part 1: overview of cogeneration and its status in asia - Fire

Policy framework for promoting cogeneration 37
CHAPTER 4: POLICY FRAMEWORK FOR PROMOTING COGENERATION
4.1 Introduction
Small and medium size cogeneration projects extend indisputable benefits to both the
cogenerator as well as the utilities/governments. Cogeneration projects are environmentally
benign or have greater scope to limit the environmental impact as compared to large-scale
fossil-fired or hydropower plants. Moreover, small to medium-scale projects are less risky to
implement as they may have a lower life cycle cost as a result of three factors:
shorter construction time in comparison with large scale power plants;
lower project development expenses due to less complex negotiation process; and
perception of lower financial risk by the potential lender.
In addition, site selection for setting power generating facility by the utilities is a rather
complicated procedure. In comparison, cogeneration is suitable for any site closer to endusers
and can lead to savings on costs associated with transmission of electricity. There is
thus a great scope for providing electricity in remote areas at a lower cost than from the
centralized utility grid.
In spite of the above facts, cogeneration development so far has been rather slow because
there is a general feeling among the Asian energy policy makers that only large scale thermal
power generation projects can be economically and financially viable to tide over the
impending electricity capacity shortage. In the process, they have underestimated the risks
involved in the implementation of large-scale power generation projects with private sector
participation and overlooked the potential contributions from a great number of small-scale
cogeneration and renewable energy projects.
Secondly, most electric utilities look down upon cogeneration projects as unreliable. It is true
that many industries, such as steel, cement, petrochemical and agro-processing, having
cogeneration potential consider the output power as a by-product, thermal energy being their
main energy source for matching the process energy demand. As the demand for thermal
energy may fluctuate with time and production, these industries will find it difficult to optimize
firm power purchase agreements with the utility. Instead of looking for innovative risk
allocation and pricing schemes, utilities often limit the amount of power that can be sold to
them in the power purchase agreement to minimize the risk of depending on the
cogenerators. Any additional electricity supplied by the cogenerator is purchased using nonfirm
pricing which discourages the cogenerators in investing on such projects.
In countries where energy prices have not been rationalized, there is a tendency for the stateowned
utilities to charge the industrial and commercial sectors more for the electricity they
consume in order to cross-subsidize other sectors. A number of industrial and commercial
sector clients have economically viable cogeneration potential. But as they pay a high
electricity price to the utilities, any attempt by them to generate their own power is perceived
as a loss of revenue and a threat by the utilities.
The following section will cover some of the barriers to cogeneration development in general.
This will be followed by discussion on the policy, institutional and regulatory measures
necessary for overcoming the obstacles and promoting cogeneration.