CHP target under threat from gas and electricity regulators

The Government's target to increase the capacity of combined heat and power (CHP) by 2000 is looking increasingly precarious, according to the CHP Association.

In July 1993, Environment Secretary John Gummer decided to increase the official target for CHP capacity in 2000 to 5,000MW, 1,000MW higher than the previous target (ENDS Report 222, pp 28-29 ).

The measure formed a key part of the Government's package for returning CO2 emissions to their 1990 level by 2000, and was expected to yield annual CO2 savings of one million tonnes.

However, the CHPA is becoming increasingly gloomy about the prospects of achieving the target. Its Director, David Green, says that installed CHP capacity has risen from roughly 1,000MW in 1989 to some 2,500MW, with a further 500MW under commission. However, orders for industrial CHP systems have "virtually dried up in the last six months or so."

The main problem, says Mr Green, is that the price of gas on interruptible supply contracts has increased by 13% over the past year. Most new CHP projects have been developed on the basis of such contracts, which offer gas to industrial users at a substantial discount provided they accept the risk that their supply may be cut off when domestic gas demand is high. In practice, interruptions have been rare in recent years.

When the industrial fixed gas supply market was opened to competition, British Gas lost over half of its business in the sector - and, says the CHPA, increased the cost of interruptible supplies "lest its commercial future relied unduly on such sales".

Furthermore, under the forthcoming Gas Bill, British Gas will face competition in the domestic market from 1996. As a result, it has less need for interruptible contracts to balance its supply and is therefore driving up prices to discourage industry from using them, the CHPA claims. Independent suppliers such as Kinetica have warned that if they are required to enter the interruptible gas market, then supplies will be cut off far more frequently.

The rise in gas prices has been compounded by a 2.4p/kWh price cap on electricity sold through the Pool system, imposed by Offer in March. According to Mr Green, this combined squeeze has created great uncertainty about the economic outlook for CHP among potential investors.

"The only clear message the industry is getting from the potential gas suppliers to the CHP market is that they will not enter it until the gas price goes up," commented Mr Green. "This seems a perverse position to take." He called on Ofgas to intervene, saying that "opening up the domestic gas market should be a benefit, not a cost to industry."

Businesses contemplating entering the CHP market face several potential barriers. Many schemes become commercially attractive only if they are "heat-led", and sell the excess electricity. However, many firms are reluctant to enter the complex and uncertain electricity supply market, which they do not see as part of their core business.

Some see these conditions as ripe for the rise of the "energy services company" offering simple, long-term, fixed-price contracts and advice on energy use - and which, in theory, should help the uptake of CHP projects.

However, a recent survey by the Energy Saving Trust showed that energy services barely exist at the moment, and that most suppliers believe that competition will remain based on price, at least in the short term. Most of the electricity companies are showing "a great deal of short-term thinking and even irrationality", according to David Sigsworth, Head of Energy Trading at Scottish Hydro Electric. "But so far the regulator and the Government have often chosen the wrong drivers which have boosted volume sales rather than create efficient use of energy."

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