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Defining key aspects of effective long-term support for micro CHP

Fri, 04/12/2013 - 18:36 -- Ruth Williams

Micro CHP (mCHP) (combined heat and power) is a cost-effective and flexible low-carbon solution that generates heat and electricity on-site and it can support this transformation of the UK’s energy system and relevant policy objectives.

MCHP is a commercially available solution, currently manufactured in low volumes, which leads to a relatively high starting price. Achieving timely economies of scale and learning to reduce costs is a challenge. Support is critical to kick-start this industry.

Solid support has already delivered greater deployment in markets like Japan - with around 20,000 domestic mCHP sales in 2012 - Germany and South Korea. MCHP prices in Japan were estimated to drop by 25% by the end of 2012 compared to 2010 levels.

Although the UK cannot readily benefit from cost reductions abroad due to considerably diverse market, and therefore product, specifications, a similar cost reduction trend is anticipated in the UK during the early stages of domestic mCHP deployment.

With the right support, the industry is committed to bringing this innovation to the mass market in order to create high value UK manufacturing jobs and deliver the numerous benefits of mCHP to consumers, communities and our energy system.

Like most microgeneration technologies, mCHP presents on-going benefits against conventional alternatives such as condensing boilers, but these have high upfront costs as a result of limited scale. An effective policy roadmap to drive mCHP deployment would reduce costs rapidly to competitive levels, eventually leading to negative resource costs for diverse mCHP technologies.

1. Providing an initial boost

Given the cost involved in developing mCHP and limited market scale at present, a plan to demonstrate the technology at scale would serve as a vote of confidence for this industry. An early thrust would generate a step change in volume, establish mCHP benefits and lay the foundations for market development in the UK.

Viable financing for flagship distributed generation projects, such as virtual power plant applications, involving mCHP from a financial institution such as the Green Investment Bank could become a factor for quick cost reductions and scale gains at this early stage.

This financing could be accompanied by support from schemes such as the Low Carbon Networks Fund as a means of demonstrating a new operating arrangement that can support security of supply while alleviating the need for local network reinforcement due to anticipated load growth.

Countries like Germany are already implementing novel approaches to encourage major mCHP projects.The German federal state of North Rhine-Westphalia is introducing a support programme of €250 million for mCHP, including supporting virtual power plant applications.  The UK should also aspire to remain at the forefront of mCHP innovation.

2. Enhancing incentive and certainty

Unlike condensing boilers, mCHP has not yet reached commercial maturity. MCHP is a new technology, currently manufactured in low volumes, which leads to a relatively high starting price.

However, at the customer level it must compete with condensing boilers, a mature technology which benefits from significant economies of scale and value engineered manufacturing processes.

To incentivise consumers to take up mCHP at this stage, fiscal support to generate an adequate return versus incumbent technologies is necessary. The support for mCHP under the FIT scheme was recently increased to 12.5p/kWh.

However this is still lower than the support of 17p/kWh deemed essential to deliver a rate of return for consumers closer to 7.5%, which is considered necessary for the uptake of low-carbon heating technologies to be supported under the domestic RHI.

A FIT increase to at least 17p/kWh therefore is necessary at present to allow mCHP to compete on par with other low-carbon heating solutions. Beyond the current FIT review point of 30,000 mCHP installations, a subsidy diversification may need to be examined in order to reflect the different commercialisation stage and specifications of diverse mCHP solutions.

3. Reflecting the benefits of mCHP to the wider energy system

By generating power at the point of use and typically at times of peak demand, mCHP reduces the strain on transmission and distribution systems, deferring the need for infrastructure upgrades. This generates cost reductions and economic gains in different parts of the electricity supply chain.

Some of these savings are captured by the consumer through the avoided purchase of electricity, but much of the value cannot be captured under current market arrangements and is socialised. The current export tariff, set at 4.5p/kWh, does not adequately reflect this and still remains lower than the market value of wholesale electricity.

A review of the export tariff design to more accurately represent the value of exported electricity is important. This could pave the way for the emergence of ‘time of generation’ or even dynamic export tariffs via the deployment of smart meters.

Under the EMR, the Government currently plans the implementation of a Capacity Market designed to provide certainty to investors to put adequate reliable capacity in place and protect consumers against the risk of supply shortages.

As part of this arrangement, providers of capacity will receive a predictable revenue stream for providing reliable capacity. Flexible mCHP generation fulfils the main objectives of the Capacity Market and should be eligible for participation in this mechanism, particularly in aggregated and controllable applications (e.g. Virtual Power Plant).

The potential contribution of flexible distributed generation as part of the capacity mechanism needs to be more adequately captured as relevant policy deliberations move forward.

4. Creating a level playing field for low carbon technologies

Solid support can put mCHP, and other low carbon technologies, on a sustainable path of growth and decisively reduce up-front costs. As a result of scale, it may be challenging to sustain fiscal support for low carbon heating technologies beyond 2020. Alternative policy means must be explored to drive essential uptake during the next decade.

The introduction of an efficiency performance standard for boilers in 2005 under the Building Regulations effectively mandated condensing boilers and made the UK the biggest market for these products in Europe. This positive regulatory intervention led to a steep increase in investment and installation rates for condensing boilers and a corresponding significant reduction in up-front costs for consumers.

A change in the Building Regulations by the end of the decade to require any replacement heating system to achieve a carbon reduction improvement versus an A-rated condensing boiler has the potential to establish a vibrant low carbon heating market in the UK.

Such change would generate a level playing field for lowcarbon heating products, including mCHP, triggering a mass shift from conventional products and eliminating the need for sustained support.