ARTICLE IN PRESS

Energy Policy 36 (2008) 2308–2319

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Simulation of micro-CHP diffusion by means of System Dynamics

El Mehdi Ben Maallaa, Pierre L. Kunschb,
a
SMG Department, Université Libre de Bruxelles, Campus de la Plaine CP 210/01, Boulevard du Triomphe, BE-1050 Brussels, Belgium
b
MOSI Department, Vrije Universiteit Brussel, Pleinlaan 2, BE-1050 Brussels, Belgium
Received 13 March 2007; accepted 14 January 2008
Available online 5 March 2008

Abstract

This paper presents a simulation analysis with System Dynamics of the possible diffusion of micro-systems for combined heat-power
generation (m-CHP) as a substitute for centralised electricity generation and local boilers in the residential sector. Decentralised energy
production is an important challenge in the 21st century to respond to the threats of exhaustion of non-renewable resources, and of
global pollution. The purpose of the System Dynamics modelling is to show the difficulties m-CHP faces, like most innovative
technologies, mainly due to its high investment costs. Feedbacks are important in modelling the diffusion process of this technology and
the fundamental aspect of learning effects on the cost decrease. The consumer model is based on the replacement of traditional boilers by
m-CHP installations using the Bass diffusion model. It is shown that natural economic forces are probably not sufficient to achieve a
sustained growth. Several incentive schemes to be implemented by the regulatory authorities are investigated to promote this technology.
r 2008 Elsevier Ltd. All rights reserved.

Keywords: Distributed combined heat power; Diffusion simulation; Economic incentives

1. Introduction generation in large power plants to distributed generation

The energy market is today undergoing deep mutations.
Considering EUR-25 in the present work, there is first the
liberalisation of energy markets away from the previous
centralised monopolies (European Commission, 1996),
which favours the coming up of independent producers.
Within this framework, new environmental challenges are
also rising regarding the safety and diversity of supply, the
rational use of energy, and the emission reduction of
pollutants, principally the CO2 emission thought to have
the main responsibility in the climate change threats
(Kyoto Protocol, 1998). The medias in all developed
countries today largely advertise the needs for sustainable
development, which could no longer be ignored by
politicians and public decision-makers in general, in
particular regarding the environmental impacts of energy
production and consumption. An attractive way of coping
with these new challenges is to move from centralised
Corresponding author.
E-mail addresses: Mehdi.benmaalla@gmail.com (E.M. Ben Maalla),
pkunsch@vub.ac.be (P.L. Kunsch).
(DG) (Chambers et al., 2001; Jenkins et al., 2000). Natural
gas is often used as a DG fuel, renewable energy sources
are developing: wind, solar photovoltaic, biomass, etc.
In this paper, we consider DG based on micro-systems
with combined heat-power generation (m-CHP), producing
locally low-temperature heat and electricity. Capacities are
small, flexible, and adapted to the local demand. Thanks to
the high efficiencies obtained with the combined heat-
power production, the reduction of primary combustion
fuel is important, implicating at the same time avoidance of
CO2 emissions. The present paper provides a strategic
dynamic modelling of deployment possibilities of m-CHP
by means of System Dynamics (SD) simulation with the
code VENSIMr (VENSIM DSS32, 1988–2003). Such a
global systemic approach is pertinent, because it allows us
to model the main feedback mechanisms (Sterman, 2000)
responsible for the diffusion of the micro co-generation
technology. Additional benefits of SD modelling are, on
the one hand, the concentration of many valuable
technical, economic and financial data, and, on the other
hand, the identification of the main levers of action to
achieve defined objectives. Our intended audiences are

0301-4215/$ - see front matter r 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2008.01.026
 ARTICLE IN PRESS
E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319
indeed public decision-makers and regulatory authorities in
charge of energy resources and environmental manage-
ment, and eager to analyse the opportunities of m-CHP
generators in the residential sector.
The DG literature on m-CHP has been rapidly growing in
the last years, principally in the number of proceedings
papers and internal reports, of which many are available on
the Worldwide Web (Harrison and Redford, 2001; Crozier-
Cole and Jones, 2002; Houwing and Bouwmans, 2006;
Houwing et al., 2006; van Dam et al., 2006). Most published
literature and m-CHP developments in Europe stem from
Great Britain, the Netherlands, and Germany (Pehnt et al.,
2006). As described below, the present analysis is based on
data available from Great Britain, a country with an
important growth potential for m-CHP (Harrison and Red-
ford, 2001; Crozier-Cole and Jones, 2002). To our knowledge,
no similar global study with SD existed at the time when the
present analysis was performed (Ben Maalla, 2005).
The paper is structured as follows: in Section 2 a
technical and economic background is provided on the
technology, and how it is represented in the proposed SD
model, which is not meant for forecasting, but as a strategic
assistance tool to public decision-makers. In Section 3 the
elements of the diffusion model are provided. The purpose
is to analyse the potential diffusion of m-CHP installations
as a substitution technology of classical household boilers.
This approach is based on an implementation of the well-
known Bass model (1969) representing the substitution
mechanisms by means of the SD feedback structure.
In Section 4 the main technical and economic aspects
addressed in the global SD model are discussed. Section 5
presents the main results of our analysis when simulating
several diffusion scenarios of the m-CHP technology, in the
case of Stirling engines. As a reference market, we consider
the substitution of classical boilers, either without the
support of economic incentives, or with such support.
Conclusions and outlooks for future developments are
given in Section 6.
2. Technical and economic background
2.1. Distributed co-generation
DG is developing today in the wake of the liberalised
market (IEA/OECD, 2000). The level of development—
status in 2005—is however very different according to the
country. For example, the same reference indicates that
about half the electricity production in the Netherlands
originates from co-generation units, which are directly
feeding the low-voltage distribution grid, but in most
countries the proportion of distributed production remains
marginal in total. Where it is present, it is most frequently
limited to diesel motors for back-up purposes. An
important growth is still to be expected, and available co-
generation technology is the master choice, as it can
provide both electricity and heat with very high efficiencies.
In our study, we are dealing with the residential households
2309
as the target market for this technology: we therefore limit
our analysis to co-generation units of a size below 5 kWe
(electricity generation).
In a first development stage of the present model natural
gas (methane) is used as a fuel, as it is best known today.
Various heat energy sources, also including renewable
energy sources like solar, or biomass, etc. may be
considered at a later stage.
Several different technologies with high combined effi-
ciencies are available, such as internal-combustion engines,
micro-turbines, fuel cells, and Stirling external-combustion
engines. We have decided to limit the present prospective
detailed analysis to Stirling engines, though our model has
been designed to handle also internal-combustion engines
and micro-turbines (excluding fuel cells). These technologies
and their necessary infrastructure are available, and they do
not necessitate any further development, so that the
simulation may concentrate on the sole substitution mechan-
isms of classical boilers for heat generation. Distributed
electricity generation and possible re-selling of excess
electricity to the distribution grid are additional benefits of
this technology. Technical characteristics of those three
m-CHP engines and different generating power sizes are given
in Table 1 with the indication of data sources.
Only detailed results relative to Stirling engines are
available. The latter are external-combustion engines
working by the repeated heating and cooling of a sealed
working gas moved by a piston between hot and cold heat
exchangers (Organ, 1992). This technology has been known
for a long time, but it was not used until the recent
development of suitable materials made it possible to
manufacture such engines down to very small sizes
(WhisperGenTM, 2006). Sales of refrigerator-sized ‘perso-
nal power stations’ equipped with Stirling generators for
residential use have now started to grow in Great Britain
and the Netherlands (Der Spiegel, 2006).
Distributed co-generation has many advantages when
compared to centralised production: efficiency gains,
reduced line losses and improved electricity supply,
especially in remote areas, reduction of greenhouse gas
emissions, etc. (Chambers et al., 2001; Jenkins et al., 2000).
Also alternate sources of heat, like gas from biomass, can
be locally used at the production site.
When no electricity is bought from or re-sold to the
external electricity company, the production ‘on the spot’
avoids the transmission and distribution costs, which are
important for low-voltage customers. But this is not the
normal case, as the local generation of electricity is
generally not sufficient for satisfying the demand. Both
buying and selling grid electricity are further discussed
below in this section.
When dealing with micro-generation systems, important
technical and economic aspects must be addressed before
deciding in favour of m-CHP:
 The load characteristics of electricity and load demand
are important, given seasonal average load curves for
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2310 E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319

Table 1
Technical characteristics of m-CHP engines for different generation power sizes

Technologies values Internal combustion engines (natural gas) Microturbine (natural gas) Stirling engines (natural gas)

Power size 1 Power size 2 Power-size range Power size 1 Power size 2

Electric power, Pe (kWe) 1 5 15–300 0.8 9.5

Ratio thermal to electric power, Pth/Pe 3 2.5 1.2–1.7 7.5 3
Electrical efficiency (%) 20 25 15–30 10 24
Global efficiency (%) 85 88 60–85 85 96
Sound level Average Average Average Low Low
CO2 emissions (kg/kWhe) 0.35 0.35 0.35 0.5 0.25
Emissions NOx (kg/MWhe) 1 0.2 0.1
Cost of installed kWe (h/kWe) 4000 2500 700–1000 3500 2500
Cost O&M (h/kWh) 0.035 0.025 0.025 0.02 0.015
Lifetime 30,000 h, maximum 15 years 40,000 h 80,000 h, maximum 15 years

Data sources: IEA/OECD (2000) and IZT (2002); http://www.energy.ca.gov/distgen/equipment; URL: www.tips-project.de; http://www.mrcc-industries.com/
cogen.htm.

different consumers’ profiles; some optimisation is
needed of the distributed power generation, so as to
satisfy these demands. Detailed optimisation of the use
of m-CHP is discussed in Houwing et al. (2006).
Houwing and Bouwmans (2006) analyse the impact of
residential m-CHP on external suppliers by means of
agent-based modelling. In the present model simple
assumptions are made in Section 2.2 on electric and heat
DG, including back-up from the distribution grid and
excess electricity.
 The possible re-selling to the external electricity
company of the excess electricity generated by m-CHP
and the economic evaluation of the price have to be
considered. Note first that the overall effects of micro
co-generation are beneficial for the distribution grid. In
rural areas, for example, non-consumed re-sold electri-
city will increase the voltage, which is welcome to the
grid operators (Jenkins et al., 2000). But electricity re-
selling also brings additional challenges to network
operators regarding, for example, voltage variations, the
capacity of equipment, back-up production capacities,
etc. (Pehnt et al., 2006, Chapter 9). They might thus be
additional equipment costs on the grid side, which are
not taken into account by the present model. These
technical implications, or penalties of grid re-selling,
impact the electricity re-selling price, which may be only
a fraction of the electricity market price (Pehnt et al.,
2006); therefore, the final benefit to investors from
electricity re-selling is quite uncertain. This is to say that
the actual income from electricity re-selling may be only
a fraction of the theoretically calculated maximum
income, assuming that the re-selling price is equal to
the electricity market price from the electricity company.
In Section 5 when considering excess electricity re-
selling, the obtained income will be handled as a random
variable, by using the electricity re-selling factor as an
uncertainty factor, representing this uncertain fraction
of the theoretical income.
 Buying electricity from the grid will be necessary in all
discussed scenarios (see Section 2.2): the DG of thermal
power is chosen in the first place as to match thermal
demand, so that the electricity from DG is not sufficient
to meet the demand.
 The electricity and fuel prices play an important role in
the diffusion process as they represent important risk
elements in the m-CHP investment decision.
 Particular technical aspects appearing for any pioneer-
ing technology are large initial outlay, necessity of back-
up production, and learning effects (EU-Deep, 2005).
Learning effects are particularly important in such start-
up technologies in order to reduce initial costs; they have
been the object of many studies like among many others:
McDonald and Schrattenholzer (2001) and Sundqvist
and Söderholm (2003).
2.2. Basic technical and economic assumptions
The SD model investigates the substitution market of
classical boilers in the residential sector by m-CHP over a
time horizon of 20 years, assuming no residential energy-
demand growth. This is a reasonably long period, also
sufficient to indicate trends. The choice of constant
electricity and thermal demands during the 20-year period
is acceptable for the present purpose, i.e., exploring with
SD the basic structural mechanisms for the technology
diffusion, with and without the support of the public
sector, rather than forecasting detailed market shares in
some more or less distant future. The addition to this
model of partly arbitrary demand growth rates would not
add much insight.
Taking as a baseline for the m-CHP diffusion, the
constant substitution market of classical boilers has the
additional advantages of defining without ambiguity two
important aspects in the diffusion model: the size of the
total market (well-defined here), and the market shares of
competing products, i.e., here high-efficiency condensing
 ARTICLE IN PRESS
E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319 2311

boilers, another alternative for replacing lower-efficiency
boilers (also well-defined). Other competing technologies,
like centralised CHP facilities launched by the industry
for district heating, heat pumps, solar boilers, etc., are
ignored in the model. This is because convincing assumptions
regarding multi-technology competition are usually difficult
to establish in prospective market studies (Sterman, 2000),
and therefore, interpretations of the diffusion potential of
m-CHP would become unnecessarily complicated.
The assumptions regarding the consumption profiles
used in the study, as well as the technical characteristics of
Stirling engines fuelled with natural gas in a size range
5.8–13 kW (total of electric and thermal powers) per
m-CHP unit, are given in Table 2.
The residential sector in Great Britain is considered as a
basis for the simulations. This country has been selected as
it seems to us to be the closest to a possible breakthrough
of m-CHP, and most reference data are available. The main
references that we have used for defining a potential market
are Harrison and Redford (2001) and Crozier-Cole and
Jones (2002). Additional references for technical and
statistical data are Organ (1992), WhisperGenTM (2006),
DTI (2005) and Eurostat (2005).
Three average consumption profiles HH1, HH2, and HH3
are considered in the present model with a total potential
market (100%) estimated at 16 million units—representing
the potential number of private housings using lower
efficiency boilers susceptible of becoming substituted by
micro generation (Harrison and Redford, 2001; Crozier-Cole
and Jones, 2002). The objective of the SD model is to present
potential market shares of m-CHP in the interval [0%, 100%]
for the different consumption profiles and scenarios.
For each consumption profile, it has been assumed that
the thermal engine power Pth in Table 2 has been adopted
in order to meet the annual thermal demand without the
need for thermal back-up production. Given that heat can
be stored, the heat generation does not need to be time-
adjusted to match the daily load curve. The number of
running hours is computed as the ratio of demand and
installed thermal power. From the proposed power sizes in
Table 2, it is easily calculated that profiles HH1 and HH2
require He ¼ 3000 h/year running time of the m-CHP
installation, while profile HH3 requires He ¼ 2400 h/year.
From there, given the complementing electric power Pe, the
production time can be optimised in order to generate
electricity matching as much as possible the load curve,
considering that electricity cannot be stored easily as heat,
and there is in general no perfect matching between current
demand and electricity generation. Because electricity
storage capacities (Houwing et al., 2006) are not considered
in the present model, only a part (fe) of the electricity
production (Pe  He) can be used for meeting the own
demand (De); the own electricity use is then given by
(Oe ¼ fe  Pe  He). Back-up electricity (Be ¼ DeOe) may
still be needed, while part of the generated electricity
(Re ¼ (1fe)  Pe  He) is not directly usable and may be
resold to the network operators.
Harrison and Redford (2001) estimate from the elec-
tricity load profiles that on average over the year fe ¼ 85%
of the electricity production is used to meet the immediate
electricity demand in case of profiles HH1 and HH3, thus
(Re) ¼ 15%  electricity production.
The most important potential for electricity re-selling lies
with profile HH2 corresponding to families with larger
thermal needs Dth ¼ 30,000 kWh/year. With an electrical
output of 9000 kWh/year, i.e., twice the yearly electricity
demand, profile HH2 is able to cover its own needs, with no
back-up from the network being necessary. As in this case
fe ¼ 50%, Re ¼ De ¼ Oe ¼ 4500 kWh/year for this profile.
In synthesis the main assumptions of our model are the
following ones:
 The base market of m-CHP for heat is the substitution
market of classical gas boiler. It represents in the model
16,000,000 units (100% market share). The generating
capacity of m-CHP is chosen to be fully autonomous
with respect to the thermal demand.
 m-CHP is competing with high-efficiency condensing
boilers for the substitution market.
 The interaction with large-scale CHP is not considered
in the m-CHP substitution model.

Table 2
Electric and thermal demands for different consumer profiles (Great Britain data) per m-CHP unit; power capacities; number of running hours to meet
thermal demand; own electricity production and fraction used locally; backup with percentage of demand, and re-selling of excess electricity

Consumption No. of m-CHP Pth Dth Running hours De Pe fe Oe Be Re

profiles units (kW) (kWh/year) He (h/year) (kWh/year) (kW) (%) (kWh/year) (kWh/year) (kWh/year)

HH1 8,000,000 6 18,000 3000 3500 0.9 85 2295 1205 (34%) 405
HH2 3,000,000 10 30,000 3000 4500 3 50 4500 0 (0%) 4500
HH3 5,000,000 5 12,000 2400 4500 0.8 85 1632 2868 (64%) 288
Total no. of units 16,000,000

The total number of potential m-CHP units (u) is 16,000,000 (100% of market).
Sources of data: Crozier-Cole and Jones (2002); Harrison and Redford (2001); DTI (2005); Eurostat (2005).
Pth: thermal power; Dth: thermal demand; De: electric demand; Pe: electric power; fe: used fraction of production; Oe: own electricity use ¼ fe  Pe  He; Be:
electricity backup ¼ DeOe (% of demand); Re: electricity reselling ¼ Oe  (1fe)/fe.
 ARTICLE IN PRESS
2312 E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319
 The average investment cost for Stirling engines is
assumed to be 3000 h/installed kWe for profiles HH1
and HH3, and 2000 h/installed kWe for profile HH2.
 The financing of investment is either by individual
purchase or by leasing.
 The m-CHP electricity production substitutes part of the
grid supply.
 The heat and electricity consumption demands are
represented by linear functions of the purchase prices.
The elasticity of energy demand defining the relative
change of energy demand for a unit price increase has
been fixed at the conservative constant value (1): the
sensitivity to changes in this value is not large, as has
been verified by simulation.
 Excess electricity is resold to the grid. The electricity re-
selling factor is the fraction of the maximum income,
which could be theoretically obtained by re-selling all
excess electricity at the current market price. In general
only a fraction of this price will be obtained (Pehnt
et al., 2006), so that the re-selling factor is an uncertain
variable in the [0%, 100%] interval.
 Regulatory authorities are ready to offer some incen-
tives to develop the m-CHP. Their own motivation is to
reduce the consumption of primary fuel and the
atmospheric emissions, as well as to diversify the
production sources of electricity and heat.
 The reduction of fuel usage (natural gas) is calculated by
difference with a scenario without m-CHP.
 The attractiveness of m-CHP is based on the following
three criteria:
J The comparison of initial outlay with classical boilers
for heat production. Remember, for example, that
for the HH1 profile this outlay (units 2002) is
3000 h/kWe/unit, while it is 1400 h/unit for a high-
efficiency condensing boiler with the same thermal
capacity (6 kWth from Table 2). It is confirmed by the
SD model to be developed later that the initial
investment by consumers is indeed the major
entrance barrier for investors to enter this market.
J The payback time of the m-CHP investment. For
example, the analysis for the HH1 profile shows that
it is about 6 years, which is quite long as compared to
the expected lifetime of 15 years quoted in Table 1.
Payback time will thus also be an important risk
factor for investors.
J The comparison between the discounted costs of new
and classical technologies.
3. The diffusion model
The Bass model (Bass, 1969) is frequently used to model
innovation diffusion (Mahajan et al., 1990; Parker, 1994;
Rogers, 1995). In modelling with SD, Sterman (2000,
Chapter 9) presents applications and extensions of the Bass
model with SD; Homer (1987) presents a diffusion model
with SD on new medical technologies.
The Bass model is an extension of the logistic diffusion
model used for modelling epidemics. It solves the start-up
problem of the logistic models, which require an installed
base, to start the attraction of new consumers by contagion
from the installed initial base, the latter being in general
very small or absent at start. The idea is taking into account
both contagion as well as advertising. Contagion rests on
the imitation effect based on ‘mouth to mouth’ diffusion of
the new technology from the existing base, according to the
logistic model. Advertising stems from market campaigns
and mass media advertisements around the innovation and
its attractiveness. In our model the advertising effect will be
assumed to arise from the knowledge of the potential
adopters of more or less attractive economic features or
incentives. No assumption needs to be made here about the
importance of advertising budgets or marketing campaigns
(like it could be done at a later stage of the technology
introduction). Our assumption is that the effect of
advertising on adoption will be proportional to the suitably
defined attractiveness of the technology. This is probably a
realistic assumption: today the mass media propagate all
the concerns about long-term fuel supply, fuel prices,
climate-change threats, herewith largely advertising and
promoting the rational use of energy.
The Bass model is shown in Fig. 1. The yearly increase
rate of the number of m-CHP installations is given by the
following set of equations:
A ¼ AI þ AD,
U
AI ¼ C  I  S  ,
N
AD ¼ a  S,
N ¼ U þ S, (1)
where A is the total increase rate, AI the imitation rate by
mouth to mouth, and AD the rate based on advertising the
attractiveness of the new product. All three rates are
expressed in units/year. The parameter C is the mouth to
mouth rate expressed in 1/year; I is the dimensionless
probability of adoption; S represents the current number of
potential units not yet installed; U is the current number of
installed units; and N is the total number of units, i.e.,
16,000,000 units in the present case, as indicated in Table 2.
The parameter ‘a’ is the attractiveness factor advertising
the merits of the product: it represents the expected
percentage of potential units S to be adopted each year.
In the model, ‘a’ is assumed to be the weighed average of n
economic attractiveness criteria ATi, i ¼ 1, 2, y, n, which
are given as functions of the price P, as follows:
X
n
a¼ wi ATi ðPÞ, (2)
i¼1
where wi’s are weights summing up to one. In the model we
consider n ¼ 3 with the three criteria defined in Section 2.2,
to be minimised for obtaining maximum attractiveness:
initial outlay, payback time, and ratio of discounted costs
between m-CHP and condensing boilers.
 ARTICLE IN PRESS
E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319 2313

N=S+U
assumed
constant
Total number of
units N

P1

Potential - Users of
units S technology U
Total adoption rate of
- technology A
N1

P2
Adoption rate
N2 Adoption rate
through imitation AI through advertised Attractiveness of the
attractiveness AD proposed technology

Probability of mouth to mouth Advertising

adoption I rate C effectiveness
factor a

Fig. 1. The System Dynamics model implementing the Bass diffusion model.

The influence diagram shows two positive loops (P1, P2),
and two negative loops (N1, N2):
The positive loops induce growth by adoption (AD)
thanks to the increasing economic attractiveness due to the
learning effects (loop P1), or by imitation (AI) of the
increasing number of m-CHP investors (loop P2).
The negative loops N1 and N2 are the equilibrium
loops associated, respectively, with P1 and P2; each
negative loop limits the corresponding growth mechanisms
of the positive loop, given the finite number of potential
users S.
The technical coefficients C, I, a in Eq. (1) and the
weights needed in the Bass diffusion model in Eq. (2) have
been obtained by calibrating the model with the deploy-
ment of the condensing boilers in the Netherlands. The
average relative errors in reproducing the diffusion data
with the technical parameter of the Bass model are 9.1%
for the period 1981–1993 and 12% for the longer period
1981–1996 (Cauret et al., 1999). Details on this calibration
are provided in Ben Maalla (2005). It has been assumed
that these results can be transposed from the diffusion of
high-efficiency boilers to m-CHP. It is observed from these
data that the growth rate of the substituting technology
obeys a threshold law: at about some critical value of the
installed capacity, the growth rate becomes much larger
than below the threshold.
 Learning effects are taken into consideration regarding
several important cost elements for the m-CHP deploy-
ment: outlay costs, O&M costs, and costs per installed
kW. Learning effects on those cost elements are
generally represented by the following formula:
 
X
lnðCðX ÞÞ ¼ lnðC 0 ðX 0 ÞÞ  E ln . (3)
X0
where C(X) represents the cost corresponding to the
cumulated number X in installed units of the m-CHP
installations; C0 represents the corresponding cost in
case the initial number of installations is equal to X0 ;
special care has been given to evaluate both C0, X0
values, given that the present installed base is very small
and transfers of learning experience exist between
different national markets (Ben Maalla, 2005). E is the
learning coefficient.
The learning rate or progress ratio (PR) represents the
relative cost decrease when the initial value is doubled
X ¼ 2X0. It is easy to see as given by Eq. (4):
PR ¼ 2E . (4)
Values of the PR in the range PR ¼ 70–90% have been
observed with respect to electricity-producing capacities
(IEA/OECD, 2000; EU-Deep, 2005; Sundqvist and Söder-
holm, 2003). Sensitivity analyses have been performed on
this critical factor.
4. The global System Dynamics model
System Dynamics has a valuable track record for
studies in the liberalising energy sector (see Bunn and
Larsen, 1997; Sterman, 2000, and references therein). The
 ARTICLE IN PRESS
2314 E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319
pertinence and legitimacy of using SD in such strategic
studies stem from the ability of capturing structural
mechanisms and feedback loops, which cause either success
or failure of new technologies.
The full model has about 2000 variables or constant
parameters, of which 192 state variables are acting as
stocks; they are distributed over 13 different modules or
views representing simulation sheets. Subscripts are used to
create multi-dimensional variables, to easily encode several
micro co-generation technologies, types of boilers, con-
sumers’ profiles, financing schemes, etc.
Because of its modular structure, the model can be easily
developed, including for example independent producers’
modules, or market instruments like green certificates
(Kunsch et al., 2002, 2004). The simplified influence
diagram in Fig. 2 shows the main feedback loops of the
SD model developed for this diffusion analysis of m-CHP.
m-CHP, or high-efficiency boilers, substitute classical
boilers at their end-of-life or before, proportionately to
their current installed base. In principle, a decrease in the
installed base of the micro co-generation technology is
possible, contrary to the behaviour observed with the
classical Bass model (Sterman, 2000), depending on the
chosen evolution of parameters in the model. It has not
been observed in the analysed scenarios.
Positive loops P1–P3 are responsible for the technology
growth, while the negative loops N1 and N2 represent the
limits to the incentive-driven growth. The main positive
loop P1 is supposed to be the virtuous learning-experience
loop diminishing the costs. In the initial phase, however, P1
acts as a vicious loop, because the technology take-off is
hindered due to the low return on the high initial
investment. This is the central loop of the model, which
explains why economic incentives will be needed to assist
the m-CHP deployment.
boiler
replacement rate
-
Number of
classical
P3
boilers Potential annual
market µ-CHP
installation rate
boiler
installation rate
-
investment decision in P2
N2 favour of µ-CHP
Average heat Profitability of
consumption µ-CHP installations
- -
Distribution price
of gas
Distribution price
of kWhe
Fig. 2. The global influence diagram of the System Dynamics model (simplified).
The positive loop P2 represents in a simplified way the
Bass diffusion model in which additional units are installed
by contagion or advertising from the previously available
units. Note again that in this model the main mechanism
for growth of the new technology is the substitution of
classical boilers. The positive growth loop P3 initiates new
m-CHP installations when classical boilers have to be
replaced.
The negative loop N1 limits the use of economic
incentives to the period in which m-CHP installations are
not yet profitable to investors. The negative loop N2 limits
the introduction rate of classical boilers and thus the later
possible substitution by m-CHP installations.
One of the main difficulties in modelling with SD is the
choice of valid data for parameters. Unless otherwise
indicated the data are drawn from the provided sources
in Table 2 on the British market (Harrison and
Redford, 2001; Crozier-Cole and Jones, 2002; DTI, 2005;
Eurostat, 2005):
 Main average consumption profiles of electricity and
heat have been defined in Table 2.
 On the basis of an analysis of electricity and gas prices in
Great Britain in the period 1993–2004 (Crozier-Cole and
Jones, 2002; Harrison and Redford, 2001; DTI, 2005;
Eurostat, 2005), we have determined the base-case
values of, respectively, 0.09 and 0.03 h/kWhth. Sensitiv-
ity studies have been performed around those values;
furthermore, different increase rates for those prices
have been tested.
 Among different technologies including micro-turbines
and gas-based internal-combustion engines, only results
of the SD model regarding gas-fuelled Stirling engines in
the total of thermal (Pth) and electric (Pe) generating
powers in the range 5.8–13 kW (see Table 2) are
Benefits of µ-CHP
development
Number of
µ-CHP
installations
P1
Learning effect
Economic incentives to
µ-CHP
- development
N1
Average electricity
- consumption
 ARTICLE IN PRESS
E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319
presented in this paper. The assumed representative
average efficiencies are 15% for electricity and 70% for
heat production. The resulting total efficiency of 85% is
to be compared with a maximum efficiency of 55% in
the case of centralised electricity production.
 Furthermore, the initial value of the PR of Eq. (4) has
been assumed to be 85% (IEA/OECD, 2000; EU-Deep,
2005). Because this parameter is particularly critical for
assessing the dynamic investment costs, sensitivity
simulations have been performed to verify the robust-
ness of the results.
 The discount rate used to calculate discounted costs is
assumed to be 5%/year in real terms (outside inflation),
a reasonable value for such investment decisions.
 Delays have been introduced as required in any dynamic
modelling to take into account the fact that consumers
will not react immediately to evolutions in prices or to
changes in incentive policies (Sterman, 2000, Chapter 11).
 Financing acquisition of m-cHP is through either
independent purchase or leasing. Mainly the former
will be discussed here.
 A time period of 20 years is considered for the
simulations, starting in 2005.
 The gain in fuel and avoided CO2 emissions are
simulated within the model by comparison with a
100% boiler scenario.
5. Main results of the simulation with System Dynamics
Before the presentation of the main results, we note that
the model has not only been calibrated for what regards
input data, but also validated in its structure. As mentioned
in Section 3, the observed trends of the deployment of the
condensing boilers in the Netherlands in the period
1981–1996 (Cauret et al., 1999) were used for calibrating
the diffusion model.
The main results of the simulation are the dynamic
percentage-diffusion values (percentage market shares for a
total of 16,000,000 units mentioned in Table 2) of the
m-CHP technology, and the benefits of the m-CHP
technology in comparison with the case where it is excluded.
We concentrate on the former results in this presentation.
In a first evaluation stage, no economic incentives to
support the m-CHP technology are considered.
5.1. Base-case model without economic incentives
The base-case model uses the parameters values de-
scribed in Section 2: it provides the following rather poor
results of the diffusion value in percents of the total market
at the termination date in 2025, assuming a negligible rate
at start time in 2005:
 profile HH1: 3.9%;
 profile HH2: 1.8%;
 profile HH3: 4.8%.
2315
Remember that the PR is chosen to be 85%. Sensitivity
studies show a rather small dispersion of values for PR
values larger than 80%, i.e., the lowest value that we
consider being realistic. Values of the PR between 70% and
80% give a very large dispersion as the cost decrease with
the installed capacity triggers a snowball effect on the
m-CHP installation rate, which indeed seemed us to be
much too optimistic. Additional simulations show that the
diffusion percentage value is rather insensitive, in the sense
of an increase, to a gas price decrease. The investment
decision in favour of a m-CHP installation replacing a
classical boiler and electricity purchased from the grid will
benefit from an electricity price increase, as also shown by
simulation. But even if both favourable electricity and gas
price evolutions are combined, a ‘natural’ breakthrough of
the m-CHP technology is shown not to be likely without the
assistance of economic incentives. The entrance barrier of
high initial outlay hinders the potential virtuous loop
revolving around the learning cost decrease, because of the
high risk for investors. It is why our SD model has
analysed several incentive schemes, and some of their
combinations, to assist the m-CHP diffusion:
(1) Investment subsidy of a percentage of the initial
investment in m-CHP, in order to lower the initial
consumers’ outlay.
(2) Re-selling to the electricity company of all electricity
produced in excess by m-CHP, but at an uncertain price.
(3) Selective internalisation in the costs of the energy
prices, like reducing the gas price for m-CHP installa-
tions, or increasing the electricity price for consumers
not using m-CHP. This is equivalent to the use of
Pigovian taxes on the fuel consumption in the non-
substitution case.
(4) Financing through leasing. Simulations confirm not
only the flexibility of the model, but also that leasing
may favourably boost the willingness to invest of
consumers. It is however not in the hands of public
decision-makers and regulatory authorities (the ‘clients’
of the model in its present stage, as mentioned in
Section 1) to influence this scheme: these results will
therefore not be further discussed here, though it has
been observed in simulations that leasing could become
a very effective tool once the market has started to
grow.
5.2. Investment subsidy and electricity re-selling
Regarding first the investment subsidy, scenarios in
which 10%, 20%, and 30% of the initial investment are
refunded to investors during 3 or 5 years, after the
simulation begins in 2005, have been considered for the
three consumers’ profiles HH1, HH2, and HH3 defined in
Table 2. They show that in practice only the HH1 profile
would benefit in a sustained way from this reimbursement,
and only in the scenario for which 30% of the investment is
 ARTICLE IN PRESS
2316 E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319
reimbursed to the investors during the first 5 years in the
simulation. Nevertheless, the total money spent in this way
by authorities becomes unrealistically high. Simulations
show that sustained growth cannot be achieved if the
market share remains below 10% at the termination date of
the investment subsidy programme.
The re-selling of electricity produced in excess by the
m-CHP installation (see values for the different profiles in
Table 2) is a second possible economic incentive. We have
discussed its limitations in Section 2.1. The reader is
reminded here that the theoretical re-selling price is taken
to be equal to the current market price, but the re-selling
factor may vary in the [0%, 100%] interval to account for
the uncertainty on the actual price. In our study, re-selling
produces rather mitigated results for all three profiles. For
a uniform distribution of the electricity re-selling factor
between 0% and 100%, the following diffusion values are
obtained at termination of the 20-year simulation period:
 profile HH1: 3.9–6%;
 profile HH2: 1.8–6%;
 profile HH3: 4.8–6.3%.
It appears that combining investment subsidy with
electricity repurchase by the grid may be more efficient.
An example is shown in Fig. 3 for the profile HH1. This
profile may be favoured by this policy because it has the
smallest electricity consumption of all three profiles,
notwithstanding its rather small electric power of 0.9 kWe.
In this calculation we have estimated that in practice the
electricity re-selling factor will be in the range [30%, 70%]
(Ben Maalla, 2005). To assess the sensitivity of the
diffusion rate to this value, we have performed a Monte-
Carlo calculation, assuming a uniform probability dis-
tribution of the electricity re-selling factor in the given
50% 75% 95% 100% Market share in % for profile HH1
60
45
28%
30
15
0 and HH3, respectively. Therefore, HH2 must ‘wait’ till
0 5 10 15 20
Time (years)
Fig. 3. Percentiles (50%, 75%, 95%, 100%) of diffusion [% of total
market] achieved in the HH1 profile for an incentive programme
combining a 30% investment subsidy over 3 years and an electricity re-
selling factor chosen as a random variable uniformly distributed in the
interval [30%, 70%]. The width of the uncertainty range is 28%. The
central line corresponds to an average electricity re-selling factor equal to
50%. The initially distributed electricity price has been set at 0.09 h/kWh
and the gas price at 0.03 h/kWh.
range. Fig. 3 shows the 50%, 75%, 95%, 100% percentiles
of the resulting dynamic diffusion rate for a total of 1000
simulations. The average diffusion rate, shown as a thin
line within the uncertainty range, is 40% at t ¼ 20 years;
the uncertainty range has a total width of 28%, i.e.,
between 23% and 51%. These results illustrate the very
important sensitivity to economic incentives, and must,
therefore, be considered with some care. They indicate the
presence of nonlinear threshold effects for the technology
breakthrough on a large scale, responsible for activating
growth (positive) feedback loops in the SD model (Figs. 1
and 2). Threshold effects have been mentioned before in
Section 3 regarding the diffusion growth of high-efficiency
boilers in the Netherlands (Cauret et al., 1999). An
accurate and trustworthy modelling of these threshold
effects is not possible. Also, re-selling of electricity should
be very carefully analysed from the point of view of the
grid operators because, as we mentioned in Section 2.1, it
may cause complications in requiring additional control
tasks or equipment adjustments (Pehnt et al., 2006,
Chapter 9). Determining suitable electricity re-selling
factor and price is thus not such a simple matter in
general; the re-selling price may also be time-dependent in
connection with the load curve management (Houwing
et al., 2006). The value of the re-selling price affects in turn
the calculation of the attractiveness factor in Eq. (2), which
makes results uncertain.
5.3. Adapting the price of energy
As confirmed by simulation, the best and most
trustworthy results are obtained by means of the third
family of incentive schemes, which consists in selectively
adapting the price of energy in favour of users of the
alternative m-CHP technology. As a possible approach of
this type, Fig. 4 shows the evolution over 20 years of
the diffusion rate with an increase by 0.01 h/kWh of the
electricity price from the grid. For the sake of clarity, the
average electricity re-selling factor has first been fixed at a
value of 0% for all profiles.
The differences in the diffusion values observed in Fig. 4
are explained by the fact that learning effects bringing
investment-cost decreases are profile-selective: they first
benefit to HH3, then ‘pour down’ to HH1, and finally to
HH2. The latter profile has the highest initial outlay due to
its important installed electric capacity, i.e., according to
Table 2, 3 kWe as compared to 0.9 and 0.8 kWe for HH1
learning within HH1/HH3 profiles have sufficiently low-
ered the costs, so that it can benefit in turn. This type of
incentive scheme is shown by the simulations to be quite
effective. Note that a selective reduction in the gas price in
favour of m-CHP users gives comparable results to the
electricity-price increase in disfavour of non m-CHP users.
In practice, this scheme is easier to implement than other
schemes, because of its systematic and equitable character
respecting the willingness-to-change attitude of consumers.
 ARTICLE IN PRESS
E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319
Market share in % for all profiles
60
45
%
30
15
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Time (years)
HH1
HH2
HH3
Fig. 4. Diffusion-value profiles (% of total market) during the period
2005–2025 of the m-CHP technology, assuming a 0.01 h/kWhe increase of
the electricity price from the grid. The upper line corresponds to HH3
profile; the central line corresponds to the HH1 profile; the lower line
corresponds to the HH2 profile. The electricity re-selling factor is set
at 0%.
50% 75% 95% 100%
Market share in % for profile HH1
60
10.5%
45
30
15
0
0 5 10 15 20
Time (years)
Fig. 5. Percentiles (50%, 75%, 95%, 100%) of the diffusion rate when
combining an increase of 0.01 h/kWe with a electricity re-selling factor in
the interval [30%, 70%]. The uncertainty range is only 10.5% at t ¼ 20
years. The thin line in the uncertainty range corresponds to electricity re-
selling factor of 50%; it gives a diffusion rate of 48.5% at t ¼ 20 years.
The lower curve shows that the case with an electricity-price increase alone
gives a diffusion rate of 37.1% at t ¼ 20 years.
In addition, this scheme is quite robust with respect to the
conditions in which excess electricity is re-sold to the
distribution grid. To verify this assertion we have
combined it with the electricity re-selling scheme, as shown
in Fig. 5. In the case of the HH1 profile, the final diffusion
increases from 37.1% (lower curve obtained without resale)
to 48.5% for a median electricity re-selling factor equal to
50%. The uncertainty width of the diffusion value is 10.5%
at t ¼ 20 years, when the electricity re-selling factor is
randomly chosen in the interval [30%, 70%]. By contrast,
under the same conditions regarding the electricity re-
selling, the combination of the electricity re-selling and
2317
investment subsidy schemes displayed in Fig. 3 shows, as
mentioned, an uncertainty range of 28% at t ¼ 20 years,
almost three times more.
Also the robustness with respect to the PR has been
tested: it proves to be better than in other schemes. For
example, the uncertainty range of diffusion values is
about 15% for a PR value randomly sampled within the
[80%; 90%] interval. By contrast a investment subsidy of
30% during 3 years would show an uncertainty range of
39% under the same conditions.
5.4. Summary on incentive schemes
In summary, we conclude that energy-price adjustments
in favour of users of m-CHP seem to provide the most
efficient and robust incentive scheme. It does not act
directly on the profitability of m-CHP installations, but
selectively by means of the learning effects and the existing
transfers between profiles. This is in fact the sole
mechanism observed in our SD model that is able to
overcome the vicious loop created by high start-up costs.
This scheme seems to be best adapted to a sustained and
permanent transformation of consumers’ needs and
attitudes in energy consumption. One should keep in mind,
however, that at the occasion of setting up efficient
incentive strategies the economic environment still remains
important, and it is largely beyond control of decision-
makers. Even if an adequate support policy of distributed
m-CHP is set in place, and is thought to be potentially
favourable to the sustainable growth of micro co-genera-
tion technology, conjectural evolutions in the fuel prices
can considerably reduce the hopes for a large diffusion of
micro co-generation technology. As simulations show, a
favourable price environment—as represented by a high
ratio (electricity price/gas price)—may have a very positive
influence on the potential diffusion. An unfavourable
change of prices of the same amplitude, but in the opposite
direction, may more than outweigh this positive effect.
5.5. Additional consequences of the development of m-CHP
The SD model gives additional results on the usage
reduction of natural gas used by both boilers and m-CHP,
and the potential reductions of CO2 emissions. Further it
provides the evolution of high-efficiency boilers substituting
low-efficiency boilers, when those are not replaced by
m-CHP. Note that high-efficiency boilers also contribute to
both natural gas and CO2 emissions reductions, as they
replace, as a competing technology, the low-efficiency
boilers. Fig. 6 shows the reduction in natural-gas usage,
expressed in TWh, first without incentives for m-CHP (lower
thin curve), corresponding to only about 3% total diffusion
for all three consumption profiles, and then in the case when
there is a investment subsidy of 30% during 3 years on the
initial outlay (upper thick curve), corresponding to about
38% diffusion. The potential CO2 emission reductions are
proportionately linked to the natural-gas usage reductions.
 ARTICLE IN PRESS
2318 E.M. Ben Maalla, P.L. Kunsch / Energy Policy 36 (2008) 2308–2319
Natural-gas usage reduction
600
450
TWh
300
150
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Time (years)
With incentives
Without incentives
Fig. 6. Fuel usage reduction without (upper thick curve) and with (lower
thin curve) economic incentives, consisting of an investment subsidy of the
initial outlay during 3 years.
6. Conclusions and further work
The modelling work with SD allows a more comprehen-
sive insight gaining into the problem of decentralised energy
production in the residential sector. A purely static point of
view, usual in traditional cost–benefit analyses, is in our
opinion not sufficient to understand the dynamic mechan-
isms at work in starter technologies like m-CHP, because of
the paucity of data. The model simulations confirm
important environmental and non-renewable resource gains
in the long term achievable with this technology. It also
confirms that such technology will probably not be able to
develop without the support of an adequate regulatory
framework providing suitable economic incentives. This is
because of the high initial outlay, which represents an
important entrance barrier to the technology. Other
important factors are the learning rate lowering the initial
costs, the price of electricity, the price of gas, and the resale
price of electricity when associated to an incentive policy.
The simulations with SD show that the most efficient
and robust strategies are those which are able to change in
a sustained way the consumers’ attitudes regarding energy
production. According to these findings public decision-
makers should prefer incentives based on the price of
energy to direct incentive policies on initial investment
costs, or electricity re-selling price of excess electricity
produced by the m-CHP.
The strategic modelling effort presented in this paper is
of course not the final one, as SD modelling is basically an
iterative approach (Sterman, 2000), and by far not all
possible scenarios have been analysed. The SD model and
its data must be adapted in a flexible way to the observed
real-world evolution of the m-CHP technologies, and the
fuel markets (Brans et al., 1998). The modellers will then be
able to reduce the important uncertainties on some key
parameters like the learning and diffusion parameters.
The presentations made in this paper are mainly based
on the point of view of regulatory authorities, at a very
early stage of the technology development. At a later stage
of deployment, the point of view of the m-CHP developers
and of independent energy producers would have to be
included. The development of the m-CHP in the residential
sector would then have to be addressed from a marketing-
oriented corner to describe the changing attitudes of
consumers facing a new product. SD would then render
good services in exploring the potential deployment paths
of m-CHP, and in elaborating business models for micro-
generator manufacturers accordingly (EU-Deep, 2005).
Acknowledgements
The authors thank the members of the ‘‘Power System
Consulting Department’’ of TRACTEBEL ENGINEER-
ING (Brussels, Belgium) who have kindly assisted in
providing information, support, and technical training at
the occasion of the Master thesis of the first author, from
which most results are drawn (Ben Maalla, 2005).
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