The future for cogeneration in Europe?

Climate change is the key driver that can overcome the barriers currently facing the cogeneration industry today, while also enabling cogeneration to compete on equal terms with other sources of electricity and heat supply. The Kyoto mechanisms will help the internalisation of the external costs on energy generation, which will provide the market advantages that clean and efficient technologies need. Other short-term factors include the process of electricity and gas liberalisation in the EU and subsequently the CEE countries. Liberalisation can support cogeneration, but only if the process is regulated to protect cogeneration from market domination by the utilities. For the CEE, EU accession is also directly affecting the potential for cogeneration.

At the current time, negative factors dominate the cogeneration market. This is affecting the short term potential for cogeneration and is causing significant damage to the confidence of the whole industry. This feeling was endorsed during the group of consultation workshops held during the course of the project., and led to the future potential for cogeneration being much lower then originally expected.

There is a primary factor currently affecting cogeneration: the assessment of risk. Under current policy frameworks, cogeneration is, economically, becoming a marginal technology. The technology risk is very low, but the economic risks are rising. Competition from marginally-priced electricity, increasing fuel prices and the general lack of co-ordinated cogeneration support policies, leads to uncertainty. If such risks could be minimised, cogeneration would become a technology of choice and would achieve significant penetration. However, the future of the industry requires that the barriers are broken down and replaced with the correct market-based incentive mechanisms.

Source: Wärtsilä NSD

What can be done?

A number of clear recommendations arise from future cogen. The primary aim is to minimise the risks associated with cogeneration. The correct signals need to be given to the cogeneration industry and market.

To achieve this aim, national and international policy makers can do the following:

- Ratify the Kyoto Protocol (helping to internalise the external costs of energy production)
- Send a clear and consistent message on regulatory intentions and developments (e.g. security of supply). None of the other recommendations will work effectively if this one is not fulfilled
- Establish legislation directly aimed at cogeneration (e.g. a cogeneration Directive)
- Give energy market regulators the duty to encourage growth in cogeneration (a practical measure that is easy to implement by government)
- Eradicate market barriers (e.g. true costing - grid access, use of grid, export pricing)
- Focus on small to medium scale cogeneration, as this area currently involves the most technology risk
- Cut the link between oil and gas prices to reduce market volatility
- Establish a cogeneration certificates market which will help to internalise the true environmental benefits of cogeneration
- Produce a standardised definition of cogeneration
- Open up and incentivise new markets, particularly for domestic sector micro cogeneration
- Shift the emphasis of electricity supply towards small decentralised markets

If Europe is to meet its climate change targets, then cogeneration has a major part to play in this process. However, this will not happen in a freely (deregulated) liberalised and centralised market. The flexible mechanisms in the Kyoto Protocol can provide commercial support to cogeneration, but it is only through harmonised policy in Europe and by the industry adapting to these market mechanisms, that this is most likely to happen. future cogen has shown that the open market will not provide the support cogeneration needs, so both national and regional government can and must play a more active role in promoting cogeneration. There are significant threats facing the industry today. If these are not surmounted, the potential benefits from cogeneration will be lost in the short to medium term, and capacity and confidence in the industry will be irreversibly damaged.

future cogen is an initiative of COGEN Europe, ESD, ETSU, KAPE, VTT and Sigma Elektroteknisk, and supported by the European Commission.

You can now download the final report from here.

This site brought to you by Energy for Sustainable Development (ESD) Limited