Cogeneration unpacked: current legal regime on CHP in the EU

The current regulatory environment - the legal nexus on combined heat and power, established by the legislation which brought the Clean Energy Package in 2018 and 2019, is built on the cornerstone of the Energy

Efficiency Directive (2012). Cogeneration - just to remind the reader -defined there as “the simultaneous generation in one process of thermal energy and electrical or mechanical energy” is nowadays seen not only through the prism of its features. Naturally, its pro-efficient nature, embodied by high-efficiency units meeting the criteria of Directive’s Annex II, is still vital - as proven by recent legal changes. In many cases, operations other than high-efficiency cogeneration units on the EU internal energy market will be limited or phased-out (see Sokolowski 2018a). However, in line with the revision provided by the Clean Energy Package apart from its high efficiency, also the scale of cogeneration plays an increasingly important role. Here, what really matters is meeting the levels provided for small-scale cogeneration (installed capacity below 1 MWe), priority dispatch small-scale cogeneration units (installed capacity below 400kWe) or micro-cogeneration units (installed capacity below 50 kWe). This enables, e.g. applying the simple procedure of the “install and inform” type, still available under Article 15(5) of the Energy Efficiency Directive (maintained in the revised version). It allows the Member States to offer this type of procedure for connecting micro-cogeneration; just as before, the Article empowers them to facilitate the grid connection for high-efficiency CHP of small-scale.

As previously discussed, cogeneration is also an element of the Energy Union. The comprehensive assessment of the potential for the application of high-efficiency cogeneration in each Member State, as presented under Article 14(1) of the Energy Efficiency Directive (see Chapter 4 of this book), is one of the key elements of the analytical basis of the Member States’ integrated national energy and climate plans prepared under Regulation (EU) 2018/1999. The integrated national plans reach as far as to the regime established by the previous CHP Directive (2004/8/EC); they are indirectly related to the analysis of the national potentials for high-efficiency cogeneration conducted under the CHP Directive.19 Apart from taking this analysis into account, the linkage to the comprehensive assessment referred to in Article 14(1) of the Energy' Efficiency Directive, incorporates identification (and also estimation in terms of identification conducted onsite in residential and service sites) of heating and cooling supply, presented in GWh per year, into the analytical basis of the integrated national plans. Regardless of whether cogeneration is the primary or secondary element of the comprehensive assessment (see Chapter 4), the assessment should be divided by technology, including high-efficiency heat and power cogeneration; in practice shown within residential, services, industry, and any other energy-consuming sectors, and where possible, categorised into conventional (fossil) and renewable sources.

Moreover, as discussed in Chapter 4, the comprehensive assessment may be a dynamic document. This depends on the Commission’s request that Member States update their assessments (such an update should be done on a five-year basis). As the provisions enabling such action have neither been repealed nor amended in the recent revision of the Energy Efficiency Directive, this kind of request is still possible. The Commission should submit such a request at least one year ahead of schedule, i.e. the five-year period. Furthermore, the request - and thus the update of the assessments -could be useful for the needs of the integrated national energy and climate plans in terms of this dimension (energy efficiency) and the indicative national energy efficiency contribution to reaching the EC’s 2030 energy efficiency goal of 32.5%. This, obviously, would only be possible if the scheduled timing is respected.21 In the same way, under the current legal regime the Member States are still obliged to conduct the cost-benefit analysis of installing high-efficiency CHP. Article 15(5) and the following paragraphs - relevant in this field - have not been altered by the last revision of the Energy Efficiency Directive. This concerns both the obligation to the cost-benefit analysis as well as the exemptions from this duty (see Chapter 4).

As one may notice, the current regulatory framework on cogeneration combines the 2012 legislation with the reform conducted in 2018—2019. On the on hand, as widely analysed in the previous subchapter, the priorities and guarantees offered for high-efficiency CHP in the 2012 version of the Energy Efficiency Directive (in terms of access to the grid, dispatch, and transmission of the distribution of electricity) are no longer available. They have been replaced by new provisions on priority dispatch small-scale cogeneration units (installed capacity below 400 kWe) as well as the legal regime on redispatching, established by the Third Electricity Regulation. On the other hand, system operators still have to follow the requirements adopted in Annex XII to the Directive (see Chapter 4). Despite slight changes, its range and general approach presented there have not been revised. Under Annex XII the operators have to publish their standard rules on the cost of technical adaptations of their gird, including the connection. They also have to inform new producers of electricity in high-efficiency CHP wishing to be connected about the costs (complex and detailed estimation) and timing (max 24 months), providing them with standardised and simplified procedures of the connection.

Another element not changed by the 2019 revision, was the matter of public support for cogeneration. As before, under Article 14(11) of Directive 2012/27/EU the Member States may provide public support for high-efficiency cogeneration achieving primary energy savings effectively. Public support, covering cogeneration, district heating generation, and network infrastructure (where applicable), falls under the regime of the EU rules on state aid (see Ezcurra 2014; Flam 2009; Hancher &. Salerno 2011). In these terms, one should refer to the Guidelines on State aid for environmental protection and energy 2014—2020 (Commission 2014), intended to be prolonged until the end of 2022 (Commission 20 1 9).22 Established pursuant to Article 107(3)(c) of the Treaty on the Functioning of the European Union, the Guidelines are aimed at facilitating the development of selected economic activities in the EU in a way which does not negatively impact internal trade to the extent of conflicting common interest.

With respect to their scope, the Guidelines are applied to public aid provided for environmental or energy reasons (“environmental protection or energy objectives”) in all fields covered by the Treaty - if such are listed in the Guidelines’ Section 1.2. Among the acknowledged environmental and energy measures - for which state aid may comply with the EU rules on the internal energy market - one may find “aid for energy efficiency measures, including cogeneration and district heating and district cooling”. The possibility of granting this type of aid to cogeneration derives from the EU’s energy saving goals, contained within the framework of the Climate and Energy Package; nevertheless, by referring to the Energy Efficiency Directive it also goes beyond it. All together they “pave the way for further energy'efficiency improvement beyond 2020” (Commission 2014), which accordingly enables extending the duration of the Guidelines (cf. Commission 2019).

The aid stems from the need to tackle negative externalities, “the market failures hampering an increased level of environmental protection or a well-functioning secure, affordable and sustainable internal energy market” (Paragraph 35 of the Guidelines). These failures hinder the environmental effects that can be reached with the help of cogeneration: the environmental goals for energy efficiency and reduction of emissions.23 Just like in the Energy Efficiency Directive, public aid granted for cogeneration by the Member States is steered by reaching high efficiency in the CHP sector. Hence, under Paragraph 139 of the Guidelines only investments in high-efficiency CHP can be qualified as compatible with the internal market (if they were financed by state aid). Additionally, state aid offered for cogeneration and district heating using waste has to comply with the waste hierarchy principle. It is based on the following steps: waste prevention, readiness for re-use of waste, recycling, other recovery (e.g. energy recovery), and finally - waste disposal (see Article 4(1) of Directive 2008/98/EC). High level of efficiency reflects an environmental contribution achieved as the effect of the aid when applying high-efficiency CHP. To cap it, the Guidelines accept different measurable indicators whose core is the volume of saved energy; the volume may result from various actions ranging from lower energy performance and higher energy productivity or lower energy consumption and reduced fuel usage.24

The form of state aid may differ. However, among different ways of supporting energy efficiency, there is a repayable advance directly addressed in the Guidelines; as emphasised in Paragraph 147, this type of aid “may be considered as an appropriate State aid instrument in particular if the revenues from the energy-efficiency measure are uncertain” (Commission 2014). If the aid has the character of an investment, the level of aid intensities - provided in the Guidelines’ Annex 1 - applies. In terms of the aid for cogeneration installations, regardless of their scale (small, medium-sized, or large enterprise) these levels account for 100% of eligible costs, i.e. “the extra investment costs in tangible and/or in intangible assets which are directly linked to the achievement of the common objective” (Paragraph 72 of the Guidelines). The

Cogenclusion 213 way of granting the aid is based on a competitive bidding process which must be “clear, transparent and non-discriminatory”.25

The Guidelines also allow granting the operating aid to high-efficiency combined heat and power. Pursuant to Paragraph 151 this applies to two types of situations (Commission 2014). First, the aid may cover CHP units producing electricity and heat if these production costs are higher than the market price. Second, it concerns industrial CHP units where - in comparison with the market price of one unit of conventional energy -higher production cost of one unit of energy in cogeneration can be demonstrated. Moreover, when granting the operational aid for high-efficient combined heat and power, the Member States shall refer to the conditions provided for granting this type of aid for electricity produced in renewable energy sources.

This concerns Section of the Guidelines; for the needs of cogeneration it should be interpreted in a suitable way. Generally, the rules are offered for renewables, and they gradually replace feed-in tariffs by competitive bidding. The application includes three steps (see Mantysaari 2015, p. 154). The 2015-2016 transitional period (first phase) set up aid granted in a bidding process for 5% of the planned renewable capacity as the minimum. Leaving this period aside, from the beginning of 2016 (second phase) all new aid schemes and measures on renewables (so also on high-efficiency cogeneration) - except units with an installed electricity capacity of less than 500 kW or demonstration projects - have been based on the rules listed in Paragraph 124:

  • (a) aid is granted as a premium in addition to the market price (premium) whereby the generators sell its electricity directly in the market;
  • (b) beneficiaries are subject to standard balancing responsibilities, unless no liquid intra-day markets exist [but outsourcing balancing responsibilities to other companies is possible]; and
  • (c) measures are put in place to ensure that generators have no incentive to generate electricity under negative prices.
  • (Commission 2014)

Finally, from 1 January 2017 (third phase), the aid for renewables and high-efficiency cogeneration shall be granted via a clear, transparent, and non-discriminatory bidding process. However, some exceptions to the obligatory bidding are provided by the Guidelines. This refers to certain situations: where there is a limited number of eligible projects; where the competitive process would be accompanied by very high or very low bidding (to avoid strategic bidding or underbidding).26 The exceptions also apply to units with the installed capacity lower than 1 MWe, or demonstration projects.2' If the competitive bidding is exempted, according to Paragraph 128 of the

Guidelines, then the rules provided for phase two apply. The competitive bidding process affects one more field: notifying the Commission about individual aid. Pursuant to Paragraph 20 of the Guidelines, if such bidding was not applied, and the aid was granted under the aid scheme as operating aid for cogeneration of a capacity bigger than 300 MWe,28 this aid has to be proclaimed according to Article 108(3) of the Treaty.

Apart from state aid, another field where cogeneration meets renewables is the RED 11, which extends the provisions on CHP (see Chapter 4 of this book), particularly in terms of renewable energy in heating and cooling. RED 11 addresses this field in Article 23 (heating and cooling in general) and Article 24 (DH &. C). The first (Article 23) provides a pathway for increasing the share of renewable energy in this regard. It obliges Member States to reach 1.3% growth,29 divided between two periods, 2021—2025, and 2026-2030, with the 2020 share of renewables in heating and cooling as the starting point. The latter (Article 24) establishes specific framework for the promotion of DH & C. Within this framework, under Article 24(4), Member States have to implement measures necessary to achieve the heating and cooling goal discussed earlier, choosing either of them. These are the “measures that can be expected to trigger that average annual increase in years with normal climatic conditions”. Other measures include a duty imposed on DH &. C operators to connect preferable suppliers (using renewables as well as waste heat and cold), and an obligation to buy heat and cold from third-party suppliers (again, using renewables or waste heat). Within this scope, RED II institutes an exemption from these duties being possible due to the usage of high-efficiency cogeneration. It concerns a situation in which “the system lacks the necessary capacity due to other supplies of ... heat or cold produced by high-efficiency cogeneration”, or when “efficient district heating and cooling ... exploits high-efficiency cogeneration”. The first (Article 24(5)) results in a possible refusal to exercise the duties of operators aimed at supporting third-party suppliers, whereas the second (Article 24(6)) releases from the application of the aforementioned duty in general.

Finally, when discussing current legal environment on combined heat and power, the recent revision of the EU ETS Directive should be addressed. It includes new rules for distribution of free allowances for CHP delivered by Directive (EU) 2018/410 (see Massai & Beyet 2018). The amendment introduces a procedure for dealing with the remaining allowances which resulted from not achieving the maximum level of possible free allocation. Pursuant to the new wording of Article 10a(5) of Directive 2003/87/EC, if the maximum amount (ceiling) which respects the auctioning share, is not reached by the sum of free allocations on an annual basis, the prevention (or limitation) of the reduction of free allocations to respect the auctioning share in later years will be applied. This will be done by using the remaining allowances up to that amount. If

Cogenclusion 215 that ceiling is reached, free allocations shall be adjusted in a uniform manner. Moreover, the free allocation for DH is exempted from the decrease of free allowances granted to sectors considered to be at low or no risk of carbon leakage.50

Directive (EU) 2018/410 is followed by Delegated Regulation (EU) 2019/ 331 adopted by the Commission in December 2018. Due to the need for “clarity as regards the rules applicable between 2021 and 2030”, 1 it repeals the Benchmarking Decision of 2011 due to substantial changes in the EU ETS. In contrast to the Benchmarking Decision, Delegated Regulation (EU) 2019/331 addresses combined heat and power in a more complex way. This pertains to the rules for assigning fuels and emissions of CHP adopted in Annex VII “Data monitoring methods” of the Regulation. Pursuant to Section 8 of the Annex, the rules apply when the operator of cogeneration units and sub-units attributes inputs, outputs, and emissions coming from combined heat and power for the needs of updating benchmark values. For this purpose, Annex VII contains six equations, enabling to determine emissions, energy input, or attribution factors related to CHP.52

To sum up these circumstances, one may try to “unpack” the regulatory regime on cogeneration, i.e. all legislative and policy steps conducted by the European Union, or earlier - the European Community. In doing so, the following two diagrams may be of help. They show the main legislation targeting cogeneration in the EU, categorised into four areas of impact (Figure 6.1) and presented as elements of subsequent packages established by the EU (Figure 6.2).





Third Electricity Regulation

Energy Efficiency Directive (2018/2019)

Fourth Electricity Directive

Renewable Energy Directive II


Emission Directive

Third Electricity Directive

Energy Efficiency Directive (2012)

Second Electricity Directive

Energy Sendees Directive

Renewable Energy Directive

EU ETS Directive

First Electricity Directive

CHP Directive

RES Directive

LCP Directive

Figure 6.1 Main EU legislation on CHP in the four energy areas of impact

Clean Energy Package

Third Energy Package

Second Energy Package

First Energy Package

First Electricity Directive

Figure 6.2 Main EU legislation on CHP within the European legislative packages

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