Comments on: a simplified financial model for CHP (or any LZC generation)

By: Ben Binns

Ben Binns — Fri, 22 May 2009 07:13:36 +0000

Thanks for your response. I just wanted to share that CHP does recieve ROCs IF energy comes from waste or biomass. See http://www.lowcarboneconomy.com/community_content/_tips_did_you_know/5473 for details. So, you’re right that gas doesn’t. But, why would you use gas?

By: Casey Cole

Casey Cole — Wed, 20 May 2009 13:18:42 +0000

Hi Gavin,
A simple model for a household system is going to be slightly less simple because effectively the backup boiler and CHP unit are bundled into one (so you can’t test the CHP element in isolation). As a result your heat to electricity ratio is going to change from moment to moment. I suspect that the only way to model this system is to do it on an hourly basis. In other words, it’s whole hog or nothing.

By: Gavin McP

Gavin McP — Wed, 20 May 2009 05:13:16 +0000

I was hoping to use your model to test the economic viability of a household micro CHP system. Will I need to install a conventional backup here too?

By: Casey Cole

Casey Cole — Tue, 19 May 2009 14:37:56 +0000

Hi Rufus. A conventional boiler will still be needed as backup, so I don’t think there should be offset costs here. You could argue that there will be some savings in consumables on the boiler opex but on this scale I don’t think it will be significant.

Re the FiT, I’m ambivalent about small CHP. The FiT should stimulate the LZC technology market so that costs come down (and subsidies become unecessary). For PV, I can see how this would work. For micro gas CHP, I’m not sure where the economies will come from.

By: Rufus

Rufus — Tue, 19 May 2009 14:20:51 +0000

5.5 kWe is pretty small for CHP, so not surprising it doesn’t stack up – that is why it has been decided to support CHP up to 50 kWe through the FiT mechanism (not RHI by the way unless it is renewably fuelled).

One thing I think is missed here is that the value of heat is not just the price of gas / efficiency. The avoided capex and opex for a conventional boiler should also be included unless it is retained as a backup / topup unit.

By: Gavin McP

Gavin McP — Mon, 18 May 2009 14:02:22 +0000

Let me try a little thought experiment (apologies for the length. and the German). I want to use your model to assess the suitability of a micro CHP unit for my house. First need to come up with reasonable figures for the gas price and the spark spread. The latest quarterly energy prices from BERR (tables 2.2.3 and 2.3.3) give unit prices for households going back to 1998. Figures for DD payments in Edinburgh show gas prices in the range 1.5 - 2.8 p/kWh and electricity prices from 7.7 to 11.5 p/kWh. By inverting the formula you give above I can use these figures to calculate the historic spark spread: spark spread = (electricity price - 1.5 p/kWh) / gas price This yields a spark spread of between 3.5 and 4.4. That's above the top end of your range, and the gas prices are consistently at the low end. However, I presume that's because you consider mini rather than micro CHP, and so different prices apply. I now want to use your model to assess a mini CHP unit installed in a small business. Repeating the exercise above but looking at industrial prices for the last 3 years (BERR table 3.1.2, small manufacturing) yields gas prices in the range 2.2 - 3.6 p/kWh and a spark spread from 2.0 - 2.7, which are close to the ranges you consider. So here are my questions: 1. I want to use your model for different types of project, and I need to feed in reasonable values for the gas price and spark spread. Is the approach I've sketched out above reasonable? 2. Why do the distribution costs for electricity enter into the model? By generating my own electricity I avoid paying the retail price of electricity for every unit I generate. Why do I care what proportion of the retail price consists of distribution costs? 3. Why have you expressed the spark spread as a ratio? Wherever I can find the term used elsewhere it's defined as the gross margin per unit of electricity generated by a gas generator. E.g. from Wikipedia: Spark Spread = Price of Electricity - (Cost of Gas * Heat Rate) Where Heat Rate is the electrical conversion efficiency of the generator. i.e. the spark spread is the difference between the marginal cost of producing electricity and the price at which it can be sold, measured in £/MWh (or p/kWh). I like your idea of building a simple model. However I think you've used a peculiar definition of the spark spread.

By: Casey Cole

Casey Cole — Mon, 18 May 2009 08:54:22 +0000

Gavin, the CHPA might be able to help for historical spark spreads. The further back in time you go, the more useful it is to have someone on hand who knows why it was the way it was. As a rough sanity check for the last 5 or so years, try the price indices(pdf) published by Buy Energy Online.

By: Casey Cole

Casey Cole — Mon, 18 May 2009 08:38:26 +0000

Hi Ben, thanks for the comment. Just to point out that gas CHP isn’t eligible for ROCs – though very small gas CHP is likely to be eligible (maybe perversely) for FiT’s and renewable heat incentive.

By: Gavin McP

Gavin McP — Sun, 17 May 2009 12:36:37 +0000

Thanks Casey, though I’m still a bit confused about point 2.

You’re probably right to focus on the spark spread given that it’s so crucial to CHP project economics – a developer considering CHP needs to become familiar with the term if they aren’t already.

However, I’m not quite sure where the spark spread you refer to comes from. For example, if I want to base my model on historical values for this figure, where can I look it up?

By: Ben Binns

Ben Binns — Sat, 16 May 2009 22:25:43 +0000

This is really interesting and informative. There are, at current prices, many renewable projects that are unviable. Your WACC is generous, but lets assume that 7% is fair. I don’t understand how you have calculated the net profit, but I’ll assume you have done a simple NPV approach.

Energy prices are very low at the moment and are they likely to stay low? I would factor some increase over time. Secondly, there are Renewable Obligation Certificates (ROCs) involved in CHP (if surplus electricity is sold) and this is extra revenue. In fact biomass CHP ROCs are double. You also gain revenue from recycled values too. Do you have to use gas?

From what I understand, CHP is an alternative energy source, not renewable. And, although it is much more efficient than most energy sources, it is not as low carbon as, say, a biomass CHP.

I’m still learning a lot about this field – I’m studying for a Strategic Carbon Management MBA at the UEA – and enjoy reading your blog so please correct any errors made and I look forward to your comments.