Price is wrong, The

price is wrong, The

Collins, Andrew

Andrew Collins says that despite CHP’s environmental and efficiency benefits, there are sound financial reasons why more trusts have not taken it up.

Combined heat and power (CHP) has been on the NHS agenda for many years and all trust energy managers will be aware of its merits in terms of its effect in reducing sites’ primary energy use and financial viability.

The NHS has been subjected to a series of stringent energy targets over the last decade. In 1990 the Government introduced an energy target for the NHS to reduce its primary energy consumption by 15% by the year 1995/96. In 1997 the Department of Health agreed to extend the original primary energy target to 20% to be achieved by March 2000, in line with the UK’s sustainable development programme.

Following the achievement of the previous targets, in April 2001 the Minister of State for Health (John Denham) issued a letter notifying the NHS of two mandatory targets:

Reduce primary energy consumption by 15% or 0.15 MtC from March 2000 to March 2010.

35-55 GJ/100 m^sup 3^ energy efficiency performance for the healthcare estate for all new capital developments and major redevelopments or refurbishments, with all existing facilities having a target of 55-65 GJ/100 m^sup 3^.

As a consequence of these primary energy targets the NHS has had to and continues to explore all possible avenues of energy reduction, with particular attention to CHP due to its effect in reducing site import electricity requirements. Electricity consumption has the single largest effect on a site’s carbon dioxide and carbon emissions, (see graph on p32) and hence electricity reduction in hospitals is extremely desirable not from just a financial aspect but also for environmental reasons.


The Climate Change Levy, which was introduced in April this year, has a very obvious effect on energy budgets. Our firm has presented many seminars to energy managers in the north west on the impact of the Levy and the best methods of reducing it since its first announcement in the Budget in March 1999.

Just to reiterate, the Climate Change Levy increases the costs of hospital energy supplies by:

* gas – 0.15 p/kWh -typically equivalent to a 13-16% increase in cost.

* electricity – 0.43 p/kWh – typically equivalent to a 7-14% increase in cost.

* coal – L11.70 per tonne – typically equivalent to a 25-29% increase in cost.

“Good quality CHP” as ratified by the CHPQA programme (organised by the then Department of the Environment, Transport and the Regions) can qualify for Climate Change Levy exemption on the input fuel (typically gas) used in the CHP unit and probably the hospital boiler plant to some degree, if included in the CHP scheme boundary. The electricity generated by the CHP unit also means a saving on the Climate Change Levy that would have been charged on import electricity costs.


Our firm, Energy Management Services, has undertaken many CHP feasibility studies and in all cases financial viability has been the overriding consideration, due to the nature of competing demands for finance within the NHS. The combination of relatively high gas prices and low electricity prices (even considering the effects of Climate Change Levy) makes the financial viability of CNP difficult to justify at this time. Scheme paybacks are typically in the range of six plus years on a capital investment with a life of around 10-12 years.

Private finance initiatives may, due to the new mandatory energy targets, seek to use CHP as a means of realising the extremely onerous public investment levels when applied to proposed new acute hospital developments. These ‘partners’ to the NHS, however, are not charitable organisations, and consequently any extra costs associated with installing CHP will eventually be met by the NHS, making value for money an essential requirement prior to installation.

The CHP units in operation in NHS trusts that are procured and managed by Energy Management Services were in the main installed during the era of the first 15% primary energy savings programme, which was outlined at the start of this article. The economic viability of these schemes, along with others installed prior to the meteoric rise in gas prices which occurred between December 1999 and December 2000, belongs to a period of relatively low gas prices and high electricity prices. The basic gas purchase component included within overall gas prices (which excludes transportation charges, supplier administration and profit margins), accounts for around 8590% of the overall cost of interruptible gas supply to a medium to large size acute hospital, and this doubled during the period December 1999 – December 2000.

In anticipation of the introduction of NETA (New Electricity Trading Arrangements), finally introduced on 27 March 2001, electricity prices have fallen significantly over the last few years.

The use in the May HD article (p29-30) of examples of trusts installing CHP in 1998 and making estimated annual savings of up to 200,000 could be misleading. The “utility markets” and prices, as discussed, have changed beyond all recognition and what was a sound investment under the conditions prevailing at that time is certainly different now. What would be more useful to report is the level of profitability of these schemes at the moment; using current market prices for gas and electricity.

Any feasibility study into the use of CHP should address the effects of the sites’ residual import requirement for electricity and its average unit price. The typical 17 hour per day operation of CHP within hospitals offsets the import of relatively expensive day units of electricity, and consequently electricity suppliers tend to offer STOD (seasonal time of day) tariffs (ie multirate tariffs) to offset against the risk of CHP failure during periods of expensive electricity generation, which have always been a feature of the electricity market. Consequently, the residual import electricity requirement for a hospital tends to have a higher average unit price than prior to the introduction of CHP.


We procure energy (electricity, gas, coal, and oil) for over 50 NHS trusts, and from this experience the following facts emerge:

The gas market has become very volatile over the last 18-20 months, and current gas prices, along with the market view for gas prices In twothree years time, are changing daily. At a random spot market position forecast, with a view to purchase over a long-term contract, the average annual flat load price of gas is projected to progressively fall through the last quarter of 2003 or the first quarter of 2004.

Short term and longer term (year out of October 2002) electricity prices, viewed in May and July of this year, show marked differences in average base load price and demonstrate how prices are changing rapidly. The longer-term view of electricity at the moment is that electricity prices will drop marginally in the future which is not good news for CHP financial viability. In addition, selling electricity back to the National Grid is a very complex process.

The NHS is precluded from taking advantage of the two areas of financial assistance outlined in the May article. Those are, firstly, the 80% reduction in Climate Change Levy offered to sectors, through their relevant trade associations, under the Negotiated Climate Change Levy Agreements (NCCLA), and secondly financial help under the Enhanced Capital Allowance Programme for the purchase of CHP since the public sector is not eligible for capital allowances.

The political and environmental climate is ripe for the increased installation and use of CHP but unfortunately the utilities markets, particularly gas and electricity, are not. It is this overriding factor of financial viability and not the lack of desire or comprehension that is preventing the NHS (and other organisations) from taking advantage of CHP.

Together with the Government’s renewed pressure on NHS energy target reductions and its desire to increase the overall capacity of CHIP within the UK, the centre may have to offer additional financial backing to the NHS to fund greater uptake, or provide a stimulus elsewhere. Utility market forces coupled with competition for financial resources within the NHS are unlikely to secure greater installed CHP capacity within the foreseeable future from NHS funding.

Andrew Collins is energy manager at Energy Management Services. The firm was established in 1995 as a business unit of the Lancashire Ambulance Service NHS Trust and provides both energy consultancy services and energy purchasing. Prior to the launch, staff were part of the estates division of the former North Western Regional Health Authority.

Copyright Wilmington Publishing Ltd. Oct 2001

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