Energy Prices, Production and the Adoption of Cogeneration in the UK and the Netherlands

Whenever industrial plants consume power and heat there is a need to consider energy efficiency investment on a cogeneration (CHP) plant. We investigate economic incentives influencing the adoption of energy saving technology by industry, namely, CHP in UK and Dutch manufacturing sectors. Our analysis is based on an empirical model by the application of cross sectional time series econometric models and examine how industrial output and historical increases in the price of electricity relative to gas prices spark the diffusion of CHP. We estimate production and price elasticities across periods and consider heterogeneous industrial groups. Using data for 13 manufacturing sectors our model shows that fuel cost savings and industry output, over time, impact significantly on CHP uptake. For example, the model confirms that an increase of 10% in the spark spread leads to a 4.1 MW (1.3%) increase in CHP installed in the entire manufacturing sector, while a unit increase in industrial output is associated to a 37 MW (12%) increase in total CHP uptake. Model outcomes are found to differ depending on the period of estimation. The estimation period is key in determining the impact of gas price and purchased power prices on adoption of CHP. The model takes into account the historical experience of CHP uptake, for these reasons our model is an improvement over its rivals (Madlener and Schmid, 2003; Bonilla et al., 2003; Dismukes and Kleit, 1999; Fox-penner, 1990; Rose and McDonald, 1991 and Joskow, 1984).