Operation: Similarly to a FiT, a FiP may impede flexible operation in case its design increases the incentive for inflexible power generation by offering production-based support. Hence, the power generation is not necessarily adjusted to market conditions, but instead maximized for receiving maximum support. Investment: Absence of stable income can reduce certainty regarding the ability to sell electricity from a CHP, which increases risk for investors. 15 4.1.4. Presence of Market Pricing for Electricity In absence of direct signals for flexibility-needs, the electricity market is considered a useful proxy for such needs. CHP can be exposed to the power market by letting electricity production be traded under market conditions. Operation: Market pricing improves flexible operation of CHP units as the power production is adjusted to market needs. Investment: The level of incentive is positively correlated with market prices. High market prices provide incentives to invest in CHP technology while low market prices prevent profit opportunities 4.1.5. Presence of Power Capacity Payments Power capacity payments are granted to CHP units for maintaining available capacity in response to system needs. Operation: Assuming that capacity payments move the marginal price of production of heat and electricity from long-run marginal cost (LRMC, i.e. marginal cost including investment) down towards short-run marginal cost (SRMC), the CHP is more competitive and more able to participate in the power market and as a heat supplier. Investment: Capacity payments can improve the investment case for new CHP, and maintain existing CHP if uncompetitive. 4.1.6. Presence of Other Subsidy to CHP Other types of subsidies to CHP, which are not acting as a barrier for flexible production. Operation: Assuming that the subsidy moves the marginal price of production of heat and electricity from LRMC down towards SRMC, the CHP is more competitive and more able to participate in the power market and as a heat supplier. Investment: Subsidies can improve the investment case for new CHP, and maintain existing CHP if uncompetitive. 4.1.7. Presence of Tax Exemptions for Fuel to Electricity Production Generally, fuels are taxed. However, exemption may be offered when the fuel is used for electricity production.
WP2 DH report
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