New rules raise push-up costs for on-site CHP

The new system of trading electricity in the UK is hurting small independent generators and threatening to undermine the government’s plan to promote cleaner forms of energy.

The new system of trading electricity in the UK is hurting small independent generators and threatening to undermine the government’s plan to promote cleaner forms of energy – particularly the energy-efficient combined heat and power plants.

The root of the problem is the balancing market under the New Electricity Trading Arrangements. This corrects any imbalances between contracted electricity supplies and actual requirements on a half-hourly basis throughout the day. However, companies have so far generally had to pay for the privilege of buying and selling power in the balancing market.

This has ruined the economic case for self-generation among large industrial users with a substantial heat or steam requirement, for whom an on-site CHP plant had been a commercially attractive as well as an energy-efficient solution.

Such companies need to sell surplus power to the grid when their own operations are not at peak demand, and under the previous pool system, they received the prevailing pool price when they did so. But now it costs them money to unload it.’Anyone who is spilling power into the grid at times when it suits them is going to lose out,’ said Jeremy Nicholson, economic adviser to the Energy Intensive Users’ Group. The paper industry is one of the more vulnerable, having adopted CHP widely because the technology is particularly well-suited to its processes. Rigid Paper, a small mill at Selby in North Yorkshire, is an example. The 3.5MW CHP plant installed on its site in 1986 now incurs a net cost at certain times.

‘It’s no longer always economic to produce electricity,’ confirmed managing director Frank Holden, adding that the mill was now a net consumer of electricity most of the time.

Job losses

The East Lancashire Paper Mill Company, which installed a ‘good quality’ CHP scheme last year, was not so fortunate. lt shut down its operation in Radcliffe, Greater Manchester, three weeks ago with the loss of 150 jobs. David Gillett, head of environment at the Paper Federation of Great Britain, said the company’s energy situation had undoubtedly been ‘one of the substantial contributing factors’.Nicholson said member companies in the chemicals industry had also been ‘hit quite hard’.

David Green, director of the Combined Heat and Power Association, said the impact of this change – coming on top of the massive hike in industrial gas prices – had been to strangle CHP development.

He said there were many schemes that had received all the necessary consents but were now not going ahead, and pointed to the 50MW plant for which Jaguar recently secured consent at its Halewood manufacturing site as a leading example.

The steel sector was another potential candidate for CHP, given its large heat requirement. However, David Fletcher, the chairman and chief executive of Sheffield Forgemasters, said industry interest had ‘disappeared over the horizon’.

Regulator Ofgem said the worst problems with price spikes in the balancing mechanism had been addressed, and that the new arrangements would need time to settle down. ‘We’ve always said that Neta is a new market and is expected to be a bit volatile in its early stages,’ said a spokesman.

Adverse impact

It is clear, however, that Neta’s adverse impact on CHP schemes – following the doubling of industrial gas prices – will sabotage the government’s plan to have 10GW of installed CHP capacity in the UK by 2010, unless it acts soon to rectify the problem. Green said it was unachievable in the present climate.

Energy minister Peter Hain is aware of the problem. At a meeting with the CHPA last week, he expressed his determination that the planned review of Neta’s impact on small generators should examine the relevant issues, particularly CHP and renewable schemes.

Nicholson said the answer for independent generators may be to sell their surplus power through a large intermediary trader, such as Enron or Dynergy. While they would undoubtedly have to pay a premium for the privilege, this should at least remove the risk of losing money.