How to achieve CHPQA assurance to maximise CHP financial incentives

Achieving the CHPQA quality mark is a vital step in maximising savings from CHP technology and avoiding rising energy costs, advises Hugh Richmond, CEO of Edina.

To unlock additional financial benefit from Combined Heat and Power (CHP) organisations must make sure their projects meet the standards for ‘Good Quality CHP’ under the Combined Heat and Power Quality Assurance (CHPQA) programme.

CHP, also known as cogeneration, is a highly efficient process involving the simultaneous production of electricity together with heat, which is captured rather than being wasted, as is the case in traditional power generation.

For suitable sites, CHP is one of the most effective ways of reducing energy costs. It can deliver huge financial savings – resulting in rapid return of investment (often within 2-3 years). It also offers a cost-effective way to reduce carbon emissions, while helping to improve energy resilience.

About CHPQA

CHPQA is a government initiative that provides a model for assessing and certifying the quality of CHP in the UK. The cogeneration assessment standard was devised in 2001 and aligns with the requirements of EU Directive 2012/27/EU on Energy Efficiency and UK policy to optimise CHP productivity.

Under CHPQA, schemes are assessed based on their efficiency and environmental performance. If a scheme is certified as ‘Good Quality CHP’ then it will qualify for a range of financial incentives, provided that certain standards are achieved.

CHP financial incentives

Given recent huge hikes in the Climate Change Levy (CCL) tax, one of the most rewarding incentives is a partial exemption from CCL, which has been charged at much higher rates since 2019. Other major financial benefits include qualification for Enhanced Capital Allowances /Annual Investment Allowances and reduced business rates.

Organisations must achieve CHPQA assurance to qualify for all three of these incentives.

1. Climate Change Levy (CCL)

The CCL is a non-domestic environmental tax on electricity, gas and solid fuels. It is designed to encourage organisations to be more energy efficient. CHP schemes that are recognised as ‘Good Quality’ under the annual CHPQA assessment that consume the electricity they generate on-site are exempt from CCL payments on the gas used to generate the power.

2. Enhanced Capital Allowance/Annual Investment Allowance

Enhanced Capital Allowances (ECAs) encourage investment in energy saving equipment by enabling the cost of investment to be written off against taxable profits. This scheme closes at the end of the 2019/20 financial year, but businesses can still benefit by claiming the Annual Investment Allowance (AIA).

3. Business rates

Organisations using ‘Good Quality’ CHP to meet their on-site energy needs may benefit from preferential business rates.

Rising cost of CCL

For many years the CCL rate increased only slightly year-on-year. This changed in 2019 when the government abolished the CRC Energy Efficiency Scheme (formerly known as the “Carbon Reduction Commitment”). The ‘lost’ CRC revenue has been offset by huge increases in CCL rates. In 2019 there was a 67% CCL rate increase on natural gas (from 0.203 pence per KWh to 0.339) and a 45% increase on electricity (from 0.583 pence per KWh to 0.847).

From April 2020, the CCL rates will increase on gas and decrease on electricity so that, from 2021, CCL rates on gas will be equal to 60% of the rate for electricity. This makes CCL exemption on natural gas fuelled CHP systems increasingly attractive.

Light energy users and charities do not have to pay the Climate Change Levy (CCL). Some very large energy users can also gain an exemption if they negotiate a Climate Change Agreement, but most other organisations are liable for this significant tax. Making use of efficient on-site CHP provides a proven route to reducing the financial sting of this environmental tax as qualifying sites will be exempt from CCL payments on the natural gas used to fuel the CHP system.

Good Quality CHP

To qualify under CHPQA as ‘Good Quality’, operators must provide evidence that their CHP system is running at energy efficiency. At a minimum, the project must be more efficient, in terms of heat and power, than alternative energy options. Each CHP system will be evaluated based on data that confirms the fuel used, power generated, and heat supplied.

The CHPQA Standard sets out the definitions, criteria and methodologies for the operation of the programme. It should be interpreted alongside the more detailed CHPQA Guidance Notes, which provide compliance information, along with notes on how the Standard will be interpreted by various government departments and agencies.

The CHPQA Standard uses two key parameters to assess CHP performance. It calculates if the proposed CHP scheme exceeds the required threshold criteria by providing the CHP with Quality Index (QI) and power efficiency ratings.

  • Existing systems must achieve a minimum QI of 100, and a minimum power efficiency of 20%.
  • New systems must achieve a minimum QI of 105 and a minimum power efficiency of 20%.

Power efficiency is the total annual power output of a scheme, divided by the total annual fuel energy input. Schemes must meet a certain efficiency threshold for their installed capacity, relative to typical values for traditional production of heat and electricity.

The full list of QI indicators is included in the CHPQA Standard.

How to qualify for CHPQA

The qualification process for CHPQA is a desk-based, self-assessment exercise.  There are several routes to completion, with the appropriate route determined by the complexity of the CHP project and whether it is an existing or new scheme.

A scheme is defined as simple if it meets all of the following criteria:

  • Generating capacity < 2MWe
  • Single reciprocating engine
  • Single conventional fuel used
  • No heat rejection facility

Those responsible for simple schemes will have to follow the same basic process as complex schemes, but the forms required at each step are shorter and easier to complete. 

A scheme is deemed ‘complex’ if any of the following apply:

  • Generating capacity greater than or equal to 2 MWe
  • Prime mover, not a single reciprocating engine
  • Non-conventional fuel used
  • Fire boiler(s) included within scheme boundary

CHPQA assessment needs to be completed once each year to ensure that a CHP project is continuing to perform efficiently. Because previous years’ performance data is available for existing CHP schemes, there is a slightly different assessment process for new and existing schemes.

In order to claim the Climate Change Levy (CCL) exemption on ‘Good Quality’ CHP fuel and electricity and the Annual Investment Allowance on eligible capital expenditure, it is necessary to apply for a Secretary of State CHP Certificate (SoS Certificate). This can be requested by completing the appropriate section of the CHPQA F3, or F4 submission form.

CHPQA timescale

CHPQA certification is issued on an annual calendar year cycle and all certificates expire on 31 December of the year of approval. For existing CHP schemes, this means that organisations should compile energy data (fuel used, electricity generated, and actual heat used), assess performance and complete forms shortly after the end of each calendar year.

Guidance from the Department of Business Energy and Industrial Strategy states that organisations should submit the completed forms by the end of March to allow enough time for administrators to validate the submissions and issue a new certificate in time for the Secretary of State Certificate to be maintained at the end of June deadline.

Failing to meet this deadline may mean that entitlement to the CCL exemption is removed between the beginning of the year until the new exemption certificate is issued.

Steps to CHPQA success

As long as your site is suitable and your CHP system is correctly specified, installed and maintained, your CHP system should meet the performance requirements of the CHPQA programme.

To meet the ‘Good Quality’ CHP classification it is important to consider the following:

Make sure the CHP project is sized properly

Any new CHP scheme needs to be based on accurate energy data at the planning stage. If a CHP plant is too large it will run inefficiently and could lose money. But if a CHP is undersized then the cost and carbon savings may not be as high as expected.

Make CHP the lead heat generator

CHP should take precedence over boilers as the lead heat generator at all times, so you benefit from the higher efficiency.

Use metering to accurately record usage

The metering and sub metering of fuel use and heat and electricity generation enables you to better understand the efficiency of CHP. Recording systems must be up to CHPQA standards or renewing the CHP Certificate will be difficult.

Perform proactive maintenance and servicing

It’s vital you look after the system, performing all the necessary maintenance and servicing to the manufacturer’s instructions to maintain optimum efficiency.

For further information about CHP or the CHPQA scheme, please contact Edina on +44 (0)161 432 8833, email info@edina.eu or visit www.edina.eu/chp.