Development of Cogeneration in Germany: A Dynamic Portfolio Analysis Based on the New Regulatory Framework

FCN Working Paper No. 4/2009 (Revised March 2010)

40 Pages Posted: 21 Mar 2013

See all articles by Günther Westner

Günther Westner

RWTH Aachen University - E.ON Energy Research Center

Reinhard Madlener

RWTH Aachen University

Multiple version iconThere are 2 versions of this paper

Date Written: March 2010


The Integrated Energy and Climate Protection Program of the German government includes the political target of doubling the share of combined heat and power generation (CHP) in Germany from currently about 12% to 25% by 2020. In order to reach this goal, a new CHP law was enacted to improve the framework conditions for CHP generation. In this paper, we tackle the political CHP target stipulated by the German government, and aim at identifying which CHP technologies are most likely to be installed in the near future. By applying Mean-Variance Portfolio (MVP) theory, we consider return- and risk-related aspects. In our model, we pay tribute to specific characteristics of CHP generation, such as promotion via feed-in tariffs, additional revenues from heat sales, specific operational features, and specifics concerning allocation of CO2 allowances. The investigation is carried out on the basis of four generic standard CHP technologies currently available on a commercial basis. These technologies are: large coal-fired CHP plants, combined-cycle gas turbines (CCGT-CHP), engine-CHP and micro-turbine CHP. The portfolio investigation includes a projection of fuel cost and prices for heat and power according to the BMU Leitstudie 2008. As selection criteria for the portfolio performance we take, independently from each other, the net present value (NPV) of investment in CHP and the expected annual portfolio return, and compare the results obtained from both approaches with each other. Irrespective of the chosen selection criteria, the analysis shows that CCGT-CHP and engine-CHP are the most attractive CHP technologies from a return perspective. A diversification of the portfolio with other kinds of CHP technologies can contribute to stabilizing portfolio returns. The application of the results obtained on the further development of CHP generation in Germany leads to the conclusion that a large portion of additional new CHP capacity will probably be built in the industrial sector. We conclude further that the ambitious political target of 25% CHP generation by 2020 is not realistic under the given framework.

Keywords: combined heat and power, CHP technology, portfolio optimization, Germany

JEL Classification: C15, D81, G11, Q49

Suggested Citation

Westner, Günther and Madlener, Reinhard, Development of Cogeneration in Germany: A Dynamic Portfolio Analysis Based on the New Regulatory Framework (March 2010). FCN Working Paper No. 4/2009 (Revised March 2010), Available at SSRN: or

Günther Westner (Contact Author)

RWTH Aachen University - E.ON Energy Research Center ( email )

Arnulfstrasse 56
Munich, 80335

Reinhard Madlener

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)


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