Project financing consequences on cogeneration: industrial plant and municipal utility co-operation in Sweden

The liberalisation of the European electricity market influences investment decisions in combined heat and power plants. Energy companies modify their business strategies and their criteria for investments in power generation capacity. In this paper, the gains from a co-operation between a paper mill and municipal utility are studied. We find that a widened system boundary, including both the industrial plant and the district heating company, increases cost-effectiveness by 7–11%, compared to a situation with two separately optimised systems. Furthermore, optimal investments are strongly influenced by the actors’ different required returns. With a relatively low required rate of return on energy investments, typical for a municipally owned utility, the most profitable investment is a wood chips-fuelled cogeneration plant. With a higher rate of return on capital, typical for a competitive industry, the optimal investment is mainly a heat-only steam boiler. Finally, some general influences on required rate of return caused by electricity market deregulation are observed. Whilst tending to increase companies’ required returns, deregulation may, besides extending the outlet for locally generated electricity, also obstruct long-term high-cost investments such as cogeneration based on conventional technology.