Combined Heat and Power (CHP), also commonly referred to as cogeneration, is any system that generates multiple types of usable energy from a single power source. For example, a gas-fired turbine burns natural gas and outputs electricity and thermal energy such as steam or hot water. The benefit of this system approach is more efficient conversion of source fuel to usable energy. The difference in efficiency between cogeneration and two separate systems generating the same electricity and heat is around 45 percent compared to up to 90 percent.
You are likely thinking to yourself, we need to implement CHP more to reduce energy consumption and carbon emissions! And up to the present time you would be correct. The Department of Energy has setup Technical Assistance Partnerships to support industries, the White House has established goals to expand its use, and many states have large financial incentives for their installation.
So what's the catch? Carbon and the age of renewable energy.
Let's demonstrate with an example comparing a GE Jenbacher J612 with a 87.8 percent overall efficiency against a typical 85 percent efficiency boiler and various electricity grids around the country. For simplicity let's use a scenario of 1 year of operation, 95 percent full-load up-time and no parasitic losses on the GE unit.
Currently the GE unit remains the more carbon friendly approach in nearly all regions within the United States (and globally); the current sole exception is the NYUP region with Niagara Falls hydro power. However, Clean Power Plan or not, the grid is becoming cleaner with renewable energy making up over 60 percent of new US generation capacity in 2015. The future is even brighter with speculation that 80 percent of electricity produced in 2050 will be from renewable sources. Extrapolation of this trend will see eGRID emission rates dropping to that of NYUP and below. The inflection point where the grid turns the story of CHP from an efficient carbon saver to an unsustainable fossil fuel approach is likely well within the typical 30+ year lifespan of new installations.
For progressive organizations such as Google, Stanford University, and Biogen, this inflection point is already here. The dramatic upswing in corporate renewable Power Purchasing Agreements (PPAs) occurring in the US over the last two years has completely decoupled electricity use from carbon emissions, as present by the '100% Wind' above. For these organizations, CHP is a long-term carbon liability, essentially locking them into a fixed amount of carbon emissions for the remaining life-span of the unit.
Absent in the discussion up to this point is the financial benefit of CHP. In areas with abundant natural gas supply and total electricity cost in excess of $0.08 / kWh, CHP can represent a large financial savings to energy spend. So how does carbon play into this aspect?
Internalizing the cost of carbon is still very much in its infancy. Globally, the regulated price of carbon ranges from a dollar to over $100 per metric ton of carbon dioxide equivalent (MTCO2e). With the Paris Agreement, we can expect more cap and trade and carbon tax programs to be implemented around the world. Businesses are also placing their own price on carbon with shadow pricing and carbon fees as a proactive step towards climate change and to mitigate future financial risk associated with carbon regulations.
Below is a simplified annual cost model for the same five options using the following assumptions:
- Natural gas at $5 / MMBTU
- Electricity at $0.08 / kWh
- Carbon tax at $10 / MTCO2e
- CHP Operation and Maintenance at $250,000
- CHP Debt Servicing (30 Yr / 7% Discount) at $400,000
- 8 MMBTU/HR, AFUE=95 Boiler O&M + Debt Servicing at $50,000
The selection of $10 / MTCO2e is based on rough current pricing in the EU ETS, California Cap and Trade system and initial pricing proposed in my home state of Massachusetts via Senate Bill 1747. Yes, this is an oversimplification that excludes consideration of the rebates, allowance credits, etc. inherent in these schemes, but I believe it to be a good floor price when looking at long-term capital expenditures.
Under this set of assumptions, CHP remains a budget saver under all scenarios. The financial impact of carbon at $10 / MTCO2e is small in comparison to the energy costs, indicating that while the cost of carbon is real, energy costs will dictate the ROI. As the cost of carbon ramps up, this story undoubtedly changes. Let's insert a carbon price of $140 / MTCO2e, the assumed value needed to keep the world at 2⁰C in 2040 by the IEA.
With the high carbon cost, a boiler and 100% wind-sourced electricity will be the financial winner. At what carbon price this cross occurs for each particular situation will depend on the local energy rates, so please have an experience energy professional evaluate the finances in your particular situation.
Combined Heat and Power (CHP) provides a financial and environmental benefit in many areas of the United States at the present time. A cleaner electricity grid will dampen the environmental benefit and eventually transition CHP into a dirtier energy generation approach. Financially, the price on carbon will slowly eat into energy cost savings and at some level turn gains into losses. The point of this cross and likelihood of occurring will ultimately depend on the local energy and carbon rates.
Is the writing on the wall for CHP similar to coal a decade ago? Certainly not a death bed, but likely no longer the darling it once was.
One item I did not call out was renewable energy fired CHP, e.g. biomass, landfill gas, agricultural biogas. While these sources still generate carbon emissions, some consider this a net zero emission and will exclude it from carbon pricing. Again depends on your specific location.