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Energy Conversion and Management 46 (2005) 893904

Optimal designs of small CHP plants in a market with uctuating electricity prices q
H. Lund


, A.N. Andersen

Department of Development and Planning, Aalborg University, Fibigerstraede 13, 9220 Aalborg, Denmark b Energy and Environmental Data, Niels Jernes Vej 10, 9220 Aalborg, Denmark Received 15 March 2004; accepted 24 June 2004 Available online 25 August 2004

Abstract Combined Heat and Power production (CHP) are essential for implementation of the climate change response objectives in many countries. In an introduction period, small CHP plants have typically been oered xed electricity prices, but in many countries, such pricing conditions are now being replaced by spot market prices. Consequently, new methodologies and tools for the optimisation of small CHP plant designs are needed. The small CHP plants in Denmark are already experienced in optimising their electricity production against the triple tari, which has existed for almost 10 years. Consequently, the CHP plants have long term experience in organising when to switch on and o the CHP units in order to optimise their prot. Also, the CHP owners have long term experience in designing their plants. For instance, small CHP plants in Denmark have usually invested in excess capacity on the CHP units in combination with heat storage capacity. Thereby, the plants have increased their performance in order to optimise revenues. This paper presents the Danish experience with methodologies and software tools, which have been used to design investment and operation strategies for almost all small CHP plants in Denmark during the decade of the triple tari. Moreover, the changes in such methodologies and tools in order to optimise performance in a market with uctuating electricity prices are presented and discussed. 2004 Elsevier Ltd. All rights reserved.

q The preliminary results of this article were presented and discussed at the Russia Power Conference in Moscow, 1011 March 2004. * Corresponding author. Tel.: + 45 9635 8309; fax: +45 9815 3788. E-mail address: (H. Lund).

0196-8904/$ - see front matter 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.enconman.2004.06.007


H. Lund, A.N. Andersen / Energy Conversion and Management 46 (2005) 893904

Keywords: CHP; Electricity markets; Energy planning; Energy system analysis

1. Introduction In most countries, small CHP plants have not yet been forced to sell electricity on the market, but the situation is changing. Thus, all small CHP plants in Denmark, which have so far been operating according to a triple tari, will instead be selling electricity on the Nordic electricity market, Nord Pool, in the near future. CHP together with energy conservation and renewable energy are essential for implementation of the European climate change response objectives [1], and such technologies are intended for further expansion in the near future. The EU strategy is to double the electricity production from CHP from 9% in 1994 to 18% in 2010 [2], and another important EU goal is that 22.1% of the total EU electricity consumption in 2010 should stem from Renewable Energy Sources (RES) [3]. Small CHP plants are important parts of achieving such objectives, and the potential has been investigated and discussed in several member countries [48]. CHP is a very ecient way of transforming fuels into energy services, and a number of studies have investigated the methodologies of optimising dierent CHP technologies in relation to variations in the district heating demand and energy conservation in buildings [915]. Such studies have also included the development of models to optimise the use of heat storage capacities in the operation [16,17]. Compared to the conventional approach of producing heat and power in separate plants, CHP plants have the potential of decreasing fuel consumption by 2030% while producing exactly the same amount of electricity and heat. Meanwhile, such increase in eciency can only be achieved when electricity and heat is produced at the same hour at the same location. Consequently, CHP has mainly been used in connection with district heating supply of large urban areas and typically in large steam turbines using fossil fuels. Small CHP plants oer the possibility of distributed generation and, thus, give two obvious advantages. One is that the CHP eciency can be used also in small urban areas and industries. The second is that local biomass resources can replace fossil fuels, and ashes can be recycled without major transportation costs [1820]. Danish Energy Policy has succeeded in stabilising primary energy supply during a period of 30 years of economic growth. Small CHP plants and dierent types of renewable energy have been introduced and supported by the government [2125], and one of the most important successes has been to decrease the fuel consumption for heating in households by 30% in the period from 1972 to 1996. At the same time, a mixture of oil, coal, natural gas and renewable energy has replaced 90% of the oil based supply [26]. The success can be explained by the combination of energy conservation, mainly by insulation, and the expansion of district heating based on CHP. Insulation of houses has resulted in a 12% decrease in the heat demand from 1972 to 1996 at the same time as heated areas have increased by 46%. In the same period, district heating was expanded by more than 50%, and in general, CHP plants have replaced boilers. Consequently, fuel consumption for heating per m2 decreased by 53% from 1972 to 1996. Approximately 40% of the decrease is caused by energy conservation and the rest is caused by expansion of CHP.

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At rst, CHP in Denmark was expanded in city areas, where power stations were already located. Secondly, during the 1990s, CHP was built in towns and even small villages. Today, over 50% of electricity demands are produced on CHP plants, and half of it is coming from small CHP plants. Also, renewable energy sources have played a major role in Danish energy policy, and today, between 15% and 20% of the electricity demand is produced by wind power. The combination of large scale integration of both wind and CHP has created an excess production problem, especially in the western part of Denmark as wind power production depends on uctuations in the wind and CHP depends on heat demand. The problem will increase along with the growing number of wind turbines and CHP plants [2731]. In order to bring along a substantial long term penetration of distributed energy resources, it is necessary to address the key issues related to their integration into existing and future energy systems. The excess production problem has become a challenge both in order to balance supply and demand as well as in relation to the interaction with the international market for electricity. Consequently, in 2001, on request of the Danish Parliament, the Danish Energy Agency formed an expert group to investigate the problem and analyse possible means and strategies to handle the problem [32]. As part of the work, Aalborg University made some long term, year 2020, energy system analyses of investments in more exible energy systems in Denmark [33]. One of the key solutions to the excess problem was to include small CHP plants more actively in the balancing of supply and demand, and in the future, it would be very feasible to add heat pumps to the CHP plants. Consequently, the following stages of operation performance demands of small CHP plants can be described: Stage 1 (Past). Electricity is sold on a contract with a xed price and subsidy, in which the price does not vary in time. Stage 2 (Present). Electricity is sold according to the triple tari (or similar), in which the price varies in accordance with typical variations in the demand. The variation is known in advance and does not change if, for example, the demand changes. Stage 3 (Short term future). Electricity is sold on the international electricity spot market, in which the prices vary from hour to hour depending on variations in demand, water supply for hydro power and uctuations in wind power. The prices are negotiated 24 h in advance. Stage 4 (Medium and long term future). Electricity is sold on the spot market, in which the share of electricity production from uctuating renewable energy sources is high and makes a major inuence on the price setting. The task of designing optimal CHP investments diers very much depending on the stage in which the individual plant owner has to meet the pricing. The optimisation is rather simple when the price is xed. Meanwhile, when the price is subject to hour by hour variations, the tasks of identifying the optimal size become much more complicated. This article presents the tools and methodologies used to nd optimal designs to comply with the Danish triple tari, and the results of both optimal triple tari designs and optimal xed price designs are presented and compared to each other. Finally, the new development of the tool in order to make both short term and long term optimal spot market operations and designs are presented.


H. Lund, A.N. Andersen / Energy Conversion and Management 46 (2005) 893904

2. Optimisation methodology The optimisation of small CHP-plants in a competitive market is both a matter of investment design as well as a matter of operation performance. When operating the plant, the manager must be able to sell electricity when the price is high and, at the same time, make sure to full the heat demand. The ability to utilise variations in electricity sales prices and to optimise the revenues calls for exibility in terms of engine capacity and heat storage facilities as well as the abilities to start, stop and, maybe, part load the CHP units. Consequently, the operation performance should be considered in the beginning when designing the plant, and such consideration should include both the size and number of CHP-units as well as possible heat storage facilities. In Denmark, most small CHP plants have been designed by using the computer tool energyPRO [34,35]. The tools and methodologies are based on the fact that CHP plants have to operate in such complex situations as described above. The methodology makes it possible to analyse optimal solutions, taking into account all the above mentioned factors. Basically, the energyPRO model is an input/output model calculating annual productions in steps of, typically, one hour. The inputs are capacities, eciencies and hour by hour distributions of heat demand and electricity sales prices. The energyPRO computer tool provides a number of facilities to handle such data. Moreover, the model includes input data examples from which new data sets can be easily derived. The period of optimisation is divided into calculation periods, where everything is constant, e.g. temperature, solar radiation, priorities, heat demand, electricity demand, cooling demand, production capacities, fuel deliveries etc. Note that a calculation period can be long, i.e. a constant heat demand might cause a calculation period to be a whole year, while a complex model might divide a year into several thousands of calculation periods. The calculation periods can be divided into groups, typically groups in which the electricity prices are the same. A priority name, e.g. peak load, high load and low load label each group. The traditional method of calculating energy production is to make chronological hour by hour calculations, trying to take into account that, for example, production during night hours may ll the thermal store too soon, which hinders more attractive production from being placed in the morning of the following day. Meanwhile, to identify the optimal operation strategy, the energyPRO tool does it the opposite way. It places production in the most favourable periods and not chronologically. The consequence is that each new production has to be carefully checked to avoid disturbing already planned future production before being accepted. The year is typically divided into more than a thousand calculation periods, which, in this nonchronologically way, are tested for possible production. Please notice that if it appears that a production unit is not allowed to produce in a calculation period, e.g. because the thermal store is lled in the middle of the period, this calculation period will be split into two periods, allowing production in one of these. The calculation periods are dened in groups of the same priority, and production in each group is analysed in the following six loops of the planning period: Loop 1: Creating continuous production periods by lling production gaps. If a subgroup of calculation periods is surrounded by two calculation periods where production on the unit has already been planned, an attempt will be made to produce in all the calculation periods between

H. Lund, A.N. Andersen / Energy Conversion and Management 46 (2005) 893904


by trying to reduce the number of times the unit is switched on. If not successful in producing in all those calculation periods between the two production periods, all productions will be dropped in this specic loop. An example where loop 1 might result in lling production gaps is when a day has two peak load periods. In such case, an attempt will be made to keep the unit running in the intermediate period. Loop 2: Expanding production to neighbour periods. Calculation periods with a neighbour period in which the production unit is already in operation are given priority. Loop 3: Forced start of production units. The above-mentioned 2 loops through the planning period will not result in any planning of production in calculation periods with the highest priority because these 2 loops require that production already is planned in neighbour calculation periods, which is not the case for calculation periods with the highest priority. In loop 3, production units are forced to start in calculation periods with relatively high priority. That is to say, if neighbour calculation periods have lower priority, a production unit will be forced to start in this calculation period with relatively high priority. Loop 4: Production when fuel storage is full. Production units will be forced to stop in calculations periods where the fuel storage is lled. Loop 5: Production when thermal store is emptied. Production units will be forced to start in calculations periods where the thermal store is emptied. Loop 6: Full exploitation of production abilities. If, after the rst ve loops, there still are calculation periods that have not been examined and where the production unit has the actual priority number, then production in these periods is attempted.

The methodology described above is based on the assumption that the CHP plants are operated optimally. Consequently, the result of the investment analysis is only valid to the degree in which the operation manager afterwards is able to achieve such optimal performance. Most small CHP plants in Denmark were built in the early 1990s and, therefore, have approximately 10 years of operation experience. In many cases, the plant has invested in an intelligent PLC based Supervisory Control and Data Acquisition System (SCADA) for controlling the plant. Such SCADA systems are typically made so that it is possible to dierentiate for each day of the week when to switch on and o the CHP at dierent hours or at dierent contents of the thermal store. The operators of CHP plants in Denmark have gained long experience in entering data dierentiated for each day of the week, and also in changing these data at least every month, taking into account seasonal variations in demands. Detailed energyPRO models of specic plants have been used to provide valuable information for the operators to identify input data for the SCADA systems. In general, the experience is that the average operation manager is able to implement the optimal performance strategy, apart from a minor part of the electricity production, which is then not produced in the exact optimal periods. Typically, the consequence is that the actual electricity income is 34% lower than expected. Based on such general experience, a practice has evolved of adjusting the energyPRO calculations by prolonging the number of days in which the CHP unit cannot operate because of maintenance and to make a slight decrease in the heat storage capacity in the calculation. Those two adjustments in the investment analysis have proven to cover up the dierence between real life operation and optimal performance, and such adjustments have also been included in the following analyses.


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3. Fixed prices and spot market prices The energyPRO methodology and tool is here used to identify optimal CHP designs for three types of electricity price setting. All the calculations have been made on the general assumptions presented in Table 1. The optimisation of CHP plants in the following examples has been performed to meet the Danish triple tari and the price setting on the Nord Pool electricity market. Moreover, the results are compared to the results of meeting a xed price [31]. The principles behind the Danish price setting were decided by the Danish parliament in 1996 [36]. The basic principle is that the system operators must buy electricity from CHP plants of more than 6 kW fuelled by natural gas, biomass or waste, and the price should be equivalent to the costs of producing and transporting electricity on alternative units. The production costs are dened as the long term marginal costs of producing electricity on a combined cycle power station fuelled by natural gas. Such costs include fuel, operation and maintenance costs and investment costs. The transportation costs include saved grid losses and saved investment costs in transmission capacities due to the distributed location of the small CHP plants. The law refers to an attachment in which it is dened in detail how to calculate the sales prices. The investment costs are adjusted by the net price index, and the fuel costs are adjusted according to the development in international fuel prices. The rest of the parameters are xed by the law. At present, such principle results in an average electricity price of approximately 300 DKK/MW h. According to the law, the system operators are allowed to introduce peak load and high load pricing within the hours of 5:0022:00 in order to locate the electricity production on suitable hours in relation to the variation in the electricity demand. The two Danish TSOs have decided on slightly dierent hours of peak and high load. The examples in Table 2, which are used in the following calculations, represent the western TSO, Eltra. The price setting is known as the triple tari. The Danish government is in the process of changing the previous price setting based on the long term marginal costs of alternative electricity production. Instead, a principle of selling electricity at international market prices will be introduced. The law was supposed to take eect from January 1, 2004 but has been delayed, thus all the details have not been decided yet.
Table 1 Denition of small CHP plant case District heating demand District heating losses District heating payment CHP investment costs Heat storage investments costs Natural gas fuel price Natural gas energy- and CO2-tax Electricity CO2-subsidy Boiler eciency CHP electric eciency CHP thermal eciency Financing 24,000 MW h/year 25% 500 DKK/MW h 5 million DKK pr. MW 1700 DKK pr. m3 1.75 DKK/N m3 2.24 DKK/N m3 100 DKK/MW h 0.95 0.39 0.51 10%, 15 years

H. Lund, A.N. Andersen / Energy Conversion and Management 46 (2005) 893904 Table 2 The triple tari electricity sales price setting of the western Danish TSO, Eltra Name Peak load Hours 8:0012:00 17:0019:00 6:0021:00 (Apart from peak load) The rest Weekdays MondayFriday MondayFriday MondayFriday MondaySunday Month JanuaryDecember OctoberMarch JanuaryDecember JanuaryDecember Price


542 DKK/MW h

High load Low load

424 DKK/MW h 183 DKK/MW h

Consequently, the following assumptions have been designed in accordance with proposals for the law but not the law itself. The new principle of market prices introduces a high element of uncertainty, since both the variation and especially the level of electricity prices changes very much depending on the water reserves in the Nordic hydro power systems. Consequently, monthly average prices between 100 and 1000 DKK/MW h have already been seen since 1999, when the market was introduced. Possible new CHP plants need to identify the expectations for coming market prices in order to optimise the investment design. Such expectations need to include time variations as well as the average level. Finally, expectations for the payment of CO2 emissions (and savings) need to be included. Here, the calculations have been made on the following expectations: The hour by hour price variations derive from historical data from the years 2000, 2001 and 2002. The prices vary during the day and during the season with high prices in the daytime and in winter and low prices in the night and during summer. The average price level is set according to the long term expectations of the Danish Energy Agency, who foresee an average price of 240 DKK/MW h equal to the long term marginal cost of new production capacity in terms of natural gas combined cycle plants located in Norway. The CO2 emission payment is kept the same as in the previous price setting, namely a subsidy of 100 DKK/MW h electricity, corresponding to a quota price of 100 DKK/ton CO2.

4. Results All of the following identication of optimal CHP designs have been compared with a reference energy plant consisting of natural gas boilers. When calculating the reference situation on the energyPRO tool, the annual revenue becomes 0.55 million DKK/year. Investments in the boiler system are not included in any of the calculations. 4.1. Fixed electricity sales prices When optimising against xed electricity sales prices, the simple task is to nd the point at which it will no longer pay to increase the size of the CHP unit. The bigger the CHP unit gets, the lesser will be the annual heat demand to supply and the lesser the revenue. The optimal size


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of the engine will primarily depend on the size of the electricity sales price. In Fig. 1, the results of the energyPRO analysis are shown for three sales prices. All of the curves increase for the rst expansion of the CHP unit, and after a while, they all decrease again. So, they illustrate the principle of high prot on the rst marginal investment. For the present price level of 300 DKK/MW h (the curve in the middle), the optimal design is a 3 MW engine, which will increase the annual revenues from 0.55 to 3.10 million DKK/year. 4.2. Triple tari electricity sales prices When optimising against the triple tari, the analyses become more complicated. In such situations, excess capacities in CHP units can be used to relocate the hours of electricity production if heat storage capacity is added to the plant. The ability to increase the hours of peak and high load production depends not only on the size of the CHP unit but also on the size of the heat storage. Fig. 2 shows four curves representing dierent CHP sizes between 0 and 6 MW. For each CHP size, the curve shows the annual revenue when the heat storage capacity is increased. In general, the revenue can be increased in the beginning by adding heat storage capacity. Then, after a while, the cost of expanding the heat storage becomes higher than the benets, and the net revenue starts to fall. The bigger the CHP unit, the more the plant benets from increasing the heat storage and the higher becomes the optimal heat storage capacity. For example, the optimal heat storage capacity is 500 m3 for the 2 MW CHP plants, while it is 2000 m3 for the 6 MW CHP plant. The optimal design is the point of the curve that results in the highest annual revenue. In Fig. 2, the optimal revenue is 3.53 million DKK/year for the 4 MW CHP unit and the 900 m3 heat storage. In order to be able to read the diagram, Fig. 2 illustrates only four dierent CHP sizes. Meanwhile, if Fig. 2 had included the curve of a 5 MW CHP unit, one could see that such an alternative does represent a maximum of 3.55 million DKK/year with 1500 m3 heat storage capacity. Meanwhile, one can achieve almost the same prot by investing in a smaller unit, namely in the 4 MW CHP unit and the 900 m3 heat storage, which should then be recommended in order to minimise the risk of losses in case the electricity sales prices should decrease.

Fig. 1. CHP plant design when electricity sales prices are xed (100 DKK = 16US$ = 13 EUR).

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Fig. 2. CHP plant design in the case of triple tari electricity sales prices (100 DKK = 16US$ = 13 EUR).

4.3. Nord Pool market prices Optimising against Nord Pool market prices is very much like optimising against the triple tari, apart from the element of uncertainty. The triple tari only had one major uncertainty, namely the development in the fuel price. The Nord Pool prices also have uncertainties as to the development in the price levels, which has proved to uctuate very much. So far, the average level has been close to the short term marginal costs of conventional power stations. Meanwhile, such price levels are expected to increase when new capacity is needed. Fig. 3 shows four curves representing the same CHP sizes as shown for the triple tari in Fig. 2. Again, the revenue increases in the beginning when adding heat storage capacity. Then, after a while, the cost of expanding the heat storage becomes higher than the benets, and the revenue begins to fall. Meanwhile, compared to the triple tari, the revenues are considerable smaller. This is mainly due to the fact that the average price of 240 DKK/MW h is smaller than the average price of the triple tari of 300 DKK/MW h. The optimal design is now the 4 MW CHP unit with the 500 m3 heat storage, which results in an annual revenue of 1.61 million DKK/year, which is not far from the plant design of the triple tari: 4 MW CHP unit and the 900 m3 heat storage. 4.4. Future RES market prices with high uctuations As described in the introduction, if future objectives to increase the share of electricity production from RES are fullled, then the electricity spot market price is likely to uctuate more. To illustrate the potential inuence from such price uctuations, a sensitivity analysis has been calculated in which the Nord Pool spot price is multiplied by a factor 340/240 and subtracted by a factor 100, leading to the same average but higher dierences between high and low electricity market prices. The result is that the optimal heat storage capacity increases slightly from 500 to 700 m3. Consequently, if the investment in the heat storage were decided during the triple tari period, one is likely to have invested in a suitable heat storage capacity, and in the case of new investments, one may consider installing a small excess capacity in order to meet potential future challenges of high price uctuations.


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Fig. 3. CHP plant design in the case of Nord Pool market sales prices (100 DKK = 16US$ = 13 EUR).

5. Conclusions The identication of optimal CHP plant designs is simple when the sales pricing is xed but becomes rather complex when the sales pricing varies over time. This article has presented a methodology to identify optimal operations strategies and a computer tool to use such operation strategies to identify optimal CHP plant designs. The methodology has been used on three dierent sales price conditions, and the result has proved to be three dierent optimal designs. In Table 3, the results are compared with the reference situation. In the case used here, triple tari and marked price settings call for higher investments in CHP units and heat storage capacities.

Table 3 Optimal CHP plant designs for three dierent sales price conditions Million DKK Optimal design: CHP size Heat storage capacity Sold heat Sold electricity Fuel costs Taxes (fuel) Subsidies (electricity) Operation (CHP) Investments (CHP) Investments (Storage) Annual Revenue Potential heat price Reference 12.00 5.02 6.43 0.55 500 DKK/MW h Fixed prices 3 MW 12.00 6.09 8.69 5.13 1.95 1.15 1.97 3.10 390 DKK/MW h Triple tari 4 MW 900 m3 12.00 7.58 9.18 4.95 2.21 1.31 2.63 0.20 3.53 380 DKK/MW h Market prices 4 MW 500 m3 12.00 5.58 9.17 4.95 2.21 1.30 2.63 0.11 1.61 450 DKK/MW h

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In general, the optimal design depends very much on the specic conditions, not only in relation to sales price conditions but also in relation to fuel prices, taxes and nancial costs. Consequently, one has to nd optimal designs for each individual plant based on the specic conditions. Since the fuel prices, district heating demand and especially the taxes are very dierent from one country to another, one cannot directly use the same results even though the market pricing may prove to become the same. Meanwhile, the methodology of identifying optimal operation strategies and optimal plant designs are the same, and the energyPRO computer tool should be able to calculate the results in other countries than Denmark. Only the input data need to be changed according to the actual conditions. References
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