UK CHP and the European Cogen Directive

27.03.06 Share

 

The European Directive on the promotion of cogeneration (2004/8/EC) came into force on 21 February 2004, and was to be implemented by Member States by 21 February 2006.

As we explored in our April 2004 briefing note, the Directive contains little of substance, and there is therefore little to implement. Nevertheless, the United Kingdom (UK) is still obliged to implement what little there is, and is late in doing so. On 20 March 2006, Defra published a consultation document setting out its proposed course of action for implementation. Responses are sought by 14 April 2006.

Content of the Directive

The Directive contains obligations on Member States to monitor, and report to the Commission on, the potential for high-efficiency cogeneration. These parts of the Directive do not need to be implemented through national legislation. On other matters, such as network access and the transparency of top-up tariffs, the UK is already compliant.

The only outstanding matters of substance relate to:

  • the establishment of EU-wide efficiency values, which in turn determine what is to be considered as "high-efficiency cogeneration"; and
  • the introduction of a guarantee of origin scheme.

High-efficiency cogeneration

This first action rests with the Commission, who is also behind schedule. Discussions are apparently on going, and Defra has indicated that a decision can be expected by May 2006.

Defra will clearly be arguing for efficiency values that are largely consistent with the UK 's current CHP Quality Assurance programme and the figure of 20 per cent presently provided for in the Climate Change Levy (Combined Heat and Power Stations) Regulations 2005. This will enable the UK to continue the current support given to CHP through exemptions from the Climate Change Levy.

If the definition of high-efficiency cogeneration set by the Commission is inconsistent with the current UK standards, further changes will be necessary to fully implement the Directive.

We will update you once the Commission makes a final decision on this matter.

Guarantees of origin

The Directive requires the introduction of a guarantee of origin scheme in respect of electricity generated by means of high-efficiency cogeneration. Clearly this is not something that currently exists in the UK , and it is on this issue that Defra is consulting.

Whilst the Directive requirements can be seen as similar to those relating to the renewable electricity guarantees of origin scheme introduced last year, the approach proposed for CHP is markedly different.

As one would expect, the consultation document poses a number of questions and proposes a number of alternative solutions. But, the Government's current preference is to create a scheme as follows:

  • the scheme will be linked to the existing CHPQA mechanism, in that the eligibility will be based on assessment under the CHPQA system;
  • the guarantees of origin (or CHPGOs as they will be termed) will not be virtual electronic certificates, but physical paper certificates;
  • the CHPGOs will not be issued by reference to a single unit, or even multiple units, of electricity, but in respect of electricity generated over a particular period;
  • the period in respect of which CHPGOs will be issued can be between three and 12 months (at the generator's option);
  • CHPGOs will not be issued to all CHP operators, only those who apply for them; and
  • the Government will recover the costs of issuing CHPGOs directly from the generators who apply for them.

A certificate scheme with a twist

The proposed scheme, and particularly the Government's ability to recover its costs directly, is quite unlike any other certificate regime we have seen in recent years - and the electricity industry has seen quite a number!

The reason for this difference in approach is simple - CHPGOs currently have no use, and therefore no tangible worth, in the UK . They are not linked to the avoidance of a tax or charge (as are Renewable Energy Certificates - ROCs and Levy Exemption Certificates - LECs) and do not go to fuelmix disclosure (as do Renewable Electricity Guarantees of Origin - REGOs).

CHPGOs issued to UK operators will only have a value to the extent that another Member State creates a support mechanism linked to cogeneration guarantees of origin, and then only where the UK operator contracts to sell electricity to a party in that Member State.

Little impact

Subject to the Commission's decision on the efficiency values referred to above therefore, the UK implementation of the Directive is unlikely to prompt a shift change in the UK cogeneration market.

Key Contact

Derek Goodban, partner, +44 (0)121 685 2710, derek_goodban@wragge.com

This alert may contain information of general interest about current legal issues, but does not give legal advice.

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