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Generating cost savings with CHP

05 October 2020

In current difficult economic conditions, Combined Heat and Power (CHP) can help manufacturers reduce costs by self-generating energy more efficiently, affordably and securely, says Hugh Richmond

The energy intensive profile of many food and drink processing sites makes them ideally suited to using on-site CHP, also know as cogeneration, and it is for this reason that many food and beverage manufacturers are already capitalising on the energy saving benefits of cogeneration – the food and drink processing sector accounts for 8.6% of all UK CHP capacity.
For high energy users – particularly sites with a strong and consistent heating or cooling demand – it is difficult to match the cost-reduction potential of CHP. Cogeneration can provide savings of 30 to 40%, when compared to grid supplied power and heat from boilers. This can yield a payback on investment of between two and three years.  

Five ways CHP can deliver cost savings:

1. Spark spread low-cost advantage: Natural gas fuelled CHP systems can generate power at a far cheaper rate than purchasing network electricity because wholesale gas prices are much cheaper than power prices. 

Much of this low-cost advantage is due to the 'spark spread' – the difference between the retail price of energy and the cost of fuel used to generate that energy. The price of gas has been consistently cheaper than electricity over the past decade, which looks set to continue. The latest UK Government energy statistics reveal that the spark gap has increased consistently and reached a peak of 5.6 (the highest level since 2003) in the last quarter of 2019. This price advantage is also illustrated by month-ahead wholesale gas prices for May 2020, which fell to the lowest level in 21 years. 

2. High efficiency: CHP plants simultaneously generate electricity and heat that can be used on-site. This process is nearly twice as efficient as using heat from boilers and grid electricity from centralised power stations, where waste heat normally vents to the atmosphere and power transmission losses of around 7-8% occur in transporting electricity to customer sites. When correctly sized and specified, CHP technology can achieve exceptional efficiencies of 85 to 90%. 

3. 'Free' heating and cooling: The heat that is 'lost' in conventional power production is recovered during cogeneration and used on-site to heat processes, water, or spaces. It can provide a cleaner, more resilient and cost-effective alternative to using boilers to generate steam.

An absorption chiller can be added to cogeneration plants to operate in trigeneration/combined cooling, heat and power (CCHP)/ mode. The waste heat can be used to produce chilled water for use in energy-intensive processes like refrigeration and process cooling, or for air conditioning. 

4. Peak power cost avoidance and flexibility: Cogeneration systems are used in combination with network electricity supply, which maximises system efficiency and ensures availability of power at all times. So, manufacturers can flex their power supply to utilise grid power when it is cheapest and to use self-generated power at peak times. This makes it possible to avoid purchasing network power during the most expensive times.

There is also potential to generate revenue from flexible power capacity via participation in Demand Side Response activities, such as the Capacity Market. CHP systems can be used in combination with battery storage to optimise flexibility opportunities.

5. Financial incentives and tax benefits: There are a number of financial incentives that increase the economic attraction of cogeneration. The most significant is an exemption from Climate Change Levy (CCL) on natural gas input fuel and self-generated electricity that's used on site. CCL is one of the biggest green taxes, accounting for approximately 5% of total charges on a typical business energy bill.

CCL rates increased significantly in 2019 to replace government income lost from the abolition of the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme. The levy on natural gas increased by a further 19.7% on 1 April 2020 and will continue to increase sharply through to 2023, making the CHP exemption even more important. 

To qualify for the CCL exemption, cogeneration systems must be classed as ‘good quality’ CHP under the Combined Heat and Power Quality Assurance (CHPQA) scheme.  These projects may also be eligible for preferential business rates and taxation benefits under the Annual Investment Allowance. 

Zero capital costs 
For manufacturers who are reluctant to commit to capital spend in the current precarious economic climate, flexible finance solutions are widely available. There are various options, including low-cost power purchase contracts and energy service agreements. 

It should be possible to tailor finance to project requirements and business objectives on a short or longer-term basis. This can unlock instant energy and operational savings, while freeing up capital for other strategic investments.

CHP has very high uptime relative to other types of on-site power generation, with more than 97% availability in most cases. Sites can therefore achieve a stable heat/steam and power supply. For added security, engines can be adapted to run off-grid in 'island mode' at mission critical sites. 

As well as generating costs savings, CHP can also minimise emissions due to its high efficiency and utilisation of waste heat. Of course, when renewable fuels are used for cogeneration, the carbon savings are greater. CHP system can complement other low and zero carbon measures to help organisations work towards their net-zero ambitions.  

Hugh Richmond is CEO of Edina.

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