger schemes are possible.

The CHP market has therefore been substantially affected by the arrival of a large number of players that are comfortable with long-term investment positions and have the financial and technical strengths to offer end users alternative approaches that avoided direct investment by the user. Privatiza- tion can therefore been seen to have provided a significant impetus to the application of CHP within the UK. Given the factors described above, which have enabled the case for CHP to be progressively advanced, it is anticipated that the installed capacity will at least double within the UK by the year 2000.

The UK government, in its environmental strategy paper This C o m m o n Inheritance has also specifically recognized the benefits of CHP and the role it can play in higher fuel efficiency and reducing CO2 emissions. The Energy Efficiency Office will continue to promote the technology under its best practice programme and will aim to ensure that the identified potential of 2000 MW will be achieved. In Europe, where CHP has achieved significantly greater levels of utilization within several member states, the contribution of CHP continues to receive increasing recognition. With energy policy in- creasingly dominated by environmental considera- tions, the European Commission endorsed a pack- age of four measures covering CO2 reductions and energy efficiency. With the exception of the energy tax there is broad acceptance within the UK electric- ity industry of the principles.

NORWEB plc has for many years encouraged the efficient use of electricity and was the pioneer in introducing special awards that promoted energy efficiency within the industrial and commercial sec- tors. In the domestic market, very high insulation standards and economic heating systems were prom- oted both in the private and local authority sector. With privatization, NORWEB was the first REC to promote CHP by entering into the small-scale pack- age market. Our belief is that this market has significant growth potential, especially where users are offered systems involving no capital outlay. NORWEB plc has also extended its CHP interests into the industrial sector where the greatest growth prospects are anticipated. At first glance, such a positive commitment towards the development of CHP by a REC would appear perhaps against its best financial interests, because of the implications for its distribution business. Our belief is, however,

that CHP is set to grow, and grow significantly, within the UK having regard to both its financial and technical benefits and developing environmental pressures. Under these circumstances, CHP is there- fore seen as an opportunity by NORWEB to partici- pate in a growing market that will widen its customer base outside its own region and produce unregulated profits for the company.

NORWEB is not alone among electricity produc- ers, and the market opportunity is broadly recog- nized by many of the participants. The rate at which CHP is taken up will, however, continue to be dominated by several key factors, such as corporate profitability and confidence, financing costs, fuel costs and electricity price relativity.

Corporate profitability and confidence could perhaps be considered as having a lower impact following the introduction into the marketplace of the new players introduced at privatization. How- ever, despite the obvious financial and technical strengths of those players and their ability to build and finance the projects, the fundamental question still remains the long-term viability of the end user. A developer must clearly have confidence in the ability of the client to survive and, not only that, in its commitment to continuing production within the UK rather than switching overseas. End users must equally have confidence in their long-term position when they consider entering into contracts for 10 years or more. Profitability can therefore be seen to still be of vital interest to both sides and judgements on the risks involved will continue to be made on a project by project basis against a varying back- ground of economic confidence levels.

In this respect, financing costs are also a reflection of the economic climate. Extensive modelling of the project to test its robustness is clearly essential to develop a full understanding. Again, each individual electricity producer is in the business of assessing risk and reward and determining at what level it is prepared to offer terms.

The most important factor of all is fuel cost and the relative prices of fuel and electricity. The fuel market remains difficult to predict, the behaviour of the pool and hence ultimately power purchase con- tracts is variable and the third party natural gas market continues to develop. Within the UK the on-going effect of electricity and gas privatization will continue to be the major influence. The com- petitive pressures released by this privatization can only be broadly assessed, but we believe that ex- isting relativities will not be substantially altered. Fuel shortages, especially of gas, which is taking a larger share of the electricity generating market

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within the UK, are not expected to materialize in the next decade. Short of some major international event leading to a step change in the oil market, the relative price of oil is not expected to significantly change either. Energy-efficiency measures within developed countries and the need for developing countries to use indigenous resources where they have them, because of the inability to pay for fuel imports, will temper demand. Views on the long term have to be adopted by electricity producers and the risk shared with users. Again in a competitive situation the extent to which a producer can stand some of the risks is just one of the pieces of information available when offers are made to users.

The balance could also be disturbed by environ- mental legislation. As previously indicated, our be- lief is that the necessity for energy/carbon taxes is not proven and that they should be viewed as a last resort measure. There is a notable lack of detailed objective analysis on the likely effects of such taxes. Unless such fiscal measures can be shown to be necessary and capable of achieving their objective without unacceptable disruption, the strategy for reducing CO2 emissions should be based on energy- efficiency measures, fuel switching and the develop- ment of alternative CO2 free energy sources. What- ever the outcome, our view is that CHP will find favour in any environmental legislation. Its obvious and dramatic impact upon energy efficiency will continue to be recognized and reinforced, albeit to a degree that is still to be determined.

The privatization of electricity within the UK has certainly provided an impetus to the development of CHP within the UK. This has not been without its downside. The new regime is highly complex and the operation of the pool system has introduced new variations that can be seen as barriers to the de- velopment of CHP. There is also some resistance to the concept of embedded generation within the distribution systems of RECs. Safety and the protec- tion of supply standards in a system which has been

CHP series: development in the UK

designed for oneway power flows have found varying interpretations among the RECs. These problems are being addressed through the lobbying of government, representations to the Office of Electricity Regulation (OFFER) and work within the Distribution Code Review Panel. Recent rulings by OFFER have certainly been in favour of CHP. The nature of the pooling and settlement system within the UK, the transmission use of system charging regimes and the legacy of historical de- velopment of the UK electricity system all shape the current position of CHP within the UK. As such many of the factors are not present in the rest of Europe where several states have always encouraged CHP more actively.

There is, for example, a much more positive approach within Europe towards joint development of heating and electricity systems. Within the UK, the current position is that with the exception of one or two specific cases, the rates of return on heating systems are not considered attractive enough. With CHP forecast to make substantial inroads into the industrial and commercial market sectors, the next stage will be the development of the domestic hous- ing market. Electricity producers such as regional electricity companies will be well placed to service such a market with local authority housing offering probably the best initial entry. Incentives to move into this market will be required, and local author- ities need more freedom to enter into ventures.

Overall, it has been forecast that by the year 2020, 25% of all the electricity produced within the UK could come from CHP. NORWEB, as one of the electricity producers within the UK, expects that whatever the figure, there will be a continuing steady growth in the application of CHP. The be- nefits to the nation are there in terms of conserving energy resources and protecting the environment. The growth of this market represents an opportunity for electricity producers to profitably participate in the development of a more balanced approach to supplying the overall energy needs of the nation.

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