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Do CHP and gas engine manufacturers need to avoid USA?

 

With Nicaragua and Syria committed to joining the Paris Agreement to tackle climate change, USA is now the only country withholding their participation in this global effort. Earlier in the year, President Donald Trump had also signed an executive order to repeal USA’s Clean Power Plan. 

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New, Innovative, Disruptive – business models for CHP in the 21st Century

New business models. Innovative business models. Disruptive business models… Today, these terms are used often by those referring to the energy industry and the fundamental changes it’s undergoing (i.e. becoming more distributed, more customer centric, more service orientated…). It sounds exciting, cutting edge, and – more importantly for some - investable. But what is the truth around the evolution of business models and their application in an increasingly dynamic and changing industry like ‘energy’?

The truth is that a “business model” – simply put – is just a company’s way of making money. Can you really have a “new” or “innovative” or “disruptive” business model when you are involved in the supply of very traditional commodities for heating and power?

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Power-Gen Europe 2017 – out with the old, in with the new

Power-Gen Europe, held in Cologne last week, has for decades been an annual ‘must attend’ fixture for the conventional power generation industry. Everyone in the sector has been there, and the big centralised power players competed at a monumental scale for stand size, profile and ‘wow factor’.

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EU policy to have mixed effects on the CHP market

Policy developments are crucial for Combined Heat & Power(CHP) deployment in Europe, as spark spreads may not be attractive enough in some European countries to drive installations. There are currently two different sets of regulations that will affect CHP regulation in Europe: The Energy Efficiency Directive (EED) and new emission regulations. These developments, briefly discussed in this blog, will likely create new dynamics in the market, with certain market segments gaining advantage.

EED:

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Germany: Auctions to be introduced for CHP and renewables in 2017

Germany’s ‘Energiewende’ (Energy Transition) is well publicised, and frequently referenced, as an example of how to (or not, depending on your point of view!) transform a country’s energy system away from low efficiency, high-carbon energy and towards an environmentally friendly, reliable energy system.

One of the fundamental pillars of the Energiewende is a support framework for renewable electricity generation. In the early 1990s, renewables accounted for less than 5% of yearly electricity generated in Germany. Today, the figure stands at around 35% - and the future direction of travel is clear.

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Japan’s stationary gas engine market to grow leading up to 2020 – but what is driving it?

Japan’s large commercial and industrial gas engine market has been declining since the mid-2000s due to the economic slump and rising natural gas prices. Between 2009-2011, the gas engine market equated to, on average, 50 MWe of newly installed capacity per year. Yet, Delta-ee believes that by 2020, the market is likely to rise to around 250 MWe of installed capacity per annum. Why? What has changed?

Based on analysis conducted as part of our Distributed Power Service (DPS), we have sifted through Japan’s complex gas engine market and identified the key drivers. The figure below demonstrates that the strength each driver will have on gas engine sales will vary depending on the time period.

1. Energy resilience (growing interest across the commercial sector)

Since the 2011 Great East Japan Earthquake and tsunami, there has been greater value attached to energy supply security and reduction in peak electricity consumption - features which can be achieved using gas engines / CHP.
Japan’s power supply shortage is still an ongoing concern (especially in Western Japan) but it is important to note that Japan has not yet experienced wide-spread power cuts since the 2011 rolling blackouts following the earthquake. So, this fear of black-outs is likely to subside as a key driver towards the end of the decade.

2. High electricity prices

Since March 2011, utilities have started raising electricity prices due to rising fossil fuel imports (to cope with the closure of >40GWe of nuclear capacity). However, Japan plans to restart some of its idle nuclear capacity after thorough security checks in the next few years. This is likely to moderate electricity prices from rising further than they otherwise might have. While spark spreads are generally weak in Japan, electricity prices are so high that end-users find value in energy-efficient technologies such as gas engines & CHP.

3. Industrial sector recovery

Japan is an industrial economy. The 2008 financial crisis significantly affected the industrial sector, and sales of gas engines in the 2 to 10 MWe size range tend to follow the same general trends of industry activity and energy demand. The good news is that Japan’s manufacturing sector is gradually recovering, and hence we will likely see the return of new gas engines deployed within the industrial sector in the second half of the decade.

4. Policy incentives show no signs of being removed

In a nutshell, modest CAPEX support is in place for natural gas systems, while biogas systems enjoy a generous OPEX incentive (the current FiT rate of c€28 / kWh for biogas is possibly the highest in the world). In the latter half of the decade, we anticipate policy support in favour of energy-efficiency, smart grid applications, and energy market liberalisation – all of which will remain largely supportive of gas-fired CHP.

5. Competitive electricity pricing and supply (due to market reforms)

Historically, the Japanese electricity market has been almost completely monopolised by 10 local electricity companies. With further reforms (as defined in the Electricity Business 2013 Act), this is likely to open up the market to Independent Power Producers (IPPs). New market entrants include business operators who see opportunities to expand their businesses (and some will likely use CHP as a means to do this – e.g. gas utilities who also stand to gain from increased gas sales) to sell electricity at more competitive prices. Since the Act was passed, the number of power producers in 2013 has more than doubled from ~50 in 2012.

6. Balancing markets (stronger driver as more intermittent renewables come online)

Since the closure of Japan’s nuclear power capacity, utilities and power producers have filled the gap with increased thermal power generation (mainly LNG) and renewables (aided by generous feed-in tariffs). Japanese policy makers have also shown interest in introducing a capacity market and have already commenced energy market reforms which will likely stimulate investor interest amongst utilities and power producers for technologies such as CHP. We expect that large gas engines (>5 MWe) that can offer energy-efficiency and flexible generation will see increased sales nearer to 2020.

To find out more about the Distributed Power Service, and Japan’s most attractive end-use segments for gas engines with market forecasts segmented by engine size classes, contact Dina Darshini at [email protected]

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