Combined heat and power

The development of the chp market over the course of the last five to 10 years means that, for a wide range of buildings, chp can now offer an economical method of providing heat and power which is less environmentally harmful than conventional methods.

In the UK, chp capacity in buildings has doubled within the last decade and there are now over 1000 installations providing around 400 MWe (electrical output). Most chp installations within buildings are small-scale, and so while they represent 90% of the total number of installations, they contribute only around 10% of the total chp capacity, the remainder being in industrial applications.

Under the Kyoto protocol, the UK government is committed to reducing greenhouse gas emissions to 12·5% below 1990 levels by 2010, and has set a target to encourage the installation of 10 000 MWe of what it calls ‘good quality chp’ by 2010 (as defined by the CHP Quality Assurance Programme), which could produce around 20% of the target savings. Government incentives include:

• Climate Change Levy exemption – for both fuel input and heat and power output.
• Qualification for Enhanced Capital Allowances – a tax incentive that can save 7-8% of the capital cost over the lifetime of the plant.
• Reduction in business rating charges.

Regulatory issues

The regulatory issues that are likely to significantly impact on the promotion and increased use of chp can be summarised as follows:

• Local authority planning departments are starting to reflect central Government’s energy policy, with some requiring chp evaluation studies to be carried out and submitted with applications.
• European Energy Performance of Buildings Directive (EPBD) – this comes into force next year and includes all new buildings and those being refurbished where the floor area is in excess of 1000 m2. For new buildings, under the directive, formal consideration needs to be given to chp systems and decentralised energy supply systems based on renewable energy. Each building will be scored in relation to its energy efficiency, and this is expected to have a bearing on it’s future sale and rental value. There is increasing awareness amongst building owners, developers and portfolio managers that energy efficiency could become a differentiator in an already competitive market for commercial buildings.
• European Emissions Trading System – this is intended to reduce carbon emissions from industry across the EU, and is currently being put into operation. Allowances will be given for energy efficiency with credits being tradable between those that are able to reduce emissions with those that cannot. It is understood that this will add considerable cost to power and heat generators, who are amongst the worst offenders. Ultimately this may be passed onto consumers, thereby making decentralised power generation schemes more viable.

Viability and applications

When considering chp, savings are achieved because the value of the electricity and heat produced is greater than the cost of operation, ie the fuel consumed and the plant maintenance.

The economic viability of chp is dependent on the demand for heat and power, and it is essential that detailed energy demand profiles for both heat and electricity are produced to allow accurate sizing of the chp plant and hence assess its suitability for use in each case. In order to achieve maximum returns, the chp plant must operate for as many hours as possible, which means matching chp capacity to base heating and power loads.

It follows that the most suitable applications for use of chp, are those with significant accommodation requirements, where washing, bathing, cleaning, catering and heating all provide significant demands for large parts of the day providing the necessary base heating loads. Universities and colleges, hotels, hospitals, public sector buildings such as prisons and leisure centres (with wet facilities) are all good candidates for consideration for use of chp. Residential/mixed use community heating schemes, which form a substantial base heating load from a series of individual smaller loads are also ideal for chp.

Heat driven absorption chilling plant should also be considered in order to extend the base load heat demand into the summer months, which can prove far more cost effective than providing separate chilling capacity, although this would require a detailed feasibility study.

CHP technologies

Traditionally, chp units have used either reciprocating engines or gas turbines as the prime mover, depending on the required load. Most small-scale chp installations, from 50 kWe to 1000 kWe, are based on packaged units, with a spark ignition gas reciprocating engine driving a synchronous electric generator.

Approximately 50% of the energy content of the fuel can be recovered from jacket water cooling and engine cooling systems, with a further 10% from exhaust gases by using a condensing heat exchanger. Typical chp efficiencies of around 70% can be increased up to 90% when condensing. This compares favourably with conventional power generation, which has a 30-45% delivered energy efficiency .

Large scale chp, typically above 1 MWe, uses gas turbines, running on gas or light oil, with the rotation of the turbine fan driving the generator. The exhaust is the source of heat energy, and the high exhaust temperatures means the gas turbine is particularly suited to high grade heat supply applications.

Packaged micro-turbine chp units, as small as 30 kWe, are an alternative to reciprocating engine chp units. These units have comparable capital costs and potentially lower maintenance costs than the latter, but have slightly lower electrical efficiency.

Although in it’s infancy, the use of fuel cells for chp, shows considerable potential for the future, since they operate without combustion, and offer much higher electrical efficiencies and reduced CO₂ emissions than either reciprocating engines or turbines. The first fuel cell chp system in the UK was installed in 2001, and is being used as a demonstration project to monitor how successfully such schemes can be implemented in the future.

Key factors affecting costs

The costs associated with building and operating a chp installation are governed by a wide range of variables as follows, all of which need to be considered when evaluating the suitability of chp for a particular application:

• The energy demand profiles for both heat and electricity and the hours of operation, as mentioned above, determine the size and type of plant required, together with the expected energy savings.
• The size of the chp unit – this needs to be optimised by assessing the economics of a range of plant sizes. Generally, chp plant is sized to a building’s base heat load with the balance of power, heating and cooling provided by conventional plant. However, since the value of electricity is considerably more than that of heat, the optimum size may result in the specification of a larger unit with some form of modulation. Installed capital costs are more expensive per kW for smaller plant.
• Where standby generation is required within the building, there is an opportunity to use the chp plant to provide all or part of the standby capacity, thereby reducing capital costs.
• The available government incentives and regulatory issues, as mentioned above.
• The cost of fuel – most UK chp installations run on natural gas. Deregulation of the gas supply has led to a reduction in prices through negotiation. The price of the fuel is a key parameter in the cost-effectiveness of chp, and particular consideration needs to be given to projected prices in future years.
• Import and export costs – where the plant has been designed with the export of electricity in mind, the greater the difference between electricity and fuel prices, the more viable the case for chp. Energy export is viable where its value is greater than the cost of generation. Whereas in the past the financial viability of schemes was based on the ability to sell surplus electricity and the chp plant sized to suit, the combination of rising primary fuel costs (mainly gas) and the driving down of electricity prices following the introduction of the New Electricity Trading Arrangements, has led to a significant reduction in the gains from the sale of surplus electricity.
• Maintenance costs – effective maintenance is essential in maximising availability and minimising downtime. Maintenance costs should include a guarantee of performance and all replacement parts. Maintenance costs are more expensive per kWh of electricity produced for smaller plant.
• The requirement for new or larger gas or electrical infrastructure supplies. The potential costs should not be underestimated and can easily make a chp installation uneconomical.
• Provision of additional plant space for the unit and the associated costs of the exhaust flue.
• Where chp is fitted to an existing installation, the costs of integration with the existing heating and electrical systems.

Procurement of chp

A variety of alternative procurement options exist to fund the purchase and installation of chp units, depending on the client’s planned strategy for the development with regard to future ownership and letting. Whilst the following represent the typical options that may be considered in the provision of chp, there are numerous possible permutations within each option. Each scheme therefore needs to be looked at on its own merits, to establish the most suitable procurement model. Whole life appraisals need to be carried out, both to compare the cost-effectiveness of alternative options and to establish a cost/revenue profile over the life of the installation.

Capital purchase

The client bears all capital, installation, running and maintenance costs:

• In the case of an owner occupier, all the savings resulting from lower fuel costs are realised.
• In the case of a landlord/building owner, they gain from selling energy to tenants at a rate lower than commercial rates but at a higher price than it has cost them to produce. For some property companies this fits with their commercial model of providing a package of managed services to tenants, in a facilities management framework, in order to form close working relationships with tenants and ultimately retain their business.

Alternatively, where property companies do not want to depart from their core business or area of expertise, they may employ a metering services company with the necessary expertise to deal with the regulatory requirements, the restrictions on the maximum price at which energy can be sold, and be responsible for all billing and collection of revenue.

Particular attention may need to be paid to the payback period for the return on the capital investment, depending on the source of the funding, as the agreement of a minimum period is often a requirement by funders, as a condition of providing finance.

Equipment supplier finance

With equipment supplier finance the chp supplier designs, supplies, installs and maintains the equipment at no cost to the client. The client pays for the primary fuel and agrees to purchase electricity and heating from the supplier, at an agreed discounted price for an agreed contract period. This approach would be typical for a client that does not have the funds available for capital investment at the outset. With this arrangement, the client’s savings are considerably lower than under the capital purchase option. Also with this option, all risks associated with the operation of the plant lie with the supplier. Under the agreement, the supplier is guaranteed a continued income from the sale of the energy over the course of the contract, and so the client needs to ensure that the energy purchased is utilised at all times, otherwise any savings will be eroded.

This option is best suited to a single end-user client. However where the development is multi-tenanted, the problems of generating bills and producing tenant agreements on a back to back basis with the client/supplier contract, again mean the client (as landlord/property manager) taking on responsibilities normally carried out by energy management companies, which may be less attractive. Alternatively, a metering services company with the necessary expertise could again be employed by the client to take on these responsibilities.

Use of energy services companies

The client contracts out its energy services to a company specialising in this field. The extent of the services offered by each energy service company very much depends on the financial model it is built around, and the particular aspect of the market that it is engaged in. This largely applies to clients with responsibility for multi-tenanted buildings or mixed use sites, where the energy generated from the chp plant is sold on to third parties.

Taking each of the key stages of the process as follows:

• Design – this may often be included, if a services design consultant is not on board as part of the project.
• Installation – some energy service company can provide an installation service, particularly where the plant and equipment is being retro-fitted into existing premises, however for new projects, the installation tends to be carried out by the services contractor.
• Operation and maintenance of the plant – this normally forms part of the energy management contract, but may be offered as a standalone service where the client is an end-user and uses all the energy generated from the chp plant themselves. However, if standalone, this service could equally be offered by a specialist maintenance company.
• Energy management – the energy management of the chp scheme can include the procurement of the plant and equipment, there are three common options.

One, the client purchases all the plant, and enters into an agreement with the energy service company to share the savings resulting from the sale of the energy to the tenants.

Two, the energy service company makes a capital contribution to the purchase of the plant, and again enters into an agreement with the client to share the savings, however these will be less than in the above option.

Or three, the energy service company makes a capital contribution equal to or greater than the cost of the chp plant (dependent on its forecast revenue from the sale of energy to third parties), and the energy service company takes all the revenue generated from the consumption of energy on the development. Under this arrangement, the ownership of the plant can either lie with the energy service company (on a leased basis) or with the client.

In all cases, the energy service company is responsible for the costs of the primary energy. The cost at which the energy service company sells on the energy from the chp plant is subject to regulatory control, and will also be tracked against average energy prices to protect the energy service company from rising fuel costs, and to provide transparency for consumers.

Table 1 provides a typical example of a project with an energy service company providing finance, and hence increasing the viability of the scheme. It can be seen that the energy service company provides a capital contribution equal to the additional cost of providing the chp plant including absorption chiller. The extent of the capital contribution is negotiable with the energy service company at the outset of the project, and in this example is based on the client leasing all the plant to the energy service company for the contract period, and the energy service company assuming responsibility for the operation and maintenance of all the plant, together with all energy management services across the development.

• Davis Langdon Mott Green Wall would like to thank EcoCentroGen for their assistance in the preparation of this article.