EU ETS Phase II - Treatment of CHP
A member of
EU ETS PHASE II: TREATMENT OF CHP A final report to Defra
August 2005
EU ETS PHASE II: TREATMENT OF CHP
Copyright © 2005 ILEX Energy Consulting Limited All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of ILEX. Important This document contains confidential and commercially sensitive information. Should any requests for disclosure of information contained in this document be received pursuant to the Freedom of Information Act 2000 we request that we be notified in writing of the details of such request and that we be consulted and our comments taken into account before any action is taken. Disclaimer While ILEX considers that the information and opinions given in this work are sound, all parties must rely upon their own skill and judgement when making use of it. ILEX does not make any representation or warranty, expressed or implied, as to the accuracy or completeness of the information contained in this report and assumes no responsibility for the accuracy or completeness of such information. ILEX will not assume any liability to anyone for any loss or damage arising out of the provision of this report.
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EU ETS PHASE II: TREATMENT OF CHP
TABLE OF CONTENTS EXECUTIVE SUMMARY
I
1.
INTRODUCTION AND BACKGROUND
1
2.
EU ETS PHASE I: TREATMENT OF CHP IN THE UK
3
3.
PHASE I TREATMENT IN OTHER MEMBER STATES
9
4.
THE IMPACT OF THE PHASE I NAP ON UK CHP: QUALITATIVE ASSESSMENT
25
RECOMMENDATIONS FOR THE TREATMENT OF CHP IN THE PHASE II NAP
31
IMPLEMENTATION OF ALLOCATION PRINCIPLES
41
ANNEX A – MEETING WITH THE CHPA ON 26 MAY 2005
45
5.
6.
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EXECUTIVE SUMMARY ILEX Energy Consulting Ltd has been commissioned by the Department for Environment, Food and Rural Affairs (Defra) to inform policy on the treatment of Combined Heat and Power (CHP) in the Phase II National Allocation Plan (NAP) of the EU Emissions Trading Scheme (EU ETS). The objectives of this report are to: •
assess the different ways that member states have treated combined heat and power plant (CHP) in their national allocation plans for Phase 1 of the EU ETS;
•
analyse how the EU ETS will impact on CHP in the UK, based on the UK NAP together with market conditions and other policy measures, in Phase 1 and beyond; and
•
establish options for the treatment of CHP in future phases of the scheme which are feasible and balance a range of diverse criteria.
We have considered how the approaches in the six NAPs that we have assessed (Austria, Denmark, Germany, Italy, the Netherlands and Poland) differ from those in the UK. We would emphasise that the wide range of factors affecting the allocations makes it rather difficult to generalise and that the impact on any individual installation could be different to the overall impact. However, we conclude that, to some extent, all of these countries are more generous to CHP in Phase I than the UK. We explored the impacts of the UK’s Phase I approach on CHP plant in the UK at a meeting with members of the Combined Heat and Power Association (CHPA). We have considered how the allocation methodology impacts on: •
the day-to-day operation of CHP plant;
•
investment in new plant; and
•
closure decisions for existing plant.
A full description of the issues that members raised is provided at Annex A. The two concerns that members expressed strongly at the meeting were that: •
allocations for CHP plant under the Phase I NAP are insufficient; and
•
the impact of the Phase I NAP on CHP also arises in part from the treatment of competitors to CHP plant for the production of heat and electricity.
We are of the view that, in principle, the Phase I allocation methodology could have resulted in the effects described above. The Phase I NAP appears to disadvantage CHP, at least in some instances. However ILEX has not attempted to quantify the impacts as part of this study and therefore it is difficult to comment on their magnitude. We have presented a range of different approaches for the treatment of CHP in Phase II, drawing on the treatments in other Member States, the concerns raised by CHPA members and our own ideas. We have evaluated each of these approaches against i
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EU ETS PHASE II: TREATMENT OF CHP Defra’s own criteria for allocation1, taking into account the constraints of the Emissions Trading Directive. Our recommendation is that in Phase II, CHP should receive a combined allocation – to cover the allocation for an equivalent electricity-only power station together with the allocation for equivalent heat-only boiler (HOB) plant. We term this the ‘principle of combined allocation’. We have developed this recommendation in order to reflect the ‘carbon advantage’ that the combined generation of heat and power at a CHP plant exhibits over the separate production of heat and power in a carbon market without free allowances. We consider that this approach addresses both of the key areas of concern that CHPA members raised and could also be made consistent with both Defra’s criteria and the Directive conditions. One of Defra’s key concerns is how any recommendation could be implemented. We have taken a first step towards identifying some of the practicalities that would need to be addressed in order to implement this approach. We have noted that it would be more straightforward to apply where installations’ allocations are calculated using benchmarks than under a grandfathering methodology. Our review of the different National Allocation Plans has highlighted that four of the six selected member states studied have already employed some form of combined allocation for CHP in Phase I. These are Denmark and Italy (for both incumbents and new entry), Germany (for new entry only) and the Netherlands (certainly for incumbents). The others (Poland and Austria – and Germany for incumbents) apply some form of ‘bonus’ to the free allowances for CHP. We have included this option as our secondbest approach to allocation, since, depending on the way that the adjustments or bonuses were calculated, this principle could approximate the incentives provided under our recommended approach and might be more straightforward to implement. We would emphasise that unless one of the objectives of the allocation methodology is to provide CHP with a certain level of allocation and this is considered explicitly in its development, it is possible that the position of CHP will not be improved as compared to Phase I.
1
A list of these criteria is presented at paragraph 5.4 on page 31.
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1.
INTRODUCTION AND BACKGROUND
1.1
ILEX Energy Consulting Ltd has been commissioned by the Department for Environment, Food and Rural Affairs (hereafter ‘Defra’) to inform policy on the treatment of Combined Heat and Power (CHP) in the Phase II National Allocation Plan (NAP) of the EU Emissions Trading Scheme (EU ETS).
1.2
This final report presents a summary of how CHP is treated under Phase I of the EU ETS in the UK and reviews the different approaches adopted by other Member States in their treatment of CHP plant. This report also provides some qualitative analysis of the effect that the EU ETS has had on the market for CHP in the UK to date. Finally, we present some options for the treatment of CHP in the Phase II NAP, using a range of criteria to evaluate their impact.
1.3
One of the purposes of this report is to inform the preparation of a consultation paper on key issues for the UK Phase II NAP, to be published during the summer of 2005.
Background 1.4
The EU Emissions Trading Scheme (EU ETS) began on 1 January 2005 and requires combustion installations over 20MWth input capacity to monitor and report their annual carbon dioxide emissions and to surrender allowances to cover those direct emissions each year. The scheme is divided into phases; the first of these, Phase I, is three years in length (2005–7), while the second, Phase II, will run for five years (2008–12).
1.5
The EU ETS Directive requires that, for at least the first two phases of the scheme, a majority of allowances be allocated for free. Each member state is required to draw up a National Allocation Plan (NAP), which determines the number of free allowances to be allocated to each incumbent installation, for each year of any given phase. The NAP also defines the rules for allocating allowances to new installations.
1.6
The UK finalised its NAP for Phase I in May 20052. It sets out the way that the UK had interpreted the guidelines laid out in the Directive and the choices it has taken in determining the number of allowances to allocate to each installation. The NAP for Phase II must be submitted to the Commission by June 2006. In order to finalise the allocation methodology for that NAP, Government officials will consult with stakeholders on the options available to them, in the light of both the Directive and UK CHP policy.
2
EU Emissions Trading Scheme: Approved National Allocations Plan 2005 – 2007. Defra, May 2005.
1
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EU ETS PHASE II: TREATMENT OF CHP 1.7
The UK Government target is for 10GW of Good Quality CHP capacity by 2010. Good Quality CHP refers to CHP generation that is energy efficient in operation. The CHP Quality Assurance programme (CHPQA), launched in May 2000, determines that quality by providing a practical method for assessing all types and sizes of CHP scheme. This determination is based on several key parameters: •
the Quality Index – indicator of the energy efficiency and environmental performance of a Scheme, where the general form of the QI definition is:
QI = (X * ηpower) + (Y * ηheat) where:
1.8
X
coefficient related to alternative power supply options
Y
coefficient for heat generation, related to alternative heat supply options
•
Power Efficiency (ηpower) - the total annual power output divided by the total annual fuel energy input; and
•
Heat Efficiency (ηheat) – the total annual heat output divided by the total annual fuel energy input.
Good Quality CHP is defined as having a Power Efficiency greater than or equal to 20% and a Quality Index greater than or equal to 1003.
Structure of this report 1.9
Chapter 2 sets out the way that allocations to EU ETS installations that contain some CHP have been calculated under the UK Phase I NAP and presents a summary of the current CHP situation in the UK.
1.10
Chapter 3 reviews how CHP is treated in six other Member States. This includes a comparison of the treatment of CHP in the NAPs and also in a wider policy context.
1.11
Chapter 4 provides some qualitative analysis of how UK CHP has fared under the EU ETS so far. This is based on a workshop, held at the CHPA offices, with some of the key CHP players currently operating in the UK market.
1.12
Chapter 5 presents a range of alternative options for the treatment of CHP in the Phase II NAP, using the criteria suggested by Defra and ourselves.
1.13
Chapter 6 takes a first step towards identifying some of the practicalities that would need to be addressed in order to implement the different options.
1.14
Annex A provides a full report of the workshop held at the CHPA offices on 26 May 2005.
3
The CHPQA Standard. Quality Assurance for CHP, November 2000.
2
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2. 2.1
EU ETS PHASE I: TREATMENT OF CHP IN THE UK This chapter presents a summary of the current CHP situation in the UK and then describes the way that allocations to EU ETS installations that include some CHP have been calculated in the UK Phase I NAP.
Current CHP situation in the UK 2.2
Figure 1 presents the growth in the number of installations in the UK over recent years, starting from 1999. It demonstrates that the total number of schemes over 10MWe remained at around 70 during this period. The main growth of CHP has been in the range of 0.1MWe – 0.999MWe, where the number of schemes has increased from 509 to 624, reaching a high of 667 schemes in 2000. Figure 1 – Growth in the number of CHP schemes in the UK 1,800 1,600
No of installations
1,400 1,200 1,000 800 600 400 200 1999 Less than 100kWe
2000
2001
100kWe to 999kWe
2002 1MWe to 9.9MWe
2003 > 10MWe
Source: Digest of UK Energy Statistics (DUKES)
2.3
CHP schemes are not identified explicitly in the list of installations for the EU ETS. We estimate4 that approximately 170 schemes are included in the scheme. Of these, around half are classified in climate change agreement (CCA) sectors, approximately 10 in the power stations sector and the remainder in non-CCA sectors.
4
Our estimates are based on information provided by Defra and the description of installations in the installation list. They are included only in order to provide an indication of the number of installations affected by the issues reflected in this report.
3
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EU ETS PHASE II: TREATMENT OF CHP Allocation to existing CHP plant that commenced commercial operations prior to 2003
2.4
As a rule, the allocation to CHP plant is calculated in the same way as that for all other installations. The methodology is based on a two-stage approach: first, the number of allowances to allocate to any given sector is calculated and then this quantity of allowances is shared between the installations in that sector.
2.5
The number of allowances to allocate to a majority of sectors are calculated using: the 2002 emissions of all installations in the sector (including CHP); sector growth rates; sector CCA and, in the case of the power stations sector5, a reduction factor to reflect the contribution of the EU ETS to UK climate change targets.
2.6
The sector in which an installation is classified therefore determines the number of allowances that it has access to. As for all other installations, the sectoral classification of a CHP plant depends on the sector in which it is modelled in DTI’s updated energy projections (UEP). This is determined by: •
whether it is listed as a power station in DUKES Table 5.116; and
•
the sector to which it provides a majority of its energy output.
An installation’s allocation is also determined by: •
whether it is part of a climate change agreement (CCA).
2.7
For instance, where a CHP plant provides a majority of its output to the food and drink sector, is not listed in DUKES table 5.11 and is covered by the Food and Drink Federation (FDF) CCA, it will be included in the sector Food and Drink – FDF. If it is not covered by a CCA, it will be part of the FDT – non-CCA sector (where FDT is food, drink and tobacco, one of the UEP sectors).
2.8
On the other hand, if a CHP installation is listed in DUKES table 5.11, it will be classified in power stations. This approach was taken in order to ensure that the EU ETS power stations sector matched the UEP power stations sector, so that the UEP projections could be used directly in the allocation of allowances to these installations7. As a rule, these are large CHP plant which export a majority of their power to the grid.
5
Some CHP installations are included in the power stations sector.
6
The Digest of UK Energy Statistics, published by DTI. Table 5.11 lists all UK power stations with a capacity of at least 1MW and publicly available information.
7
Further detail on the methodology used for the power sector can be found on page 3 of http://www.defra.gov.uk/environment/climatechange/trading/eu/nap/pdf/annexb.pdf.
4
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EU ETS PHASE II: TREATMENT OF CHP 2.9
The sector allocation is divided between the installations classified in each sector, using each installation’s ‘relevant emissions’ during the baseline period8 as the basis for its share. Thus an installation’s allocation also depends on the relevant emissions of each of the other installations in its sector.
2.10
It is worth noting that since incumbent CHP installations are treated in the same way as all other installations, the presence (or absence) of good quality CHP capacity at an installation is not considered explicitly in the incumbent allocation calculation. Allocation to existing CHP plant that commenced commercial operations during 2003
2.11
Since there is only limited historical information for installations that started operation towards the end of the baseline period, it was not considered appropriate to use the methodology described above for them.
2.12
Instead, allocations are calculated using a benchmarking approach developed by DTI. This is determined by the following formula: Allocationi = Ci * UHind * 8760 * EFgas/ηBMTEC
Where: i
(subscript) is an index for the installation;
Ci
is the installation-specific power output capacity QPC in MWe, taken from the CHP QA certificate;
UHind is the average load factor based on an estimation of the heat load for the sector that receives the heat; EFgas is the emissions factor of natural gas (tCO2/MWh); and
ηBMTEC is the technology specific net power efficiency9. 2.13
Each installation is classified in the sector to which it provides the majority of its energy output. Allocations to installations classified in the power stations sector are adjusted downwards by a standardised factor to reflect the more stringent cap
8
An installation’s relevant emissions are average emissions between 1998 and 2003, dropping the lowest year and all zero years. Rules apply for installations that changed significantly, rationalised or commissioned during the baseline period.
9
The technology specific net power efficiency values, which are more or less Best Available Technology (BAT) based, are provided in the FES report entitled “EU Emissions Trading Scheme – calculating the free allocation for new entrants, November 2004” – http://www.dti.gov.uk/energy/sepn/allocation_report.pdf
5
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EU ETS PHASE II: TREATMENT OF CHP level for that sector. Allowances for this kind of installation are also taken from the sector total. Allocation to new entrant CHP plant that commenced commercial operations during or after 2004
2.14
In the UK, new entrants are defined as installations that commenced commercial operations after 31 December 2003. The UK has set aside a number of allowances to allocate to such installations in a new entrant reserve (NER). A portion of the NER is ring-fenced for allocation to good quality CHP.
2.15
The allocation to an individual new entrant CHP plant is calculated using the benchmarking methodology described in paragraph 2.12 above. Allocations to new entrant installations classified in the power stations sector are also adjusted by a standardised factor to reflect the more stringent cap level for that sector. The allowances are taken from: •
the ring-fenced CHP reserve; or
•
the generic NER if the CHP ring-fence runs out; or
•
if there are no allowances left in the reserve at all, the new entrant must buy its allowances, but will be kept in a queue and may receive some allowances for free if any are returned through plants closing.
Allocation to installations that change their good quality CHP capacity during Phase I
2.16
Where an installation’s installed good quality capacity increases during Phase I, it may be eligible for additional allowances from the NER. This is true for installations whose initial allocation was calculated using both the incumbent and benchmarking methodologies. The change in good quality capacity would need to be certified by the CHPQA team. Allowances for this kind of change are also taken from the NER. Interaction between CCA targets and EU ETS allocations
2.17
The Directive includes provision for Member States to temporarily exclude (or opt out) from Phase I installations that are subject to equivalent national policies governing their emissions. The UK submitted opt out applications for those installations that are covered by CCAs or the UK ETS and that indicated they would rather be excluded.
2.18
One of the reasons that CCA targets were used in the sector calculations was in order to show equivalence between the EU ETS and national policies, to strengthen the opt out application. Temporary exclusion will not be possible in Phase II, however the use of CCA targets may still be considered appropriate, for instance to reflect energy commitments made outside the EU ETS in sector allocations.
6
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EU ETS PHASE II: TREATMENT OF CHP 2.19
Where the installations covered by a CCA fall into a number of UEP sectors, there will be a corresponding number of EU ETS sectors. For instance, the Chemical Industries Association CCA covers installations classified in Chemicals, Refineries, Nuclear Fuels and Food and Drink for the purposes of the EU ETS. The large number of combinations of CCA target and UEP sector, means that, in principle, CHP installations could fall into any one of 50 or so EU ETS sectors. Summary of drivers that impact on allocations to CHP for Phase
2.20
The methodology described above highlights that there are a wide range of factors that determine the allocation to CHP plant during Phase I, some of which are installation-specific. The key drivers for determining a CHP’s allocation allowance are represented in Figure 2. Figure 2 – Determinants of UK CHP plant allocations for Phase I
Total sector allocation Determined by: • installations in sector • 2002 emissions • sector growth rates • power stations cut • CCA targets
Sector contribution to NER Determined by: • known new entrants • sector growth rates • requirement for CHP ringfence
Individual new entrant CHP allocation Determined by: • benchmarking methodology (installation capacity, technology type and sector)
Allowances for sector’s 2003 installations Determined by: • number and type of 2003 installations • benchmarking methodology
Individual 2003 CHP allocation Determined by: • benchmarking methodology (installation capacity, technology type and sector)
Allowances for sector’s incumbent installations Determined by: • total sector allocation, less sector contribution to NER and allocations to 2003 installations
Individual incumbent CHP allocation Determined by: • installation’s share of the sector’s relevant emissions • number of allowances available for incumbent installations
Source: ILEX
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3.
PHASE I TREATMENT IN OTHER MEMBER STATES 3.1
This chapter presents a review of the treatment of CHP for Phase I in other countries. For this part of the analysis we have looked at six other Member States under the EU ETS, namely: Germany; Poland; Denmark; Austria; the Netherlands; and Italy.
3.2
We have selected these countries based on a range of criteria. These include the following:
3.3
•
fuel source – countries where a high proportion of CHP is fired by fossil-fuel sources (as opposed to renewable sources), for example Germany, were preferable on the basis that parts of their NAP could possibly be transposed to the UK where the majority of CHP plant are also fossil-fired;
•
volume of CHP plant – countries where CHP plant are prevalent, for example the Netherlands or Italy;
•
approved NAPs – countries where the NAP had included specific treatment for CHP and had been approved by the EC were felt to be more appropriate for this study;
•
benchmarking methods used, for example the treatment of both heat and electricity separately; and
•
the availability of additional allowances for CHP installations, for example Austria and Poland.
We have compared both the treatment of CHP in the NAPs and also in a wider policy context, in order to inform our understanding of how different, or similar, treatment is elsewhere.
Background on the uptake of CHP in other Member States 3.4
As a first step, we have compared the contribution that CHP production makes to total electricity production on a percentage basis. Figure 3 shows how combined heat and power plant have developed and contribute to a much greater extent in, for instance, Denmark and the Netherlands as compared to the UK. Figure 4 demonstrates how the growth in CHP production between the years 1996 – 2000 varies from country to country. For example, the Netherlands, Germany and Italy have experienced more aggressive growth in CHP production than countries such as the UK or Austria.
3.5
This differences emphasise how even before the EU ETS was established, the uptake of CHP varied significantly between countries. It has depended on the market conditions for investment, incentives to promote the technology, the availability of suitable host sites and the availability of the infrastructure needed to design, build, run and maintain the plants.
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60% 50% 40% 30% 20% 10%
U K
Ita ly
a A
us
tri
y G er m an
N
Po la n
nd s et he rla
m D en
d
0% ar k
CHP electricity as a percentage of total electricity production.
Figure 3 – Comparison of contribution that CHP makes to total net electricity generation across the six member states and the UK
Source: CHP Statistics and impacts of the Gas Directive on the future development in Europe (CHPSTAGAS). Institut Walloon and CEREN, 2000.
Figure 4 – Comparison of growth in gross electricity generation in CHP plant (TWh) across the six member states
Gross CHP electricity generation (TWh) .
70 60
1996 1997 1998 2000
50 40 30 20 10 0 Denmark Netherlands Germany
Poland
Austria
Italy
UK
Source: CHP Statistics and impacts of the Gas Directive on the future development in Europe (CHPSTAGAS). Institut Walloon and CEREN, 2000. An energy overview of the republic of Poland. US DoE, 2004.
10
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EU ETS PHASE II: TREATMENT OF CHP 3.6
The extent to which national governments take measures to incentivise CHP will depend on where CHP fits in their wider energy policy objectives. In order to inform our analysis, we have compared each of the six countries’ stated intention to promote CHP (or otherwise). Table 1 shows that, in absolute terms, the UK target is more ambitious than the majority of the other six countries, especially when considered in the light of historic trends. Table 1 – Comparison of ambitions for CHP in different member states
Country
Target for CHP
Denmark
Adopted a target of 1.4GW of small-scale CHP in March 1990 (has been largely reached). (In aggregate, large, medium and small-scale CHP constitutes almost three quarters of electricity generation capacity in Denmark).
The Netherlands
•
8GW by 2000 (installed capacity in the Netherlands today remains around this level).
•
15GW by 2010.
Poland
Increasing obligations on energy companies that produce or trade electricity to purchase only electricity produced in CHP processes. The obligation is 12.4% in 2004 and rises to 16% by 2010. (CHP contributes approximately 15% of electricity generation in Poland, see Figure 3).
Germany
Climate protection target to reduce annual CO2 emissions between 1998 and 2005 by 10 million tonnes, and by 2010 by at least 20 million tonnes, due to use of cogeneration.
Austria
No specific target.
Italy
No specific target.
UK
Target of 10GWe of installed Good Quality CHP capacity by 2010 (compared to an installed capacity of approximately 5GW in 2004).
Source: Renewable Energy Policy Review for Denmark, the Netherlands, Germany, Austria and Italy, Europrog 2004, DUKES and ILEX.
Differences between other member states’ CHP policy 3.7
Given the different degrees of commitment to incentivise CHP across the EU, we might expect that policies to promote CHP also differ significantly. Table 2 compares at a high level the different incentives and opportunities available to CHP in the countries we have studied. It shows how even where countries are not very ambitious, a range of policies are in place.
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EU ETS PHASE II: TREATMENT OF CHP Table 2 – Comparison of key policies to incentivise CHP in different member states
Country
Target for CHP
Denmark
Large scale CHP with district heating was made a local natural monopoly exempted from competition along with economic and regulatory incentives to support its implementation.
The Netherlands
A temporary tax refund for cogeneration power was introduced in the Regulatory Energy Tax in 2000. For the years 2001 and 2002, the refund was €0.057/kWh. To be entitled to the refund, the plant must have a minimum efficiency of 60%.
Poland
Increasing obligations on any energy companies(which produce or trade electricity) to purchase electricity produced in CHP processes. The obligation is 12.4% in 2004 and rises to 16% by 2010.
Germany
Agreement between the Federal Government and German industry on the reduction of CO2 emissions and promotion of heat-power cogeneration, as a supplement to the climate protection agreement of 9 November 2000 and the Act on heat-power cogeneration (KraftWärme-Kopplungsgesetz).
Austria
Continuation of public remote heat and power aid tariff (additional margin over the market price, electricity remains property of the CHP operator).
Italy
Decision 6/92 of the Comitato Interministeriale dei Prezzi (CIP) implemented Law 9/91 giving incentives to renewables and, more importantly, to plants using conventional sources but with a high efficiency, mostly CCGTs with co-generation of heat (i.e. CHP). This has now been superseded by an obligation on all conventional generators to acquire a percentage of their output as renewable (currently at 2.7%) or to buy green certificates to the same amount. CHP plant are exempt from this obligation.
UK
• • • • • •
10
Exemption from the Climate Change Levy for all Good Quality CHP fuel inputs and electricity outputs. Climate Change Agreements to provide an incentive for emissions reductions. Enhanced Capital Allowances (ECAs) to stimulate investment. Business Rates exemption for CHP power generation plant and machinery10. Reduction in VAT on certain domestic micro-CHP installations. Grant support through the Community Energy programme to encourage CHP in community heating schemes.
Some CHPA members appear to have found it difficult to access these exemptions.
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Differences between other member states’ NAPs 3.8
We have focussed our analysis on six countries, chosen to provide a good overview of the different approaches to CHP allocations used in Phase I. Table 3 sets out the different questions we have considered in reviewing the way each country allocates allowances for free for Phase I. Table 3 also presents information gathered to answer these questions for each of the six member states and compares them to the situation in the UK. In some instances, the necessary information could not be gleaned from the official NAP documentation for the particular country concerned. The following sections pull out the more interesting points regarding the six selected country NAPs. CHP installations included in the scheme
3.9
Across the six countries an explicit definition of a CHP plant is provided in the NAPs of the Netherlands, Poland, Germany, Austria and Italy. However, definitions vary; Italy simply states that CHP is an installation that produces heat and electricity simultaneously, while others are more closely defined, such as that used in the German NAP, which sets down the domestic law with which CHP has to comply.
3.10
CHP is covered by a range of sectors under the EU ETS, whilst more general classifications for an installation covered by the EU ETS largely follow that provided by the EU Commission. Allocation methodology for incumbent CHP plant
3.11
With respect to allocation methodologies for incumbent CHP plant, several countries have made an explicit distinction between heat and electricity production. For example, Denmark has allocated allowances for electricity production using data for historical electricity production, whilst heat production has been allocated allowances on the basis of historical emissions. However, it could be inferred that this has been done due to the extensive use of district heating prevalent in Denmark with its low historic emissions.
3.12
In Italy, similar distinctions regarding allocation methodology have been made. The allocation criteria for electricity production is based on expected production, whilst allowances to cover heat production are based on historical emissions. For heat and electricity production, their allowances have been based on historical production. Italy provides even further distinctions, whereby cogeneration installations that have a Thermal Limit (LT11) of less than 15% receive an allocation based on the same criteria used for plants producing only electricity. For cogeneration installations with a LT of more than 15% allowances are based on a formula that takes into account electricity and heat production over the
11
The Thermal Limit is based on net thermal energy over net electrical energy plus net thermal energy, as defined by the methodology defined by Decision n.42/02 of the Energy Authority.
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EU ETS PHASE II: TREATMENT OF CHP historical reference period, actual electricity and heat production, an emissions factor for the production of heat by a reference boiler and an energy saving index. 3.13
The other main feature of some of the NAPs is the use of a co-generation bonus for incumbent CHP plant, whereby these particular installations have access to additional allowances. This includes the countries Poland, Austria and Germany. For example the German bonus for Phase I has been set at 27tCO2 equivalent per GWh, which equates to a total of approximately 4.5MtCO2 or 1.5 MtCO2 per year. The intention of this additional allocation is to offset any negative incentives for existing CHP installations. Allocation methodology for new entrant CHP plant
3.14
With regard to the allocation methodology for new entrants, it appears that the majority of the six selected member states do not have a specific ring-fenced new entrant reserve for CHP.
3.15
The only exception to this rule is Poland, where the rules for new CHP installations are identical to CHP rules for incumbents. The Polish cogeneration bonus is applicable to those installations that are able to demonstrate an energy efficiency of at least 65%, and is calculated according to the following formula: A_KOG INST = kKOG * E_KOG INST * TP Where: A_KOG INST allowances allocated for the period of 2005 – 2007 as a bonus for co-generation; kKOG
efficiency adopted for the calculation of the bonus for the reductions achieved by co-generation, kKOG = 0.5;
E_KOG INST effects of CO2 emissions reductions, measured in annual values, which were achieved by co-generation at installation INST; and TP
number of years in period P for which allowances are allocated.
Equity across different types of CHP
3.16
In comparing how the treatment of new entrant plant compare with incumbent CHP, it is clear that different methodologies have been used in each of the NAPs for the six selected member states. For the most part, incumbent CHP have had their allowances allocated on historical production or/and historical emissions, whilst new entrants have had their allowances based on either Best Available Techniques (BAT) standards or benchmarking formulas. This would be expected given that historic data are available for existing plant but are unlikely to be available for proposed plant or for plant that have just begun to commence operations.
14
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Interestingly where a co-generation bonus have been used, similar formulas appear to have been used for both incumbent and new entrant CHP. For example, in Poland the co-generation bonus is granted (on the principles in paragraph 3.15) for both types, whilst in Austria the allocation formula for both incumbents and new entrants is: Allocation = allocation basei * WFi * PFi * EF sector WFi
Growth factor of the industry based on business-as-usual CO2 emissions from a study undertaken by the Austrian Institute of Economic Research (WIFO) and the consultancy agency KWI.
PFi
The reduction potential of installations.
EF sector
The compliance factor matches the quantity of allowances allocated at industry level to the allowances available to the sector and is the same for all industries of a given sector.
whereby CHP plant can get a CHP bonus as part of their potential factor12. Summary of key differences
3.18
Table 3 details the features of the different NAPs that we have evaluated. In Chapter 5 we consider how some of the different treatments for CHP under the six selected member states could be used for the UK during Phase II.
12
If an installation qualifies for the co-generation bonus, the necessary reduction is halved (e.g. -2% instead of -4%) for the relevant emissions (in line with the CO2 intensity of the fuel input).
15
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Table 3 – Comparison of key features in different Phase I NAPs
Denmark
The Netherlands
CHP installations included in the scheme Definition of CHP No definition Installation defined as provided in NAP. either a WKC or 13 WKK . In both cases the production of heat and power is combined, but the function at the installation differs.
Poland
Germany
Austria
Installations which produce electricity and heat in a combined system and demonstrate an energy efficiency of at least 65%.
Defined in Act referred to in NAP what does or does not constitute a CHP 14 installation .
Cogeneration should have at least 5 % primary energy savings compared to the separate production of power and heat.
Italy
UK
A plant producing simultaneously power and heat.
Definition of a Good Quality CHP plant provided in Annex to main NAP.
13
The function of a WKC is to supply electricity and steam and/or warm water to production units that belong to the installation or to other installations or to district heating. A WKK is integrated into a production unit’s process.
14
Act on the Preservation, Modernisation and Development of Combined Heat and Power Generation (Combined Heat and Power Act; KWKG) of 19 March 2002.
16
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Denmark
The Netherlands
Definition of EU ETS installation Used the EU Based on the list of Commission's installations covered by interpretation of Annex 1 of the EU which installations Emission Trading are covered by the Directive. Those EU ETS. which emit less than 25ktCO2 p.a. have the option to remain outside for Phase I.
Poland
Germany
Grouped into sectors on the basis of their main market activities. Combustion installations are assigned to the sector to which they serve.
Based on the Federal Emission Control Act taking into account the limit values set by the EU Emissions Trading Directive.
Is CHP included as part of a wider installation? Not defined in Can be Yes, when it is a NAP but based on part of an industrial the installation list installation. it can be.
Italy
UK
Used the EU Commission's interpretation of which installations are covered by the EU ETS.
Classed in a reference activity for which a corresponding allocation has been made. Activities cover energy industry, production and processing of ferrous materials, minerals industry and others.
Based on the sector in which installations are modelled for DTI’s UEP. Where relevant, an installation’s CCA has also been considered.
Yes, when it is a part of an industrial installation.
Yes, when it is a part of an industrial installation.
Yes, when it is a part of an industrial installation.
Not defined in NAP but based on the installation list it can be.
Yes
Yes
Yes
Yes
Is CHP from a range of sectors included in the scheme? Yes Yes Yes
17
Austria
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Denmark
The Netherlands
Poland
Allocation methodology for incumbent CHP plant Have CHP plant been treated any differently to non-CHP plant? No. Allocation for No. WKCs are treated Yes. Every CHP CHP will be made same as electricity installation gets a separately for production plants. cogeneration bonus. power and heat. WKKs are treated similar to other combustion plants.
Does the allocation to CHP vary by sector? No Only exemption is if a WKK plant is part of a BM or LTA 15 agreement .
15
No
Germany
Austria
Italy
UK
Yes. CHP-plants get a special (additional) allocation set at 27tCO2 equivalent per GWh
Allocation = Basic allocation * Potential factor * Filling factor. CHP can get a bonus as part of their potential factor.
Formula for allocation to installations with a Thermal Limit >= 15% during the historical reference period, takes into account expected power and heat production separately.
No. Installations have been allocated allowances in the same way as installations in all other sectors.
No
Filling factors are different for every sector, thus if CHP happens to be in a different sector it may receive a different allocation.
Yes. Depending on sector allocation can be based on either historical production or historical emissions.
Yes. Each sector total is determined by a range of factors (see Chapter 2 for further details).
Benchmarking Energy-Efficiency covenants (BM) and Long-term agreements (LTAs) requires companies in the Netherlands to be among the best in the world in terms of their energy efficiency.
18
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Denmark
The Netherlands
Poland
Germany
Austria
Italy
UK
Combustion installations that produce energy to meet the needs of a particular industrial installation are classified to that particular industry sector.
No information provided in the NAP.
No information provided in the NAP.
Stand-alone CHP belongs to the energy activities sector. CHP operating as part of an industrial process is classified in the industrial sector.
CHP installations are placed in sectors according to where their emissions are modelled by the DTI.
Does the allocation methodology differentiate between good quality/efficient CHP? Incumbent: no Incumbent: WKCs no Incumbent: early Incumbent: no distinction. energy efficiency action and CHP distinction. New CHP: Energy parameter. WKKs: the plant bonuses New CHP: Energy efficiency is taken energy efficiency efficiency is taken understood to be into account, factor is used. into account, because plant specific. because benchmarking New CHP: The New CHP: Energy benchmarking method is used. treatment is the same efficiency is taken method is used. as for incumbent CHP. into account.
Incumbent: no distinction. New CHP: Energy efficiency is taken into account, because benchmarking method is used.
New and Incumbent CHP: yes, allocation depends on thermal limit and the technology mix of the installation.
Incumbent: all installations treated the same. New entrants: benchmarks take good quality capacity into account.
The separate CHP bonus.
Definition of CHP differs from UK. Allocation methodology is done for heat and electricity separately.
N/A
How have CHP been classified into sectors? No information WKCs are treated provided in the separately. WKKs are NAP. part of the industrial sector for which they produce energy.
What makes the treatment different to that in the UK? Allocation Explicit distinction and The separate methodology is treatment of standcogeneration bonus. done for heat and alone CHP plant electricity compared to those that separately. are integrated in the industrial process.
The special (additional) allocation for CHP and the different treatment of CHP compared to other electricity plant.
What makes the treatment the same as in the UK?
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Denmark No special bonus for CHP.
The Netherlands No special bonus for CHP.
Poland CHP plant are allocated to the industry sector that they serve.
Allocation methodology for new entrant CHP plant How is a new entrant defined? New entrants are Known new entrant: a Installations that companies which began operation or new installation or extension to an existing are neither on the were significantly unit for which a permit list of installation expanded between covered by the NAP 1 January 2002 and application or ‘report’ nor on the list of was submitted before the introduction installations date for the Danish 30/11/2003 and has a proposed to start-up date before 1 law on CO2 exclusion from ETS. January 2008. allowances (31 Unknown new entrant: March 2004) an installation or together with production unit that on expected new 30 November 2003 is entrants in 2005 – not yet known to the 2007. competent authority. Do CHP installations have preferential access to the NER? No. Allowances No No. Allowances allocated on a "first allocated on a "first come, first served" come, first served" basis. basis.
Germany
Austria
Italy
UK
Treatment is not the same as the UK.
Treatment is not the same as the UK.
No special bonus for CHP.
N/A
New entrants are installations commissioned from 1 January 2005 onwards. Capacity extensions in existing installations are similarly treated as new entrants, although this classification will refer exclusively to the extension and not to the installation in its entirety.
No definition is provided.
New plants – a newly built plant that is permitted. Repowering: substantial changes to a pre-existing plant that requires an update of the existing permit. Return to operation – restarting activities after more than one year. All changes must be after 31/12/04.
Installations that commenced commercial operations after 31 December 2003.
No
No. Allowances allocated on a "first come, first served" basis.
Electricity activities sector has biggest NER, but CHP doesn't have any special position.
Yes. Priority access to a ring fenced proportion of the NER is given to Good Quality CHP.
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Denmark
The Netherlands
Poland
Will Government buy additional allowances if the NER runs out? The system No indication in No. The ‘allocation administrator may NAP that Denmark reserve’ is used to use non-ETS would buy reserve and allocate emissions reserve (if additional CO2 emission such a reserve allowances. allowances to exists), or will buy ‘unknown new entrants’ once shown to allowances on the market for new comply with the entrant allocations. definition and characteristics of ‘known new entrants’. Have CHP plant been treated any differently to non-CHP plant? No. WKCs are treated No. Allowances are Allowances are similar to electricity allocated to new allocated in production entrants on the basis proportion to new installations. WKKs of their justified production unit's production plans and capacity. For CHP have same rules as other combustion specific emission units, the factors, on the electricity capacity plants. condition that they is calculated with conform to the BAT full heat 16 (best available production . technology) standards.
16
Germany
Austria
Italy
UK
If investment turns out to be more dynamic than predicted when the allocation plan was drawn up, the operator must purchase emission allowances from the market.
No indication in NAP that would buy additional allowances. If NER is not fully used by 31 November 2007, surplus can be auctioned.
If the reserve runs out, the competent authority will purchase allowances on the market and may sell any surplus left in the reserve at the end of the Phase, to recover the cost of any such purchased allowances.
No. If the NER runs out and not enough becomes available from those surrendered following closure of installations, operators will have to buy allowances from the market.
Allocation based on a dual benchmark; a power benchmark determines the power output allocation, the heat benchmark the heat output allocation. All other rules (e.g. ex-post adjustment) apply to CHP new entrants too.
Allocation methodology not specified, but it is likely that the same formula as for existing plants is used i.e. using the formula: Allocation = Basic allocation * Potential factor * Filling factor.
Yes. For plants producing simultaneously electricity and heat, allocation will take into consideration their role within the national electricity system and thus the balance between electricity and heat production.
No. Installations have been allocated allowances in the same way as new entrants in all other sectors using a benchmarking approach (although specific benchmarks do exist for good quality CHP).
i.e. for extraction plants, electricity capacity is calculated with maximum heat yield as opposed to capacity in condensing mode.
21
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Denmark
The Netherlands
Does the allocation to CHP vary by sector? No No
Poland No
How have CHP been classified into sectors? No information WKCs are treated Similar to existing provided in the separately. WKKs are installations. NAP. part of the industrial sector in which they produce energy.
What makes the treatment different to that in the UK? No ring-fenced The division of new The Government CHP reserve and entrants to known and intends to buy more the allocation unknown. The allowances if the method for a allocation appears not NER is used up. cogeneration unit. to be based on benchmarking. No ring-fenced CHP reserve.
Germany
Austria
Italy
UK
No
NER varies for each sector. Allocation to CHP may vary depending on which sector it is in.
The sizes of new entrant reserves are different for different sectors. The formula is the same for all sectors.
Yes. Benchmarks include average load factor based on the heat load for the sector that receives the heat.
Similar to existing installations.
Similar to existing installations.
Similar to existing installations.
CHP allocations are determined in part by the sector to which an installation provides the majority of its energy output.
The definition of a new entrant is slightly different. No ring-fenced CHP reserve.
All sectors have a NER of 1%, although the NAP does not specifically state how this is allocated.
The Government intends to buy more allowances if the NER is used up.
N/A
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EU ETS PHASE II: TREATMENT OF CHP
Denmark
The Netherlands
Poland
Germany
Austria
Italy
UK
There is a ringfenced reserve for CHP (and for all other branches). There is also a generic NER. For new installations the allowances are calculated using the benchmarking methodology.
If there are no allowances left in the NER, the new entrant must buy its allowances. For new installations the allowances are calculated using the benchmarking methodology.
If there are no allowances left in the NER, the new entrant must probably buy its allowances.
Treatment is not the same as the UK.
N/A
The basic allocation is calculated for the existing plants from the reference period emissions and for new entrants from the plant capacity, average capacity usage of the sector, average capacity usage of the plant and expected emissions of the plant. Otherwise formulas for both are very similar.
Existing plants: based on emissions in the reference period. New entrants based: on expected emissions. Both formulas have the parameters λt (= emission factor for the production of heat by the reference boiler) and IRE (= energy saving index).
New entrant allocations are based on expected emissions using standardised assumptions. Incumbent allocations are derived from sector totals and historic emissions and are therefore likely to vary more widely between similar installations.
What makes the treatment the same as in the UK? If there are no allowances left in the NER, the new entrant must probably buy its allowances.
If there are no allowances left in the NER, the new entrant must probably buy its allowances.
How does the treatment of new entrant CHP compare with incumbent CHP? The allocation of The difference Existing plants: Existing plants: existing plants is between the electricity allocation based on based on emissions allocation is based emissions from energy allocation formulas in the reference is that the basic on historical and heat production period, a compliance allocation of the electricity averaged over 2001 factor for the existing plants is production, heat and 2002, production allocation period and based on emissions allocation is based growth and allocation a special allocation in the reference on historical factor. New entrants: for CHP. The period and the emissions. WKKs based on
EU ETS PHASE II: TREATMENT OF CHP A final report to Defra
August 2005
EU ETS PHASE II: TREATMENT OF CHP
Copyright © 2005 ILEX Energy Consulting Limited All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of ILEX. Important This document contains confidential and commercially sensitive information. Should any requests for disclosure of information contained in this document be received pursuant to the Freedom of Information Act 2000 we request that we be notified in writing of the details of such request and that we be consulted and our comments taken into account before any action is taken. Disclaimer While ILEX considers that the information and opinions given in this work are sound, all parties must rely upon their own skill and judgement when making use of it. ILEX does not make any representation or warranty, expressed or implied, as to the accuracy or completeness of the information contained in this report and assumes no responsibility for the accuracy or completeness of such information. ILEX will not assume any liability to anyone for any loss or damage arising out of the provision of this report.
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TABLE OF CONTENTS EXECUTIVE SUMMARY
I
1.
INTRODUCTION AND BACKGROUND
1
2.
EU ETS PHASE I: TREATMENT OF CHP IN THE UK
3
3.
PHASE I TREATMENT IN OTHER MEMBER STATES
9
4.
THE IMPACT OF THE PHASE I NAP ON UK CHP: QUALITATIVE ASSESSMENT
25
RECOMMENDATIONS FOR THE TREATMENT OF CHP IN THE PHASE II NAP
31
IMPLEMENTATION OF ALLOCATION PRINCIPLES
41
ANNEX A – MEETING WITH THE CHPA ON 26 MAY 2005
45
5.
6.
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EXECUTIVE SUMMARY ILEX Energy Consulting Ltd has been commissioned by the Department for Environment, Food and Rural Affairs (Defra) to inform policy on the treatment of Combined Heat and Power (CHP) in the Phase II National Allocation Plan (NAP) of the EU Emissions Trading Scheme (EU ETS). The objectives of this report are to: •
assess the different ways that member states have treated combined heat and power plant (CHP) in their national allocation plans for Phase 1 of the EU ETS;
•
analyse how the EU ETS will impact on CHP in the UK, based on the UK NAP together with market conditions and other policy measures, in Phase 1 and beyond; and
•
establish options for the treatment of CHP in future phases of the scheme which are feasible and balance a range of diverse criteria.
We have considered how the approaches in the six NAPs that we have assessed (Austria, Denmark, Germany, Italy, the Netherlands and Poland) differ from those in the UK. We would emphasise that the wide range of factors affecting the allocations makes it rather difficult to generalise and that the impact on any individual installation could be different to the overall impact. However, we conclude that, to some extent, all of these countries are more generous to CHP in Phase I than the UK. We explored the impacts of the UK’s Phase I approach on CHP plant in the UK at a meeting with members of the Combined Heat and Power Association (CHPA). We have considered how the allocation methodology impacts on: •
the day-to-day operation of CHP plant;
•
investment in new plant; and
•
closure decisions for existing plant.
A full description of the issues that members raised is provided at Annex A. The two concerns that members expressed strongly at the meeting were that: •
allocations for CHP plant under the Phase I NAP are insufficient; and
•
the impact of the Phase I NAP on CHP also arises in part from the treatment of competitors to CHP plant for the production of heat and electricity.
We are of the view that, in principle, the Phase I allocation methodology could have resulted in the effects described above. The Phase I NAP appears to disadvantage CHP, at least in some instances. However ILEX has not attempted to quantify the impacts as part of this study and therefore it is difficult to comment on their magnitude. We have presented a range of different approaches for the treatment of CHP in Phase II, drawing on the treatments in other Member States, the concerns raised by CHPA members and our own ideas. We have evaluated each of these approaches against i
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EU ETS PHASE II: TREATMENT OF CHP Defra’s own criteria for allocation1, taking into account the constraints of the Emissions Trading Directive. Our recommendation is that in Phase II, CHP should receive a combined allocation – to cover the allocation for an equivalent electricity-only power station together with the allocation for equivalent heat-only boiler (HOB) plant. We term this the ‘principle of combined allocation’. We have developed this recommendation in order to reflect the ‘carbon advantage’ that the combined generation of heat and power at a CHP plant exhibits over the separate production of heat and power in a carbon market without free allowances. We consider that this approach addresses both of the key areas of concern that CHPA members raised and could also be made consistent with both Defra’s criteria and the Directive conditions. One of Defra’s key concerns is how any recommendation could be implemented. We have taken a first step towards identifying some of the practicalities that would need to be addressed in order to implement this approach. We have noted that it would be more straightforward to apply where installations’ allocations are calculated using benchmarks than under a grandfathering methodology. Our review of the different National Allocation Plans has highlighted that four of the six selected member states studied have already employed some form of combined allocation for CHP in Phase I. These are Denmark and Italy (for both incumbents and new entry), Germany (for new entry only) and the Netherlands (certainly for incumbents). The others (Poland and Austria – and Germany for incumbents) apply some form of ‘bonus’ to the free allowances for CHP. We have included this option as our secondbest approach to allocation, since, depending on the way that the adjustments or bonuses were calculated, this principle could approximate the incentives provided under our recommended approach and might be more straightforward to implement. We would emphasise that unless one of the objectives of the allocation methodology is to provide CHP with a certain level of allocation and this is considered explicitly in its development, it is possible that the position of CHP will not be improved as compared to Phase I.
1
A list of these criteria is presented at paragraph 5.4 on page 31.
ii
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1.
INTRODUCTION AND BACKGROUND
1.1
ILEX Energy Consulting Ltd has been commissioned by the Department for Environment, Food and Rural Affairs (hereafter ‘Defra’) to inform policy on the treatment of Combined Heat and Power (CHP) in the Phase II National Allocation Plan (NAP) of the EU Emissions Trading Scheme (EU ETS).
1.2
This final report presents a summary of how CHP is treated under Phase I of the EU ETS in the UK and reviews the different approaches adopted by other Member States in their treatment of CHP plant. This report also provides some qualitative analysis of the effect that the EU ETS has had on the market for CHP in the UK to date. Finally, we present some options for the treatment of CHP in the Phase II NAP, using a range of criteria to evaluate their impact.
1.3
One of the purposes of this report is to inform the preparation of a consultation paper on key issues for the UK Phase II NAP, to be published during the summer of 2005.
Background 1.4
The EU Emissions Trading Scheme (EU ETS) began on 1 January 2005 and requires combustion installations over 20MWth input capacity to monitor and report their annual carbon dioxide emissions and to surrender allowances to cover those direct emissions each year. The scheme is divided into phases; the first of these, Phase I, is three years in length (2005–7), while the second, Phase II, will run for five years (2008–12).
1.5
The EU ETS Directive requires that, for at least the first two phases of the scheme, a majority of allowances be allocated for free. Each member state is required to draw up a National Allocation Plan (NAP), which determines the number of free allowances to be allocated to each incumbent installation, for each year of any given phase. The NAP also defines the rules for allocating allowances to new installations.
1.6
The UK finalised its NAP for Phase I in May 20052. It sets out the way that the UK had interpreted the guidelines laid out in the Directive and the choices it has taken in determining the number of allowances to allocate to each installation. The NAP for Phase II must be submitted to the Commission by June 2006. In order to finalise the allocation methodology for that NAP, Government officials will consult with stakeholders on the options available to them, in the light of both the Directive and UK CHP policy.
2
EU Emissions Trading Scheme: Approved National Allocations Plan 2005 – 2007. Defra, May 2005.
1
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EU ETS PHASE II: TREATMENT OF CHP 1.7
The UK Government target is for 10GW of Good Quality CHP capacity by 2010. Good Quality CHP refers to CHP generation that is energy efficient in operation. The CHP Quality Assurance programme (CHPQA), launched in May 2000, determines that quality by providing a practical method for assessing all types and sizes of CHP scheme. This determination is based on several key parameters: •
the Quality Index – indicator of the energy efficiency and environmental performance of a Scheme, where the general form of the QI definition is:
QI = (X * ηpower) + (Y * ηheat) where:
1.8
X
coefficient related to alternative power supply options
Y
coefficient for heat generation, related to alternative heat supply options
•
Power Efficiency (ηpower) - the total annual power output divided by the total annual fuel energy input; and
•
Heat Efficiency (ηheat) – the total annual heat output divided by the total annual fuel energy input.
Good Quality CHP is defined as having a Power Efficiency greater than or equal to 20% and a Quality Index greater than or equal to 1003.
Structure of this report 1.9
Chapter 2 sets out the way that allocations to EU ETS installations that contain some CHP have been calculated under the UK Phase I NAP and presents a summary of the current CHP situation in the UK.
1.10
Chapter 3 reviews how CHP is treated in six other Member States. This includes a comparison of the treatment of CHP in the NAPs and also in a wider policy context.
1.11
Chapter 4 provides some qualitative analysis of how UK CHP has fared under the EU ETS so far. This is based on a workshop, held at the CHPA offices, with some of the key CHP players currently operating in the UK market.
1.12
Chapter 5 presents a range of alternative options for the treatment of CHP in the Phase II NAP, using the criteria suggested by Defra and ourselves.
1.13
Chapter 6 takes a first step towards identifying some of the practicalities that would need to be addressed in order to implement the different options.
1.14
Annex A provides a full report of the workshop held at the CHPA offices on 26 May 2005.
3
The CHPQA Standard. Quality Assurance for CHP, November 2000.
2
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2. 2.1
EU ETS PHASE I: TREATMENT OF CHP IN THE UK This chapter presents a summary of the current CHP situation in the UK and then describes the way that allocations to EU ETS installations that include some CHP have been calculated in the UK Phase I NAP.
Current CHP situation in the UK 2.2
Figure 1 presents the growth in the number of installations in the UK over recent years, starting from 1999. It demonstrates that the total number of schemes over 10MWe remained at around 70 during this period. The main growth of CHP has been in the range of 0.1MWe – 0.999MWe, where the number of schemes has increased from 509 to 624, reaching a high of 667 schemes in 2000. Figure 1 – Growth in the number of CHP schemes in the UK 1,800 1,600
No of installations
1,400 1,200 1,000 800 600 400 200 1999 Less than 100kWe
2000
2001
100kWe to 999kWe
2002 1MWe to 9.9MWe
2003 > 10MWe
Source: Digest of UK Energy Statistics (DUKES)
2.3
CHP schemes are not identified explicitly in the list of installations for the EU ETS. We estimate4 that approximately 170 schemes are included in the scheme. Of these, around half are classified in climate change agreement (CCA) sectors, approximately 10 in the power stations sector and the remainder in non-CCA sectors.
4
Our estimates are based on information provided by Defra and the description of installations in the installation list. They are included only in order to provide an indication of the number of installations affected by the issues reflected in this report.
3
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EU ETS PHASE II: TREATMENT OF CHP Allocation to existing CHP plant that commenced commercial operations prior to 2003
2.4
As a rule, the allocation to CHP plant is calculated in the same way as that for all other installations. The methodology is based on a two-stage approach: first, the number of allowances to allocate to any given sector is calculated and then this quantity of allowances is shared between the installations in that sector.
2.5
The number of allowances to allocate to a majority of sectors are calculated using: the 2002 emissions of all installations in the sector (including CHP); sector growth rates; sector CCA and, in the case of the power stations sector5, a reduction factor to reflect the contribution of the EU ETS to UK climate change targets.
2.6
The sector in which an installation is classified therefore determines the number of allowances that it has access to. As for all other installations, the sectoral classification of a CHP plant depends on the sector in which it is modelled in DTI’s updated energy projections (UEP). This is determined by: •
whether it is listed as a power station in DUKES Table 5.116; and
•
the sector to which it provides a majority of its energy output.
An installation’s allocation is also determined by: •
whether it is part of a climate change agreement (CCA).
2.7
For instance, where a CHP plant provides a majority of its output to the food and drink sector, is not listed in DUKES table 5.11 and is covered by the Food and Drink Federation (FDF) CCA, it will be included in the sector Food and Drink – FDF. If it is not covered by a CCA, it will be part of the FDT – non-CCA sector (where FDT is food, drink and tobacco, one of the UEP sectors).
2.8
On the other hand, if a CHP installation is listed in DUKES table 5.11, it will be classified in power stations. This approach was taken in order to ensure that the EU ETS power stations sector matched the UEP power stations sector, so that the UEP projections could be used directly in the allocation of allowances to these installations7. As a rule, these are large CHP plant which export a majority of their power to the grid.
5
Some CHP installations are included in the power stations sector.
6
The Digest of UK Energy Statistics, published by DTI. Table 5.11 lists all UK power stations with a capacity of at least 1MW and publicly available information.
7
Further detail on the methodology used for the power sector can be found on page 3 of http://www.defra.gov.uk/environment/climatechange/trading/eu/nap/pdf/annexb.pdf.
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The sector allocation is divided between the installations classified in each sector, using each installation’s ‘relevant emissions’ during the baseline period8 as the basis for its share. Thus an installation’s allocation also depends on the relevant emissions of each of the other installations in its sector.
2.10
It is worth noting that since incumbent CHP installations are treated in the same way as all other installations, the presence (or absence) of good quality CHP capacity at an installation is not considered explicitly in the incumbent allocation calculation. Allocation to existing CHP plant that commenced commercial operations during 2003
2.11
Since there is only limited historical information for installations that started operation towards the end of the baseline period, it was not considered appropriate to use the methodology described above for them.
2.12
Instead, allocations are calculated using a benchmarking approach developed by DTI. This is determined by the following formula: Allocationi = Ci * UHind * 8760 * EFgas/ηBMTEC
Where: i
(subscript) is an index for the installation;
Ci
is the installation-specific power output capacity QPC in MWe, taken from the CHP QA certificate;
UHind is the average load factor based on an estimation of the heat load for the sector that receives the heat; EFgas is the emissions factor of natural gas (tCO2/MWh); and
ηBMTEC is the technology specific net power efficiency9. 2.13
Each installation is classified in the sector to which it provides the majority of its energy output. Allocations to installations classified in the power stations sector are adjusted downwards by a standardised factor to reflect the more stringent cap
8
An installation’s relevant emissions are average emissions between 1998 and 2003, dropping the lowest year and all zero years. Rules apply for installations that changed significantly, rationalised or commissioned during the baseline period.
9
The technology specific net power efficiency values, which are more or less Best Available Technology (BAT) based, are provided in the FES report entitled “EU Emissions Trading Scheme – calculating the free allocation for new entrants, November 2004” – http://www.dti.gov.uk/energy/sepn/allocation_report.pdf
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EU ETS PHASE II: TREATMENT OF CHP level for that sector. Allowances for this kind of installation are also taken from the sector total. Allocation to new entrant CHP plant that commenced commercial operations during or after 2004
2.14
In the UK, new entrants are defined as installations that commenced commercial operations after 31 December 2003. The UK has set aside a number of allowances to allocate to such installations in a new entrant reserve (NER). A portion of the NER is ring-fenced for allocation to good quality CHP.
2.15
The allocation to an individual new entrant CHP plant is calculated using the benchmarking methodology described in paragraph 2.12 above. Allocations to new entrant installations classified in the power stations sector are also adjusted by a standardised factor to reflect the more stringent cap level for that sector. The allowances are taken from: •
the ring-fenced CHP reserve; or
•
the generic NER if the CHP ring-fence runs out; or
•
if there are no allowances left in the reserve at all, the new entrant must buy its allowances, but will be kept in a queue and may receive some allowances for free if any are returned through plants closing.
Allocation to installations that change their good quality CHP capacity during Phase I
2.16
Where an installation’s installed good quality capacity increases during Phase I, it may be eligible for additional allowances from the NER. This is true for installations whose initial allocation was calculated using both the incumbent and benchmarking methodologies. The change in good quality capacity would need to be certified by the CHPQA team. Allowances for this kind of change are also taken from the NER. Interaction between CCA targets and EU ETS allocations
2.17
The Directive includes provision for Member States to temporarily exclude (or opt out) from Phase I installations that are subject to equivalent national policies governing their emissions. The UK submitted opt out applications for those installations that are covered by CCAs or the UK ETS and that indicated they would rather be excluded.
2.18
One of the reasons that CCA targets were used in the sector calculations was in order to show equivalence between the EU ETS and national policies, to strengthen the opt out application. Temporary exclusion will not be possible in Phase II, however the use of CCA targets may still be considered appropriate, for instance to reflect energy commitments made outside the EU ETS in sector allocations.
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Where the installations covered by a CCA fall into a number of UEP sectors, there will be a corresponding number of EU ETS sectors. For instance, the Chemical Industries Association CCA covers installations classified in Chemicals, Refineries, Nuclear Fuels and Food and Drink for the purposes of the EU ETS. The large number of combinations of CCA target and UEP sector, means that, in principle, CHP installations could fall into any one of 50 or so EU ETS sectors. Summary of drivers that impact on allocations to CHP for Phase
2.20
The methodology described above highlights that there are a wide range of factors that determine the allocation to CHP plant during Phase I, some of which are installation-specific. The key drivers for determining a CHP’s allocation allowance are represented in Figure 2. Figure 2 – Determinants of UK CHP plant allocations for Phase I
Total sector allocation Determined by: • installations in sector • 2002 emissions • sector growth rates • power stations cut • CCA targets
Sector contribution to NER Determined by: • known new entrants • sector growth rates • requirement for CHP ringfence
Individual new entrant CHP allocation Determined by: • benchmarking methodology (installation capacity, technology type and sector)
Allowances for sector’s 2003 installations Determined by: • number and type of 2003 installations • benchmarking methodology
Individual 2003 CHP allocation Determined by: • benchmarking methodology (installation capacity, technology type and sector)
Allowances for sector’s incumbent installations Determined by: • total sector allocation, less sector contribution to NER and allocations to 2003 installations
Individual incumbent CHP allocation Determined by: • installation’s share of the sector’s relevant emissions • number of allowances available for incumbent installations
Source: ILEX
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3.
PHASE I TREATMENT IN OTHER MEMBER STATES 3.1
This chapter presents a review of the treatment of CHP for Phase I in other countries. For this part of the analysis we have looked at six other Member States under the EU ETS, namely: Germany; Poland; Denmark; Austria; the Netherlands; and Italy.
3.2
We have selected these countries based on a range of criteria. These include the following:
3.3
•
fuel source – countries where a high proportion of CHP is fired by fossil-fuel sources (as opposed to renewable sources), for example Germany, were preferable on the basis that parts of their NAP could possibly be transposed to the UK where the majority of CHP plant are also fossil-fired;
•
volume of CHP plant – countries where CHP plant are prevalent, for example the Netherlands or Italy;
•
approved NAPs – countries where the NAP had included specific treatment for CHP and had been approved by the EC were felt to be more appropriate for this study;
•
benchmarking methods used, for example the treatment of both heat and electricity separately; and
•
the availability of additional allowances for CHP installations, for example Austria and Poland.
We have compared both the treatment of CHP in the NAPs and also in a wider policy context, in order to inform our understanding of how different, or similar, treatment is elsewhere.
Background on the uptake of CHP in other Member States 3.4
As a first step, we have compared the contribution that CHP production makes to total electricity production on a percentage basis. Figure 3 shows how combined heat and power plant have developed and contribute to a much greater extent in, for instance, Denmark and the Netherlands as compared to the UK. Figure 4 demonstrates how the growth in CHP production between the years 1996 – 2000 varies from country to country. For example, the Netherlands, Germany and Italy have experienced more aggressive growth in CHP production than countries such as the UK or Austria.
3.5
This differences emphasise how even before the EU ETS was established, the uptake of CHP varied significantly between countries. It has depended on the market conditions for investment, incentives to promote the technology, the availability of suitable host sites and the availability of the infrastructure needed to design, build, run and maintain the plants.
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60% 50% 40% 30% 20% 10%
U K
Ita ly
a A
us
tri
y G er m an
N
Po la n
nd s et he rla
m D en
d
0% ar k
CHP electricity as a percentage of total electricity production.
Figure 3 – Comparison of contribution that CHP makes to total net electricity generation across the six member states and the UK
Source: CHP Statistics and impacts of the Gas Directive on the future development in Europe (CHPSTAGAS). Institut Walloon and CEREN, 2000.
Figure 4 – Comparison of growth in gross electricity generation in CHP plant (TWh) across the six member states
Gross CHP electricity generation (TWh) .
70 60
1996 1997 1998 2000
50 40 30 20 10 0 Denmark Netherlands Germany
Poland
Austria
Italy
UK
Source: CHP Statistics and impacts of the Gas Directive on the future development in Europe (CHPSTAGAS). Institut Walloon and CEREN, 2000. An energy overview of the republic of Poland. US DoE, 2004.
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EU ETS PHASE II: TREATMENT OF CHP 3.6
The extent to which national governments take measures to incentivise CHP will depend on where CHP fits in their wider energy policy objectives. In order to inform our analysis, we have compared each of the six countries’ stated intention to promote CHP (or otherwise). Table 1 shows that, in absolute terms, the UK target is more ambitious than the majority of the other six countries, especially when considered in the light of historic trends. Table 1 – Comparison of ambitions for CHP in different member states
Country
Target for CHP
Denmark
Adopted a target of 1.4GW of small-scale CHP in March 1990 (has been largely reached). (In aggregate, large, medium and small-scale CHP constitutes almost three quarters of electricity generation capacity in Denmark).
The Netherlands
•
8GW by 2000 (installed capacity in the Netherlands today remains around this level).
•
15GW by 2010.
Poland
Increasing obligations on energy companies that produce or trade electricity to purchase only electricity produced in CHP processes. The obligation is 12.4% in 2004 and rises to 16% by 2010. (CHP contributes approximately 15% of electricity generation in Poland, see Figure 3).
Germany
Climate protection target to reduce annual CO2 emissions between 1998 and 2005 by 10 million tonnes, and by 2010 by at least 20 million tonnes, due to use of cogeneration.
Austria
No specific target.
Italy
No specific target.
UK
Target of 10GWe of installed Good Quality CHP capacity by 2010 (compared to an installed capacity of approximately 5GW in 2004).
Source: Renewable Energy Policy Review for Denmark, the Netherlands, Germany, Austria and Italy, Europrog 2004, DUKES and ILEX.
Differences between other member states’ CHP policy 3.7
Given the different degrees of commitment to incentivise CHP across the EU, we might expect that policies to promote CHP also differ significantly. Table 2 compares at a high level the different incentives and opportunities available to CHP in the countries we have studied. It shows how even where countries are not very ambitious, a range of policies are in place.
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EU ETS PHASE II: TREATMENT OF CHP Table 2 – Comparison of key policies to incentivise CHP in different member states
Country
Target for CHP
Denmark
Large scale CHP with district heating was made a local natural monopoly exempted from competition along with economic and regulatory incentives to support its implementation.
The Netherlands
A temporary tax refund for cogeneration power was introduced in the Regulatory Energy Tax in 2000. For the years 2001 and 2002, the refund was €0.057/kWh. To be entitled to the refund, the plant must have a minimum efficiency of 60%.
Poland
Increasing obligations on any energy companies(which produce or trade electricity) to purchase electricity produced in CHP processes. The obligation is 12.4% in 2004 and rises to 16% by 2010.
Germany
Agreement between the Federal Government and German industry on the reduction of CO2 emissions and promotion of heat-power cogeneration, as a supplement to the climate protection agreement of 9 November 2000 and the Act on heat-power cogeneration (KraftWärme-Kopplungsgesetz).
Austria
Continuation of public remote heat and power aid tariff (additional margin over the market price, electricity remains property of the CHP operator).
Italy
Decision 6/92 of the Comitato Interministeriale dei Prezzi (CIP) implemented Law 9/91 giving incentives to renewables and, more importantly, to plants using conventional sources but with a high efficiency, mostly CCGTs with co-generation of heat (i.e. CHP). This has now been superseded by an obligation on all conventional generators to acquire a percentage of their output as renewable (currently at 2.7%) or to buy green certificates to the same amount. CHP plant are exempt from this obligation.
UK
• • • • • •
10
Exemption from the Climate Change Levy for all Good Quality CHP fuel inputs and electricity outputs. Climate Change Agreements to provide an incentive for emissions reductions. Enhanced Capital Allowances (ECAs) to stimulate investment. Business Rates exemption for CHP power generation plant and machinery10. Reduction in VAT on certain domestic micro-CHP installations. Grant support through the Community Energy programme to encourage CHP in community heating schemes.
Some CHPA members appear to have found it difficult to access these exemptions.
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Differences between other member states’ NAPs 3.8
We have focussed our analysis on six countries, chosen to provide a good overview of the different approaches to CHP allocations used in Phase I. Table 3 sets out the different questions we have considered in reviewing the way each country allocates allowances for free for Phase I. Table 3 also presents information gathered to answer these questions for each of the six member states and compares them to the situation in the UK. In some instances, the necessary information could not be gleaned from the official NAP documentation for the particular country concerned. The following sections pull out the more interesting points regarding the six selected country NAPs. CHP installations included in the scheme
3.9
Across the six countries an explicit definition of a CHP plant is provided in the NAPs of the Netherlands, Poland, Germany, Austria and Italy. However, definitions vary; Italy simply states that CHP is an installation that produces heat and electricity simultaneously, while others are more closely defined, such as that used in the German NAP, which sets down the domestic law with which CHP has to comply.
3.10
CHP is covered by a range of sectors under the EU ETS, whilst more general classifications for an installation covered by the EU ETS largely follow that provided by the EU Commission. Allocation methodology for incumbent CHP plant
3.11
With respect to allocation methodologies for incumbent CHP plant, several countries have made an explicit distinction between heat and electricity production. For example, Denmark has allocated allowances for electricity production using data for historical electricity production, whilst heat production has been allocated allowances on the basis of historical emissions. However, it could be inferred that this has been done due to the extensive use of district heating prevalent in Denmark with its low historic emissions.
3.12
In Italy, similar distinctions regarding allocation methodology have been made. The allocation criteria for electricity production is based on expected production, whilst allowances to cover heat production are based on historical emissions. For heat and electricity production, their allowances have been based on historical production. Italy provides even further distinctions, whereby cogeneration installations that have a Thermal Limit (LT11) of less than 15% receive an allocation based on the same criteria used for plants producing only electricity. For cogeneration installations with a LT of more than 15% allowances are based on a formula that takes into account electricity and heat production over the
11
The Thermal Limit is based on net thermal energy over net electrical energy plus net thermal energy, as defined by the methodology defined by Decision n.42/02 of the Energy Authority.
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EU ETS PHASE II: TREATMENT OF CHP historical reference period, actual electricity and heat production, an emissions factor for the production of heat by a reference boiler and an energy saving index. 3.13
The other main feature of some of the NAPs is the use of a co-generation bonus for incumbent CHP plant, whereby these particular installations have access to additional allowances. This includes the countries Poland, Austria and Germany. For example the German bonus for Phase I has been set at 27tCO2 equivalent per GWh, which equates to a total of approximately 4.5MtCO2 or 1.5 MtCO2 per year. The intention of this additional allocation is to offset any negative incentives for existing CHP installations. Allocation methodology for new entrant CHP plant
3.14
With regard to the allocation methodology for new entrants, it appears that the majority of the six selected member states do not have a specific ring-fenced new entrant reserve for CHP.
3.15
The only exception to this rule is Poland, where the rules for new CHP installations are identical to CHP rules for incumbents. The Polish cogeneration bonus is applicable to those installations that are able to demonstrate an energy efficiency of at least 65%, and is calculated according to the following formula: A_KOG INST = kKOG * E_KOG INST * TP Where: A_KOG INST allowances allocated for the period of 2005 – 2007 as a bonus for co-generation; kKOG
efficiency adopted for the calculation of the bonus for the reductions achieved by co-generation, kKOG = 0.5;
E_KOG INST effects of CO2 emissions reductions, measured in annual values, which were achieved by co-generation at installation INST; and TP
number of years in period P for which allowances are allocated.
Equity across different types of CHP
3.16
In comparing how the treatment of new entrant plant compare with incumbent CHP, it is clear that different methodologies have been used in each of the NAPs for the six selected member states. For the most part, incumbent CHP have had their allowances allocated on historical production or/and historical emissions, whilst new entrants have had their allowances based on either Best Available Techniques (BAT) standards or benchmarking formulas. This would be expected given that historic data are available for existing plant but are unlikely to be available for proposed plant or for plant that have just begun to commence operations.
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Interestingly where a co-generation bonus have been used, similar formulas appear to have been used for both incumbent and new entrant CHP. For example, in Poland the co-generation bonus is granted (on the principles in paragraph 3.15) for both types, whilst in Austria the allocation formula for both incumbents and new entrants is: Allocation = allocation basei * WFi * PFi * EF sector WFi
Growth factor of the industry based on business-as-usual CO2 emissions from a study undertaken by the Austrian Institute of Economic Research (WIFO) and the consultancy agency KWI.
PFi
The reduction potential of installations.
EF sector
The compliance factor matches the quantity of allowances allocated at industry level to the allowances available to the sector and is the same for all industries of a given sector.
whereby CHP plant can get a CHP bonus as part of their potential factor12. Summary of key differences
3.18
Table 3 details the features of the different NAPs that we have evaluated. In Chapter 5 we consider how some of the different treatments for CHP under the six selected member states could be used for the UK during Phase II.
12
If an installation qualifies for the co-generation bonus, the necessary reduction is halved (e.g. -2% instead of -4%) for the relevant emissions (in line with the CO2 intensity of the fuel input).
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Table 3 – Comparison of key features in different Phase I NAPs
Denmark
The Netherlands
CHP installations included in the scheme Definition of CHP No definition Installation defined as provided in NAP. either a WKC or 13 WKK . In both cases the production of heat and power is combined, but the function at the installation differs.
Poland
Germany
Austria
Installations which produce electricity and heat in a combined system and demonstrate an energy efficiency of at least 65%.
Defined in Act referred to in NAP what does or does not constitute a CHP 14 installation .
Cogeneration should have at least 5 % primary energy savings compared to the separate production of power and heat.
Italy
UK
A plant producing simultaneously power and heat.
Definition of a Good Quality CHP plant provided in Annex to main NAP.
13
The function of a WKC is to supply electricity and steam and/or warm water to production units that belong to the installation or to other installations or to district heating. A WKK is integrated into a production unit’s process.
14
Act on the Preservation, Modernisation and Development of Combined Heat and Power Generation (Combined Heat and Power Act; KWKG) of 19 March 2002.
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Denmark
The Netherlands
Definition of EU ETS installation Used the EU Based on the list of Commission's installations covered by interpretation of Annex 1 of the EU which installations Emission Trading are covered by the Directive. Those EU ETS. which emit less than 25ktCO2 p.a. have the option to remain outside for Phase I.
Poland
Germany
Grouped into sectors on the basis of their main market activities. Combustion installations are assigned to the sector to which they serve.
Based on the Federal Emission Control Act taking into account the limit values set by the EU Emissions Trading Directive.
Is CHP included as part of a wider installation? Not defined in Can be Yes, when it is a NAP but based on part of an industrial the installation list installation. it can be.
Italy
UK
Used the EU Commission's interpretation of which installations are covered by the EU ETS.
Classed in a reference activity for which a corresponding allocation has been made. Activities cover energy industry, production and processing of ferrous materials, minerals industry and others.
Based on the sector in which installations are modelled for DTI’s UEP. Where relevant, an installation’s CCA has also been considered.
Yes, when it is a part of an industrial installation.
Yes, when it is a part of an industrial installation.
Yes, when it is a part of an industrial installation.
Not defined in NAP but based on the installation list it can be.
Yes
Yes
Yes
Yes
Is CHP from a range of sectors included in the scheme? Yes Yes Yes
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Denmark
The Netherlands
Poland
Allocation methodology for incumbent CHP plant Have CHP plant been treated any differently to non-CHP plant? No. Allocation for No. WKCs are treated Yes. Every CHP CHP will be made same as electricity installation gets a separately for production plants. cogeneration bonus. power and heat. WKKs are treated similar to other combustion plants.
Does the allocation to CHP vary by sector? No Only exemption is if a WKK plant is part of a BM or LTA 15 agreement .
15
No
Germany
Austria
Italy
UK
Yes. CHP-plants get a special (additional) allocation set at 27tCO2 equivalent per GWh
Allocation = Basic allocation * Potential factor * Filling factor. CHP can get a bonus as part of their potential factor.
Formula for allocation to installations with a Thermal Limit >= 15% during the historical reference period, takes into account expected power and heat production separately.
No. Installations have been allocated allowances in the same way as installations in all other sectors.
No
Filling factors are different for every sector, thus if CHP happens to be in a different sector it may receive a different allocation.
Yes. Depending on sector allocation can be based on either historical production or historical emissions.
Yes. Each sector total is determined by a range of factors (see Chapter 2 for further details).
Benchmarking Energy-Efficiency covenants (BM) and Long-term agreements (LTAs) requires companies in the Netherlands to be among the best in the world in terms of their energy efficiency.
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Denmark
The Netherlands
Poland
Germany
Austria
Italy
UK
Combustion installations that produce energy to meet the needs of a particular industrial installation are classified to that particular industry sector.
No information provided in the NAP.
No information provided in the NAP.
Stand-alone CHP belongs to the energy activities sector. CHP operating as part of an industrial process is classified in the industrial sector.
CHP installations are placed in sectors according to where their emissions are modelled by the DTI.
Does the allocation methodology differentiate between good quality/efficient CHP? Incumbent: no Incumbent: WKCs no Incumbent: early Incumbent: no distinction. energy efficiency action and CHP distinction. New CHP: Energy parameter. WKKs: the plant bonuses New CHP: Energy efficiency is taken energy efficiency efficiency is taken understood to be into account, factor is used. into account, because plant specific. because benchmarking New CHP: The New CHP: Energy benchmarking method is used. treatment is the same efficiency is taken method is used. as for incumbent CHP. into account.
Incumbent: no distinction. New CHP: Energy efficiency is taken into account, because benchmarking method is used.
New and Incumbent CHP: yes, allocation depends on thermal limit and the technology mix of the installation.
Incumbent: all installations treated the same. New entrants: benchmarks take good quality capacity into account.
The separate CHP bonus.
Definition of CHP differs from UK. Allocation methodology is done for heat and electricity separately.
N/A
How have CHP been classified into sectors? No information WKCs are treated provided in the separately. WKKs are NAP. part of the industrial sector for which they produce energy.
What makes the treatment different to that in the UK? Allocation Explicit distinction and The separate methodology is treatment of standcogeneration bonus. done for heat and alone CHP plant electricity compared to those that separately. are integrated in the industrial process.
The special (additional) allocation for CHP and the different treatment of CHP compared to other electricity plant.
What makes the treatment the same as in the UK?
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Denmark No special bonus for CHP.
The Netherlands No special bonus for CHP.
Poland CHP plant are allocated to the industry sector that they serve.
Allocation methodology for new entrant CHP plant How is a new entrant defined? New entrants are Known new entrant: a Installations that companies which began operation or new installation or extension to an existing are neither on the were significantly unit for which a permit list of installation expanded between covered by the NAP 1 January 2002 and application or ‘report’ nor on the list of was submitted before the introduction installations date for the Danish 30/11/2003 and has a proposed to start-up date before 1 law on CO2 exclusion from ETS. January 2008. allowances (31 Unknown new entrant: March 2004) an installation or together with production unit that on expected new 30 November 2003 is entrants in 2005 – not yet known to the 2007. competent authority. Do CHP installations have preferential access to the NER? No. Allowances No No. Allowances allocated on a "first allocated on a "first come, first served" come, first served" basis. basis.
Germany
Austria
Italy
UK
Treatment is not the same as the UK.
Treatment is not the same as the UK.
No special bonus for CHP.
N/A
New entrants are installations commissioned from 1 January 2005 onwards. Capacity extensions in existing installations are similarly treated as new entrants, although this classification will refer exclusively to the extension and not to the installation in its entirety.
No definition is provided.
New plants – a newly built plant that is permitted. Repowering: substantial changes to a pre-existing plant that requires an update of the existing permit. Return to operation – restarting activities after more than one year. All changes must be after 31/12/04.
Installations that commenced commercial operations after 31 December 2003.
No
No. Allowances allocated on a "first come, first served" basis.
Electricity activities sector has biggest NER, but CHP doesn't have any special position.
Yes. Priority access to a ring fenced proportion of the NER is given to Good Quality CHP.
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Denmark
The Netherlands
Poland
Will Government buy additional allowances if the NER runs out? The system No indication in No. The ‘allocation administrator may NAP that Denmark reserve’ is used to use non-ETS would buy reserve and allocate emissions reserve (if additional CO2 emission such a reserve allowances. allowances to exists), or will buy ‘unknown new entrants’ once shown to allowances on the market for new comply with the entrant allocations. definition and characteristics of ‘known new entrants’. Have CHP plant been treated any differently to non-CHP plant? No. WKCs are treated No. Allowances are Allowances are similar to electricity allocated to new allocated in production entrants on the basis proportion to new installations. WKKs of their justified production unit's production plans and capacity. For CHP have same rules as other combustion specific emission units, the factors, on the electricity capacity plants. condition that they is calculated with conform to the BAT full heat 16 (best available production . technology) standards.
16
Germany
Austria
Italy
UK
If investment turns out to be more dynamic than predicted when the allocation plan was drawn up, the operator must purchase emission allowances from the market.
No indication in NAP that would buy additional allowances. If NER is not fully used by 31 November 2007, surplus can be auctioned.
If the reserve runs out, the competent authority will purchase allowances on the market and may sell any surplus left in the reserve at the end of the Phase, to recover the cost of any such purchased allowances.
No. If the NER runs out and not enough becomes available from those surrendered following closure of installations, operators will have to buy allowances from the market.
Allocation based on a dual benchmark; a power benchmark determines the power output allocation, the heat benchmark the heat output allocation. All other rules (e.g. ex-post adjustment) apply to CHP new entrants too.
Allocation methodology not specified, but it is likely that the same formula as for existing plants is used i.e. using the formula: Allocation = Basic allocation * Potential factor * Filling factor.
Yes. For plants producing simultaneously electricity and heat, allocation will take into consideration their role within the national electricity system and thus the balance between electricity and heat production.
No. Installations have been allocated allowances in the same way as new entrants in all other sectors using a benchmarking approach (although specific benchmarks do exist for good quality CHP).
i.e. for extraction plants, electricity capacity is calculated with maximum heat yield as opposed to capacity in condensing mode.
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Denmark
The Netherlands
Does the allocation to CHP vary by sector? No No
Poland No
How have CHP been classified into sectors? No information WKCs are treated Similar to existing provided in the separately. WKKs are installations. NAP. part of the industrial sector in which they produce energy.
What makes the treatment different to that in the UK? No ring-fenced The division of new The Government CHP reserve and entrants to known and intends to buy more the allocation unknown. The allowances if the method for a allocation appears not NER is used up. cogeneration unit. to be based on benchmarking. No ring-fenced CHP reserve.
Germany
Austria
Italy
UK
No
NER varies for each sector. Allocation to CHP may vary depending on which sector it is in.
The sizes of new entrant reserves are different for different sectors. The formula is the same for all sectors.
Yes. Benchmarks include average load factor based on the heat load for the sector that receives the heat.
Similar to existing installations.
Similar to existing installations.
Similar to existing installations.
CHP allocations are determined in part by the sector to which an installation provides the majority of its energy output.
The definition of a new entrant is slightly different. No ring-fenced CHP reserve.
All sectors have a NER of 1%, although the NAP does not specifically state how this is allocated.
The Government intends to buy more allowances if the NER is used up.
N/A
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114_FinalReport_v3_0.doc August 2005
EU ETS PHASE II: TREATMENT OF CHP
Denmark
The Netherlands
Poland
Germany
Austria
Italy
UK
There is a ringfenced reserve for CHP (and for all other branches). There is also a generic NER. For new installations the allowances are calculated using the benchmarking methodology.
If there are no allowances left in the NER, the new entrant must buy its allowances. For new installations the allowances are calculated using the benchmarking methodology.
If there are no allowances left in the NER, the new entrant must probably buy its allowances.
Treatment is not the same as the UK.
N/A
The basic allocation is calculated for the existing plants from the reference period emissions and for new entrants from the plant capacity, average capacity usage of the sector, average capacity usage of the plant and expected emissions of the plant. Otherwise formulas for both are very similar.
Existing plants: based on emissions in the reference period. New entrants based: on expected emissions. Both formulas have the parameters λt (= emission factor for the production of heat by the reference boiler) and IRE (= energy saving index).
New entrant allocations are based on expected emissions using standardised assumptions. Incumbent allocations are derived from sector totals and historic emissions and are therefore likely to vary more widely between similar installations.
What makes the treatment the same as in the UK? If there are no allowances left in the NER, the new entrant must probably buy its allowances.
If there are no allowances left in the NER, the new entrant must probably buy its allowances.
How does the treatment of new entrant CHP compare with incumbent CHP? The allocation of The difference Existing plants: Existing plants: existing plants is between the electricity allocation based on based on emissions allocation is based emissions from energy allocation formulas in the reference is that the basic on historical and heat production period, a compliance allocation of the electricity averaged over 2001 factor for the existing plants is production, heat and 2002, production allocation period and based on emissions allocation is based growth and allocation a special allocation in the reference on historical factor. New entrants: for CHP. The period and the emissions. WKKs based on
