Responding to energy market changes

s-hodgson

So, I wonder where E.ON’s CHP portfolio will end up, following the planned separation of Germany’s largest utility into two new entities in 2016, announced earlier this week. Most likely, I guess, in the new: ‘customer-oriented, sustainable, innovative’ business alongside its renewables, distribution networks and customer solutions functions. Surely a better fit than the ‘conventional’ company with mainstream power generation – even though most of E.ON’s CHP plants are gas-fired and many supply power to the grid. E.ON’s new corporate strategy is a response to what it calls ‘dramatically altered global energy markets.’

CHP has always suffered from a bit of an identity crisis – sometimes part of a utility offering, other times operated directly by the customer or its energy services company agent. Some schemes just supply site heat and power loads; others generate lots of power for export to the grid. It’s complicated, and so is CHP’s interaction with heat and electricity regulators, and with government support programmes aimed at encouraging energy efficiency and renewables.

Germany has, of course, enjoyed a rapid expansion in renewable energy in recent years, due to its energy transformation, Energiewende, programme, which has also led to a lowering of overall power prices. This has dampened growth in CHP plants, according to the Point Carbon team at Thomson Reuters, and the development of CHP will probably fall short of the Energiewende target – to account for 25% of total power production by 2020.

The Energiewende programme does include CHP as a key technology; useful as flexible production able to adapt to fluctuations caused by the growth of intermittent power. Yet the Energiewende-inspired expansion in renewables has resulted in an overcapacity in the power market – 2014 prices may come in as a 12-year low, says Point Carbon. Low power prices hamper the economics of gas-fired CHP in particular and Point Carbon adds that, despite modest growth in new CHP capacity in recent years, the number of running hours for existing plants has fallen.

To meet the 25% target, Point Carbon says that some 15–17 GW of new CHP capacity would be needed by 2020, in addition to the 27 GW installed as of 2011, and the number of running hours must reach 3,000–4,000 per year. This will require an improvement in the level of both the support scheme and power prices.

Power markets in Germany and across Europe are in a state of considerable flux and utilities are working out how to respond. Let’s hope CHP retains – or expands – its position in the new arrangements.

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