Experiences with CHP promotion in the Netherlands and Denmark

1
Experiences with CHP promotion in the Netherlands
and Denmark

• First Polish workshop within the SAVE II project
  Regional Action Plan for promotion of combined
  heat and power production in the Neisse-Nisa-Nysa
  Euroregion
• October 8, 2001, Jelenia Gora, Poland
• Michael ten Donkelaar
• Hans van den Heuij
• ECN Policy Studies

2
History of Dutch CHP - I

• Since the late seventies, CHP is an important
  technology for energy efficiency
• In early eighties, high gas and electricity
  prices, favourable rates of return but low
  feed-in tariffs and overcapacity
• Promotion Programme CHP developed in 1987,
  including
• Investment support for CHP
• Mandatory purchase of surplus electricity by
  distribution companies
• Specific natural gas tariffs for CHP
• Establishment of support office for co-ordination
  and implementation
• Large increase in CHP in industry during the
  early nineties, influenced by
• Environmental policy/management
• Long term agreements on energy efficiency
• Additional financial support by government aimed
  at environmental protection

3
History of Dutch CHP - II

• Increase of CHP capacity from 2000 MW in 1985 to
  7000 MW in 1999 (about 30 of Dutch electricity
  production)
• Government decided in 1995 to slow down
  development of CHP because of increasing
  overcapacity
• Feed-in tariffs were decreased and investment
  subsidies were abolished as CHP proved to be
  economically attractive
• During the late nineties, CHP benefited from
  climate policy actions (fiscal measures for
  highly efficient installations)
• Adoption of electricity Act (1999) and Gas Act
  (2000) changed beneficial situation of CHP
• No benefits from supportive gas tariff
• No specific feed-in tariffs
• From now on, CHP will have to cope with
  uncertainties of the liberalised markets

4
What caused the CHP boom ?

• The historical boom of CHP was not the result of
  a single policy measure but a mix of favouring
  instruments
• regulated feed-in tariffs for electricity
• specific gas price for CHP
• fiscal measures
• investment subsidies
• Institutional framework supporting CHP
• voluntary agreements on energy efficiency
• environmental action plan of energy distribution
  sector
• Liberalisation of the energy market limits the
  use of some of these instruments, due to the
  threat of unfair competition

5
Liberalisation A threat to CHP development ?

• In liberalised energy markets, gas and
  electricity prices are not fixed but based on
  market developments
• Uncertainty about the price development of these
  energy carriers causes uncertainty about the
  profitability of CHP installations
• Overcapacity in the Netherlands causes strong
  competitive environment, creating an unfriendly
  investment climate
• This situation may result in stabilisation or
  even decrease of the CHP share in the Dutch
  electricity production
• Liberalisation of gas and electricity market did
  not occur at the same time. Result relatively
  high gas prices and low electricity price

6
Electricity and gas prices - impact on CHP

• Both gas and electricity price are based on two
  elements
• commodity price (left to the market)
• transport tariff (for electricity rTPA, for gas
  nTPA)
• Tariff system for transmission of electricity
  differentiated in
• grid connection costs, system costs and transport
  cost
• Transport tariff does not apply to own use of
  electricity, as transport services are not
  required
• Favourable gas tariff system for CHP no longer
  applicable
• In new Commodity Service System, gas prices
  depend on load factor, not beneficial for clients
  with fluctuating energy demand such as
  small-scale CHP plants only producing at peak time

7
Future of CHP in the Netherlands

• ECN has analysed the future investment behaviour
  in CHP plants based on two different development
  scenarios
• Low scenario, electricity market faces strong
  competition due to overcapacity
• High scenario, investments in CHP will be
  necessary due to the disappearance of current
  overcapacity
• Results of analysis
• Low scenario, no incentive for investments in new
  CHP
• High scenario, CHP is more economically
  attractive (mainly large-scale plants)
• In general, sizing the plant on own demand for
  electricity makes investing in CHP more
  attractive
• Small-scale CHP is less cost-effective, mainly
  due to the small load-factor (high gas price)
• Exception, island companies, producing for own
  use, avoiding connection costs, can even be
  cost-effective in low scenario

8
CHP promotion in a liberalised energy market

• The types of policy measures available in a
  liberalised market
• Fiscal measures, regulating energy tax (REB) in
  NL can be varied according to source of energy
  produced
• Specific certificate for CHP, similar to the
  system of green certificates, end-consumers
  owning a certificate can apply for tax reduction
• Investment subsidies through tax-deduction
  constructions
• Environmental Management Act (and IPPC
  regulations), can oblige energy users to reduce
  their energy consumption using best available
  technologies.
• LTA/Benchmarking, negotiated agreements between
  industry and government about energy efficiency
  objectives for the future. CHP is still a
  relatively cost-effective way to reduce energy
  intensity

9
Financial instruments supporting CHP

• Existing financial schemes
• Energy Investment Deduction - mechanism of
  tax-deductible investments (up to 40 of
  investments). CHP installations eligible need to
  have a certain energy efficiency level
• Random write-off regulation for environmental
  investments (Vamil), applicable for CHP
  installations up to 2 MW
• Natural gas used for electricity production
  through CHP is exempted from the regulatory
  energy tax as well as electricity produced for
  own use through CHP
• Influence of energy market liberalisation and
  overcapacity
• Existing financial stimuli not sufficient for
  investments in new capacity
• Government is considering the extension of
  financial means
• Alternative ways of support considered, based on
  avoided grid losses

10
Additional instruments for CHP

• Additional financial instruments
• Increase of the EIA from 40 to 55
• Upper limit of 2 MW for Vamil regulation has been
  released
• The reduction of the REB for electricity produced
  through CHP with 0.5ct per kWh, applicable to
  power generation lt 200 GWh
• The fuel tax for power generation will be
  converted from an input levy to an output levy
  meaning an increase in total taxation. This
  increase will not apply to CHP power for own use
• Other instruments (Environmental Management Act)
• main legal instrument protecting the environment
• ALARA principle - As Low As Reasonably Achievable
  - diminishing negative impacts to the environment
  to a reasonable minimum
• Connection of reasonable energy efficiency
  measures with the issuing of environmental
  permits
• Measures cost effective within 5 years ( NPV and
  15 IRR)

11
Long-term Agreements / Benchmarking

• Principle
• Private companies take initiative for energy
  efficiency and environmental protection based on
  a negotiated agreement
• In return, government does not impose extra
  policy measures on these companies (e.g. taxes)
• Result
• Private entities have to take own initiative in
  reaching EE objective, looking for relatively
  cost-effective measures like CHP
• Own initiative means that energy efficiency gains
  a higher priority of company management
• Additional instruments / facilities connected to
  CHP
• National energy agency (Novem) and related
  organisations give advice to companies regarding
  energy efficiency
• Support for the development of new technologies
  (RD) and its utilisation (through CO2-reduction
  plan)

12
CHP Promotion in Denmark

• Denmark is one of the biggest performers in CHP,
  about 50 of electricity is produced through CHP
• Important factors in this success
• Existence of DH network over the whole country
• Willingness of government to secure energy supply
  after oil crisis (Denmark had been heavily
  dependent on oil imports)
• Environmental concerns during the 1980s
• Existence of a legal framework supporting CHP
• Legal Framework for CHP in Denmark
• Electricity Supply Act (1976)
• Gas Supply Act (1979)
• Heat supply Act (revised in 1990), introduced
  energy planning
• Voluntary agreements between government and the
  energy sector

13
Legal framework supporting CHP

• Heat Supply Act has been most important for
  development of CHP in Denmark
• Places an obligation on municipalities to ensure
  development of CHP projects in District heating
  areas above 1 MW of heat capacity
• Ministry of Energy can issue guidelines for CHP
  planning (country is divided into heat supply
  districts)
• Municipalities have the right to impose
  compulsory connection to DH networks and to
  forbid new electrical heating installations in DH
  areas.
• Regulation of heat and electricity prices by
  pricing committees under the Ministry of Industry
  and Trade
• Electricity supply Act (amended in 1998)
• Ensures obligation of utilities to buy surplus
  power from CHP installations against a price
  covering both short-term as long-term marginal
  costs

14
Danish Heat Planning System

• The system (adopted in 1979) aimed at planning of
  large investment projects connected to the
  introduction of natural gas and utilisation of
  surplus heat
• The country was divided into heat supply
  districts, based on available options of heat
  supply and individual gas supply
• Responsibility for heat planning has been placed
  on municipal level (since 1990), state has
  supervisory role
• Planning phases in Heat Supply Act
• Mapping phase, description of current status
• Proposal phase, outline of future options
• Planning phase, identifying least cost options
  and project development
• Project phase, implementation of planned project
• In revision of the Act, a follow-up phase has
  been included (surveillance, adjustments and
  connecting up)

15
Promotional policies

• CHP Conversion Programme (1990)
• Converting all small- and medium sized district
  heating plants to CHP or to biomass before 1998
• Programme consisting of three phases starting
  with the largest coal- and gas-fired DH plants up
  to small-scale DH schemes
• Financial incentives
• Investment subsidy for conversion of district
  heating into small-scale CHP and biomass if
  conversion would lead to higher heat prices
• Investment grants for new district heating
  networks and rehabilitation of existing networks
  in cases of compulsory connection to the grid
• Subsidy for electricity production sold to the
  grid from small-scale CHP and industrial CHP
  based on natural gas or renewables (100 DKK/MWh,
  later reduced to 70 DKK/MWh).
• Investment subsidies for installation of central
  heating in pre 1995 houses in areas with DH
  supplied from CHP plants .
• Introduction of green taxes on trade and
  industry. The tax yield is returned as investment
  grants.

16
Barriers to further increase of CHP

• Uncertainty of liberalisation, government is
  discussing new legislation, but not certain what
  will come
• Most of the CHP potential in Denmark has actually
  been developed, the remaining potential lies in
  the industrial sector
• Decrease in subsidy to industrial CHP has
  increased payback time, which is unacceptable to
  most industries
• Gas is relatively expensive and the price is not
  likely to decrease. The electricity price is
  quite low. Possibility exists that electricity
  prices will rise after liberalisation
• There is large overcapacity of electricity in
  Denmark

17
Comparing Dutch and Danish approach

• Dutch approach
• Important role of economic instruments (tax
  incentives, subsidies)
• No regulatory framework on local/regional level
• Due to little spread of district heating
  networks, CHP has been installed in large power
  stations and (energy-intensive) industries, where
  the highest potential was available.
• With liberalisation came an end to feed-in
  tariffs and beneficial gas tariffs, presenting a
  threat to existing and new CHP installations
• Danish approach
• National regulatory framework connected with
  strong local energy planning aimed at increase of
  district heating and CHP
• Spread of CHP started at heating plants, due to
  existence of large district heating network.
  Industrial CHP developed later in connection with
  subsidies and energy taxes.
• CHP covers a large part of the basic electricity
  supply, existing installations are therefore less
  threatened by liberalisation

18
What can we learn from the Dutch and Danish
examples ?

• Share of district heating networks in heat supply
  influences the utilisation of CHP
• Small-scale and industrial CHP heavily relies on
  subsidies and favourable tariffs
• A strong planning tool can favourably influence
  the utilisation of CHP from the beginning
• The Dutch system relies on financial instruments
  and willingness of private entities (and
  voluntary agreements)
• Danish policy is more strict, but also partly
  based on agreements with utilities and other
  stakeholders
• In both countries, CHP strategies would not be
  successful without involvement of private
  stakeholders