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Germany has set itself ambitious targets: by 2050, it intends to have reduced greenhouse gas emissions by 80-95% compared with 1990 levels, with intermediate goals set out for 2020, 2030 and 2040. All sectors of the national economy will contribute to achieving these goals. While efficiency measures and renewable energy can reduce emissions in the industrial and agricultural sectors, they cannot eliminate these entirely. Consequently, other sectors need to sharply reduce their energy consumption and minimise their use of fossil fuels. This also applies to the electricity sector.
Combined heat and power
Combined heat and power (CHP) has a special role to play here: CHP plants produce not just electricity, but also heat and are therefore far more efficient than other electricity generation facilities. The heat that is generated as a by-product of power generation is used to supply thermal energy to public and private consumers. Compared with other power generation facilities, CHP plants require less fuel and are therefore more efficient.
The role played by combined heat and power in transforming Germany’s energy supply
Combined heat and power is part of both the heat and the electricity markets. Both the heat and the electricity sectors will become increasingly integrated over the next few decades. For example, an increasing number of homes will be heated using heat pumps that run on electricity. As the electricity and heat sectors are transformed, the role that CHP plays for these two sectors is changing as well.
As part of its electricity 2030 dialogue process, the Federal Ministry for Economic Affairs and Energy has been engaged in intensive dialogue with the relevant stakeholders and has published the outcomes of this consultation process in a report. The main outcomes are described below:
Heat networks form a forward-looking infrastructure of strategic importance.
They have a wide range of different benefits: First of all, they can be used to supply heat to a large number of buildings (as part of a central heating system). They can also combine different types of technologies. This helps operators of heat networks to respond to unforeseen events in a needs-based manner. Whether the heat is supplied via a heat network or whether it is generated using distributed generation facilities is decided on a case-to-case basis and also depends on the building’s location. However, there is a clear trend towards supplying densely populated areas with heat from heat networks. This means that the role played by the heat networks is also changing: apart from ‘only’ distributing heat, heat networks will now also absorb heat from different sources and then pass it on to consumers. The heat that is supplied to consumers also often has a lower temperature than in the past.
Fuel-based CHP plants have the potential to remain an important element of our energy supply, but only if they are updated:
This applies for both CHP plants running of fossil fuels and those running on renewable fuels. By 2030, CHP plants will have replaced most of non-CHP fossil-fuel powered plants and provide much of the baseload power, thus helping cut emissions. However, after 2030, fossil-fuel powered CHP plants will see their role gradually reduce. By 2050, renewable energy and demand-side management will replace most of the fossil fuels currently used in the heat and power sectors. This means that even if fossil-fuel powered CHP plants have close to zero greenhouse gas emissions, they only have a future if they use fuels that are renewable. In the long term, however, renewable fuels will be available only to a limited extent or at a very high cost, which limits their use. They will then only be used in areas where they are difficult to replace, for example in aviation or maritime transport. CHP funding schemes therefore need to take account of competition between CHP plants and other generation technologies across all sectors.
CHP plants face a wide range of different challenges that vary depending on whether they supply heat to the industrial sector or to private consumers.
The heat supplied to heat up and provide hot water to homes does not have to be as hot as the heat supplied to the industrial sector where higher temperatures are required for running certain technical processes. Going forward, different technologies will be deployed depending on whether the heat is used to supply industry or private households. Whilst in industry, power-to-heat installations and CHP plants will play an important role for the medium and long term, solar thermal energy, geothermal energy and waste heat plants can be use to supply a large part of the heat needed by private consumers.
Driving CHP development in the right direction means that policy conditions for CHP need to be updated. This includes making it possible to take decisions on important infrastructure such as heat networks at an early stage.
It also includes looking at a particular region and identifying the potential for developing renewable energies that can be fed into the heat network. In addition, the use of municipal heat plans needs to become standard practice, so as to make it easier for municipal stakeholders to take decisions. As far as the industrial sector is concerned, barriers to flexibility that prevent companies from receiving price signals need to be eliminated. At the same time, it should be ensured that companies can use flexibility options such as power-to-heat. In addition, further analysis needs to be conducted into the role that CHP used by private households and small site networks can play as part of an efficient overall strategy for the heat sector.
The documents providing information on the relevant sessions can be found on the Electricity Market Platform website. The paper setting out the results for Trend 7 can be found here. It is also based on the preliminary analysis of the Fraunhofer Institute for Systems and Innovation Research ISI on the long-term role of CHP, which can be found here (PDF, 2MB) (in German).
The Combined Heat and Power Act (CHP Act)
Since 2002, the Combined Heat and Power Act (CHP Act) has been the main basis for the promotion of CHP plants. The Act provides a framework for funding the particularly efficient technology of combined heat and power generation based on the application of a surcharge. Pursuant to the CHP Act, the operators of funded CHP installations are entitled to the payment of a supplement for a limited period of time.
The CHP Act is thus creating incentives for investment in what are highly efficient, low-carbon CHP installations, with the aim of raising the level of CHP-based power generation.
The revision of the Combined Heat and Power Act, which entered into force on 1 January 2016, means that government has doubled funding for combined heat and power, raising it to €1.5 billion. The revision focuses on the following goals:
Combatting climate change: the CHP Act provides targeted support for power generated by gas-fired CHP installations, which is a particularly low-carbon technology. This is to enable carbon emissions from CHP plants to be reduced by four million tonnes, which will make an important contribution to meeting the 40% reduction target by 2020.
Increasing flexibility: by providing better funding for heat storage systems, focusing funding on CHP plants that feed electricity into the public grid, making the direct marketing of electricity mandatory, and taking additional measures, CHP plants will be able to react more flexibly to fluctuating volumes of renewable energies being fed into the grid.
Increasing certainty and predictability for investors: the funding scheme for CHP plants will be extended up to 2022, the expansion target will be more clearly defined and further target periods specified (110 TWh of power to be generated from CHP plants by 2020 and 120 TWh of power by 2025).
Introducing auctions: since 2017, the funding for medium-sized combined heat and power stations with a capacity of between 1 and 50 megawatts has been determined by auction – as is the case for energy technologies covered by the Renewable Energy Sources Act. A new funding category which will cover innovative CHP systems will also be introduced. The auction system has been enshrined in the 2017 revision of the CHP Act. The details of this system are set out in the ordinance on CHP auctions.
Harmonising privileges granted under the Combined Heat and Power Act with those granted under the Renewable Energy Sources Act: privileges granted to energy-intensive industries under the Combined Heat and Power Act will be made to comply with EU state aid rules and matched to the special equalisation scheme provided for in the Renewable Energy Sources Act. A company which has received a decision granting it privileges under the Renewable Energy Sources Act will also be granted privileges under the CHP Act.
In line with the 2017 revision of the Combined Heat and Power Act, funding for innovative CHP systems is being auctioned. Innovative CHP systems combine flexible CHP plants with renewable heat, for example from solar thermal installations or heat pumps, which considerably lowers their greenhouse gas emissions. Innovative CHP systems therefore show ways in which CHP installations can remain a viable option for generating CHP long into the future.
Up to 2021, a total capacity of 200 MW is being auctioned each year, of which initially, 150 MW are to come from conventional CHP plants and 50 MW from innovative CHP systems. In the years that follow, the share of innovative CHP systems will be gradually increased. Funding will continue to be provided in the form of a fixed feed-in tariff paid in cents per kilowatt-hour. Since 2017, the level of funding is no longer fixed by government, but determined via competitive auctions. This helps meet expansion targets in a cost-effective manner. The auction system also helps make the funding scheme more transparent. The first auction round ended on 1 December 2017. On 19 April 2017, the Federal Ministry for Economic Affairs and Energy launched a consultation procedure to seek the views of the German Länder and associations on the draft ordinance introducing auctions for determining the level of funding awarded to CHP plants and innovative CHP systems (PDF, 2MB) and on other ordinances that are being revised. Comments were to be submitted by 26 April 2017. They are published here with the author’s permission.
Outcome of auctions for CHP installations and for innovative CHP systems
Auctions for CHP installations from 1 to 50 MW and for innovative CHP systems take place twice a year; the most recent one was on 2 June 2020.
22 bids with a volume of 70.5 MW were submitted for the tendered quantity of 75 megawatts (MW).
21 bids with a volume of 68.5 MW were accepted. The tender volume was not exhausted. One bid had to be excluded from the award procedure as it did not meet the formal requirements. The value of the bids awarded funding ranged from 4.70 ct/kWh to 7.00 ct/kWh. The quantity-weighted average bid value stands at 6.22 ct/kWh and is the highest of all previous bidding rounds.
In parallel to the auction for medium-sized CHP installations, the auction for innovative CHP systems was also held.
Innovative CHP systems combine CHP installations, electrical heat generators and an innovative source of renewable heat. They are intended to gather initial experience with CHP installations using a significant share of renewable energy and thus to provide insights into the future role of CHP installations in the provision of heat.
13 bids with a volume of 43.8 MW were submitted for the tendered quantity of 29.5 megawatts. This was the first time that the volume up for auction in the tender for innovative CHP systems was oversubscribed. As was the case with the tender for CHP installations, one bid had to be excluded from the award procedure for formal reasons.
Of the twelve admissible bids, eight were accepted. The prices at which bids were approved were between 9.50 ct/kWh and 10.98 ct/kWh. The quantity-weighted average award value is 10.22 ct/kWh. The last bid could not be accepted because it exceeded the tendered quantity to a large extent. It was thus not possible to exhaust the entire quantity of 26.2 MW which was up for auction.
The next CHP auctions will be for bids due on 1 December 2020.