Combined Heat and Power:
Saving Energy and the Environment

by Tina Kaarsberg & R. Neal Elliott

What if a technology could cut energy costs by 40 percent, reduce pollution and greenhouse gas emissions by 50 percent, increase energy efficiency by 20 percent, and pay for itself in less than five years? Wouldn't manufacturers, universities, and other institutions rush to buy it? Wouldn't local, state, and federal governments support its increased use? Such a technology exists — we call it Combined Heat and Power or "CHP" — but it has received little recognition. In fact, CHP sales declined in 1997, largely because of uncertainties associated with electric utility restructuring, increased problems obtaining environmental permits, and rising costs and difficulties in dealing with local utilities.

Conventional electricity generation is inherently inefficient, converting only about a third of the fuel's potential energy into usable energy. CHP — which produces both electricity and useable heat — converts as much as 90 percent of the fuel into usable energy. This intrinsic efficiency means CHP is better for the bottom line and the environment.

Though the basic CHP concept has been understood for over a century, new CHP technologies greatly increase the technology's attractiveness. In the 1970s President Jimmy Carter coined the word "cogeneration" to describe using a steam boiler to generate electricity and heat simultaneously. Modern systems span a wider range of technologies and are far more efficient and versatile. The ratio of electrical and mechanical energy to thermal energy can be easily varied in systems. Many new systems require little operator attention or maintenance. This flexibility and simplicity, along with the technology's falling installation and operating costs, should open new markets for CHP.

CHP also has great potential for the environment. The Energy Innovations study, published by five public interest groups in the spring of 1997, identified CHP as one of the most important long-term opportunities for reducing U.S. industrial carbon emissions and criteria air pollutants. Later that year, Scenarios of U.S. Carbon Reductions, a study in which five Department of Energy laboratories examined more than 200 technologies, found that just three CHP-type applications — fuel cells, advanced turbines, and integrated combined cycle technologies — accounted for nearly 10 percent of the study's projected carbon savings. Both reports also illustrate just how inefficient, polluting, and carbon-intensive our current electric system is. This system, which remains mainly a regulated monopoly, is no more efficient now than in 1963.

Electric industry restructuring has the potential to encourage CHP and increase the electric system's efficiency, but, if done wrong, it could close many new CHP markets. Although the Public Utilities Regulatory Policy Act of 1978 (PURPA) addressed many market barriers to CHP, new hurdles have emerged with the move to a competitive utility marketplace. To date, most legislative activity on restructuring has taken place at the state level. Some states, such as Massachusetts, based on the difficulties of high-profile CHP users, have passed CHP-friendly legislation that opens electricity markets while exempting CHP facilities from many fees and charges that would make them economically unattractive. Other states are adopting rules that will discourage CHP. If energy users continue to encounter barriers to CHP, an opportunity to dramatically increase industrial productivity and efficiency and decrease emissions will have been lost.

The case studies below illustrate the real-life consequences of these barriers to innovative technologies. The two states involved in these case studies, Massachusetts and Pennsylvania, are typical, or even less prone than other states to impose barriers to electric innovation. As states and the federal government move to restructure the electric industry and develop state implementation plans to comply with clean air regulations, they have an opportunity to remove these obstacles to innovation.

Massachusetts Institute of Technology

The Massachusetts Institute of Technology (MIT) in 1985 began to consider generating its own electricity for a variety of reasons. With its students now using PCs, stereos, hair dryers, and toaster ovens, the university faced soaring electricity costs from the local utility, Cambridge Electric Company (CelCo). Many of MIT's world class research projects also could be ruined by power quality problem or service interruptions. Also, MIT's steam-powered heating and cooling system, which included 1950's-vintage boilers that burned fuel oil, was a major source of local air pollution.

The university selected a 22-megawatt (MW), combustion-turbine-based, natural gas-fired, CHP system. The system was to be 18 percent more efficient than generating electricity and steam independently. It was expected to meet 94 percent of MIT's power, heating, and cooling needs, and to cut its annual energy bills 40 percent. MIT expected to recoup its investment in less than seven years.

MIT's first major hurdle was in obtaining the environmental permit needed before construction could begin. Because it retired two 1950's-vintage boilers and relegated the remaining boilers to backup and winter peaking duty, the CHP system would reduce annual pollutant emissions by 45 percent, an amount equal to cutting auto traffic in Cambridge by 13,000 round trips per day. Despite this substantial emissions savings, plant designers had problems meeting the state's NO_x (nitrogen oxides — a smog precursor) standard. The state's approved technology for meeting that standard — which was designed for power stations more than ten times larger than MIT's generator — was expensive and posed a potential health risk because of the need to house large amounts of ammonia in the middle of the campus. MIT appealed and won by performing a sophisticated life-cycle assessment that showed its innovative system had lower net emissions than the state-approved tech nology that vented ammonia.

Although MIT overcame the environmental hurdle and completed construction in September 1995, the story wasn't over. MIT had the misfortune to leave the grid just when Massachusetts was restructuring its electric utility industry. The Massachusetts Department of Public Utilities (DPU) approved CelCo's request for a "customer transition charge" of $3,500 a day ($1.3 million a year) for power MIT would not receive. MIT appealed the ruling in federal court — arguing that it already was paying $1 million per year to CelCo for backup power, and that for ten years CelCo had been informed of the university's plans and could have taken actions to compensate for MIT's self generation, and that the utility's projected revenue loss was inflated — but the judges ruled they did not have jurisdiction. MIT then appealed to the Massachusetts Supreme Judicial Court, which in September 1997 reversed DPU's approval of the customer transition charge, remanded the case for further proceedings, and stated that no other CelCo ratepayers contemplating self-generation should have to pay similar stranded costs.

In the meantime, the state's proposed restructuring legislation could have raised the amount that MIT would have had to pay for leaving the system to as much as $6.5 million. Fortunately for the university, the Massachusetts law exempted CHP generators from an "exit charge," or a non-bypassable transition charge paid by anyone who leaves the system.

Although MIT now has a CHP system — which is saving money and reducing pollution — the university's experience demonstrates the substantial efforts that have been needed to overcome regulatory barriers to CHP. MIT was a major research institution ready to fight, but most potential CHP users would have had neither the financial resources nor technical expertise to surmount these barriers.

Malden Mills (Polartec)

In 1987, Malden Mills Industries, a textile plant that long had been one of the largest employers in Lawrence, Massachusetts, began to consider generating its own electricity, steam, and heat. The plant, founded by the current president's grandfather in 1907, employed about 2,300 workers at its 2-million-square-foot headquarters. Steam and electricity were obtained from a nearby resource recovery facility. However, that facility was unreliable and unlikely to meet new pollution emissions limits. Additionally, demand was taking off for the company's Polartec, an engineered, high-performance polyester fleece made from recycled beverage bottles. Shutdowns due to intermittent electricity were unacceptable.

Malden Mills by 1992 had developed a plan for a 12 MW, combustion-turbine-based, natural-gas-fired CHP system to supply its electricity and steam needs. Malden Mills also planned to use the new CHP system for heating and possibly cooling. Executives expected to recoup their investment quickly, based on projected growth.

The first hurdle was obtaining an environmental permit from the Massachusetts Department of Environmental Protection (DEP). Because Malden Mills's proposed CHP system avoided the use of boilers and grid electricity, it would have cut emissions by almost half. Despite this savings, the state rejected Malden Mills's request. Malden Mills, like MIT, was required to use an expensive ammonia-based, exhaust-gas, after-treatment technology in order to meet the state's new NO_x standards. Such requirements made the project economically unattractive, and like MIT, Malden was not eager to be emitting ammonia.

Malden Mills appealed in 1993. Meanwhile, Malden Mills was forced to buy four boilers to meet its urgent need for process steam, and it began purchasing electricity from the local utility, Massachusetts Electric while continuing to use its existing heating system.

On Dec. 11, 1995, tragedy struck. Something in the plant blew up, starting a fire that badly injured a number of workers, destroyed three buildings, and threatened the company's survival. The next day, the company's CEO, Aaron Feuerstein, pledged to keep all his employees on the payroll and rebuild. Malden Mills and its CEO soon became famous, with reporters and politicians, including President Bill Clinton in his 1996 State of the Union address, highlighting the 71-year-old Feuerstein as a symbol of compassion in an age of corporate indifference to workers. Local and national political leaders came to visit, and offered to help.

Feuerstein needed such help. He had to get back in business fast, continue limited production at remaining sites, while scrambling to build a new factory to meet consumer demand that he feared might evaporate if not satisfied in time. Hundreds of state, federal, and local permits were obtained at breakneck speed. The president pledged to facilitate the rebuilding, especially the usually time-consuming permitting. The U.S. Department of Energy (DOE) advised Malden Mills that an ultra-low-NO_x CHP system developed as part of the Office of Industrial Technologies's (OIT) Advanced Turbine System (ATS) program, would meet the state's new requirements. This reopened negotiations with the DEP.

OIT then helped Malden Mills negotiate an agreement with the state based on the use of its technology. In 1997, the DEP issued a permit for a "technology demonstration" program to install three 4 MW gas turbines. Since some of the technology still was being developed by OIT, the system would be deployed in three phases.

First, in late 1998, Malden Mills will install two commercial turbines made by Solar Turbines, an ATS partner. These 4.3 MW CHP systems will have an electrical simple-cycle efficiency slightly higher than that of delivered electricity. It would also use Solar's SoloNO_x^TM lean-burn, premix combustor to reduce NO_x emissions. After the first year, Malden Mills will retrofit these two turbines with a ceramic combustor liner developed by the ATS partnership that reduces NO_x by another 40 percent. A two-year demonstration period then will determine if the system is meeting the state's emissions requirement and if the liner is durable. During this demonstration period, the first commercial ATS engine, a 4.6 MW CHP system with a 85 percent system efficiency, will become available and could be installed as part of phase III.

An analysis by Energy and Environmental Analysis Inc. estimates that, compared to the pre-1995 system, this highly-efficient, three-turbine system, combined with the pollution-preventing advanced burner system, will virtually eliminate SO₂ emissions, reduce NO_x emission by three quarters, and cut carbon dioxide emissions by one quarter. Phase I is now on track to be completed this fall. The plant will be a "turnkey" operation that does not require an extensive service contract.

There was one final hurdle. Malden Mills was caught in the same Massachusetts utility restructuring process that undermined the MIT project. Fortunately, state legislation in Fall 1997 resolved the problem.

This CHP story also has a happy ending. While the CHP system is still not installed, it should be by the end of this year. Even if further difficulties arise, Malden has the financial and technical resources to overcome them. But if it is this hard for an innovative, local employer — who has the political support of everyone from the mayor to the president — to put in a CHP system, the barriers must be daunting for would-be installers of CHP equipment.

Gray's Ferry

Not all CHP systems have such a rocky beginning. Increasingly, CHP projects have the local utility or its subsidiary as partners, preempting any stranded cost problems.

In 1993, for instance, Trigen Corporation formed a partnership with Adwin Cogeneration, a subsidiary of the local utility PECO Energy, after it purchased a Philadelphia steam district heating system that served 375 users at the Gray's Ferry site in downtown Philadelphia. Adwin managed the project's development phase to combine this large central steam system with electric power generation. NRG Generating, a subsidiary of Northern States Power, a Minnesota-based electric utility, managed the construction. In November 1997, the plant was commissioned, on schedule. Trigen-Philadelphia will manage the system operation for the duration of the 25-year electric-steam contract. PECO Energy, under a 20-year contract, will purchase up to 150 MW of the plant's electricity.

The Gray's Ferry project benefits from its large size, since environmental and utility regulations generally are designed for large systems. Unfortunately, such large aggregated steam demands comprise a relatively small portion of CHP's potential market. Because of Gray's Ferry's large steam load, the project uses a 118 MW gas turbine. Exhaust gas from the turbine is used by a heat recovery system to generate high pressure steam, which then goes through a 52 MW condensing steam turbine to generate more electricity and also provide low-pressure steam for use in the district heating system. By this process, energy that is lost in more typical electric-only plants will be used to heat 70 percent of Philadelphia's downtown buildings and institutional facilities.

Trigen will provide to its customers the steam from the plant. The entire system will have a fuel conversion efficiency of 70 percent — more than twice the national average for utility generation. The doubled efficiency has enabled a true win-win situation. The utility gets electricity at a competitive price for a growing demand from downtown Philadelphia customers. The low transmission and distribution losses and the high fuel use efficiency means Trigen and its partners also reap a substantial benefit. Finally, the project has many benefits for energy customers, the economy, and the environment. More than 400 local construction workers helped build what was one of the largest private investment projects ever in Philadelphia, and the city's citizens obtained competitive electricity and steam prices.

Because Philadelphia had been producing steam for its heating system with aging oil-fired boilers, this new system is a major environmental improvement. Carbon-dioxide emissions are reduced by more than 50 percent (one million tons), and NO_x emissions by 90 percent (4,500 tons per year) compared to separate production of electricity from PECO's less efficient capacity and steam from the city's boilers.

Although the Gray's Ferry project was developed with relative smoothness, conflicts still arise. Recent changes in the regional power markets, for instance, have lowered the cost of purchased power. As a result, PECO in early March 1998 announced its desire to negotiate a lower price for electricity from the Gray's Ferry project.

New CHP Technologies Are Even Better

Recent advances in efficient, cost-effective, electricity generation technologies — in particular, advanced combustion turbines and engines — have allowed for new configurations that reduce size yet increase output. Turbines are now cost-effective for systems down to 500 kilowatts (KW), the size needed for a small manufacturing plant or moderate-sized building. Reciprocating engines are cost-effective for systems down to 50 KW, the size of a small office or restaurant. Even smaller equipment is on the horizon.

This next generation of turbines, fuel cells, and reciprocating engines is the result of intensive, collaborative research, development, and demonstration by government and industry. Advanced materials and computer-aided design techniques have increased equipment efficiency and reliability dramatically, while reducing costs and emissions of pollutants. Now the range of CHP system configurations includes:

• Boiler Systems with Steam Turbines ­ In the traditional cogeneration configuration, a boiler generates steam from burning fuel or utilizing waste heat from an industrial process, such as a furnace. Some or all of the steam turns a steam turbine that generates electricity. The steam then satisfies thermal requirements like space heating or industrial processes. This CHP configuration still dominates industrial electricity cogeneration.

• Combustion Turbine or Reciprocating Engine with Heat Recovery ­ In this configuration, a combustion turbine or engine generates electricity or mechanical energy. The heat in the exhaust and in the cooling water and oil generates steam in a boiler. Such systems will capture a greater share of the CHP market in the future. Reciprocating engines are the dominant technology for smaller systems with an average installed size of less than one MW.

• Combined Cycle Systems ­ In a combined cycle system, a steam turbine is used as part of a combustion turbine system in order to increase the electricity produced. The electricity fraction of usable energy in these systems frequently exceeds the thermal output. While these systems account for only a small number of industrial CHP systems, they are significant in terms of capacity and are the dominant configuration for new merchant power plants. These independently-owned power generation facilities produce both electrical and thermal energies that are sold to third parties.

• Fuel Cell with Heat Recovery ­ Fuel cells are an emerging technology that converts chemical energy directly into electricity, producing very little pollution. Heat is a byproduct of the reaction, and can be recovered in much the same way as with turbines and reciprocating engines. Until 1998, the only fuel cell commercially available in the U.S. was a 200 KW phosphoric acid fuel cell (PAFC). Of the 24 commercial PAFCs installed since 1993, all but two are operated in CHP mode. This technology will gain an increasing market share in coming years as new types of fuel cells enter the marketplace. In 1998, the first proton exchange membrane fuel cell was sold and by 2000, several other types of fuel cells could be on the market.

A Service-Oriented Industry

Nearly half of industrial CHP systems are now third-party owned and/or operated. Many CHP facilities are merchant power plants owned by an independent power producer that seeks an industrial customer for its waste steam and sells excess electricity on the wholesale market. This move to outsourcing non-core business activities is part of a national trend that allows a company to focus its resources, both capital and staff, on its primary activity (e.g., making widgets), while the contractor focuses on its core service activity.

CHP makes sense as an "outsourced utility" for end-users. First, energy is not a focus of most companies or institutions. Most customers have not developed requisite expertise in environmental and utility regulation associated with CHP systems. An external firm, meanwhile, can benefit from aggregation of expertise, as well as end-use and supply-side efficiencies. That firm also can access capital for the project, freeing the customer's capital to invest in its core business.

The CHP marketplace is evolving, driven by changes in the electric industry and technology. Several broad areas divide the CHP market:

• Large industrial CHP systems ­ This sector represents the largest share of the current installed capacity in the U.S., and is the segment with the greatest potential for near-term growth. These systems typically are found in the petroleum refining, petrochemical, or pulp and paper industries. They have installed electricity capacities of greater than 25 MW (often hundreds of MW) and steam generation rates measured in hundreds of thousands of pounds of steam per hour.

• District energy CHP systems ­ These systems, a growing area for CHP, may be installed at large, multi-building institutional campuses such as universities, government complexes, and state hospitals, and as merchant thermal systems providing heating (and often cooling) to several buildings. The addition of CHP to existing district energy systems represents an important area for adding new electricity generation capacity. However, new district energy systems that incorporate CHP typically will require several years to develop because of their complexity.

• Small industrial CHP systems ­ Thousands of boilers provide process steam to a broad range of U.S. manufacturing plants. These boilers offer a large potential for adding new electricity generation capacity between 50 KW and 25 MW, by either modifying boiler systems to add electricity generation (e.g., repowering existing boilers with a combustion turbine), or replacing the existing boiler with a new CHP system. Small manufacturers represent an important growth segment over the coming decade for installed CHP generation.

• Smaller commercial and institutional CHP systems ­ With the arrival of reliable, reciprocating engines and smaller combustion turbines, CHP is becoming feasible for small commercial buildings. This area, sometimes called "self-powered" buildings, involves the installation of a system that generates part of the building's electricity requirement and provides heating and/or cooling. Packaged systems, such as the reciprocating engines from Cummins and Caterpillar, have a capacity beginning at 25 KW, which makes it possible to install CHP at a McDonald's restaurant, as well as larger commercial buildings. Though an important long-term market, this segment's total capacity will be modest for the next few years since these systems are so small and the market infrastructure for distributing and installing them is still developing.

Besides these end-use markets, five major groups participate in the CHP marketplace:

• Equipment manufacturers (e.g., Solar Turbines, Caterpillar Engines, Copus Steam Turbines)
• Engineering and construction firms (e.g., Fluor Daniel)
• Utility energy service business units (e.g., CINergy Solutions, Duke Energy's Out-Sourced Utilities Group, PECO Energy Services)
• Independent energy service companies (e.g., Onsite Energy, Trigen)
• Independent power developers (USGen, AES)

These groups offer a range of alternatives from design/build, to build/own/operate, to comprehensive energy supply/services. At this point no single delivery structure dominates, although most projects seem to involve electric utilities in some capacity. Different parties frequently partner with other groups in order to develop and implement projects. For instance, Trigen of White Plains, New York, has partnered with CINergy Solutions in Cleveland, Ohio, to identify and install CHP projects at industrial and institutional sites across the country. AlliedSignal is working with a number of electric utilities, including PECO Energy in Philadelphia, Pennsylvania, to market and install their recently introduced TurboGenerators, which are small, packaged CHP systems.

CHP's Potential

CHP is well-established technology with a long history. Many manufacturing plants operated CHP facilities at the turn of the century, although most abandoned these systems as utility monopolies emerged. However, some industries, such as pulp and paper and petroleum refining, have continued to operate their CHP facilities, and some new CHP facilities have been constructed, especially during the late 1970's and early 1980's. In 1995, CHP provided 42 gigawatts (GW) of electricity generation capacity, accounting for about 6 percent of the U.S. total. When policies to promote CHP are instituted, the CHP's share of electric generation can grow dramatically. The CHP-friendly countries of Finland, Denmark, and the Netherlands receive about 30 percent of their electricity from CHP.

New, near-term CHP projects likely will occur at larger industrial plants which have large steam loads, and at existing district energy facilities, such as the Gray's Ferry project. Sometimes a back-pressure turbine can be added to an existing steam system, as Trigen has done at the U.S. Mint in Philadelphia. In other cases, an existing boiler may be repowered with a combustion turbine. As time progresses, smaller industrial, institutional, and commercial facilities will begin to make up a greater part of the new capacity — if policy innovation keeps pace with innovations in technologies. District energy systems that consolidate the thermal demands of several buildings or facilities will take longer to become a major factor in CHP because of the time required to develop the new infrastructure.

Growing environmental concerns also should advance the CHP market. By replacing older generating equipment with cleaner and more efficient systems, CHP will reduce carbon dioxide and other air pollutants, including NO_x, while increasing thermal efficiency. In contrast, traditional "end-of-pipe" pollution control techniques usually reduce the thermal efficiency of the energy generation equipment, increasing carbon dioxide emissions.

Barriers to Adoption and Policies Needed to Accelerate CHP

Although the cost and technical performance of CHP systems have improved, significant barriers limit CHP's widespread use as the case studies illustrate. Importantly, these barriers influence investments in capital equipment, and tend to "lock-in" continued use of polluting and less-efficient separate electricity generation equipment. Below are four of the main barriers to CHP:

• Environmental permitting is complex, costly, time consuming, and uncertain, as illustrated by the MIT and Malden Mills examples.
• Current regulations do not recognize CHP's overall energy efficiency, or credit the emissions avoided from displaced electricity generation, as in the Malden Mills example.
• Many utilities currently charge discriminatory backup rates and require costly interconnection arrangements. As the Massachusetts examples illustrate, some utilities are charging (or are proposing to charge) prohibitive "exit fees" to customers building CHP facilities.
• CHP facilities fall into several tax categories, with depreciation periods far longer than comparable non-electric generating equipment.

Experts convened by the U.S. Department of Energy are confident that significant new CHP capacity will be installed if these barriers are removed. They have proposed the following policy responses:

• Establish an expedited permitting process ­ EPA is initiating a review of permitting related to CHP, but it will fall to the states to implement new guidelines. Many states will need both encouragement and technical assistance to implement changes to environmental regulations.

• Identify opportunities for expanded implementation of output-based regulation ­ Output-based standards judge emission standards on the usable energy produced rather than on the fuel burned. Since CHP systems use fuel very efficiently, they are favored by this regulatory approach, as are many new, efficient electricity generation technologies. This approach must give credit for the substantial transmission and distribution savings of onsite CHP. EPA already has issued such guidelines with respect to utility generation, and initiated a process to investigate output-based standards for other energy systems. This area of environmental reform will have an impact on utility restructuring, since many existing power plants will not fare well under this standard.

• Address issues of utility access and exit fees ­ PURPA addressed several barriers to CHP that existed in the electricity markets of the 1980's. These markets have changed, and the barriers are now different. Many analysts hope a national restructuring bill will address these barriers, but states already are acting. Laws in Massachusetts and Illinois have exempted some CHP facilities from the stranded asset recovery change, but other states have ruled out such an exemption. It will be necessary, therefore, to make the case for CHP on a state-by-state basis.

• Establish a common classification of CHP investments ­ To encourage power system efficiency maximization and the rapid deployment of innovative electricity-producing technologies, electric equipment depreciation tax life should be standardized and made similar to comparable industrial equipment.

• Set national CHP targets and deadlines for action ­ Many European countries have had great success establishing national goals for CHP. Such goals motivate policymakers to consider the impacts of policy alternatives upon CHP. In December 1997, ten companies and public interest groups called upon President Clinton to set a national target of reducing at least 25 million metric tons of carbon from the installation of an additional 36 MW of CHP systems by 2010. This goal represents a 70 percent increase in CHP capacity over the Energy Information Administration's 2010 baseline projection of 49 GW, but less than three-quarters of what experts feel is achievable (Figure 1).

Although CHP has been around for more than a century, we are at a nexus in the technology's history. On the "demand" side, there's an urgent need to reduce overall emissions in order to comply with the Clean Air Act Amendments that are now going into effect. CHP clearly can play a role in meeting these targets, as well as in reducing our national greenhouse gas emissions. On the "supply" side, highly-efficient CHP systems can help meet our future needs for electricity generating capacity. Utility restructuring and environmental regulatory reinvention provide enormous market opportunities, while the need to replace boilers and other energy infrastructure provides a large technology opportunity. In the near term, achieving CHP's full economic and environmental potential does not depend on research and development, advanced technology, or even improved economics, but instead on policy reinvention to reduce barriers to innovation.