# Presentation: 294957

## Industrial Cogeneration or Combined Heat and Power in Bangladesh – Policy Issues

- Zia Haq
- US Department of Energy
- Energy Information Administration
- January, 2004

## Introduction

- Combined heat and power technology description, cost
- Cost data for illustrative purposes only
- Local manufacture and learning can substantially reduce costs
- Policy environment that has facilitated the growth of CHP in India
- Potential for CHP in Bangladesh
- Recommendations for future actions

## What is Combined Heat and Power?

- Sequential generation of two different forms of energy from a single energy source – electrical, thermal
- Conventional electricity generation efficiency 33%, separate heat and power system 45%, CHP 85%
- Large and medium industrial CHP systems – “process industries” petroleum refining, pulp and paper, chemicals, capacities > 25 MW, steam generation rates measured in thousands of pounds of steam/hr
- Small industrial – boilers providing process steam to manufacturing plants, 50 kW to 25 MW, can repower existing boilers or install new systems
- Small commercial and institutional – reciprocating engines, small combustion turbines, building electrical and heating/cooling, starting at about 25 kW, restaurants, large commercial buildings

## CHP Technologies (Reciprocating Engine)

| Technology | Typical size | Sectors | Equipment |
| --- | --- | --- | --- |
| Reciprocating engine | 100 kW | Commercial | MAN 80 kW |
| Reciprocating engine | 300 kW | Commercial | Cummins QSK19G |
| Reciprocating engine | 1 MW | Commercial | Cummins QSV91G |
| Reciprocating engine | 3 MW | Commercial, industrial | Caterpillar G3616 LE |
| Reciprocating engine | 5 MW | Commercial, industrial | Wartsilla 18V34SG |

## CHP Technologies (Gas Turbine)

| Technology | Typical size | Sectors | Equipment |
| --- | --- | --- | --- |
| Gas turbine | 1 MW | Commercial | Solar Saturn 20 |
| Gas turbine | 5 MW | Commercial, industrial | Solar Taurus 60 |
| Gas turbine | 10 MW | Commercial, industrial | Solar Mars 100 |
| Gas turbine | 25 MW | Industrial | GE LM2500 |
| Gas turbine | 40 MW | Industrial | GE LM6000 |

## Reciprocating Engine Based CHP Systems

- Low first cost, easy startup, proven reliability when properly maintained, good load-following characteristics
- Well-suited for packaged CHP in commercial and light industrial applications of 20 kW to 5+ MW
- Ability to produce steam is limited due to waste heat being rejected in jacket water at low temperatures
- Jacket water generally suitable for production of hot water
- Good for food and manufacturing industries that do not require high pressure steam but use large quantities of wash water and low pressure steam
- Other systems – high pressure boilers, steam turbines, combined cycle systems

## Gas Turbine or Combustion Turbine Based CHP Systems

- Produces high quality heat that can be used to generate steam for additional power (combined cycle) or on-site steam use
- Can burn natural gas, diesel, or be dual-fuel capable
- Low maintenance cost
- Good for > 5 MW applications
- Industrially sized CHP plant is a complex process with many inter-related subsystems
- Construction for larger sizes can take over 2 years

## Benefits of CHP Systems

- Lower fuel consumption and lower electricity costs leading to reduced operating costs
- Boilers, turbines and other components are available in the region Bangladesh, India, Thailand, Malaysia
- Increases reliability of industry reduces the impact of energy supply disruptions
- Small size, rural location, can reduce transmission and distribution system losses by 8-10%
- Financial burden can be shared by industry and utilities
- Can improve the quality of power supply for local utility
- Can delay the need for peak demand driven capacity expansion
- Diversification of energy supply
- Reduced dependence on imported sources of energy

## Comparison of CHP Technologies

| Property | Reciprocating engine | Steam turbine | Combustion turbine | Combined cycle |
| --- | --- | --- | --- | --- |
| Electric efficiency (LHV) | 25-45% | 15-25% | 25-40% | 40-50% |
| Size (MW) | 0.05-5 | Any | 1-100 | 25-300 |
| Footprint (sqft/kW) | 0.2-0.3 | <0.1 | 0.02-0.6 | 0.6 |
| Installed cost ($/kW) | 800-1,500 | 800-1,000 | 700-900 | 600-800 |
| O&M cost ($/kWh) | 0.007-0.015 | 0.004 | 0.002-0.008 | 0.002-0.008 |
| Availability | 92-97% | Near 100% | 90-98% | 90-98% |
| Hours of operation between overhauls | 24,000 – 60,000 | >50,000 | 30,000 – 50,000 | 30,000 – 50,000 |

## Regulatory and Policy Issues in India

- Central government issued a resolution on “Promotion of Cogeneration Power Plants” in November, 1996
- Defines cogeneration system – a system that produces two or more forms of energy (electricity/steam or electricity/mechanical, etc.)
- A facility qualifies as a cogeneration facility if it satisfies certain operating and efficiency standards
- Two cogeneration cycles – topping cycle and bottoming cycle
- Topping cycle – fuel is used for electricity generation and heat for other industrial activities
- Bottoming cycle – waste heat is utilized for electricity generation

**Notes:**
Further define topping and bottoming cycles

## Qualifying Requirements for Cogeneration Facilities

- Topping cycles
- For coal and refinery bottoms, power output (net) plus 50% of thermal output (net) has to be greater than 45% of the facilities energy consumption
- For liquid fuels, power output (net) plus thermal output (net) has to be greater than 65% of the facilities energy consumption
- Facilities must be able to supply at least 5 MW of power for 250 days per year
- Bottoming cycles – power output (net) in any calendar year must be at least greater than 50% of total heat input through supplementary firing

## Policy Initiatives From the Central Government

- Interest rate subsidy for bagasse/biomass cogeneration projects: 40 bar (580 psi) and above qualifies for 1% reduction of interest rate on term loan, 60 bar (871 psi) and above qualifies for 2% reduction in interest rate, and 80 bar (1,161 psi) and above qualifies for 3% reduction in interest rate
- Interest rate floor 11% after subsidy
- Capital cost subsidy for cooperative/public sector sugar mills through joint venture companies amounting to 35 lakh Rupees/MW to 45 lakh Rupees/MW ($71/kW to $92/kW)
- Concessions in customs duty, excise duty, central sales tax, direct taxes

## Foreign Investment Policy

- Joint ventures allowed with Indian partners
- Liberalized foreign investment approval regime
- Up to 74% foreign equity participation in joint venture qualifies for automatic approval
- 100% foreign investment as equity is permissible with the approval of the Foreign Investment Promotion Board (FIPB)
- Chambers of Commerce and industry associations can be approached for finding partners
- Foreign investors can set up liaison offices in India

## Policy Initiatives at State Government Level

- Some states considering concession or exemption of State sales tax, reduced customs duty, accelerated depreciation, etc
- In Maharashtra the Maharashtra State Electricity Board (MSEB) can be an equity partner
- Karnataka extends a subsidy of Rupees 2.5 million/MW
- Wheeling is allowed at 2% charge
- Banking is allowed for 8 to 12 months
- Third party sales are allowed
- Buy back rate for electricity is Rupees 2.25/kWh (1994 Rupees) with an annual escalation of 5%

## Wheeling

- Supply of power by a private producer to a private consumer over existing utility power grid
- Rates have to be mutually agreed between cogenerator, utility, and power consumer
- In Tamil Nadu, SEB will charge a fee of 10% for wheeled power
- Karnatka allows wheeling and banking at Rs. 1.75/kWh
- Utility keeps 10% of power as fee
- 8 companies sell power to 30 private consumers and spot market has developed
- Prices range from Rs. 2.0 to 2.3/kWh depending on demand

## Banking and Buy-Back Rates

- Banking - utility banking for later use by cogenerator for a fee
- In Tamil Nadu, SEB will bank power for later consumption by cogenerator in return for 2% of electricity
- Buy-back rates – rate at which cogenerator can sell power to the grid
- Tamil Nadu equal to tariff charged by SEB to industrial customers less 2% for cost of transmission
- SEB to pay Rs. 1.80/kWh and they will increase as tariff is increased
- Progress in Maharashtra slow due to low buy-back rate of Rs. 1.20/kWh for cogenerated power

## Has been effective in Tamil Nadu and Karnatka
Tariff schedule (Rs. 2.25/kWh escalating at 5%/year as of 93-94), wheeling, banking policies have contributed significantly to implementation of early projects
Ministry of Non-conventional Energy Systems (MNES) guidelines on tariff schedule and mechanisms of power sale have been interpreted differently in different states leading to slow implementation of projects

- Tariff schedule (Rs. 2.25/kWh escalating at 5%/year as of 93-94), wheeling, banking policies have contributed significantly to implementation of early projects
- Ministry of Non-conventional Energy Systems (MNES) guidelines on tariff schedule and mechanisms of power sale have been interpreted differently in different states leading to slow implementation of projects

- Effectiveness of Biomass Cogeneration Policy in India

## Sale and Purchase of Power

- In early 1990’s key barrier was lack of contractual precedence between utilities and sugar mills involving sale and purchase of power
- Major disagreement was over the price of cogenerated power
- SEB’s wanted cost plus fixed fee pricing - sugar mills would have to open their account books to utilities (impractical and prone to lack of transparency)
- Sugar mills wanted price based on “established norms and accounting practices” - no uniform practices existed for pricing steam and power in a cogeneration facility
- How to allocate variable and capital costs to cost of electricity
- To resolve this issue fixed price of Rs. 2.25/kWh was proposed by MNES - floor price with escalation of 5%/year and this has worked
- It would have been better to have added conditions such as a time limit of 5 years or 500 MW of capacity, whichever comes first

## Potential Improvements to Tariff Structure

- Need to broaden cogeneration policy to include non-sugar cogenerators
- Phasing out the single tariff rate and creating a two-tiered tariff structure
- Letting sugar mills get a capacity credit from SEB’s and providing for peak and off-peak electricity pricing
- Introducing “avoided cost” methodology in pricing cogenerated power

## Wheeling and Banking

- Problems with wheeling and banking occur because SEB’s have poor credit worthiness and poor payment records
- Sugar mills are required to deal directly with third parties and wheeling charges are paid as compensation to utilities
- Energy 2001 Bill could change this somewhat by having cogenerators sell directly to distribution service companies (DisCO’s)
- This is not a healthy situation
- In the long term, SEB’s must be made credit worthy so that they can pay their bills on time
- Then it will be possible to change this mechanism so that cogenerators can sell directly to utilities or to their unbundled subsidiaries

## Financing and Subsidization

- Enough capital for industrial cogeneration projects - high return on investments, can operate without subsidies at existing commercial rates
- Bagasse-based cogeneration may not need capital cost buy-downs, reduced interest rates, support for feasibility studies, preferential cost of electricity
- Subsidies can be used to augment the transmission interconnection costs or they can serve as counter-guarantees against the risk of non-payment by SEB’s or the third party
- Indian industry claims that they can install cogeneration facilities at or above 80 bar pressure (1,160 psi) and $750/kW that can produce competitively priced power

## Costs and Financing Options

- Rural Electrification Corp. Ltd. (REC), Housing and Urban Development Corp. Ltd. (HUDCO), and Power Finance Corp. (PFC) are providing financing
- Most projects are being financed by IREDA, Industrial Development Bank of India (IDBI) and Industrial Credit Investment Corporation of India (ICCI)
- For bagasse-based cogeneration projects up to 25 MW, interest 14%/year, repayment period 10-15 years, up to 75% loan available, eligible organizations include private/public companies, State Electricity Boards, sugar mills, NGO’s

## Problems Faced by CHP Projects in India

- Stand-alone plants are meeting emergency or captive requirements of industry
- Back-up supply from the utility is required in most cases
- Installed capacity is far below of estimated potential in India
- Significant work and experience has been obtained
- Problems with the State Electricity Boards
- Delay in construction of transmission lines
- Synchronization with grid
- Inconsistent State government policies pertaining to power purchase agreements
- Bagasse/biomass availability

## Examples of Problems

- EID Parry - had to restrict capacity to 24 MW to avoid implementation delay as Government of India policies required clearance from Central Government for projects above 25 MW.
- Dhampur.
- power purchase agreement with Uttar Pradesh State Electricity Board restricts capacity to 15 MW.  Further problems with SEB forced Dhampur to export only 10 MW.
- Dhampur could not comply with 270 days/year of operation on bagasse/biomass criteria, crushing season 125 days/year in eastern Uttar Pradesh.
- Major turbine breakdown.
- Criteria for GEP-ABC-FA grants was reduced to 220 days/year of operation on bagasse/biomass as a special concession.
- Despite these setbacks project performance has been satisfactory.

## Barriers to Growth of CHP in India - I

- Absence of credit-worthy power purchaser (SEB’s)
- Sugar mills financially weak
- Absence of reliable market mechanism to ensure guaranteed supply of surplus bagasse, other biomass or backup fuels at competitive prices
- Absence of effective institutional and financing mechanisms
- Absence of a commercial culture and inability to develop commercial structures that address these barriers
- A continued desire for freebies exists
- Recommendation:  Government resources should be invested in ensuring adequate and reliable buyers of the electricity, wheeling facilities, and backup of fuel in competitive terms

**Notes:**
Sugar mill financial weakness means that they cannot support levels of commercial debt and cannot generate enough equity to invest in cogeneration technology
Surplus bagasse could be purchased from smaller mills that cannot justify installing cogeneration systems
Collecting other biomass would effectively lengthen the season during which feedstock is available
Absence of institutional and financing mechanisms means that there is insufficient financing capacity, lack of institutional support, limited access to financing and lack of interest of SEB’s to promote biomass
Maharashtra “mega” project addressed these barriers but failed because Maharashtra State Electricity Board (MSEB) would not allow BSES and Tata (each committed to develop 250 – 500 MW of bagasse-based cogeneration capacity) to buy the surplus electricity which would have enabled third party sales on a competitive basis

## Barriers to Growth of CHP in India - II

- Lack of adequate policy and regulatory framework – non-uniform policies, inadequate policies related to escrow/Letter of Credit
- Lack of technical capability – technologies not yet fully standardized, packaged, documented, validated, in early stages of commercialization
- Reliability not established for multiple feedstocks
- Absence of effective information dissemination
- Limited successful commercial experience – viable business models needed
- Issues of concern in India
- Price of power
- Apportioning of costs between thermal and electrical output
- Discounting benefits to utility and cogenerator
- Stranded costs to utility and under-utilization of transmission assets of utility

## CHP Study - Bangladesh

- Based on 1998 BUET-AIT-UNDP study preliminary survey of CHP potential in Bangladesh – 1,000 MW potential in Bangladesh
- Some experience with technology meeting 10% of total electrical requirement – fertilizer, sugar, paper, textile spinning
- Potential sites in industrial sector: pharmaceutical, edible oil, refinery
- Potential sites in commercial sector: hotel, hospital, cinema hall,
- How much follow-on and project implementation work has been done since then?
- How much of the capacity is only stand-by emergency capacity and how much wheeling, banking and buy-back activities are being done between BPDB, REB and CHP sites?

**Notes:**
Other potential sites in industrial sector include: paper recycling, textile processing, textile spinning, jute, tobacco curing, food processing, tea, tannery, knitting and hosiery, soap and chemicals, cement, ceramics, distillery, and industrial estates
Other potential sites in commercial sector include: housing complex, shopping, office

## CHP Potential in Bangladesh I

| Industry | Number of sites | Avg. installation potential per site (kW) | Potential (MW) |
| --- | --- | --- | --- |
| Tea gardens | 180 | 900 | 162 |
| Sugar (surplus capacity) | 15 | 10,000 | 150 |
| Jute | 70 | 1,500 | 105 |
| Textile spinning | 50 | 2,000 | 100 |
| Hospital | 150 | 500 | 75 |
| Office complex | 150 | 500 | 75 |
| Textile processing | 50 | 1,000 | 50 |
| Paper recycling | 14 | 3,000 | 42 |
| Ceramics | 20 | 1,500 | 30 |
| Knitting and hosiery | 50 | 600 | 30 |
| Tannery | 50 | 600 | 30 |
| Export processing zone | 5 | 5,000 | 25 |
| Hotel | 50 | 500 | 25 |
| Industrial estate | 5 | 5,000 | 25 |
| Soap and chemicals | 20 | 800 | 16 |
| Food | 15 | 1,000 | 15 |
| Housing complex | 10 | 1,000 | 10 |
| Cement | 10 | 800 | 8 |
| Distillery | 10 | 600 | 6 |
| Total |  |  | 979 |

## Sugar mill average potential per site may be high since mills are not big in terms of TCD
2,500 TCD provide an excess of 10 MWe to grid with high pressure boiler according to Indian experience
Using this as a guide, potential for sugar industry surplus capacity may be about 80 MW
Sugar mills have to upgrade to high pressure boilers to realize the 80 MW potential
Sugar mills have to find alternative sources of biomass to augment sugarcane bagasse, extend operation of CHP system, increase profitability
Jute industry with closing of Adamjee may have lower potential than indicated in table
If jute is approximately halved from 105 to 50, sugar is reduced to 80, the total reduces to 860 MW CHP potential in Bangladesh

- 2,500 TCD provide an excess of 10 MWe to grid with high pressure boiler according to Indian experience
- Using this as a guide, potential for sugar industry surplus capacity may be about 80 MW
- Sugar mills have to upgrade to high pressure boilers to realize the 80 MW potential
- Sugar mills have to find alternative sources of biomass to augment sugarcane bagasse, extend operation of CHP system, increase profitability
- Jute industry with closing of Adamjee may have lower potential than indicated in table
- If jute is approximately halved from 105 to 50, sugar is reduced to 80, the total reduces to 860 MW CHP potential in Bangladesh

- CHP Potential in Bangladesh II

## Sugar Mills in Bangladesh, 1993-94

| Mill | Cane processing capacity (TCD) | Existing electricity capacity (MW) | Potential electricity capacity (MW)* | Operating season (days/year) |
| --- | --- | --- | --- | --- |
| Panchagar | 1,016 | 2.0 | 4.1 | 150 |
| Thakurgaon | 1,524 | 3.0 | 6.1 | 148 |
| Shetabganj | 1,250 | 4.0 | 5.0 | 114 |
| Shyampur | 1,016 | 2.0 | 4.1 | 138 |
| Rangpur | 1,321 | 2.6 | 5.3 | 131 |
| Joypurhat | 2,032 | 2.5 | 8.1 | 136 |
| Rajshahi | 2,000 | 3.5 | 8.0 | 162 |
| Natore | 1,500 | 4.0 | 6.0 | 167 |
| North Bengal | 1,500 | 2.0 | 6.0 | 166 |
| Kushtia | 1,524 | 3.0 | 6.1 | 130 |
| Carew | 1,150 | 3.0 | 4.6 | 175 |
| Mobarakganj | 1,500 | 2.0 | 6.0 | 156 |
| Faridpur | 1,016 | 2.0 | 4.1 | 160 |
| Zeal Bangla | 1,016 | 2.0 | 4.1 | 155 |
| Deshbandhu | 300 | 0.5 | 1.2 | 67 |
| Total |  |  | 78.8 |  |

-   Export potential to grid with installation or retrofit of high-pressure boilers

## Feasibility Study Revision Needed

- Feasibility analysis was conducted in 1998 with the following capital cost assumptions: steam turbine US$1,200/kWe, gas turbine US$1,000/kWe, reciprocating engines US$900/kW
- Taka exchange rate of 48 Taka/US$
- These need to be revised, steam turbine, gas turbine costs have come down, further reductions are possible with local manufacture, Indian examples show the potential for cost reductions
- Feasibility analysis was done for paper mill, vegetable oil refinery, textile spinning mill, textile processing mill, hospital, and hotel
- Revisions needed for these with updated costs and financial conditions

## Summary of Feasibility Study for Bangladesh

| Study site | Hypothetical installed capacity (MW) | Hypothetical initial investment (crore Takas) |
| --- | --- | --- |
| Recycled paper mill | 2.75 | 11.88 |
| Vegetable oil refinery | 0.52 | 2.2 |
| Textile spinning | 2.35 | 10.2 |
| Textile processing | 0.875 | 3.7 |
| Hospital | 0.8 | 3.56 |
| Hotel | 0.8 | 3.56 |

-   All sites used reciprocating engine power match option
-   In 1998 Takas, need to be revised
-   Economics look good but depend on price of natural gas

## Manufacturers

- Over 250 component manufacturers
- About 50 system integrators
- Most have presence on the web
- Many have local offices in South Asia
- Significant Indian experience with sugarcane bagasse cogeneration should be exploited by Bangladesh
- Experience with CHP in Thailand, Indonesia, Malaysia, is also valuable in designing projects for Bangladesh

## Conclusions

- Significant potential in Bangladesh
- The hurdles are: institutional structure, policies, energy pricing and tariff, investment and financing
- Strong institutional barriers
- Lack of awareness
- Study needs to be updated to assess cogeneration potential (energy demand patterns, plant size, power-to-heat ratio, access to natural gas)
- Discussions are necessary between PDB and energy users to explore the CHP option

## Recommendations for Follow-up Actions

- Regulatory measures needed for sale of electricity to grid or third party, backup power from grid
- Electricity and gas company partnerships with industries to invest, guarantee O&M, share costs
- Exploration of alternative financing such as third-party participation, leasing, soft loans
- Extension of financial incentives: faster depreciation, soft loans, tax benefits
- Demonstration projects
- Education and outreach
- Survey and pre-feasibility study on CHP

**Notes:**
Alternative financing includes bilateral and international funds targeted towards global environmental protection (clean development mechanism, GEF).
Financial incentives have to be selectively granted to projects that satisfy well-specified technical, economic, and environmental criteria.
Education and outreach includes: Courses, training programs, information exchange on renewable energy, cogeneration, site selection, equipment design, establishment of curricula in schools and colleges for development of long-term human resources