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New market based price regulation on combined heat and power in Denmark

Panel: Panel 5. Market-based instruments

Authors:
Jesper Koch, Danish Energy Authority
Marianne Nielsen, Danish Energy Authority
Anders B. Hansen, Danish Energy Authority
Henrik Lawaetz, Danish Energy Authority

Abstract

Major economic risks can become reality when local co-generation plants (L-CHP ) meet the full market penetration with new market based price regulation. Co-generation produces more than 50% of the national electricity consumption and half of the production is generated from L-CHP. The new price regulation is assumed to take action in 2004.

The paper will present an analysis of a market based price regulation on the L-CHP-sector. The paper will spotlight on L-CHP in district heating systems supplying heat for domestic purposes.

When smaller and medium sized CHP sell electricity they are paid an average price of 46 Euro per MWh. The return of selling electricity shall primarily cover the expenditure of buying gas for electricity production and writing off investments cost of a CHP-plant. With the framework of today it is a fact that the plants (in average) are only slightly competitive compared to individual heat production plants.

When CHP meet market conditions there is a high risk that electricity prices will be reduced significantly (prices of 20 – 30 Euro per MWh) for a longer period. Significantly reduced electricity prices will result in dramatically increased heat prices. If no action is taken there will be a potential risk that heat consumers in the smaller and medium sized cities together must pay an extra bill of 200 million Euro each year. It corresponds to an average increase of the heating bill of 300 – 500 Euro per year for an average house. This is far from acceptable. There will also be a high risk that companies with industrial CHP will permanently convert to heat only boiler and only use their CHP occasionally because CHP plants might not be cost-effective when electricity prices are low. These effects can cause a significant increase of the national CO2 emission.

Paper

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