COMBINED HEAT AND POWER:  CAPTURING WASTED ENERGY

R. Neal Elliott and Mark Spurr

May 1999

Executive Summary

Combined heat and power (CHP) systems (also known as cogeneration) generate electricity (and/or mechanical energy) and thermal energy in a single, integrated system (see Figure ES-1). This contrasts with common practice in this country where electricity is generated at a central power plant, and on-site heating and cooling equipment is used to meet non-electric energy requirements. The thermal energy recovered in a CHP system can be used for heating or cooling in industry or buildings. Because CHP captures the heat that would be otherwise be rejected in traditional separate generation of electric or mechanical energy, the total efficiency of these integrated systems is much greater than from separate systems.

CHP is not a specific technology but rather an application of technologies to meet end-user needs for heating and/or cooling energy, and mechanical and/or electrical power. Recent technology developments have "enabled" new CHP system configurations that make a wider range of applications cost-effective. New generations of turbines, fuel cells, and reciprocating engines are the result of intensive, collaborative research, development, and demonstration by government and industry. Advanced materials and computer-aided design techniques have dramatically increased equipment efficiency and reliability while reducing costs and emissions of pollutants.

Conventional electricity generation is inherently inefficient, converting only about a third of a fuel's potential energy into usable energy. The significant increase in efficiency with CHP results in lower fuel consumption and reduced emissions compared with separate generation of heat and power. CHP is an economically productive approach to reducing air pollutants through pollution prevention, whereas traditional pollution control achieved solely through flue gas treatment provides no profitable output and actually reduces efficiency and useful energy output.

Energy losses in power generation represent a huge and growing source of carbon emissions during a period in which the United States will be seeking to reduce total emissions to below 1990 levels (see Figure ES-2).

Since there are two or more usable energy outputs from a CHP system, defining overall system efficiency is more complex than with simple systems. The system can be viewed as two subsystems, the power system (which is usually an engine or turbine) and the heat recovery system (which is usually some type of boiler). The efficiency of the overall system results from an interaction between the individual efficiencies of the power and heat recovery systems.

The most efficient CHP systems (exceeding 80 percent overall efficiency) are those that satisfy a large thermal demand while producing relatively less power. As the required temperature of the recovered energy increases, the ratio of power to heat output will decrease. The decreased output of electricity is important to the economics of CHP because moving excess electricity to market is technically easier than is the case with excess thermal energy. However, there currently are barriers to distributing excess power to market.

CHP can boost U.S. competitiveness by increasing the efficiency and productivity of our use of fuels, capital, and human resources. Dollars saved on energy are available to spend on other goods and services, promoting economic growth. Past research by ACEEE (Laitner et al. 1995) has shown that savings are retained in the local economy and generate greater economic benefit than the dollars spent on energy. Recovery and productive use of waste heat from power generation is a critical first step in a productivity-oriented environmental strategy.

History

CHP is a well-established concept with a long history. Engineers have always appreciated the tremendous efficiency opportunity of combining electricity generation with thermal loads in buildings and factories. Interest in CHP has fluctuated over the years because of changes in the marketplace and government policies, and the future is uncertain if we stay with current policies. CHP has evolved differently in Europe than in the United States.

At the turn of the century in the United States, CHP systems were the most common electricity generators. As the cost and reliability of a separate electric power industry improved in the United States, users abandoned their on-site electric generation in favor of more convenient purchased electricity. By 1978, CHP's share of electricity use had fallen to only 4 percent (Casten 1998). In the late 1970s, after the energy price increases resulting from the 1973 and 1979 "energy crises," a renewed interest in CHP developed. U.S. industries found they could reduce energy demand if they built larger, more economical cogeneration plants optimized for both thermal and electric output (Cicio 1998). However, by this time, utilities had become sophisticated in protecting their markets for electricity. Many utilities refused to purchase excess power from CHP facilities, limiting on-site electricity generation to the level usable at the site (EEA 1998).

This situation motivated the enactment of the Public Utilities Regulatory Policy Act of 1978 (PURPA). This act played a critical role in expanding cogeneration into the marketplace by addressing many barriers that were present in the early 1980s.

Since PURPA provided the only way for non-utility generators to sell excess electricity, many independent power producers found a use for some of their waste thermal energy. This allowed them to qualify as a cogenerator under PURPA. These electricity-optimized CHP systems are called "non-traditional" cogenerators.

The 1980s saw a rapid growth of CHP capacity in the United States. Installed capacity increased from less than 10 gigawatts electric (GWe) in 1980 to almost 44 GWe by 1993 (see Figure ES-3). Most of this capacity was installed at large industrial facilities such as pulp and paper, petroleum, and petrochemical plants. These plants provided a "thermal host" for the electric generator.

While on average the European Union countries obtain about the same amount of their electricity from CHP as the United States (9 percent), the market interest in CHP has gained in strength in many European countries. The United Kingdom has seen CHP's share of electricity power production double in the last decade. Installed CHP capacity has risen to 3.7 GWe in 1997, with projections of increases to 5 GWe by the year 2000. Similarly, Denmark and the Netherlands have seen tremendous growth in CHP since 1980, with these countries now obtaining more than 30 percent of their electricity from CHP. Figure ES-4 shows the percentage of national power production generated by CHP systems in 1997 in a variety of European countries, along with the United States (Brown 1998; Green 1999).

Markets

The authors have chosen to divide the market for CHP into three categories: industrial plants, district energy systems, and small-scale commercial and residential building systems.

The industrial sector represents the largest share of the current installed capacity in the United States and is the segment with the greatest potential for near-term growth. Large industrial CHP systems are typically found in the petroleum refining, petrochemical, or pulp and paper industries. These systems have an installed electricity capacity of greater than 50 Megawatts electric (MWe) (often hundreds of MWe) and steam generation rates measured in hundreds-of-thousands of pounds of steam per hour. Some facilities of this type are merchant power plants using combined cycle configurations. They are generally owned by an independent power producer that seeks an industrial customer for the steam and sells the electricity on the wholesale market. Sometimes the thermal customer may also contract for part of the electric power.

District energy systems (DES) are a growing market for CHP. DES distribute steam, hot water, and/or chilled water from a central plant to individual buildings through a network of pipes. DES provide space heating, air conditioning, domestic hot water, and/or industrial process energy. DES represent an important CHP market because these systems significantly expand the amount of thermal loads potentially served by CHP. In addition, DES aggregate thermal loads, enabling more cost-effective CHP. District energy systems may be installed at large, multi-building institutional campuses such as university, hospital, or government complexes or as merchant thermal systems providing heating (and often cooling) to multiple buildings in urban areas. The addition of CHP to existing district energy systems represents an important area for adding new electricity generation capacity (Spurr 1999).

With the arrival of low-cost, high-efficiency reciprocating engines, and the prospect of cost- effective, micro-combustion turbines, CHP is now becoming potentially feasible for smaller commercial buildings. This area, sometimes called "self-powered" buildings, involves the installation of a system that generates part of the electricity requirement for the building, while providing heating and/or cooling. Packaged systems, such as the reciprocating engines from Waukesha and Caterpillar, have a capacity beginning at 25 kilowatts electric (kWe). This size range makes it possible to install CHP in smaller commercial applications, like fast-food restaurants, as well as larger commercial buildings.

The CHP supply market is beginning to develop. Besides these above end-use markets, four major categories of players are emerging:

• Project developers

• Equipment manufacturers

• Engineering and construction firms

• Energy supply companies

These groups offer a range of alternatives from design/build to build/own/operate to comprehensive energy supply/services.

Barriers

Although technologies used in CHP systems have improved in recent years, significant hurdles exist that limit widespread uses of CHP. Importantly, these hurdles have the effect of tending to "lock in" continued use of polluting and less-efficient electricity generation equipment. The main hurdles to CHP are:

• A site-by-site environmental permitting system that is complex, costly, time consuming, and uncertain.

• Current regulations do not recognize the overall energy efficiency of CHP or credit the emissions avoided from displaced grid electricity generation.

• Many utilities currently charge discriminatory backup rates and require prohibitive interconnection arrangements. Increasingly, utilities are charging (or are proposing to charge) prohibitive "exit fees" as part of utility restructuring to customers who build CHP facilities.

• Depreciation schedules for CHP investments vary depending on system ownership and may not reflect the true economic lives of the equipment.

• The market is unaware of technology developments that have expanded the potential for CHP.

In addition, development of new district energy systems as part of a CHP implementation face some additional barriers.

Potential

Current projections foresee a stagnation of the CHP market, with no significant additions to capacity because of the barriers discussed above (see Figure ES-5). However, if these barriers are removed, new capacity would likely be built. Estimating this added CHP capacity is difficult because of the diversity of system types and potential sites. However, it is anticipated that much of the early capacity will occur at larger industrial and institutional facilities that already have boiler systems and thermal distribution infrastructures (e.g., district energy systems). As time progresses, smaller industrial, institutional, and commercial facilities will begin to make up a greater part of the new capacity. New district energy systems, which aggregate the thermal demands of several facilities or buildings, will take longer to become a major factor in CHP because of the time required to develop and grow the piping network. Figure ES-5 presents the results of the analysis conducted for this report of the potential for CHP capacity with barriers removed. This analysis draws upon several other studies and analyses. Table ES-1 summarizes the impacts of this added capacity.

Table ES-1 Impact of Additional CHP Capacity

	New Additional CHP (GWe)	Displaced Util. Gen. (TWhe)	Cumulative Additional Capital ($Mill)	Net Energy Savings (TBtu)	Net Savings ($mill.)	Carbon (MMTce)
Industrial (ACEEE)
2010	34	217	22,100	1,214	5,918	34
2020	62	396	40,300	1,995	8,825	57
DES (Spurr 1999)
2010	19	148	13,860	700	2,290	21
2020	50	390	19,540	1,600	5,210	51
Small CHP (Kaarsberg et al. 1998)
2010	20	NA	NA	480	NA	17
2020	40	NA	NA	960	NA	35
Total
2010	73	365	35,960	2,394	8,208	73
2020	152	786	59,840	4,555	14,035	143

NA—not reported in source

Policies

The U.S. Department of Energy and U.S. Environmental Protection Agency have committed to double CHP capacity by 2010. This represents a commitment to add approximately 50 GWe of additional capacity. From the analysis conducted for this report, this goal appears realistic. Now that this ambitious goal for expanding CHP capacity has been set, the challenge is to take steps to convert this goal into action and reality with policies and programs.

Among the options that should be considered are:

• Reform of environmental permitting regulations and the permitting process to provide credit for the inherent efficiency of CHP systems.

• Reform electric utility regulations to provide fair and open access to the grid for procurement of standby power and excess generation sales.

• Modernize the depreciation schedules for CHP equipment to reflect current markets and technologies.

• Provide financing opportunities and incentives, such as tax credit, to spur interest in CHP systems.

• Develop educational and technical assistance programs to increase awareness of CHP opportunities and technologies.

• Initiate research and development activities to expand the range of CHP technologies, especially for small-scale systems.

• Installation of CHP systems in government facilities to demonstrate the benefits and provide market leadership.

Conclusions

Combined heat and power can contribute to the transformation of the United States' energy future. CHP offers significant, economy-wide energy efficiency improvement and emissions reductions. Our existing system of centralized electricity generation charts an unsustainable energy path, with increasing fuel consumption and carbon emissions, while continuing to squander over two-thirds of the energy contained in the fuel. At least half this wasted energy could be recaptured if we shift from centralized generation to distributed systems that cogenerate power and thermal energy. Besides saving energy and reducing emissions, distributed generation also addresses emerging congestion problems within the electricity transmission and distribution grid.

CHP represents an opportunity to make significant progress toward meeting our Kyoto commitments on greenhouse gas reductions. The local air quality improvements and opportunities for economic growth presented by CHP are equally compelling. CHP presents an opportunity to improve the "bottom line" for businesses and public organizations, while also providing a path for improving the environment.

During the last two years, CHP has become an important element of the national energy debate. The United States has taken the first steps toward setting in place policies to promote CHP by establishing a national target. The DOE and the EPA have begun to review the means for achieving this target. The target now needs to be translated into concrete policies and programs at both the federal and state levels for overcoming the significant hurdles to greater use of CHP.

The private sector also needs to take a leadership role. The primary barriers to greater CHP use are regulatory and institutional, not technical or economic. The private sector must work with government regulators and policy makers to insure that competition and incentives for innovation are preserved, while creating a favorable regulatory environment for CHP. And the private sector should actively pursue adoption of CHP — both for environmental and "bottom-line" benefits.

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