Investments in combined heat and power plants: influence of fuel price on cost minimised operation

doi:10.1016/S0196-8904(01)00065-6

Energy Conversion and Management

Volume 43, Issue 5, March 2002, Pages 639-650

https://doi.org/10.1016/S0196-8904(01)00065-6 Get rights and content

Abstract

Liberalisation of the electricity market and governmental politics influence heat and power supply in Sweden, like in many other countries. In this paper, the impact of subsidies and fuel and electricity costs on a representative Swedish district heating system is analysed. The energy system model MODEST (model for optimisation of dynamic energy systems with time dependent components and boundary conditions) was used to optimise investments and operation for heat and power production plants. At higher electricity prices, combined heat and power introduction may be profitable in the studied system. With current fuel prices, a natural gas fired combined cycle would primarily be favourable. A lower woodchips price and a governmental grant would make cogeneration with a biomass fired steam cycle more beneficial.

Introduction

Since the Swedish electricity market was liberalised in January 1996, electricity prices have decreased substantially due to increased competition. Thus, industries and local district heating utilities have lacked incentives to invest in combined heat and power (CHP) production plants. During 2000, electricity prices may have reached their lowest level, and a trend towards higher prices may be seen in prices on future contracts on the Nordic Power exchange. This turn is primarily due to choked supply from domestic nuclear power producers. In the long run, increased power trade with continental Europe, where the average electricity price level is higher, may establish higher Swedish electricity prices. This should initiate an expansion of Swedish cogeneration, but forecasts of future conditions are always uncertain, and detailed sensitivity analyses of cogeneration profitability is essential to avoid unfavourable decisions [1].

Besides the revenue that can be earned from electricity sales, the cost of fuel supply is an important parameter in assessing the benefit of CHP introduction. The main fuel options in Sweden are natural gas and biomass, primarily woodchips. However, there is now a gas grid only in the Southwest part of Sweden, whereas forests, which can serve as fuel sources, are close to the heat demand in most parts of the country. Historically, the major changes in costs for consumers are related to fuel taxation for heat and electricity generation. The current Swedish taxation includes a carbon dioxide tax on fossil fuels used for heat production.

In this paper, the choice between heat production and cogeneration, as well as the choice between natural gas and woodchips, are evaluated for many combinations of electricity and fuel prices. The applied variation of fuel costs may represent changes in market prices, as well as taxes. The impact of a governmental CHP grant is also analysed.

Section snippets

The optimising model

To perform the study, a linear programming model was used for optimising the municipal energy system, Henning [2], [3]. The model, called MODEST (model for optimisation of dynamic energy systems with time dependent components and boundary conditions), has been developed to find the operation profile of existing plants and potential investments that satisfy the heat (and power) demand at the lowest cost. MODEST has been used for national, regional and local studies. The Simplex algorithm is used

The studied municipal energy system

Several Swedish municipal heat and electricity producers have diversified their fuel supply for heat production in order to meet the frequently changing taxation during the last decades. The oil dependence of district heating production has, for instance, during the last 20 years, been reduced from 90% to 15%, Swedish National Energy Administration [4].

The fight for customers in the liberalised electricity market, as well as pressure on the prices and the following reduction of the margins of

Energy costs and taxation

Present market prices for fuels and the Swedish energy taxation are used in the study, Table 3. There are energy, carbon dioxide and sulphur taxes on the fuel used for heat production. Fuel used for production of electricity may just have a sulphur tax. The taxes are fiscal, as well as promoting a sustainable energy supply. Biomass is, therefore, not taxed.

The profile of the electricity price used in this study is shown in Fig. 3. The time dependence is an approximation of the price

Results

For each combination of woodchips price, natural gas price and electricity price, the optimal sizes of the possible new investments and the most beneficial system operation were calculated. The results are summarised in the following diagrams and discussions.

An overview of the optimal choice of investment, depending on fuel prices at three electricity price levels, is presented in Fig. 4. The result when a grant for the investment in a biomass fired CHP plant is taken into account is presented

Discussion

The study shows that for the analysed representative Swedish district heating system, no investments in new CHP plants will be profitable until the electricity price has increased by more than 40% if current prices and taxation of natural gas and woodchips remain. Otherwise, a new woodchips fired hot water boiler should be installed.

If the natural gas cost decreases slightly, due to lower taxes or to a lower market price, a gas turbine combined cycle may be profitable if the average electricity

Conclusions

To make CHP introduction profitable for local Swedish district heating utilities, significantly higher electricity prices than today are required. The CHP plant type closest at hand is a natural gas fired combined cycle. Very high electricity price and heavily taxed natural gas or a governmental grant and cheap biomass fuel would make a biomass fired CHP plant profitable.

Acknowledgements

ALSTOM Power Sweden AB, Finspang, Sweden, has financed this study.

References (7)

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Citation Excerpt :
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Power grids connected to renewable energy sources must cope with fluctuating output by those sources. One method to do so is for the power grid company to accept bids to increase grid stability. These bids are accepted via capacity market auction of increasing grid stability. These offers are to increase the maximum power capacity by using power stations (both utility and non-utility stations) and by reducing electricity consumption via demand response. One candidate for achieving this is a district heating and cooling (DHC) system installed with combined heat and power. However, the electricity adjustment (EA) operation needed by the DHC for the auction is complicated because the system consists of boilers, water heaters, chillers, generators, and other items. To investigate the possibility of using DHC systems for capacity market auctions, this paper proposes two models for operating a DHC system: electricity-adjustment capacity (EAC) provision and EA operation. In addition, to develop methods for evaluating the cost of the proposed operational methods, a model DHC system is formulated with an actual DHC system as a basis. Using the models, numerical simulations are conducted by particle swarm optimization. Then, the running costs of EAC, EA, and normal operation are calculated. The results show that the running costs of the proposed operations are relatively stable by day and season, not varying beyond the range of ±10%. Nevertheless, the running costs in spring and fall are be lower than those in summer and winter. The cost of providing EAC is no more than 1% the cost of normal operation, and the cost of EA itself is no more than 2% that of normal operation.

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