Combined Heat and Power

January 9, 2015

Combined heat and power (CHP) systems, also known as cogeneration, generate useful thermal energy and electricity or mechanical power in a single, integrated system. They are much more efficient than separate generation of thermal energy and electricity because heat that is normally wasted in conventional power generation is recovered to meet existing thermal demands.

CHP offers local, state, and national benefits, including reduced energy operating costs, increased energy efficiency, lower greenhouse gas emissions, stronger critical energy infrastructure, and improved resiliency, as well as increased manufacturing competitiveness and greater economic growth. CHP is widely used in industrial and manufacturing facilities, and at large institutional sites such as universities and military bases. In recent years, installations of smaller CHP systems have grown in commercial buildings with continuous thermal loads such as hospitals, casinos, and multifamily buildings. As of 2016, over 82 gigawatts (GW) of CHP capacity exists at more than 4,400 industrial, institutional, and commercial facilities across the country.

There is the potential to significantly expand CHP deployment in the US, but several barriers impede cost-effective CHP applications. ACEEE's State Energy Efficiency Scorecard outlines several of the key policy factors that can overcome barriers to CHP, and this toolkit is designed to provide technical resources and practical information to help states address those policy factors. A range of technical, financial, political, and regulatory issues influence how much CHP potential is achieved, and policy makers should consider a set of options that fit their individual circumstances. This toolkit briefly discusses the following categories and provides a list of annotated resources for further guidance:

  • Interconnection standards and standby rates
  • Encouraging CHP as a resource
  • Deployment incentives
  • Additional supportive policies

Interconnection Standards and Standby Rates

Interconnection Standards 

To remain economically viable, many CHP systems and other distributed generation (DG) technologies rely on the ability to connect to the electric grid and be able to purchase supplemental or backup power from the grid when down for maintenance. The lack of a consistent standard that explicitly establishes parameters and procedures for connecting to the grid complicates these transactions and drives up both capital and transaction costs for project developers and owners, discouraging CHP deployment.

States need not start from scratch when adopting interconnection standards; there are both technical and institutional models at the national, regional, and state levels that have been successfully implemented by CaliforniaOhioOregon, and other states. According to the Interstate Renewable Energy Council (IREC), leading interconnection standards promote broad participation by utilities and customers, with a range of system specific standards. Best practice standards should:

  • Cover all distributed generation technologies (including all forms of CHP, regardless of fuel type)
  • Apply to a range of system sizes, including fast-track options for smaller, less complex systems as well as specific standards for larger systems (10 MW or greater)
  • Offer transparent, uniform and accessible application information, forms, procedures, and include dispute resolution guidance
  • Use current technical standards dealing with safety considerations and interconnection maintenance, such as IEEE 1547 and UL 1741
  • Prohibit unnecessary external disconnect switches and requirements for additional insurance where the proposed system does not need it for safety reasons

For additional information, see IREC’s report on model interconnection procedures, which outlines specific elements in procedural design, as well as "Freeing the Grid", a state-by-state scorecard on interconnection and net metering standards.

Standby Rates

Standby rates are charges paid by customers who operate onsite generation systems, such as CHP, for services from an electric utility that typically include access to supplemental, standby, and back-up power. Rates for these services are generally composed of two elements: energy charges, in $/kWh, which reflect actual energy provided to the customer; and demand charges, in $/kW, which attempt to recover the utility’s costs of providing capacity to meet the peak demand of the facility using the CHP system. Rates that recover the majority of the cost of standby service in fixed customer charges or ratcheted demand charges significantly reduce the financial viability of a CHP project. For more information on rate design, see the Regulatory Assistance Project (RAP) report, Smart Rate Design for a Smart Future.

Many of the prevailing tariff structures are confusing and can seem arbitrary, which may create a disincentive to invest in CHP. States should look to known best practices and ensure that tariffs represent the principles of good standby rate design. Standby Rates for Customer-Sited Resources: Issues, Considerations and the Elements of Model Tariffsa report prepared for the Environmental Protection Agency (EPA), provides a detailed discussion on rate structures that appropriately charge customers for the services they take, without creating economic barriers to distributed generation. It shows how well-designed rates effectively incentivize customers to use electric services as efficiently as possible, minimize costs imposed on the system, and avoid charges when service is not taken.

For additional information, see RAP’s report, Standby Rates for CHP Systems, which examines utility standby rates in five states, identifies deficient designs, and makes recommendations on how to improve rate structures to encourage CHP.

Encouraging CHP as a Resource

While CHP is known for its energy efficiency benefits, few states actively identify it as an energy resource similar to more traditional sources such as centralized power plants. CHP can offer energy, capacity, and even ancillary services to grids to which they are connected; but to maximize those benefits, states must first identify CHP as a resource and integrate it into system planning and energy resource acquisition efforts. One of the best ways to do this is to include CHP within state energy efficiency goals and utility plans and programs. This can include incorporating CHP in an integrated resource plan (IRP), or making CHP an eligible technology in an energy efficiency resource standard (EERS). States could also develop programs to acquire CHP resources, establish production goals, or offer revenue streams.

Utility Resource Planning

Many large utilities across the country prepare IRPs that consider investments in a range of supply and demand-side technologies to meet future requirements.  In addition to traditional resources, a utility can consider electricity from customer-sited CHP systems in its planning activities. For example, Duke Energy Carolinas and Duke Energy Progress included 40 megawatts (MW) of CHP in their 2015 IRPs. Some utility companies have also begun to invest in owning CHP systems located at customer facilities that have continuous thermal loads. State policies can encourage utilities to evaluate customer-sited CHP as a supply-side asset, which has the potential to expand investments in cost-effective CHP projects that would not otherwise be built.

Energy Efficiency Resource Standard

An EERS is a quantitative, long-term energy savings target for utilities or third-party efficiency administrators, under which they must procure a portion of the region’s future electricity (and sometimes natural gas) needs using energy efficiency measures, typically equal to a specific percentage of retail electricity (or natural gas) sales. EERSs are critical policies for ensuring sustained investment in energy efficiency and allowing CHP as an eligible technology within an EERS supports greater deployment.

Twenty-six states currently enforce and fund energy savings targets to drive investments in utility-sector energy efficiency programs and 16 of them include CHP as an eligible technology. A good example is Massachusetts’ Green Communities Act of 2008, which requires utilities to prioritize cost-effective energy efficiency resources over supply resources, including CHP systems with an annual efficiency of 60% or greater with the goal of 80% annual efficiency for CHP by 2020. Policymakers should also consider including a specific methodology for calculating energy savings from CHP and take CHP potential into account when setting overall energy savings targets.

CHP Resource Acquisition Programs 

A state can support cost-effective CHP in similar ways to other energy efficiency resources by ensuring that most customers have access to clearly defined CHP programming offered by major utilities or other program administrators. In addition, states can actively reach out to potential CHP users and developers to market programs, which should lead to acquiring new CHP resources. Several leading states are implementing CHP programs that effectively acquire energy resources from CHP systems. The New York State Energy Research and Development Authority’s (NYSERDA) “packaged CHP” approach is one example of an innovative model that has lowered costs and reduced barriers. NYSERDA’s Program 2568 provides financial incentives for small-scale CHP (up to 3 MW) using a catalog of pre-engineered systems and approved vendors.

Production Goal 

By setting a state-approved production goal (kWh) or a program budget for the acquisition of a defined amount of kWh savings from cost-effective CHP, states can send a clear signal to utilities to develop and deploy programming designed to acquire CHP as a resource. For example, New York’s Clean Energy Fund Investment Plan documents a three-year program budget for the acquisition of a defined amount of generation from CHP. The plan includes approximately $36 million in incentives and services for CHP installations and is expected to result in 220,000 MWh of CHP generation.

Revenue Streams

States can encourage CHP deployment through revenue streams that are directly linked to acquisition of electricity generated by the systems. These can include production incentives, feed-in tariffs, standard offer programs, or other revenue streams. Production incentives, for example, can help states support the continued efficient operation of CHP systems after they are installed. In Maryland, utility programs offer $0.07 per kWh for electricity produced for the first 18 months of operation. In California, production is incentivized in the form of a feed-in tariff, which specifies a $/kWh payment to CHP operators for exporting electricity to the grid. Similarly, standard offer programs provide a set price for qualifying CHP production and often have a program cap or point at which the standard offer will no longer be available. Ontario Power Authority’s rules and contract for its CHP Standard Offer Program may provide useful sample language. These approaches provide price certainty and long-term contracts that can help finance investments in CHP systems.

Deployment Incentives

Deployment incentives can encourage CHP at the state level in a variety of ways, with best practices including incentives that apply to all CHP, regardless of fuel, and in both the commercial and industrial sectors. Incentives include items such as an investment tax credit, a credit for installed capacity, a loan or loan guarantee, a project grant, or a net metering standard. Below we will discuss specific examples of each type of incentive as they apply to CHP.

Tax Credits

A variety of tax credits, incentives and exemptions for CHP can be offered at the federal or state levels. They can take many forms, but credits are often taken against business or real estate taxes. For instance, in Florida, the purchase of eligible CHP equipment is exempt from the state’s sales and use tax.

Grants, Loans & Bonds

State grants can also support CHP deployment by providing funding for capital or other costs. Some grant awards and other simple incentive programs offer rebates or payments based on the size of the system ($/kW). Most grant programs are designed primarily to offset the capital costs of CHP equipment, although some are administered in conjunction with production incentives. For example, the Maryland Energy Administration provides grants up to $500,000 per project to encourage the implementation of CHP at industrial and critical infrastructure facilities, including healthcare, wastewater treatment, and essential state and local government facilities. This grant program complements production incentives provided by Maryland utility programs.

Low-interest loan programs, loan guarantees, and bonding authorities are other strategies states can use to make CHP systems financially attractive and reduce the cost of financing. Connecticut's low-interest loan program, in effect since 2006, provides loans to customers for the installation of distributed generation systems, including CHP, with a capacity range of 50 kW or greater. In addition, the Connecticut Green Bank CHP Projects Pilot Program provides grants, loans, loan enhancements or power purchase incentives to CHP projects.

The use of bonds to incentivize CHP deployment is less common but may help public entities borrow capital at lower interest rates. For example, in New Mexico, qualifying CHP systems at government facilities, schools, and universities may be eligible to receive up to $20 million in bonds through the state’s Clean Energy Revenue Bond Program.

Net Metering

Although generally associated with renewable technologies, net metering may also be applicable to small CHP systems. Net metering can incentivize CHP deployment by allowing owners of systems to get credit for net excess electricity that they produce onsite. With wholesale net metering, sometimes known as dual-meter net metering, utilities pay customers at the wholesale or avoided-cost rate for any excess electricity exported to the grid. There are many examples from which states may draw when designing net metering rules and IREC’s "Freeing the Grid" provides a good discussion of best practices on net metering. In most states, net metering does not apply to CHP or is limited to systems powered by renewable fuels. Of the states that do allow net metering for all types of CHP, standards generally apply to systems of 1 MW or less. We consider best practice to be a net metering standard that is applicable to all CHP, regardless of fuel, and the larger the size limit, the more likely it is to encourage CHP systems.

Additional Supportive Policies

There are a wide variety of complementary efforts that can encourage CHP adoption at the state level, including supportive policies in several of the following areas:

  • Renewable-fueled CHP
  • Air permitting
  • Technical assistance
  • Resiliency and critical infrastructure

Support for Renewable-fueled CHP

State policies can support the use of opportunity fuels in conjunction with CHP technologies. These alternative fuels are typically derived from a byproduct or waste and include biomass, biogas, anaerobic digester gas, landfill gas, wood, and other waste (including waste heat). Most states with renewable portfolio standards (RPS) set goals requiring a percentage of total electricity sold to be derived from renewable sources and defining renewable-fueled CHP as an eligible resource can be a supportive element. CHP is eligible for an RPS in more than half of states. States may also define CHP as a technology that is eligible for renewable energy tax credits, financing, or other incentives for renewables.

Air Permitting

By streamlining air permitting procedures, such as developing permit-by-rule options, states can help reduce the time and cost involved in permitting eligible CHP units. Several states, including Connecticut, New Jersey, and Texas, have introduced streamlined permitting procedures for certain types of CHP units to simplify and speed up the permitting process. In addition, adopting output-based emissions regulations, which define emissions limits based on the amount of pollution produced per unit of useful output (e.g., pounds of sulfur dioxide per megawatt-hour of electricity), can encourage cost-effective, long-term pollution reductions. Output-based emissions standards recognize both the efficiency and environmental benefits of CHP and other distributed generation systems, which is not the case with traditional input-based standards. 

Technical Assistance

States can support CHP through targeted technical assistance programs that go beyond the services provided by the Department of Energy’s CHP Technical Assistance Partnerships (DOE CHP TAPs) program. For example, the Iowa Economic Development Authority (IEDA), which houses the state energy office for Iowa, works with stakeholders to facilitate CHP deployment in a variety of ways. Activities have included hosting outreach events with potential CHP candidates, leading workshops for operators of CHP systems, and the formation of stakeholder working groups to develop a state CHP Resource Guide.

CHP for Resiliency in Critical Infrastructure

CHP can play a unique role in securing a state’s critical infrastructure and supporting resiliency planning, especially during unexpected disturbances or natural and man-made disasters. Recent events like Superstorm Sandy or Hurricane Katrina have focused attention on securing critical infrastructure for public health and safety, security, and economic activity. CHP can ensure uninterrupted power where it is needed most, including hospitals, schools, and places of refuge. Some states, such as Louisiana and Texas, have policies that require the consideration of CHP for public buildings and critical facilities during times of upgrade or new construction. Other states, including Connecticut and New York, provide grants and loans for CHP systems and CHP-supported microgrids that improve grid resiliency and reliability. 


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