Explanatory Memorandum to COM(2002)415 - Promotion of cogeneration based on a useful heat demand in the internal energy market - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2002)415 - Promotion of cogeneration based on a useful heat demand in the internal energy market. |
|---|---|
| source | COM(2002)415  |
| date | 22-07-2002 |
This proposal, building on the dual objectives of contributing both to security of energy supply and to climate change polices, arises from the need for reinforced efforts to promote high-efficiency cogeneration i in the internal energy market.
In its Green Paper on security of energy supply i, the Commission highlighted the following points:
- the European Union is extremely dependent on its external energy supplies, with imports currently accounting for 50% of requirements. This figure is projected to rise to 70% by 2030 if current trends persist.
- at present greenhouse gas emissions in the European Union are on the rise making it difficult to respond to the challenge of climate change and to meet the commitments under the Kyoto Protocol.
- the European Union has relatively limited scope to influence energy supply conditions. Efforts will have to focus on orienting the demand for energy in a way that respects the EU's Kyoto commitments and is mindful of security of supply.
These observations provide strong arguments for developing new Community policies and measures aimed at curbing energy demand and reducing greenhouse gas emissions. Even the level of greenhouse gas emissions in EU in 1999 was the same or just below the level of 1990, it is still a great challenge to meet the Kyoto target. Due to the efficient use of the fuel, the simultaneous production of heat and power can offer energy savings and avoided CO2 emissions compared with separate production of heat and power. This need for policy action on co-generation at EU level was reinforced in the Commissions Communication on the implementation of the European Climate Change Programme i.
Cogeneration is a highly efficient technique to provide electricity and heat for the European energy market. Promotion of cogeneration is a part of the strategy for efficient use of energy and supplementary to the strategy of increased use of renewables. However cogeneration is not a target in itself but can be an efficient tool to generate energy savings and to pursue the targets of reductions in CO2 emissions by replacing separate production of heat and electricity.
As cogeneration is linking together the production of heat and electricity, it is important to ensure that the produced electricity and heat meet real demands. The electricity can be transmitted into a market place and sold where it is needed, the heat however cannot easily by transported or stored, and therefore the cogeneration process must be based in time and place of a real need for heat. The real need for useful heat is the cornerstone of efficient cogeneration, because if the produced heat is not meeting a real demand the advantages of cogeneration disappear. Furthermore the promotion of cogeneration should not lead to encouragement of increased heat consumption.
In the Commission's cogeneration strategy i from 1997, an overall indicative Community target of doubling the share of electricity production from cogeneration in total EU electricity production from 9% in 1994 to 18% by 2010 was set. Nevertheless, despite the promising potential for cogeneration, no significant increase in the share of cogeneration has been seen in the past years. An overall indicative target of 18% provides a benchmark against which to measure progress. Once a stable framework has been established, based on common definitions and methodologies, and the potential of Member States assessed, the Commission could examine the possibility of indicative objectives for each Member State.
A stable framework based on common definitions and methodologies provides the best possible foundation for promotion of cogeneration based on an economically justified heat demand also taking into account the deep complexity of the matter.
Contents
- 2. Objective and scope of the proposed Directive
- 3. Current status for cogeneration in the EU
- 3.1 Problems to face
- 3. The installation costs per kilowatt are usually higher than in a large electrical plant
- 3.2 Reasons for political support
- 3.3 Statistic overview
- 5. Elements of the proposed Directive
- 5.1 Definition of cogeneration
- 5.2 Guarantee of the origin of electricity from cogeneration
- 5.3 Efficiency criteria
- 5.4 National potentials for high-efficiency cogeneration
- 5.5 Support schemes
- 5.6 Grid system issues
- 5.7 Administrative procedures
- 6. Justification for action at Community level
- 6.1 Current political context
- 6.2 Additional impact of action at Community level
- 7 Impact of the proposed Directive
- 7.1 Potential energy savings
- 7.2 Impact on security of energy supply
- 7.3 Cost-effectiveness of the measure
- 8. Relevance for the Candidate Countries
- 9. Consultation during the preparation of the proposal
- 10. Contents of the proposal
- Annex I lists the cogeneration technologies covered by the proposal
The overriding objective of this proposal is to create a framework, which can support and facilitate the installation and proper functioning of electrical cogeneration plants where a useful heat demand exists or is foreseen. This overall objective translates into two specific aims:
- In the short term, a cogeneration Directive should serve as an instrument to consolidate existing and, where feasible, promote new high-efficiency cogeneration installations in the internal energy market. In order to create a level playing field, regulatory certainty and in some cases financial support are vital for cogeneration. This applies to the current transitional phase of the liberalisation process, where the internal energy market is not fully completed and where internalisation of external costs is not reflected in energy prices.
- In the medium to long term, a cogeneration Directive should serve as a means to create the necessary framework that will ensure that high-efficiency cogeneration, alongside other environmentally friendly supply options, constitutes a key element when decisions on investment in new production capacity are made. By creating a supportive framework, such cogeneration can contribute to the establishment of more diversified and energy efficient supply systems in the Community.
In order to exploit the potential for cogeneration regulatory certainty and appropriate mechanisms that address the lack of internalisation of external costs are needed. The proposed Directive lays down a framework, which addresses these issues through a set of common principles for the promotion of cogeneration.
The practical application of the framework will to a large extent be the responsibility of the individual Member States, given the heterogeneous nature of the cogeneration sector across Europe and the need to take account of national and climatic circumstances. However the Commission could have an important role in facilitating that EU objectives on cogeneration are met.
It is necessary to stress the importance of the different climatic and industrial conditions in Member States for development of cogeneration providing different possibilities for using the produced heat, and taking into account the thermodynamic efficiency of the engines and systems employed. The consequences in practice of the thermodynamic efficiency for electricity production could be illustrated for a steam turbine. If the heat output is needed at a temperature of 200°C it is not possible to produce as much electricity in the turbine as if the heat output is needed at 60°C.
These considerations lead to creation of three classes of cogeneration reflecting thermodynamic considerations as well as a division of cogeneration into market segments facing different barriers to overcome:
- Industrial applications of heat, that usually require steam or hot water above 140º C;
- Central Heating applications that require warm water between 40ºC and 140ºC;
- Agricultural applications: for example in order to heat greenhouses, the temperature of the warm water could be below 40º C, but in the case of heating pools in aquaculture the need is only of 15-25ºC. Justification of useful heat at this temperature level should be considered very careful in order not to increase fuel consumption.
The climatic differences among Member States is one of the most important factors explaining the huge differences of penetration of cogeneration and underline the relevance of the principle of subsidiarity. This proposal for Directive does not aim to ensure the same level of penetration of cogeneration in all Member States. The aim is to promote cogeneration wherever an economically justified potential is identified in order to save energy and reduce CO2-emission.
The proposed Directive builds in some respects on the recently adopted Directive 2001/77/EC on the promotion of electricity from renewable energy sources i. Renewables and cogeneration are in some areas faced with similar problems such as for example lack of internalisation of external costs, the need to provide regulatory certainty concerning grid issues and administrative procedures. However it has to be stressed that there are important differences between cogeneration and renewable energy. Cogeneration is not a source of energy, it is a highly efficient process to transform energy from one source usually fossil fuel but also renewables into electricity and heat.
The proposal covers the following main elements:
- Guarantee of origin of electricity produced from cogeneration following the 'disclosure' requirements on Directives concerning commons rules for the internal markets in electricity and natural gas;
- provisions obliging Member States to analyse national potentials for high-efficiency cogeneration and barriers to their realisation;
- provisions for evaluating the experiences gained with the application and coexistence of different support mechanisms for cogeneration used by Member States;
- provisions laying down the principles for the interaction between cogeneration producers and the electricity grid; furthermore to facilitate grid access for cogeneration units using renewable energy sources and microcogeneration plants below 1 MW
- provisions requiring Member States to evaluate current administrative procedures with a view to reducing the administrative barriers to the development of cogeneration.
In an open market to be developed in Europe, cogeneration has to face several problems in order to take advantage of the useful heat demands and propose the construction of new plants or carry on exploiting the existing ones. These are mainly the following:
1. High prices for fuels, usually due to the fact that they are smaller fuel users than the large traditional electricity producers.
2. Problems linked to the access to the electricity market, especially if they are small producers.
4. The amount of operating hours of the installation will usually be lower than for larger baseload plants because it will be linked to the real use of heat in the associated installations. In an industrial cogeneration plant, the working hours will be the hours that the industrial associated process works, for example not at night hours or on weekends. In the case of cogeneration for central heating some facilities may have to stop during summer time.
The following reasons justify a political support for high efficient cogeneration:
1. High efficiency means less fuel consumption and less CO2 and other emissions and thereby a contribution to sustainable development.
2. Avoided losses on the electrical grid because these installations usually are close to the consumption point on the electrical grid. .
3. Increasing competition among electricity producers because cogeneration technology allows new actors to enter the market of electricity generation.
4. Opportunity to create new enterprises, notably SME's, joint ventures and other collaboration formulas among the stakeholders (industrial, electrical, technological and so on).
5. Facilitation of the link between the population and the territory, mainly in less favorised, isolated or ultraperipherical areas.
According to the latest cogeneration statistics from Eurostat i presented in Table 1, the overall share of cogeneration electricity in total EU electricity production was 11% i in 1998 compared with 9% in 1994.
In the cogeneration statistics it is important to avoid counting in electricity, that has not been produced in cogeneration mode. For this purpose the cogeneration statistics are developing and new methodologies have to be adopted. This directive would establish a methodology, which only takes into account electricity gained from cogeneration, the residual heat of which has been used efficiently.
Taking into account the previous considerations, the available statistics show substantial differences across the EU. Denmark, Finland and the Netherlands are the countries with the highest market penetration with cogeneration accounting in some case for more than 50% of total electricity generation. In contrast, in countries like France, Greece and Ireland cogeneration only plays a marginal role with contributions around 2%. However, if the cogeneration share is related to the amount of thermal based electricity production, the market shares of cogeneration in some case change significantly. Then countries like Sweden, Austria and France report cogeneration shares of 96%, 76% and 23% respectively.
Roughly 40% of electricity from cogeneration is produced for public supply purposes, often in connection with district heating networks. The remaining 60% are generated by auto-producers, normally for industrial processes. In terms of installed capacity, the electrical capacity of cogeneration in the EU increased with 14% between 1994 and 1998 from 63 GW to 72 GW. In absolute terms, Germany was in 1998 with 22 GW cogeneration electrical capacity by far the country with most cogeneration capacity in the EU followed by Italy (9,5 GW), Netherlands (8,5 GW), Denmark (7 GW) and Finland (5 GW).
The development in the use of fuels for cogeneration shows a trend towards cleaner fuels thus enhancing the environmental benefits of cogeneration. Natural gas is the most used fuel in cogeneration production with a share of 45% in 1998 compared with 30% in 1994. In contrast, the use of hard coal and lignite has declined from 30% to 20% between 1994-1998. Renewables accounted for 13% in 1998. Within the Eurostat definition of renewables for cogeneration both biodegradable and non-biodegradable municipal solid waste have until now been included. However, in the light of the definition of waste for renewables in the Directive for the promotion of electricity from renewables, it would be coherent to establish data as well for the biodegradable part alone.
The absence of more recent figures means, however, that the above figures should be treated by some caution. Since 1998, the cogeneration sector has reported stagnating or even declining market trends in several EU countries. This lack of progress in promoting new cogeneration is to large extent results from the existence of a number of barriers, which hampers the development of cogeneration.
Table 1 - Historical data on CHP in Member States and CHP as a percentage of thermal and total electricity generation.
>TABLE POSITION>
* Eurostat estimation
** The German figures are for 1995.
Source: 'Combined Heat and Power production (CHP) in the EU - Summary of statistics 1994-1998', Eurostat 2001
A study on the administrative obstacles to decentralised cogeneration i has analysed the situation in France, Netherlands and the United Kingdom. The study identifies economic barriers to decentralised cogeneration such as low prices for excess electricity sold to the grid, high connection costs, high costs of grid reinforcement charged on the cogeneration developer, high costs for use of the distribution system, complex and lengthy administrative procedures, lack of recognition of the benefits to the network of embedded generation etc. Another study i has evaluated the impact of the liberalisation of the electricity market on the cogeneration and district heating and cooling sector through analyses of the economic viability of such plants. The study concludes that new efficient gas fired cogeneration technologies in principle should be competitive to new efficient condensing power plants. However, if the electricity prices do not reflect real costs (including internalisation of external costs), only large gas fired cogeneration plants are competitive. If an assumed rate on environmental benefits of 10 EUR per saved ton CO2 is included in the calculation some additional medium-sized gas fired cogeneration plants would be feasible. If the price on the Nordic power market from May 2000 of 15 EUR/MWh is applied none of the cogeneration plants analysed would be feasible on purely economic criteria i.
Due to its widespread use in cogeneration production, the price of natural gas is another important parameter influencing the economic viability of cogeneration. The opening of gas markets to competition should in principle lead to lower gas prices. However, many cogeneration producers have during the past years experienced fluctuating and often high gas prices due to i.a. gas prices being linked to the oil price. Moreover, Article 18 i of Directive 98/30/EC i, which allows Member States to restrict the access of cogeneration producers to the internal gas market, is another potential barrier for cogeneration. However, the Commission's proposal for amendment of the gas Directive i envisages that this provision would disappear. Ensuring access to the gas market for all cogeneration producers is important as gas fired cogeneration allows for the highest possible fuel efficiency thus benefiting both the environment and the Community's energy balance. From an internal market point of view it is also important to create a level playing field where cogeneration producers and other power producers enjoy the same basic rights with regard to access to the gas market across the Community.
As described above, barriers to cogeneration continue to exist both in the electricity and gas markets. Many cogeneration producers have experienced increasing gas input prices combined with decreasing electricity output prices thus putting the economic viability of cogeneration under threat. Both markets are still in a transitional phase with asymmetric market openings across the EU, increased market uncertainty, more focus on short-term decisions, and lack of internalisation of external costs. Such a market environment is generally detrimental to smaller and less competitive operators such as cogeneration producers. Altogether, the current market conditions have contributed to a situation where many existing cogeneration plants have came under pressure and where incentives to upgrade existing capacity or invest in new capacity are significantly reduced.
4. Focused public support of cogeneration based on useful heat demand in the European internal market.
The purpose of this directive, according to the subsidiarity principle, is to introduce a common and transparent framework in order to focus Member States public support for cogeneration process based on useful heat demand according to the national circumstances and energy policies, in the framework of the European competition rules. This Directive sets up common definitions of electricity from cogeneration in order to develop the same methodological background for member state support schemes. The aim of this methodology is also to ensure impacts on the internal electricity market from support schemes are transparent.
As the large cogeneration installations have easier access to more favourable financing and fuel prices direct support for production of cogenerated electricity should be concentrated to electricity produced either in installations with a capacity below an indicative threshold value of 50 MW (e) or in larger installations but then only the amount of electricity produced by the capacity below such an indicative threshold. The reason for this is not to disqualify larger installations but to avoid overcompensation of the larger installations. Larger installation would still have support for the production based on the first 50 MW, but will not receive additional support for the rest of the production. If direct support to the production of cogenerated electricity is based on a fixed amount per MWh produced, the support should not be applied to production above the indicative threshold value. Member States should use the following considerations in design of support schemes:
1. Support schemes for production of cogenerated electricity should be limited to the electricity produced in one process together with a useful heat production.
2. The economic support to the electricity production should be focused to develop the necessary economic incentive to operate efficient cogeneration plants on the basis of economically justified heat demand.
3. Direct support for production should in principle be focused on the share of cogenerated electricity produced either in installations with a capacity below an indicative threshold value that should be set at 50 MW(e) or lower, or in larger installations but then only the amount of electricity produced by the capacity below such a threshold value.
4. The cogeneration plants should be designed and sized for the actual heat demand present or foreseen with certainty.
Cogeneration is currently defined in different ways across the Community. Some definitions are only intended to identify and measure cogeneration for statistical purposes. Other definitions are related to the eligibility of cogeneration for national support schemes. Sometimes such eligibility criteria are linked with quantifications of the benefits of cogeneration measured in terms of energy savings or CO2 savings. In addition, defining cogeneration is complicated by certain cogeneration technologies that allow cogeneration units to switch between cogeneration and generation of separate electricity or heat.
For the purpose of this Directive, it is necessary to create a common basis for the definition of cogeneration. In principle, it would be desirable to lay down a single harmonised definition of cogeneration to be used across the Community for all purposes. However, the Commission is mindful that most Member States have already adopted different national definitions of cogeneration developed for various purposes and often adapted to national circumstances. To take account of these two opposite concerns, this Directive introduces a two-step approach consisting of:
a harmonised basic definition of electricity from cogeneration (Annex II to the Directive)
a methodology to define high-efficiency cogeneration (Annex III to the Directive)
The basic definition will serve as a means to eliminate the current ambiguity resulting from the different definitions of cogeneration. This will create certainty that the basic concept of cogeneration is understood and measured in the same way across the Community. The basic definition will be used for cogeneration statistics and for monitoring purposes at Community level. As a second step, the Directive provides a methodology to be used to determine the quality i - expressed in terms of energy savings - of the cogeneration production identified under the basic definition in step 1. The latter will be applied to promotional aspects, notably certification of origin, identification of national cogeneration potentials and, where appropriate, eligibility for financial support.
In order to fulfil the obligations on information about the primary energy sources used on the production of the electricity, as set up on the 'disclosure' provisions at the amending directives 96/92/EC and 98/30/EC concerning common rules for the internal markets in electricity and gas, this Directive sets up a mechanism, which will ensure that producers and others with an interest in cogeneration can request a guarantee of the origin of electricity from cogeneration.
Under the proposal the guarantee of origin must specify the fuel source used, the use of the heat generated together with the electricity and the dates and places of production. The guarantee of origin must also specify the national reference values used to define high-efficiency cogeneration.
It is not the aim at this stage of development of cogeneration and statistic knowledge to establish any other connection between the Guarantee of origin of electricity from cogeneration and the system of Guarantee of origin of electricity produced from renewable energy sources, than introducing the same procedures to be established by Member States. The high efficient cogeneration plants using fossil fuels produce at least 5-10% less CO2 than in the situation of separate production, while electricity from renewables produce almost no CO2 . It is therefore obvious that the CO2 reduction value of 1 kWh cogenerated electricity is much smaller than the CO2 reduction value of 1 kWh renewable electricity.
It is important for reasons of transparency and for monitoring purposes that cogeneration is defined and counted in the same way across the EU. This proposal therefore introduces in Annex II a harmonised methodology to be used for the basic definition of cogeneration. This methodology is largely based on a recently revised methodology used by Eurostat for collection of EU-wide cogeneration statistics i. The new Eurostat methodology essentially implies that in cogeneration units with annual overall efficiency higher or equal to 75%, the total electricity generation is considered to be cogeneration electricity. In cogeneration units with an annual overall efficiency below 75%, calculations must be made in order to subtract electricity that is not produced in a cogeneration process.
To address the concerns expressed by some experts that a 75% threshold in some cases may be too low, the methodology set out in Annex II adds a separate threshold of 85% to be applied to cogeneration units, which can switch to operation in non-cogeneration mode. Such units below an overall annual efficiency of 85% will be subjected to additional calculations to identify the actual cogeneration production. With this approach, the risk of certifying non-cogeneration as cogeneration electricity is judged to be minimal.
To secure that only cogeneration that offers actual benefits compared with separate production of heat and power is promoted under this Directive, it essential that an appropriate mechanism to determine these benefits exists. The proposal therefore provides in Annex III a methodology for determining the benefits of cogeneration.
The benefits of cogeneration can be expressed in terms of energy savings or CO2 savings. In most cases, a cogeneration installation that provides energy savings will also offer CO2 savings. However, the choice of fuel for cogeneration will have an impact on the amount of CO2 savings. The concept of cogeneration is basically about saving energy by using the fuel input in a highly efficiency manner to generate both electricity and heat. For the purpose of this Directive energy savings are therefore considered the most suitable indicator to express the benefits of cogeneration. By using this indicator, the Directive focuses on the energy efficiency characteristics of cogeneration and it remains fuel neutral thus allowing for a diversified mix of fuels in the cogeneration sector. However, under the reporting requirements the Commission could make an assessment of the environmental benefits, including the CO2 emission savings.
To determine the energy savings from cogeneration, the basic definition of cogeneration as set out in Annex II cannot stand alone because it only identifies cogeneration without quantifying the potential energy savings. It is therefore necessary to develop additional criteria to determine the energy savings from cogeneration production as defined under the basic definition provided in Annex II. To define high-efficiency cogeneration the fuel used to produce a given amount of heat and power by cogeneration must be quantified and compared with the fuel that would have been necessary to produce the same amount of heat and power via separate generation. This implies that for the comparison assumptions must be made as to what kind of separate production cogeneration displaces.
One option would be to lay down in the Directive harmonised references for separate production of heat and power that any given cogeneration production should be compared with. However, defining such references is a highly complex exercise, especially for new production where empirical data is not available and assumptions must be made about the future fuels, technologies and expected efficiencies. In addition, the differences in the energy mix across the Community also make it difficult to establish a single harmonised reference, which can be applied to all Member States. This has led the Commission to conclude that at this stage it is necessary to provide a common methodology for calculating the energy savings from cogeneration. However, it will be up to Member States to define, on the basis of the framework provided in Annex III, the exact national efficiency reference values to be used in the calculation. Member States will be asked to present a well-documented analysis of the choice of reference values, which must be published and forwarded to the Commission. The Commission will evaluate the efficiency reference values adopted by Member States and on that basis consider the scope for further harmonisation.
For the application of the efficiency criteria, the proposal distinguishes between new and existing production. Electricity from new cogeneration production should - within the same fuel category - be compared with the best new state-of-the-art power production technology that it is assumed to displace. By comparing efficiencies within similar fuel categories, the assessment of the benefits of cogeneration remains fuel neutral and focuses entirely on the energy efficiency characteristics of cogeneration. On the heat side, new cogeneration should normally be compared with an indicative heat efficiency reference value of 90% although lower efficiency references may be used for some fuels. Altogether, new cogeneration production should provide energy savings of at least 10% to qualify as high-efficiency cogeneration. Small-scale cogeneration and cogeneration based on renewable energy sources may qualify with a reduced level of energy savings. Electricity from existing cogeneration should be compared with the average efficiency of the existing national fossil-based electricity production. Nuclear and renewable electricity is excluded from the mix, as they in an actual market situation are normally not displaced by cogeneration electricity. On the heat side, existing cogeneration should be compared with the average efficiency of the existing national heat generation mix. Existing cogeneration production should provide energy savings of at least 5% to qualify as high-efficiency cogeneration.
Setting targets helps to quantify and subsequently monitor what the Community and individual Member States wish to achieve in the field of cogeneration. The Commission has therefore considered whether indicative national targets for the market share of cogeneration should be set for all Member States at Community level. On the other hand, the national market frameworks for cogeneration across the EU are very disparate with regard to for instance market potential for cogeneration, national energy mix, availability of fuels, industrial structure, demand for heating and/or cooling etc. This means that the conditions for promoting a specific energy efficiency technology like cogeneration in the national heat and electricity markets are very different. At this stage the establishment of indicative targets for each Member State would be technically difficult. However, the Commission could examine the possibility and need for such targets on the basis of the first reporting from Member States on the national potentials for high efficiency cogeneration. The Commission considers that initially the focus should be on stimulating effective promotional policies and measures in favour of cogeneration. The Directive will therefore initiate a compulsory procedure aimed at activating the existing national potentials for high-efficiency cogeneration.
Member States will be obliged to carry out well-documented analyses of the national potentials for cogeneration. To ensure that the analyses are carried out in a systematic and comparable manner, which will allow the Commission and the general public to monitor the implementation of the Directive, Annex IV to the Directive sets out a number of criteria and elements that must be covered in the analyses. The criteria include inter alia a requirement to consider the likely fuels for cogeneration with special emphasis on the scope for promoting renewable energy sources in the national heat markets via cogeneration and an obligation to examine aspects relating to cogeneration technologies, cost effectiveness and timeframes.
Annex IV also requires a breakdown of the cogeneration potential into at least three main categories. The categories 'Industrial cogeneration', 'Heating cogeneration' and 'Agricultural cogeneration' refer to the different applications of the heat output. Member States will also be obliged to make a separate analysis of national barriers to cogeneration and to report regularly on progress towards realising national potentials and measures taken to promote cogeneration. To allow monitoring and assessment of progress at regular intervals reliable cogeneration statistics are necessary. The Directive therefore introduces an obligation for Member States to submit cogeneration statistics on an annual basis to the Commission. It is envisaged that this data collection in practice will be a continuation of the current practice where Member States submit national cogeneration statistics to Eurostat.
A variety of different national support schemes for cogeneration are currently in operation or in the process of implementation. Such schemes include inter alia direct price support (feed-in tariffs), tax exemptions or reductions, green certificates and investment aid.
While the justification for financial support of cogeneration will disapear as the external costs are fully internalised in the market, support for cogeneration will in many cases be justifiable in the short to medium term. In order to reflect this aspect public support schemes should include the phase-out principle In order to realise the potential benefits from the installation and proper functioning of electrical cogeneration plants where a heat demand exists or is foreseen, continuation and reinforcement of support schemes in favour of cogeneration will therefore often be necessary within the limits set by the EC Treaty and in particular its Articles 87 and 88. The Community has, however, a clear interest in ensuring that support is successful in promoting high-efficient cogeneration. Under the Directive, the Commission will therefore be obliged to evaluate the application of the different support schemes for cogeneration used in Member States and to present a report on the experiences gained with the application and coexistence of different support mechanisms.
To function properly, the internal electricity market has to provide a level playing field for all existing and potential new producers of electricity. In this context, objective, transparent and non-discriminatory rules and procedures in relation to grid system issues can facilitate the market penetration of cogeneration. Regulatory certainty about grid system issues is of particular importance for cogeneration given that cogeneration producers in many cases are smaller and independent operators that are vulnerable to costs and conditions in this field.
Cogeneration producers are generally faced with the same difficulties as producers of electricity from renewable energy sources in relation to grid system issues. As a consequence, this proposal in many respects bases itself on the same provisions as those contained in Directive 2001/77/EC. This implies that the proposal has provisions, which guarantee the transmission and distribution of electricity produced from cogeneration. Grid connection and grid reinforcement is another area where barriers to cogeneration in some cases exist as described in section 3. To address such barriers, the proposal contains provisions requiring transmission system operators and distribution system operators to set up and publish standard rules relating to grid connection and reinforcement. Such rules must be based on objective, transparent and non-discriminatory criteria.
Due to the link between electricity production and the heat demand, cogeneration producers sometimes need to purchase additional electricity to back-up or top-up the producer's own generation. Excess electricity must also sometimes be sold, when production exceeds consumption. Special markets for balancing and regulating power are gradually emerging. However, not all cogeneration producers are currently eligible customers with access to such markets. Until the electricity market is fully opened, it is therefore necessary with specific provisions to ensure that the tariffs offered to cogeneration producers without market access that need to purchase electricity are set according to objective, transparent and non-discriminatory criteria. For reasons of transparency and for monitoring purposes, it is also proposed that benchmarking analyses on tariffs offered to cogeneration both for the purchase of additional electricity and for the selling of excess electricity are undertaken.
It has been pointed out by organisations representing cogeneration developers that administrative procedures represent a barrier to the further development of cogeneration. Such barriers can for instance be the length of the procedure, the requirements necessary to meet, or high costs associated with the authorisation procedure.
Directive 96/92/EC provides the basic rules in this respect, notably with regard to authorisation procedures. Nevertheless, these general rules may not always be sufficient for smaller producers such as for example many independent cogeneration producers for whom administrative and planning procedures can be a serious barrier.
In many respects, harmonised rules in this area could contribute towards promoting cogeneration. On the other hand, administrative and planning procedures vary significant across the Community reflecting very different administrative and constitutional set-ups. Taking this into consideration and with due regard to the principle of subsidiarity, this proposal does therefore not contain provisions for such harmonised rules.
Nevertheless, reinforced efforts to minimise administrative barriers are needed. It is therefore proposed that Member States or the competent bodies appointed by the Member States evaluate existing legislative frameworks with a view to reducing barriers to cogeneration, streamlining and expediting procedures and ensuring that rules are objective, transparent and non-discriminatory. Member States will be obliged to report the results of the evaluation and indicate, where appropriate, action taken to remove barriers.
In the Green Paper on the security of energy supply i, the Commission outlines the prospective energy situation in the EU for the coming decades. The Green Paper emphasises the need to reinforce efforts to reduce energy demand as a means to both reduce the dependence on external suppliers and to contribute to solving climate change problems. Clear rules for cogeneration, which allows plants to work properly with its fuel saving characteristics, can contribute to both policy objectives.
The Commission in its proposal for amendment of the electricity and gas directives i emphasised that a fully opened market needs an internalisation of external costs to ensure a true level playing field. According to for example the ExternE study i, CHP provokes with the same fuel at least two times less socio-environmental damages compared with conventional electricity production. As long as external costs are not fully integrated into energy prices, the Commission will promote initiatives that seek to rectify this imbalance. Such initiatives should seek to compensate the extra costs of the cogeneration producer compared to the costs involved in separate production of heat and electricity. At the present market conditions such compensation should seek to rectify the above mentioned imbalance and to avoid that the extra costs result in higher prices of the cogenerated heat and electricity compared to the separately produced. Compensation of extra costs should be adjusted in order to reflect the need for compensation for the different sizes of installations, types of technologies and fuels. Larger cogeneration plants have less need for compensation than the smaller ones.
The Commission in its Communication on the completion of the internal market i underlined that the creation of the internal market for electricity and gas in many respects has shown to have had positive environmental effects in terms of e.g. increased operating efficiency and switch to cleaner fuels. However, it was also stressed that falling energy prices might not be conducive to the development of energy efficiency and renewables. Waiting for the internal energy market to be fully completed could involve many risks because opportunities for cogeneration could be lost in the meantime. The Commission therefore announced in the above-mentioned Communication that it intends to prepare, in 2002, proposals with respect to cogeneration.
Art.2 of the EC Treaty calls for a sustainable development of the economy of the Community. Art.6 of the EC Treaty reinforced these objectives of sustainable development by integrating environment policy into other Community policies. In addition, the Commission's Communication on sustainable development i presented at the European Council in Göteborg in June 2001 identified greenhouse gas emissions as a one of the major obstacles to sustainable development. The European Council in Göteborg i adopted a strategy for sustainable development and added an environmental dimension to the Lisbon process on economic and social renewal.
To address climate change, the Commission recently adopted a Communication on implementation of the European Climate Change Programme i, in which it announced its intention to put forward a proposal for a cogeneration Directive in 2002. Moreover, a proposal for a Directive on greenhouse gas emission trading i has also recently been adopted by the Commission. When such a market is in full operation, a price on CO2 emissions will in effect be disclosed whereby an important step towards internalisation of external costs will have been taken. Furthermore introduction of such a market will also be a step towards eliminating the justification of national economic support schemes for promoting cogeneration. However, as long as a well-functioning market reflecting the price of CO2 emissions is not in operation, cogeneration is particular vulnerable to competition from less clean energy producers and will therefore often need specific promotion. In response to the Commission's energy efficiency action plan i, the Council identified promotion of cogeneration as one of the short-term priority actions in the follow-up on the action plan i. The European Parliament called on the Commission to submit proposals for common rules for the promotion of cogeneration i.
In the recently revised Community guidelines on state aid for environmental protection i, provisions were included, which allow under certain conditions financial support to cogeneration. In order to qualify under the guidelines, the environmental benefits of the concerned cogeneration scheme must be documented.
Member States are becoming increasingly interdependent in the field of energy, notably as regards the internal energy market and the common commitment to reduce greenhouse gas emissions following the ratification of the Kyoto Protocol. Policy decisions on cogeneration in one Member State can have an impact on the energy markets in other member States. Member States are also faced with common competition rules of the Treaty, including the recently revised Community guidelines on state aid for environmental protection, which also define the national room of manoeuvre in the field of cogeneration. In addition, the current lack of progress in the cogeneration market demonstrates that it is doubtful that the potential for cogeneration can be realised via initiatives at Member State level alone.
This has led the Commission to conclude that cogeneration policies at Member State level need to be complemented by legislative action at Community level. This Directive will create the necessary legislative framework whereby efforts at all levels can be concentrated on promoting high-efficiency cogeneration. The Directive will serve as a means to reduce the current market uncertainty surrounding cogeneration and provide important stimuli for cogeneration in individual Member States by establishing a coherent Community framework. Given the need to take account of the different national circumstances for cogeneration and to respect the principle of subsidiarity, it will to a large extent be left to Member States to decide how to operate within this overall Community framework for cogeneration.
Legislative action at Community level will ensure that a set of common principles for the promotion of cogeneration is developed. The definition of high-efficiency cogeneration is an example of an area where Community action is necessary to ensure a coherent methodology for promoting cogeneration so as to avoid market distortions. Moreover, common principles for high-efficiency cogeneration can also ensure that financial support for cogeneration is prioritised in such a way that support is allocated to the most efficient production.
It is also of common Community interest to work towards the creation of a level playing field within the internal energy market. Establishing an objective, non-discriminatory and transparent framework for cogeneration producers in relation to grid system issues is an important question with a clear Community dimension. Creation of a level playing field is also relevant from a competition point of view as it could contribute to ensuring a certain number of market players in the internal energy market. Community action in favour of independent, and often small-scale, power producers such as cogeneration could thereby indirectly contribute to stimulating competition in the internal electricity market.
From a security of energy supply perspective, the Community also has an interest in promoting high-efficiency cogeneration as an element in its overall strategy to reduce energy demand. Promotion of cogeneration using indigenous energy sources such as bioenergy, waste and geothermal energy is particularly important in this context.
In respect of the future Community a Directive on promotion of cogeneration provides the Candidate Countries with possibilities to improve security of supply based on the existence of large heat markets and existing support programmes.
Finally, cogeneration can due to its high fuel efficiency and reduced environmental impact contribute to Community policies on sustainable development, notably in relation to the need for increased use of clean energy and measures to reduce energy demand. In the context of climate change, the Community has a clear interest in putting forward concrete proposals aimed at reducing the emission of greenhouse gases. A Directive on the promotion of cogeneration will therefore be one of the elements in the package of measures needed to comply with the Kyoto Protocol to the United Nations Framework Convention on Climate Change and any policy package to meet further commitments.
In its summary report on cogeneration statistics, Eurostat presents the following calculation of the estimated primary energy savings achieved by different types of cogeneration plants in the years 1994 to 1998.
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* German figures are for 1995.
Source: 'Combined Heat and Power production (CHP) in the EU - summary of statistics 1994-1998', Eurostat, 2001.
According to Eurostat the absolute primary energy savings from cogeneration in 1998 amounted to 1176 PJ, or 28 Mtoe. This corresponds to 2% of total EU gross inland consumption of primary energy. The Eurostat calculation is based on an assumed average efficiency of separate electricity generation of 36%, an average efficiency of separate heat generation of 85% and an overall efficiency of CHP plants of 75% in 1998
Import dependency and rising import ratios may lead to concern about the risk of interruption to or difficulties in supply. However, it would be simplistic and wrong to conceive security of supply as merely a question of reducing import dependency and boosting domestic production. Security of supply calls for a wide range of policy initiatives aimed at, inter alia, diversification of sources and technologies and improved international relations.
From an import dependency point of view, cogeneration would be beneficial, if the import of fuel to the EU were to be reduced compared with separate production of electricity and heat. However cogeneration schemes do not automatically trigger a reduction in energy imports. When it follows, the benefits from a security of supply point of view can be of varying size. If a more diversified fuel mix results from a cogeneration project than from separate production, the security of supply will be increased. Local production of electricity may also enhance security of electricity supply, since it ensures that electricity is produced in many different regions of a country where heat is needed. These regions become more self sufficient in power supply and less vulnerable to power failures. Most large industries with a steam demand are very sensitive to power failures for their industrial production and see their own electricity generation as an increased security of electricity supply.
If cogeneration takes place in a district heating system the security of heat supply is increased, considering that a large cogeneration installation always has stand-by capacity to back-up failures in individual units, something that a small heat installation can rarely afford.
The physical security of a cogeneration plant as regards sabotage and terrorist attacks also needs to be considered, especially following the 11 September 2001 attack on the USA. Cogeneration production would take place in a large number of plants, whereas electricity production in the reference case would take place in a few, large, centralised power plants, which are more likely targets for terrorists because of the larger impact of an attack. Cogeneration production would thus normally increase the physical security of the power system.
New high-efficiency and well-designed cogeneration installations dimensioned on the basis of a relatively stable heat demand and operated for a reasonable amount of hours over the year are generally considered to be a cost-effective energy solution.
Nevertheless, determining the costs-effectiveness of this proposal must necessarily be subject to many uncertainties and assumptions. In this context, a key issue is to define the reference case with which the cost-effectiveness of cogeneration is compared. The huge differences in the calculation of CO2 savings from cogeneration referred to in section 6.2 illustrate the impact of applying different assumptions to the calculation of CO2 savings or to calculations of cost-effectiveness.
In the context of the European Climate Change Programme reference was made to an estimated savings potential from a cogeneration Directive of 65 Mt CO2eq of which 12 Mt CO2eq could be achieved at costs of between EUR20 and EUR50 per tonne i. However, the document subsequently underlines that actual reductions are subject to uncertainties because the proposed Directive will leave the choice of implementation strategy and specific support mechanisms in favour of cogeneration to the Member States.
It should also be noted that these cost estimates are based on the assumption that the reference to cogeneration is a gas economy with combined cycle gas turbines with electrical efficiencies of 55%. In other words, this is the assumption that generates the most conservative estimates as to the cost-effectiveness of cogeneration. If other references were used, cogeneration would be more cost-effective.
The fact that this Directive will only promote high-efficiency cogeneration installations that make optimal use of the fuel input is also likely to improve the overall cost-effectiveness of the measure. In addition, it should be kept in mind that promotion of cogeneration is not only aimed at reducing greenhouse gas emissions, but also at saving energy. Important additional benefits with regard to energy savings and security of energy supply must therefore also be taken into account when judging the cost-effectiveness of the measure.
Community action promoting cogeneration is also very important for the Candidate Countries of in particular Central and Eastern Europe where cogeneration, and especially district heating, for many years has been an important component in the energy supply system. Most of the Central and Eastern European Countries have cogeneration shares of at least 10% of electricity production and some substantially higher i. District heating is even more widespread in Central and Eastern Europe with district heating networks in most major cities and markets shares for district heating in the range between 13-70% i. According to Euroheat & Power i almost 40% of the inhabitants of Central and Eastern Europe are customers of district heating representing 41 million users compared with around 20 million in the EU.
& Power, 2001.
& Power, 1999.
The energy sectors in most of the countries in Central and Eastern Europe are generally characterised by a high heat demand and a considerable potential for energy savings. The general conditions of many district heating systems in Central and Eastern Europe is not good with sometimes oversized capacities and old district heating networks in need of refurbishment. This often results in relatively low system efficiencies. At the same time, district heating is sometimes faced with competition from other energy sources. Community action to promote cogeneration could therefore provide a stable and supportive framework for cogeneration and district heating in this region.
In this context, it could be of particular importance to protect the existing district heating infrastructure, which has come under threat due to lack of renovation and competition from individual heating. A cogeneration Directive could provide guidance and incentives to promote high-efficiency cogeneration on the basis of i.a. the existing infrastructure and the documented experiences with cogeneration and district heating in the region. Modernisation of the district heating networks and shift to cogeneration instead of heat-only boilers could in many cases be important elements in future efforts to improve energy efficiency in the Candidate Countries.
This proposal follows a consultation and preparation phase involving a number of different meetings and working groups.
Member States and representatives of European associations and non-governmental organisations were invited to a formal consultation meeting organised by the Commission services on 26 November 2001. At this meeting Member States and stakeholders were given the opportunity to present their views and positions on the possible elements of a cogeneration Directive. A background document circulated prior to the meeting formed the basis for the consultation. A number of Member States and stakeholder organisations have subsequently submitted written comments on the Directive.
Specific consultation with experts from industry, associations and research institutes took place on 12 November 2001 in the form of a workshop devoted exclusively to discussing technical issues relating to the definition and certification of cogeneration.
Another workshop focussing on the future outlook for cogeneration in Europe was organised on 25 October 2001 where representatives from Member States and Candidate Countries as well as industry were invited.
Finally, Community action in favour of cogeneration was also subject to discussions in two separate working groups under the European Climate Change Programme working from mid-2000 to mid-2001. In these working groups work was conducted through a co-operative effort involving representatives from the Commission's different departments, the Member States, industry and environmental groups.
Article 1 defines the purpose of the proposal.
Article 2 sets out the scope of the proposed Directive.
Article 3 lays down technical definitions.
Article 4 contains provisions for guarantee of origin of electricity from cogeneration, in line with the 'disclosure' provisions on common rules for the internal markets in electricity and natural gas.
Article 5 obliges Member States to development criteria to determine the energy efficiency of cogeneration on the basis of a common methodology.
Article 6 obliges Member States to publish reports with analyses of national potentials for high-efficiency cogeneration and national barriers to their realisation.
Article 7 contains provisions for the evaluation of support schemes for cogeneration.
Article 8 concerns grid system issues.
Article 9 obliges Member States to evaluate the scope for reducing administrative barriers to cogeneration.
Article 10 concerns reporting requirements under the Directive.
Annex II sets out the methodology to be used for the basic definition of cogeneration.
Annex III outlines a methodology for determining the efficiency of cogeneration production.
Annex IV lists the criteria to be followed when analysing national potentials for high-efficiency cogeneration.