Opinion of the Economic and Social Committee on 'A Community strategy to promote combined heat and power (CHP) and to dismantle barriers to its development (Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions)` (98/C 157/06)

On 23 October 1997 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for Energy, Nuclear Questions and Research, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 3 March 1998. The rapporteur was Mr Bernabei.

At its 353rd plenary session (meeting of 25 March 1998), the Economic and Social Committee adopted the following opinion by 104 votes to two, with four abstentions.

1. Introduction

1.1. The European Commission has sent the Economic and Social Committee and the Council, European Parliament and Committee of the Regions, a communication on 'A Community strategy to promote combined heat and power (CHP) and to dismantle barriers to its development`. This communication follows up the Commission's commitment set out in its white paper (), on which the Committee regrets not having been consulted.

1.2. The communication also meets a request from the European Parliament regarding the need to encourage the use of combined heat and power in Member States and to dismantle barriers to its development, and responds to the invitation from the Energy Council of 27 May 1997 to prepare 'a Community strategy for the promotion of renewables and of combined heat and power (CHP) which will contribute further to improve the performance of the energy sector` (). The Committee has consistently concerned itself with strategies for reducing CO2 and other greenhouse gas emissions (), and for promoting renewable energy sources (), energy efficiency and rational use of energy (). Furthermore, on 8 December 1997 the Energy Council adopted a resolution on a Community strategy to promote combined heat and power.

2. Gist of the Commission communication

2.1. The Commission's stated objective is to 'propose a strategy, in the context of EU energy policy, which will facilitate the development of CHP in Europe and its penetration in the European energy market as an energy saving and environmentally friendly system of heat and power production`. This strategy has to be based on mutually reinforcing measures at both EU and national levels. It must also be consistent with, and take account of, other Community policies.

2.2. The Commission outlines the measures taken to date: legislative measures (), technological measures (notably those supported under the Joule and Thermie programmes) and non-technological measures - especially those supported within the SAVE and Synergy programmes, and those supported under the Phare, Tacis and MEDA programmes and by EIB funding. The Commission then pinpoints a series of barriers to the development of combined heat and power which exist to varying degrees in each Member State and hinder the satisfactory development of CHP installations:

2.2.1. Economic barriers: the non-availability and uncompetitive pricing of primary fuel sources, general and specific problems relating to financing, failure to 'internalize` the environmental costs of competing forms of energy, problems between cogenerators and electricity companies regarding access to the grid, inadequate payment for excess capacity sales and high tariffs on the supply of auxiliary or supplementary electricity.

2.2.2. Legislative barriers: difficult and time-consuming procedures to obtain operating licences, non-observance of rights of access to the grid.

2.2.3. Institutional barriers: imbalances and lack of transparency in the relations between private companies with CHP plant and public utilities which are in a dominant position.

2.2.4. Specific barriers: particularly to district heating and cooling which, in Europe, is not yet sufficiently economic or technologically advanced.

2.3. As part of a coherent framework for a Community energy policy aimed at reinforcing environmental protection, security of supply and the competitiveness of European companies on world markets, which the ESC has again recently welcomed (), the Commission outlines a new Community strategy for combined heat and power. This will aim to double the existing installed CHP capacity by the year 2010 and increase the annual load factor of existing plants by 30 %, raising the share of electricity produced using cogeneration from 9 % to 18 % and reducing emissions of CO2 and other greenhouse gases by 4 %.

3. The international aspects of cogeneration

3.1. The December 1997 Kyoto conference on global climate change set specific targets for the reduction of greenhouse gas emissions (based on 1990 levels) for all the countries party to the UN framework convention. By the year 2010, EU Member States are to cut emissions by 8 %, the United States by 7 %, and Japan by 6 %.

3.2. Hence a binding environmental obligation has been added to the general need - particularly apparent in the industrialized nations - to contain energy consumption, improve security of supply, and use fuel more efficiently.

3.3. It is now accepted that combined production of heat and power (CHP) is one of the very few technologies able to make a significant contribution to addressing the problems of energy efficiency and environmental protection side by side.

3.4. The United States and Japan have recognized the need to promote CHP development for some time; they have adopted general and specific legislation providing tax and other incentives, and have provided funding and extended R& D programmes in this field.

3.5. Some of these provisions could offer useful pointers for an effective CHP support policy in the EU.

4. A European strategy for CHP

4.1. In general terms, the Committee firmly approves the Commission's move to propose a Community strategy to promote CHP.

4.2. However, the Committee points out that the proposed indicative target (doubling CHP's share of total electricity generation from 9 to 18 % by the year 2010) is extremely ambitious, and will require considerable commitment. This target can only be met if the Member States respond fully to the Community call for action, taking full account of the differences in initial situations and market needs.

4.3. The Committee would also stress that for the detailed national targets and action plans to match the general guidelines approved by the Council, there will have to be a collaborative relationship between the programmes of the individual Member States and wider EU policy on all energy resources and technologies, which must be based on consensus and not imposed from above.

4.4. In the Committee's view, use must be made of the full potential of Member States' energy systems (whose structures still differ considerably) in order to expand and improve the penetration of CHP technologies in both the electricity and the district heating and cooling sectors.

4.4.1. Inefficient thermal power stations which use highly polluting energy sources are still in operation in many Member States. The Committee thinks that combined-cycle CHP may offer the best solution in such cases, wherever electricity demand is accompanied by a need for heat to be produced in large quantities over a long period. When deciding where to site new plants, account should be taken of the potential market for heat, cooling and desalination.

4.4.2. The most effective solution would be to build new, highly efficient CHP plants and to decommission or modernize the oldest, least heat-efficient and most polluting plants, with Member States applying the CHP Directive. The Committee thinks that the Commission should keep an eye on this problem, and should check that national programmes make appropriate provision for this, pursuant inter alia to Directive 96/92/EC on the internal market in electricity () and the future revision of the Directive on large combustion plants.

4.4.2.1. EU electricity demand is rising all the time. Any new plants built to meet this extra demand should give priority to CHP technologies wherever this is feasible and economically viable, inter alia in terms of the costs for the final consumer.

5. Prospects for the development of district heating and cooling and desalination

5.1. The Committee agrees that CHP has great potential in the district heating sector even though situations differ widely within the EU, not only for obvious climatic reasons but also because of governments' active incentive and support policies and local authority initiatives based on social costs/benefits analyses that compare CHP with traditional systems.

5.2. Although district cooling systems (DCS) are less common (around 1 500 out of a total of over 7 000 plants), the Committee feels that they could usefully be promoted in specific climatic or environmental situations. Small-scale pilot schemes, offering maximum flexibility, are one possibility; the DCS initiative for Lisbon's Expo-98 merits particular highlighting.

5.3. These positive experiences could be extended, if some regulatory obstacles could be overcome and if the problem of investment financing could be addressed (as payback time is long and the return not very high). In a deregulated economy, the decision to invest in CHP will be determined by the expected return on capital invested in comparison with alternative investment.

5.4. Similar considerations apply to the cogeneration of electricity and desalination of sea water. This is of special interest in areas such as the Mediterranean or in certain island regions. All the preceding recommendations could be equally valid for this sector.

5.5. The Committee thinks that special attention must be paid to the situation of central and eastern Europe, and especially of the applicant countries, where district heating was widely introduced in the past and still serves tens of millions of people. The Committee believes that the conditions and means exist (via the Phare, Tacis and Synergy programmes) for radical modernization and innovation that would bring considerable energy savings, clean up the environment, and cut greenhouse gas emissions.

6. CHP in industry and service sectors

6.1. The communication states that there is also considerable scope for expanding CHP in industry and service sectors. Preliminary studies were carried out quite recently, but it would be useful to update them in order to obtain reliable quantified forecasts.

6.2. The Committee asks the Commission to update these studies as soon as possible, using precise methodologies which could help Member States when they draw up their own development plans for district heating and cooling in both the industry and service sectors.

6.3. Removal of barriers to the growth of CHP

6.3.1. The preliminary studies mentioned above also considered the regulatory and institutional barriers which have slowed down the development of investment in the industry and service sectors in a number of countries.

6.3.2. The difficulties have arisen mainly over relations between companies which have built or plan to build CHP plants and the companies which manage the public supply networks. Typical problems include unremunerative prices for the electricity supplied, refusal in some cases to purchase the electricity at all, high cost of emergency and top-up supplies, and difficulty in gaining access to the grid.

6.3.3. These issues should be resolved by the definitive application of Directive 96/92/EC on the liberalization of the internal market in electricity.

6.3.4. The Committee supports the Commission's intention to vet Member States' application of the directive, in order to ensure that improper barriers to CHP development are removed as quickly as possible.

6.3.5. However, the overriding criterion should be to encourage practical cooperation between cogeneration companies and the public utilities responsible for the generation and distribution of electricity.

6.3.6. The Committee therefore endorses the communication's encouragement of new forms of negotiated agreements to achieve specific efficiency and technological innovation targets.

6.3.7. Turning to the energy sources used in CHP plants, the Committee agrees with the Commission's comments on the future importance of natural gas but asks that proper attention be given to the use of some renewables, especially biomass.

6.4. Internalization of environmental costs

6.4.1. The switch to CHP in industrial and service sectors - especially on the part of electricity suppliers in the different countries - has been thwarted by economic barriers, because the investment decision has been based solely on the economic return for the individual companies and suppliers.

6.4.2. In many cases, investment decisions that would tie up vast sums of money have been balked at because the entrepreneur feels it simpler to continue using old, inefficient plant whose cost has been fully written off, and to continue buying electricity from the grid or producing electricity without harnessing the additional heat generated.

6.4.3. The Commission has realized that this undesirable state of affairs should be countered by reaffirming that CHP offers one of the few ways of reducing greenhouse gas emissions and making considerable savings on energy consumption.

6.4.4. The Commission proposes two measures to safeguard and encourage CHP initiatives: firstly, internalization of external costs and environmental benefits in energy consumption costs, by means of tax incentives; secondly, use of traditional and innovative financial instruments to help make investment in CHP in the industry and service sectors more profitable.

6.4.5. Internalization of environmental costs was envisaged in the fifth environmental action programme, which was approved by the Council and the European Parliament at the end of 1995. It was recently also taken up in the proposal for a directive restructuring the Community framework for the taxation of energy products; this proposal is still before the Council, because of its problematic nature and the Treaty requirement for it to be adopted unanimously.

6.4.6. The Commission proposes to set minimum tax levels for all energy products throughout the EU, but to provide an exemption for CHP.

6.4.7. The intention is to improve the return on investment in CHP, and encourage companies to act accordingly.

6.4.8. On 29 October 1997 the Committee adopted an opinion () which looked into the possible benefits and problems of applying the principle of selective, harmonized taxation of energy consumption as a way of integrating the environmental benefits of highly efficient energy generation.

6.4.9. However, it thinks that the Commission should lose no time in starting to examine all the other ways in which the energy and environmental benefits of CHP could be incorporated in tax policy (point 4.7 of the communication), as part of the drive to promote rational use of energy. Similarly, action is needed to plan and promote demand for heating and hot water so as to achieve the most effective balance between supply and demand.

6.4.10. In some EU Member States, and in Japan and the United States, there are examples of specific tax incentives which might merit consideration by the Member States (deduction of part of the investment from the general tax figure, higher capital allowance for the first few years, etc.).

6.5. Financial instruments

6.5.1. The preparatory studies which the Commission carried out on the situation and outlook for CHP in Europe showed that one obstacle to the sector's development is the shortage of financial resources to invest in schemes that offer a medium or low return and demand an excessively long payback period.

6.5.2. For example, if an independent university hall of residence had capital at its disposal, then a CHP plant might be expected to show a return of 9 % p.a. This would be greater than the 7 % real which a stock exchange portfolio might be expected to yield. In this case CHP would be a sound investment. In manufacturing industry, where the risks are not the same as in education, a yield of 15 to 25 % might be required and CHP would only be justified in continuous processing plant with high requirements for both heat and electricity such as chemical and steel plants. A further constraint appears in state-owned operations such as large hospitals where, although CHP investments can be economically justified, treasury limits on capital expenditure may prevent such investment.

6.5.3. The greatest progress in building new CHP capacity has been made in the Netherlands, but the February 1995 report () on Joule II pointed out that far fewer CHP plants would have been built there had it not been for the policies which the government has enacted in recent years to encourage and support the sector.

6.5.4. Guided by a similar concern, many countries have offered various forms of economic and financial support, subsidies and soft loans. Hence, according to an IEA report (), CHP has been considered in many Member States as an 'infant industry` that needs help and protection during the start-up stage.

6.5.5. There have been some noteworthy examples in the past. In a number of cases, subsidies have covered 25-40 % of investment costs, and an even higher percentage of feasibility study costs (). Similar assistance has been given in Canada, the United States and Japan.

6.5.6. However, the communication seems to pay little attention to this aspect, possibly on the grounds that it is primarily a matter for the individual Member States.

6.5.7. The Committee considers that the right balance must be struck between the liberalization of the single market, the principles of EU competition policy on state aid, the shared objectives of the strategy for doubling the percentage of CHP by the year 2010 and - above all - the international commitments entered into by the EU at the Kyoto conference.

6.5.8. The Committee therefore asks the Commission to encourage Member States to do everything to support investment in CHP plants, especially through the use of soft loans, ensuring that the schemes are sound and do not distort competition. This is the only way to achieve the ambitious target of doubling CHP capacity by the year 2010 in a fully liberalized internal energy market.

6.5.9. The Commission proposes that the European Investment Bank should lend more support to CHP projects. Other European and international financial institutes, such as the EBRD and the World Bank, should offer similar assistance. The new Structural Funds should also provide an important contribution in less advantaged regions.

7. The contribution of Community programmes to CHP development

7.1. The Committee thinks that the Community programmes Phare and Tacis, with support from the Synergy and Alure studies for Latin America, should provide more support for the construction of CHP plant in central and eastern European countries and in Latin America; CHP systems could rapidly enable these countries to make major progress in energy saving, rational energy use and containment of pollution levels. In the case of the MEDA programme, it should be noted that no assistance is provided at present for infrastructure and hence for the energy sector; this shortcoming should be remedied.

7.2. Community RTD programmes - and especially Joule and Thermie - have for some time been geared to specific topics relevant to CHP. Although it is generally acknowledged that cogeneration plants for heat and power, cooling and desalination use relatively proven technology, there is scope for further technical and economic improvements which could help CHP to compete with traditional systems.

7.2.1. The fifth RTD framework programme must give ample consideration to energy and environmental issues. The new 'problem solving` approach in the key actions, especially those on the city of tomorrow, advanced energy systems and water technology, should help give a new boost to CHP, and particularly to mini and micro CHP schemes sited close to their users; these could offer advanced solutions and significant savings of both energy and costs, as the Commission points out.

7.2.2. The SAVE II programme and, to a lesser extent, Altener II should also play an important role, offering innovative solutions backed by reliable technical standards, so that they are easy to market where CHP techniques have the potential to become competitive in their own right.

7.2.3. The Commission proposes to incorporate these programmes in a multiannual programming framework and to press ahead with them. The Committee supports the inclusion of CHP development in this strategy, on which it is drafting a separate opinion.

8. Conclusions and recommendations

8.1. The Committee firmly supports the Commission's proposal for a Community strategy to promote combined production of electricity, heat, cooling and water treatment. The Committee believes that this is one of the few avenues open to the EU for respecting the commitments which the Member States made at Kyoto to reduce greenhouse gas emissions, in line with other stances (some very recent) on energy efficiency and sustainable development.

8.2. Once the Commission has received the opinions of the Community institutions, the Committee asks it to frame a specific action plan for coordinating the general guidelines with the decisions to be made by the individual Member States, inter alia in relation to the significant differences in structures. The Committee would like to see this plan included at some future date in the recent energy framework programme, with a view to making Community energy initiatives clearer and more consistent.

8.3. The main responsibility for the new policy will continue to lie with the Member States. They must act swiftly to set specific national targets for CHP development, to be achieved in stages by the year 2010, at the same time identifying the intervention instruments they intend to use.

8.4. The success of the European strategy for CHP development will depend on effective cooperation between the Commission and the Member States.

8.5. The Committee asks that the utmost effort be devoted to this objective. It would recommend the Commission, the European Parliament and the Council to:

8.5.1. give appropriate consideration to CHP issues and promotion schemes as part of a multi-annual energy policy strategy, in order to ensure continuity and certainty in this sphere, taking account of the differences in initial situations and with due respect for the subsidiarity principle;

8.5.2. seek a proper balance between the liberalization of the single market and the state aid authorized for environmental purposes by EU competition policy, on the one hand, and the shared strategic objective of doubling CHP production by the year 2010 and the international commitments entered into by the EU at Kyoto, on the other;

8.5.3. make regular checks that the Member States are properly applying the directives on the internal market in electricity and natural gas (to be adopted shortly), with a view to removing many of the regulatory and institutional barriers which penalize CHP;

8.5.4. monitor national programmes for restructuring the electricity generation and transmission sector;

8.5.5. promote a regular exchange of information and experience between Member States, on support and encouragement for CHP in industry, services, district heating and cooling, and desalination;

8.5.6. draw up, collect and disseminate harmonized statistics on the situation and development of CHP in the Member States and in the candidate countries of central and eastern Europe;

8.5.7. devise concrete measures to internalize the external and environmental costs, by means of fiscal and other provisions, in order to draw on the environmental and energy benefits of CHP;

8.5.8. adopt regulatory provisions to promote negotiated solutions committing grid operators to the purchase of electricity generated by CHP plants, following the example of similar initiatives by the European Parliament on electricity from renewables;

8.5.9. use EU and national financial instruments - and soft loans in particular - to encourage and facilitate investment in new CHP plant, promoting a gradual but precise programme to decommission or modernize obsolete plant;

8.5.10. adopt a common methodology for quality certification and validation of projects for new CHP plants and/or, where practically and economically feasible, for the modernization of existing plants, according to common criteria regarding a minimum efficiency threshold, inter alia in order to encourage the granting of EU and national financing for certified business plans;

8.5.11. consider making CHP plants eligible for the future 'efficiency credits` related to greenhouse gas emissions, being examined by the UN in the wake of the Kyoto decisions;

8.5.12. ensure that the key actions of the fifth framework programme, and particularly those concerning the city of tomorrow, advanced energy systems and water treatment, give adequate consideration to new CHP technologies, especially for small, flexible, decentralizable plants.

Brussels, 25 March 1998.

The President of the Economic and Social Committee

Tom JENKINS

() An energy policy for the European Union.

() Council resolution on climate change - Energy Council of 27.5.1997.

() The energy dimension of climate change (OJ C 19, 21.1.1998).

() Green Paper - A Community strategy on Energy for the future: renewable sources of energy (OJ C 206, 7.7.1997) and Altener II (OJ C 19, 21.1.1998).

() SAVE II (OJ C 82,19.3.1996).

() Council Recommendation 77/714/EEC of 25.10.1997; Council Recommendation 88/611/EEC of November 1988; Energy Charter Treaty; Directive 96/92/EC on the liberalization of the internal market in electricity (OJ L 27, 30.1.1997); Taxation of energy products (OJ C 139, 6.5.1997).

() OJ C 19, 21.1.1998.

() OJ L 27, 30.1.1997.

() OJ C 19, 21.1.1998.

() Regulation and energy conservation - Joule II project for DG XVII, February 1995, p. 13.

() See, for example, the study on combined heat and power generation in IEA member countries - International Energy Agency - October 1994.