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)'
Date: 1998-03-25
Institutions: European Economic and Social Committee
Subjects: EU production, EU programme, electrical energy, energy policy, heating

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25.5.98

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 (Communi-
cation 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 Econ-
omic and Social Committee and the Council, European
Parliament and Committee of the Regions, a communi-
cation 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 (1),
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 encour-
age 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’ (2). The Committee
has consistently concerned itself with strategies for
reducing CO2 and other greenhouse gas emissions (3),
and for promoting renewable energy sources (4), energy
efficiency and rational use of energy (5). 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

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.

The Commission outlines the measures taken to
2.2.
legislative measures (6), technological measures
date:
(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
inadequate
companies regarding access to the grid,
payment for excess capacity sales and high tariffs on the
supply of auxiliary or supplementary electricity.

The Commission’s stated objective is to ‘propose
2.1.
a strategy, in the context of EU energy policy, which

Legislative barriers: difficult

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

(1) An energy policy for the European Union.
(2) Council resolution on climate change — Energy Council

of 27.5.1997.

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

21.1.1998).

(4) 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).

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

(6) 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 liberal-
ization of the internal market in electricity (OJ L 27,
30.1.1997); Taxation of energy products (OJ C 139,
6.5.1997).

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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.

have adopted general and specific legislation providing
tax and other incentives, and have provided funding and
extended R&D programmes in this field.

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

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

2.3.
As part of a coherent framework for a Com-
munity 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 (1), 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.

The United States and Japan have recognized the
3.4.
need to promote CHP development for some time; they

(1) OJ C 19, 21.1.1998.

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 tech-
nologies 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.

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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 (1) and the future
revision of the Directive on large combustion plants.

EU electricity demand is rising all the time.
4.4.2.1.
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.

special interest in areas such as the Mediterranean or in
certain island regions. All the preceding recommen-
dations 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 con-
siderable energy savings, clean up the environment, and
cut greenhouse gas emissions.

5. Prospects for the development of district heating

and cooling and desalination

The Committee agrees that CHP has great
5.1.
potential
in the district heating sector even though
situations differ widely within the EU, not only for
obvious climatic reasons but also because of govern-
ments’ active incentive and support policies and local
authority initiatives based on social costs/benefits analy-
ses 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 environmen-
schemes, offering
tal
maximum flexibility, are one possibility;
the DCS
initiative for Lisbon’s Expo-98 merits particular high-
lighting.

situations. Small-scale pilot

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.

Similar considerations apply to the cogeneration
5.4.
of electricity and desalination of sea water. This is of

(1) OJ L 27, 30.1.1997.

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 method-
ologies 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

The preliminary studies mentioned above also
6.3.1.
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.

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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 com-
munication’s encouragement of new forms of negotiated
agreements to achieve specific efficiency and technologi-
cal 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.

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 (1) 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.

In some EU Member States, and in Japan and
6.4.10.
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.).

6.4.3.
The Commission has realized that this undesir-
able 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.

6.5. 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

6.4.4.
The Commission proposes two measures to
safeguard and encourage CHP initiatives: firstly, inter-
nalization of external costs and environmental benefits
in energy consumption costs, by means of tax incentives;
secondly, use of traditional and innovative financial

(1) OJ C 19, 21.1.1998.

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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.

the percentage of CHP by the year 2010 and — above
all — the international commitments entered into by
the EU at the Kyoto conference.

6.5.2.
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 (1) 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 (2), CHP has been considered in many
Member States as an ‘infant industry’ that needs help
and protection during the start-up stage.

There have been some noteworthy examples
6.5.5.
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 (2). 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

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.

(1) Regulation and energy conservation — Joule II project for

DG XVII, February 1995, p. 13.

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

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,

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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.

The SAVE II programme and, to a lesser extent,
7.2.2.
Altener II should also play an important role, offering
innovative solutions backed by reliable technical stan-
dards, 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

The Committee firmly supports

8.1.
the Com-
mission’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.

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:

give appropriate consideration to CHP issues
8.5.1.
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
for the
in initial situations and with due respect
subsidiarity principle;

seek a proper balance between the liberalization
8.5.2.
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;

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

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.

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

8.4.

The success of the European strategy for CHP

8.5.8.
adopt regulatory provisions to promote nego-
tiated solutions committing grid operators to the pur-
chase of electricity generated by CHP plants, following

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the example of similar initiatives by the European
Parliament on electricity from renewables;

threshold, inter alia in order to encourage the granting
of EU and national financing for certified business plans;

use EU and national financial instruments —
8.5.9.
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 feasi-
ble, for the modernization of existing plants, according
to common criteria regarding a minimum efficiency

consider making CHP plants eligible for the
8.5.11.
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 frame-
work 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, decentral-
izable plants.

Brussels, 25 March 1998.

The President

of the Economic and Social Committee

Tom JENKINS

Opinion of the Economic and Social Committee on the ‘Proposal for a Council Directive on
safeguarding the supplementary pension rights of employed and self-employed persons
moving within the European Union’ (1)

(98/C 157/07)

On 15 January 1998 the Council decided to consult the Economic and Social Committee,
under Article 235 of the Treaty establishing the European Community, on the above-mentioned
proposal.

The Section for Social, Family, Educational and Cultural Affairs, which was responsible for
preparing the Committee’s work on the subject, adopted its opinion on 12 February 1998. The
rapporteur was Mr Whitworth.

At its 353rd plenary session of 25 and 26 March 1998 (meeting of 25 March 1998) the Economic
and Social Committee adopted the following opinion by 98 votes to four, with five abstentions.

1.

Introduction

From the earliest days of the European Com-
1.1.
to
munity the Commission has sought, pursuant
Article 51 of the Treaty, to bring forward measures in
the field of social security to provide freedom of
movement for workers and in particular to ensure that
persons moving jobs from one Member State to another
do not sustain any loss of benefits in this field.

1.2.
Regulation 1408/71 on the application of social
security schemes to employed persons, self-employed

(1) OJ C 5, 9.1.1998, p. 4.

persons and their families moving within the Community
sought inter alia to remove obstacles to cross-border
mobility in the field of statutory pensions. The regulation
which is a complex one has been frequently amended
but has achieved its objective in this particular field.

1.3.
The pursuit of a similar objective in the area of
occupational pensions has proved much more difficult.
This is undoubtedly because of the extreme diversity
of such arrangements and the laws and regulations
governing them in the various Member States. Never-