The Future of Cogeneration in Europe

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BUSINESS INSIGHTS

The Future of Cogeneration in Europe Growth opportunities and key drivers of success

Relative economics of Combined Heat and Power vs. utility supply Total cost* Buy power from supplier, generate heat only

Break-even cost

Co-generate heat and power

Slope = price of fuel + per-unit O&M cost

Variable cost Upfront capital cost

Slope = retail price of power

Break-even usage

Electricity consumption

Note: * Net of excess electricity output exported to the grid Source: The Future of Cogeneration in Europe

Discover new profitable opportunities for growth and develop successful strategies for investment, using the in-depth analysis in this report.

The Future of Cogeneration in Europe

Share of total electricity production (%)

Leading European Combined Heat and Power markets, 2003 45 40

NL

35 AT

30

DK

FI RO

25 20 TK

SK 15

HU

PT

10 BL 5

CZ

PL

ES LT

SE

DE IT

UK FR

BE

0 0

4,000

8,000

12,000

16,000

Installed CHP capacity (MWe)

Source: The Future of Cogeneration in Europe

"The major European CHP markets can be categorized in three groups. There is a small group of countries, comprising Denmark, The Netherlands, Finland, Austria and Romania, where cogeneration is a crucial part of the generation portfolio, albeit for different historical reasons..."

Cogeneration (simultaneous production of electricity and heat), offers significantly higher fuel efficiency compared with conventional ways of generating electricity from fossil fuel. Provided there is a ready market for the heat output, this not only saves on fuel costs but also reduces CO2 emissions. The Future of Cogeneration in Europe is a new management report that analyzes the current state of the market offering an European overview as well as detailed profiles for selected markets - such as Germany, Italy, Denmark, The Netherlands, United Kingdom, Turkey and Russia. This report assesses the future prospects and the position of cogeneration technology within the overall power generation mix. It evaluates the economics of cogeneration, the regulatory environment, market structure and growth potential. It also offers actionable recommendations based on independent, expert analysis of the critical success factors. Use the comprehensive analysis in this new report to assess current and future profit opportunities and to anticipate potential market threats.

Some key findings from this report... Efficiency gain of CHP over separate power and heat generation CHP plant* Primary fuel Efficiency Energy output Grid losses Heat-to-power ratio Heat output Power output

Boiler

Total separate

100 80% 80 n/a

Power plant* 65.9 52.5% 34.6 2.6

56.5 85% 48 n/a

122.4

1.5 48 32

n/a n/a 32

n/a 48 n/a

n/a 48 32

Fuel saving Fuel efficiency gain

82.6 2.6

• Within the EU, national support regimes have very different efficacy in encouraging high-efficiency Combined Heat and Power (CHP) schemes. In a typical example, the UK system would provide a highefficiency plant only 25% more subsidy than a low-efficiency one. By contrast, in the Flemish system the difference would be four-fold. • The expanded EU is now home to the world’s largest cogeneration industry, with c.104 GWe installed capacity. This is more than Russia and the US, with c.80 GWe each.

22.4 18%

Note: * Based on typically achievable efficiency from respective “best in class” technologies (CCGT)

Source: The Future of Cogeneration in Europe

"CHP technology is capable of delivering fuel efficiency gains of up to 18% compared with separate generation of power and heat, in all cases using the most efficient currently available technology..."

• Micro-CHP is set to be one of the high-growth areas in the next few years. By contrast, biomass-fired CHP faces considerable hurdles and is likely to remain a niche segment in most markets. • Cogenerators do not need a ”level playing field” with power utilities, as they rarely compete against them head-on. However, investors in CHP require greater cash flow predictability to make their projects viable. • In its current initial form, the EU’s support framework for cogeneration does not fully reflect the requirements of the CHP sector, in part because of the top-down way in which it was drawn up.

This new report will provide you with... Principal schematics of a Stirling engine Combined Heat and Power plant

• Analysis of the technical capabilities and principal applications of the main established and emerging cogeneration technologies. • Illustration of the Net Present Value model of Combined Heat and Power investment and of the principal risk factors involved. • Benchmarking of the technical characteristic and cost structures of the main cogeneration technologies. • Assessment of the private and public costs and benefits of CHP vs. conventional electricity generation.

Source: The Future of Cogeneration in Europe

"The efficiency of the Stirling engine is improved considerably through the deployment of a “regenerator” between the boiler-heat and the cooler-heat exchangers. The regenerator is typically a mass of metal wire, through which the working fluid can move freely. It increases the speed of temperature change within the working fluid by absorbing some of its heat during the expansion movement, and releasing it back during the contraction movement...”

• Evaluation of the cogeneration industry structure and growth potential, both in the EU and elsewhere. • Discussion of the regulatory regime pertaining to Combined Heat and Power with a focus on the EC Cogeneration Directive and its implementation across the EU Member States. • Examination of what policy makers can do to improve the economic case for investment in CHP and increase growth potential.

Some of your questions answered... Output characteristics of the main cogeneration technologies

• How is the Combined Heat and Power industry organized and where do I fit within that scheme?

High

• What is the most cost-efficient cogeneration technology on offer?

Global efficiency

CCGT Gas turbine Fuel cell

Kalina engine Steam engine

Reciprocating engine

Medium Steam turbine ORC

Stirling engine

Peak capacity:

High Medium Low

Microturbine Hot air turbine

• What are the main growth segments and how can I benefit from that growth?

Inverse gas turbine

Low

Medium

High

Power / heat ratio

Source: The Future of Cogeneration in Europe

"The CHP technologies currently available exhibit a huge variation in their technical characteristics, such as peak capacity range, electrical and overall efficiency. The figure above present a summary of the key capacity and efficiency metrics of the principal established and alternative technologies..."

• How helpful is the current regulatory environment to my CHP investment strategy and what are the expected changes?

• What are the main risk factors when investing in a CHP scheme and how can they be mitigated?

• What impact does government policy have on the cost-efficiency of CHP vs. other options?

Some hot issues covered in this report... Principal schematics of a fuel cell Combined Heat and Power plant

• EU ETS and the Kyoto process – low-emissions technologies and the integration of CHP within the EU’s ETS and renewable power frameworks. • Distributed generation – cutting down on transmission and distribution losses, reduction on the need for investing in the centralized power grid and the improvement on grid stability. • Externalities – costs and benefits of private economic agents’ actions that accrue to society as a whole rather than to those specific agents.

Source: The Future of Cogeneration in Europe

"There are several versions of the fuel cell technology, depending principally on the electrolyte used. They fall into two main categories: low-temperature fuel cells (operating temperature between 80–220°C), and high-temperature fuel cells (operating temperature between 600-1,000°C)..."

• Fuel cells – most promising emerging technology in CHP. The association with transport applications and the potential to make micro and small-scale CHP. • Subsidies – the market-distorting and undesirable perception and the EU Cogeneration Directive’s recognition of the need for some kind of incentive to acknowledge CHP’s social benefits and to increase its role within the power market.

Top 5 reasons to order this new report today Drivers and inhibitors of support for Combined Heat and Power

• Identify the advantages of established and emerging cogeneration technologies and their suitability for specific user requirements.

Carbon emissions vs. EU ETS target

are Sp

id gr

Increasing support for CHP

y cit pa ca

le ab nda ur vo ge Fa cal a liti o p

& ble ns wa tio ne op Re lear c nu

Utilisable heat demand

Source: The Future of Cogeneration in Europe

"These considerations are schematically reflected in the figure above and can be used for a prima facie assessment of the likely investment case for Combined Heat and Power in a given national market..."

• Analyze the impact of the EC Cogeneration Directive on existing schemes and future investment and its implementation across the EU Member States.

• Understand the economics of the CHP sector and the critical risk factors involved.

• Isolate the potential pitfalls and avoid them, when planning your cogeneration investment strategy.

• Anticipate the likely changes in the regulatory environment and how they might affect your decisions.

Sample information from the report Chapter 3: Economics of Cogeneration Other social benefits Other social benefits from cogeneration are less obvious, and are perhaps more difficult to quantify. They derive

Capital Cost Requirements to Meet 20 Year Projected Electricity Demand in Brazil and China, 2005-25

from its characteristic as a decentralized source of power,

Brazil

and include the following: • Reduced investment by the network operator in the transmission and distribution infrastructure (which lowers the T&D portion of energy bills of all the grid users, and not just of the cogenerators);

China

• Greater elasticity (responsiveness) of supply compared with large centralized plants (due to the smaller scale and the more flexible technologies typically involved, and also to the different nature of the business imperatives); • Increased competition in electricity supply, due to a greater number of generators and a greater range of alternatives to the incumbent or predominant supplier

Source: The Future of Cogeneration in Europe

in each area; • Improved power quality, due to the user being able to specify technical characteristics to its own requirements and having greater control over outages or brownouts; • Improved security of supply and decreased vulnerability of the power infrastructure. A less centralised generation structure implies improved security of supply, because a possible outage affects only the site at which it has occurred, and not the other users or the power grid in general. There can be no “cascading” effect where a fault in a relatively minor part of the central network may lead to a major shut-down, as happened in northeastern US and eastern Canada in August 2003, and in Italy just over a month later. In sum, CHP in particular and distributed generation in general could yield considerable economic savings at the macro level, based on calculations by the World Alliance for Decentralized Energy (WADE) illustrated in the figure above.

Order this report today to find out more...

Table of Contents CHAPTER 1: INTRODUCTION TO COGENERATION CHAPTER 2: TECHNOLOGY OVERVIEW • Summary • Introduction • Established technologies - Technical descriptions and application for: - Steam turbine - Gas turbine - CCGT - Microturbine - Reciprocating engine • Alternative technologies - Technical descriptions and application for: - Fuel cell - Stirling engine - Inverse gas turbine - Hot air turbine - Steam engine - ORC engine - Kalina engine • Comparative overview of the main technologies - Technical overview - Cost overview - Technology costs - Fuel costs - Overview of applications CHAPTER 3: ECONOMICS OF COGENERATION • Summary • Introduction • General framework - Net present value - Risk factors - Non-utility vs. utility cogenerators • CHP vs. utility supply - Revenues and cost savings - Costs - Summary of free cash flow from CHP • CHP vs. stand-alone generation - Direct fuel cost savings - Fuel efficiency - Achievable price of power

- Fuel spread - Transmission and distribution savings - Externalities - Greenhouse gas reductions - Other social benefits • The problem of scale • The need for support CHAPTER 4: REGULATORY FRAMEWORK • Summary • Introduction • EU Cogeneration Directive - Guarantees of Origin - Quantification methodology - Volume of electricity from cogeneration - Efficiency of cogeneration - Reference values • Implementation mechanisms - “Green tax” relief: UK case example - Feed-in tariffs and price support: Portugal case example - CHP obligations: Flanders case example - Investment incentives - Other support mechanisms - Competitive tenders - Direct targets - Network assistance - Summary of support mechanisms within member states - Support schemes outside of the EU • Kyoto mechanisms CHAPTER 5: MARKET STRUCTURE AND GROWTH POTENTIAL • Summary • Introduction • Industry organization - Not a “proper” market - Demand-side organization - Supply-side organization - Stand-alone plants - Third-party intermediaries - In-sourced solutions

Table of Contents (Contd.) • Current state of the market - European overview - Selected market profiles - Germany - Italy - Denmark - The Netherlands - UK - Turkey - Russia • Future levels of support • Priority growth areas - The case for micro-CHP - Benefits and incentives - Technology requirements and operating regime - Potential obstacles - Addressable market - The trouble with biomass - Benefits and drawbacks - Likely growth areas • Barriers to growth - Difficult underlying economics - Uneasy relationship with utilities - Planning and permitting burden - Support schemes interfering with market mechanisms CHAPTER 6: CONCLUSIONS • Summary • Introduction • “Philosophy” of CHP policy - Top-down vs. bottom-up - Focus of support - Stable policy framework • Unfinished business - Certification and direct support - A “level playing field”? FIGURES • Principal schematics of a: - steam turbine CHP plant - gas turbine CHP plant - CCGT turbine CHP plant

• • •



• •

- microturbine CHP plant - reciprocating engine CHP plant - fuel cell CHP plant - Stirling engine CHP plant - inverse gas turbine CHP plant - hot air turbine CHP plant - steam engine CHP plant - ORC engine CHP plant - Kalina engine CHP plant Output characteristics of the main cogeneration technologies Relative economics of CHP vs. utility supply Capital Cost Requirements to Meet 20 Year Projected Electricity Demand in Brazil and China, 2005-25 Cumulative emissions reductions from CDMregistered cogeneration projects, Sept 2005 – Sept 06 Leading European CHP markets, 2003 Drivers and inhibitors of support for CHP

TABLES • Output characteristics of the main cogeneration technologies • Cost characteristics of the main cogeneration technologies • Fuel utilization of main cogeneration technologies • Typical (or optimal) applications of main cogeneration technologies • Efficiency gain of CHP over separate power and heat generation • Support mechanisms for CHP within EU-15 • CHP electricity in the EU and neighboring states, 2003 • EC Cogeneration Directive efficiency reference values for separate production of electricity, December 2006 • EC Cogeneration Directive efficiency reference values for separate production of heat, December 2006

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